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, 1996

                                       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, 1996 and March 31, 1996 (Unaudited)
                                 (In thousands)

                                     ASSETS
                                                   December 31     March 31
                                                   -----------     --------

Operating investment properties:
   Land                                           $   8,808         $   8,808
   Building and improvements                         41,753            41,396
                                                  ---------         ---------
                                                     50,561            50,204
   Less accumulated depreciation                    (12,230)          (10,781)
                                                  ---------         ---------
                                                     38,331            39,423

Investments in unconsolidated joint
  ventures, at equity                                31,752            32,206
Cash and cash equivalents                             5,511             5,126
Escrowed cash                                           263               150
Accounts receivable                                     208               261
Accounts receivable - affiliates                         15                15
Net advances to consolidated ventures                     -                78
Prepaid expenses                                         54                29
Deferred rent receivable                                798               731
Deferred expenses, net                                  706               703
                                                  ---------        ----------
                                                  $  77,638        $   78,722
                                                  =========        ==========

                        LIABILITIES AND PARTNERS' CAPITAL


Accounts payable and accrued expenses             $     521        $      283
Net advances from consolidated ventures                 251                 -
Tenant security deposits                                116                96
Bonds payable                                         2,364             2,408
Mortgage notes payable                               19,683            19,907
Other liabilities                                       349               349
Partners' capital                                    54,354            55,679
                                                -----------        ----------
                                                $    77,638        $   78,722
                                                ===========        ==========















                             See accompanying notes.


<PAGE>


               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS
   For the three and nine months ended December 31, 1996 and 1995 (Unaudited)
                      (In thousands, except per Unit data)

                                       Three Months Ended    Nine Months Ended
                                          December 31,          December 31,
                                       ------------------    -----------------
                                          1996     1995        1996     1995
                                          ----     ----        ----     ----
Revenues:
   Rental income and expense
     reimbursements                   $ 1,194    $ 1,166     $ 3,773   $3,432
   Interest and other income              138        166         318      284
                                      -------    -------     -------   ------
                                        1,332      1,332       4,091    3,716

Expenses:
   Property operating expenses            372        381       1,038    1,008
   Depreciation and amortization          518        409       1,531    1,206
   Interest expense                       494        557       1,492    1,580
   General and administrative              93        245         372      573
   Real estate taxes                      146        113         355      350
                                      -------    -------     -------   ------
                                        1,623      1,705       4,788    4,717
                                      -------    -------     -------   ------
Operating loss                           (291)      (373)       (697)  (1,001)

Investment income:
   Interest income on note 
     receivable from unconsolidated 
     venture                                -         27           -       80
   Partnership's share of 
     unconsolidated
     ventures' income                      67        121         272      467
                                      -------    -------     -------   ------

Net loss                              $  (224)   $  (225)    $  (425)  $ (454)
                                      =======    =======     =======   ======

Net loss per 1,000 Limited
  Partnership Units                    $(1.65)    $(1.65)     $(3.13)  $(3.34)
                                       ======     ======      ======   ======

Cash distributions per 1,000 Limited
  Partnership Units                   $  2.21     $42.72      $ 6.63   $52.16
                                      =======     ======      ======   ======


   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 September 30, 1996 and 1995 (Unaudited)
                                 (In thousands)

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

Balance at March 31, 1995                        $   (527)        $  61,126
Cash distributions                                    (19)           (7,012)
Net loss                                               (5)             (449)
                                                 --------         ---------
Balance at December 31, 1995                     $   (551)        $  53,665
                                                 ========         =========

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

































                             See accompanying notes.


<PAGE>


               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
        For the nine months ended December 31, 1996 and 1995 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)

                                                         1996            1995
                                                         ----            ----
Cash flows from operating activities:
   Net loss                                          $  (425)         $  (454)
   Adjustments to reconcile net loss to net cash
     provided by operating activities:
     Partnership's share of unconsolidated 
       ventures' income                                 (272)            (467)
     Depreciation and amortization                     1,531            1,206
     Amortization of deferred financings costs            24               28
     Changes in assets and liabilities:
      Escrowed cash                                     (113)            (192)
      Accounts receivable                                 53                7
      Accounts receivable - affiliates                     -              (70)
      Prepaid expenses                                   (25)              (1)
      Deferred rent receivable                           (67)            (228)
      Deferred expenses                                  (57)              53
      Accounts payable and accrued expenses              238              183
      Advances to (from) consolidated ventures           329              165
      Tenant security deposits                            20               (8)
      Other liabilities                                    -                1
                                                     -------          -------
        Total adjustments                              1,661              677
                                                     -------          -------
        Net cash provided by operating activities      1,236              223
                                                     -------          -------

Cash flows from investing activities:
   Distributions from unconsolidated ventures          1,966           15,868
   Additional investments in unconsolidated ventures  (1,240)          (1,401)
   Payment of leasing commissions                        (52)             (65)
   Additions to operating investment properties         (357)            (312)
                                                     -------          -------
        Net cash provided by investing activities        317           14,090
                                                     -------          -------

Cash flows from financing activities:
   Distributions to partners                            (900)          (7,031)
   Proceeds from issuance of loans                         -            2,000
   Repayment of principal on long term debt             (268)          (2,216)
                                                     -------          -------
        Net cash used in financing activities         (1,168)          (7,247)
                                                     -------          -------

Net increase in cash and cash equivalents                385            7,066

Cash and cash equivalents, beginning of period         5,126            1,827
                                                     -------          -------

Cash and cash equivalents, end of period             $ 5,511          $ 8,893
                                                     =======          =======

Cash paid during the period for interest             $ 1,493          $ 1,553
                                                     ======           =======




                             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,
      1996. 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, 1996 and March 31,
     1996 and  revenues  and  expenses  for each of the  three-  and  nine-month
     periods ended December 31, 1996 and 1995.  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, 1996 and 1995 is $164,000 and  $195,000,  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 months
     ended  December  31,  1996 and 1995 is $13,000  and  $4,000,  respectively,
     representing fees earned by an affiliate,  Mitchell Hutchins  Institutional
     Investors, Inc., for managing the Partnership's cash assets.

        Accounts receivable - affiliates at December 31, 1996 and March 31, 1996
     consist  of $15,000 at both  dates due from  certain  unconsolidated  joint
     ventures  for  expenses  paid by the  Partnership  on  behalf  of the joint
     ventures.

3.  Investments in Unconsolidated Joint Ventures

        As of December  31,  1996,  the  Partnership  had  investments  in three
     unconsolidated  joint venture  partnerships which own operating  investment
     properties as described further in the  Partnership's  Annual Report. As of
     March 31, 1995, the  Partnership  had  investments  in five  unconsolidated
     joint venture  partnerships.  On November 2, 1995,  the joint venture which
     owned the Richmond Park and Richland Terrace Apartments sold the properties
     to a third party for $11 million.  The Partnership received net proceeds of
     approximately $8 million after deducting  closing costs, the  co-venturer's
     share  of the  proceeds  and  repayment  of a $2  million  short-term  loan
     collateralized  by the  Partnership's  share  of  the  sale  proceeds.  The
     Partnership distributed approximately $5.1 million of these net proceeds to
     the Limited Partners in a Special  Distribution  made on December 27, 1995.
     The  remaining  sale  proceeds  were  retained by the  Partnership  for the
     capital needs of the Partnership's  commercial properties.  In addition, on
     December  29,  1995 the joint  venture  which  owned the Treat  Commons  II
     Apartments  sold the  property  to a third  party  for $12.1  million.  The
     Partnership  received net  proceeds of  approximately  $4.1  million  after
     deducting  closing costs and the repayment of the existing mortgage note of
     $7.3 million.  The Partnership  distributed  approximately  $3.1 million of
     these net sale proceeds to the Limited  Partners in a Special  Distribution
     made on February 15, 1996. The remaining sale proceeds of  approximately $1
     million  were  retained for  potential  reinvestment  in the  Partnership's
     commercial properties.

        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.
<PAGE>
      Summarized  operations  of the  unconsolidated  joint  ventures,  for  the
    periods indicated,  are as follows (the three- and nine-month periods in the
    prior year include the results of  operations of the  Richmond/Richland  and
    Treat Commons joint ventures).

                    Condensed Combined Summary of Operations
         For the three and nine months ended September 30, 1996 and 1995
                                 (in thousands)

                                       Three Months Ended    Nine Months Ended
                                          September 30,        September 30,
                                       ------------------    -----------------
                                          1996     1995        1996     1995
                                          ----     ----        ----     ----

Revenues:
   Rental revenues and expense 
     recoveries                        $2,368     $3,200      $7,228   $9,362
   Interest and other income               20         36          68      218
                                       ------     ------      ------   ------
                                        2,388      3,236       7,296    9,580

Expenses:
   Property operating expenses            675      1,044       2,135    2,918
   Real estate taxes                      545        706       1,658    2,094
   Interest expense                       200        383         602    1,108
   Depreciation and amortization          812        959       2,423    2,897
                                       ------     ------      ------   ------
                                        2,232      3,092       6,818    9,017
                                       ------     ------      ------   ------
   Net income                          $  156     $  144      $  478   $  563
                                       ======     ======      ======   ======

   Net income:
     Partnership's share of
       combined income                $    82    $   141      $  316   $  527
     Co-venturers' share of 
       combined income                     74          3         162       36
                                      -------    -------      -------  ------
                                      $   156    $   144      $  478   $  563
                                      =======    =======      ======   ======

               Reconciliation of Partnership's Share of Operations
         For the three and nine months ended September 30, 1996 and 1995
                                 (in thousands)

                                     Three Months Ended    Nine Months  Ended
                                        September 30,         September 30,
                                     ------------------    -----------------
                                        1996     1995         1996      1995
                                        ----     ----         ----      ----

   Partnership's share of operations,
       as shown above                  $   82   $  141      $   316    $  527
   Amortization of excess basis           (15)     (20)         (44)      (60)
                                       ------   ------      -------    ------
   Partnership's share of 
       unconsolidated
       ventures' income                $   67   $  121      $   272    $  467
                                       ======   ======      =======    ======
<PAGE>
4.  Operating Investment Properties

        The  Partnership's  balance  sheets 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, 1996 and 1995 (in thousands):

                                    Three Months Ended     Nine Months  Ended
                                        September 30,         September 30,
                                     ------------------    -----------------
                                        1996     1995         1996      1995
                                        ----     ----         ----      ----

      Property operating expenses:
        Repairs and maintenance        $  128   $  158       $   355  $   385
        Utilities                          59       52           149      150
        Salaries and related costs         51       48           133      128
        Insurance                          17       17            50       48
        Management fees                    44       38           123      111
        Administrative and other           73       68           228      186
                                       ------   ------       -------  -------
                                       $  372   $  381       $ 1,038  $ 1,008
                                       ======   ======       =======  =======

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, Hacienda Park Associates
     will 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, 1996 and March 31, 1996 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 $55  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, 1996 and March 31, 1996.        $   9,448        $   9,542

      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 $88  through  maturity
      on  October  15,  2001.  The  fair
      value   of   the   mortgage   note
      approximated its carrying value at
      September 30, 1996 and December 31,
      1995.                                            6,798            6,897

      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, 1996 and December 31,
      1995.                                            3,437            3,468
                                                    --------         --------
                                                    $ 19,683         $ 19,907
                                                    ========         ========


        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.

7.   Contingencies

        As  discussed  in more  detail in the  Annual  Report for the year ended
     March 31, 1996, the  Partnership  is involved in certain legal actions.  At
     the present time, the Managing  General Partner is unable to determine what
     impact,   if  any,  the  resolution  of  these  matters  may  have  on  the
     Partnership's financial statements, taken as a whole.

<PAGE>





             PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

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


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

     As a result of an overall  improvement  in operations at the  Partnership's
investment   properties,   the  Partnership   expects  to  increase  its  annual
distribution  rate from 1% to 2.5% on the $882 remaining  portion of an original
$1,000  investment.  This  potential  adjustment  would  be  effective  for  the
distribution  to be paid on May 15, 1997 for the quarter  ending March 31, 1997.
As discussed in the Annual Report, the Partnership reduced its distribution rate
to a level of 1% on remaining invested capital effective for the payment made on
February  15, 1996 for the quarter  ended  December  31, 1995 as a result of the
reduction in Partnership cash flow resulting from the sale of the Richmond Park,
Richland  Terrace and Treat  Commons II  properties  during the third quarter of
fiscal 1996.  During fiscal 1997,  management has evaluated the expected  future
capital needs of the Partnership's  remaining investment properties and believes
that current cash reserve levels are sufficient for such purposes. The status of
these potential future capital requirements are discussed further below.

    Loehmann's  Plaza was 84% leased as of December 31, 1996,  an increase  from
79% as of the end of the  second  quarter.  During  the third  quarter of fiscal
1997, a lease was signed with a new 8,526  square foot tenant.  This tenant will
take 5,525  square  feet of vacant  space and 3,001  square  feet of an existing
tenant's  7,290 square foot space.  During the second  quarter of fiscal 1997, a
renewal  and  expansion  agreement  was  signed  with an  existing  tenant  that
increased its 7,058 square foot store to a total of 13,160 square feet, or 9% of
the Center's rentable area. As previously  reported, a major capital enhancement
program was  completed at  Loehmann's  Plaza  between the spring of 1995 and the
fall of 1996.  The  improvement  program cost  approximately  $2 million and was
necessary in order for the property to remain competitive in its market. As part
of a  planned  repositioning  program,  management  terminated  the lease of the
property's  anchor tenant,  Loehmann's,  which  occupied  15,000 square feet, or
approximately 10% of the property's net leasable area.  Loehmann's,  which is no
longer a prominent  retailer in the Kansas City area, was not serving as a major
draw for the center and was paying a substantially  below market rental rate. On
November 7, 1995,  management  completed the negotiation of an agreement whereby
Loehmann's  consented to terminate its lease, vacate the property and relinquish
control of its space to the Partnership's  joint venture in return for a payment
of $75,000.  Management is currently in  discussions  with a number of potential
replacement  anchor  tenants  for the vacant  Loehmann's  space.  A lease with a
national or strong  regional  credit  anchor  tenant would  greatly  enhance the
position of the property in its  marketplace,  resulting in increased  cash flow
and an improved ability to lease vacant shop space.  Once this anchor  space is 
fully leased, the property would be in a position to be sold.

    A portion of the funds required to pay for the capital  improvement  work at
Loehmann's  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.  In addition, the lender required that
the  Partnership   unconditionally  guarantee  up  to  $1,400,000  of  the  loan
obligation.  This  guaranty  was to be  released  in the event that the  venture
satisfied the requirement for the release of the Renovation and Occupancy Escrow
funds. The Partnership did not satisfy the requirements for the release of these
escrow funds by the required date in August 1996.  As a result,  these funds are
expected to be applied  against the  mortgage  loan  payable  obligation  during
fiscal 1997,  and the $1.4 million  recourse  obligation  will likely  remain in
place until the property is sold or  refinanced.  The funds  required to pay for
the  remaining  re-leasing  costs at  Loehmann's  Plaza will be  provided by the
proceeds  retained  by the  Partnership  from the  sales of the  Richmond  Park,
Richland Terrace and Treat Commons II properties in fiscal 1996.

     A  significant  amount  of  funds  may  also be  needed  to pay for  tenant
improvement  costs to re-lease the vacant 36,000 square foot anchor tenant space
at West Ashley Shoppes.  As previously  reported,  Children's  Palace closed its
retail  store at the center in May 1991 and  subsequently  filed for  bankruptcy
protection  from creditors.  West Ashley's other major anchor tenant,  Phar-Mor,
emerged from the  protection  of Chapter 11 of the U.S.  Bankruptcy  Code during
fiscal 1996. While Phar-Mor closed a number of its stores  nationwide as part of
its bankruptcy  reorganization,  the company remains  obligated under a lease at
West Ashley which runs  through  August  2002.  On  September 9, 1996,  Phar-Mor
announced plans to merge with ShopKo,  another major pharmacy store chain. Prior
to the  merger,  Phar-Mor's  strategy  since  emerging  from  bankruptcy  was to
"rightsize" its stores down to 40,000 square feet.  Since the announced plans to
merge with Shopko,  Phar-Mor has announced that its stores will be approximately
55,000  square  feet,  which is in line with the size of the  existing  Phar-Mor
store at West Ashley Shoppes.  With these new  developments,  it does not appear
that  Phar-Mor  will  continue to pursue the  relocation  scenario to the former
Children's  Palace space as discussed in prior reports.  The property's  leasing
team is currently  refocusing  its efforts on finding  another  national  credit
tenant or  tenants  to fill the  vacant  anchor  space at West  Ashley  Shoppes.
Overall  occupancy at West Ashley  Shoppes stood at 70% as of December 31, 1996,
up from 68% as of the end of the second quarter.  During the third quarter,  the
leasing team  finalized a 4,000  square foot lease with a national  tenant which
will occupy a space vacated during the prior quarter.

     The 625 North Michigan Office Building was 86% leased at December 31, 1996,
down 3% from the prior quarter.  A tenant occupying 15,639 square feet moved out
of the  building  during the current  quarter upon the  expiration  of its lease
obligation.  However,  the loss of this tenant was  partially  offset by certain
positive  leasing  developments  during the quarter.  Two tenants expanded their
spaces for a total of 2,358 square feet, two leases were signed with new tenants
occupying  4,724 square feet,  and one tenant renewed its lease for 2,109 square
feet.  The  modernization  of the  building's  elevator  controls  is  currently
underway, and this work is expected to continue for approximately one year at an
estimated total cost of approximately $700,000.

     Occupancy at the Hacienda Business Park remained at 100% as of December 31,
1996.  Market  conditions  in  Pleasanton,  California,  where  Hacienda Park is
located,  have  improved  significantly  over the past year.  During the quarter
ended  September 30, 1996, four  build-to-suit  office  developments,  totalling
542,000 square feet, commenced construction. In calendar 1997, three speculative
office  projects,   totalling  560,000  square  feet,  are  scheduled  to  begin
construction.  The Hacienda Park investment property has been fully leased since
the third  quarter of fiscal  1996 with no leases due to expire  until  February
1998.  During the third quarter,  however,  a major tenant at Hacienda  Business
Park  announced  that it will  vacate the  property  and  relocate to one of the
proposed new buildings.  This tenant  occupies 51,683 square feet, or 28% of the
property's  leasable area, and will remain  responsible  for paying rent and its
share of  operating  expenses  on its six leases at Hacienda  Park which  expire
between  February 1998 and January 2001. The property's  leasing team will focus
its efforts on securing replacement tenants for this space. When new leases for
a substantial portion of this tenant's space  have been signed, management will
review the potential for selling the Hacienda Business Park property.

     The  average  occupancy  level at Asbury  Commons  Apartments  in  Atlanta,
Georgia,  was 89% for the third quarter of fiscal 1997,  compared to 93% for the
previous  quarter.  Despite the 4% decline,  average occupancy at Asbury Commons
continues to compare favorably to other similar quality apartment  properties in
the market.  The decrease in occupancy at Asbury  Commons  resulted from several
factors including the development of a substantial  number of apartment units in
the local  market,  as well as a seasonal  decline in the number of  prospective
tenants looking to rent  apartments.  In addition,  there has been a market-wide
decline in average  occupancy  levels as a result of the  thousands of temporary
employees that moved out of Atlanta after the Olympics. As the newly constructed
apartments are leased over the next year,  rental rates and occupancy levels are
projected to remain flat.  After this absorption  period,  however,  the Atlanta
apartment  market  should  benefit  from the  continuation  of  strong  regional
population and job growth.

     During the third  quarter,  an analysis of the exterior  wood trim and wood
framing at the Asbury Commons Apartments 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.
Management  is in the process of  assembling a design and  construction  team to
further  evaluate  the  potential  problems,  make  cost-effective   remediation
recommendations  and  implement  the repair  program.  Based on the  preliminary
assessments,  the magnitude of the repair work could be substantial.  Management
is  also  evaluating  potential  claims  to  be  made  against  various  parties
responsible for the construction of the apartment complex.  The eventual outcome
of any such claims cannot be determined at the present time.

     At The Gables Apartments in Richmond, Virginia, the average occupancy level
was 90%,  compared to 95% the previous  quarter.  The drop in average  occupancy
resulted  from a decline in the number of  prospective  tenants  looking to rent
apartments during the holiday season as well as the continued  attraction of the
local  single-family  home market.  However,  with demand for  apartments in the
Richmond market  generally  remaining  strong and only moderate new construction
activity  underway,  management  anticipates that average  occupancy levels will
rebound during the next quarter. In order to ensure that The Gables continues to
show well to prospective tenants, a signage and entrance improvement program was
completed during the third quarter.

     The  Partnership  elected  early  application  of  Statement  of  Financial
Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of Long-Lived
Assets and for  Long-Lived  Assets to Be Disposed Of" (SFAS 121) in fiscal 1996.
In  accordance  with SFAS 121, an  impairment  loss with respect to an operating
investment  property is recognized  when the sum of the expected future net cash
flows  (undiscounted  and without  interest  charges) is less than the  carrying
amount of the asset.  An impairment  loss is measured as the amount by which the
carrying amount of the asset exceeds its fair value, where fair value is defined
as the  amount  at  which  the  asset  could  be  bought  or sold  in a  current
transaction between willing parties,  that is other than a forced or liquidation
sale.  Based on  management's  analysis of  potential  impairment  in the fourth
quarter of fiscal 1996,  the  estimated  fair values of the Hacienda  Park,  625
North Michigan,  Loehmann's Plaza and West Ashley Shoppes  properties were below
their net carrying  amounts as of December 31, 1995.  Management's  estimates of
future  undiscounted  cash  flows for all four  properties  indicated  that such
carrying  amounts were expected to be  recovered,  but, in the case of 625 North
Michigan and Hacienda Park, the reversion values could be less than the carrying
amounts  at the time of  disposition.  As a result of such  assessment,  the 625
North  Michigan  joint  venture   commenced   recording  an  additional   annual
depreciation  charge of $350,000 and the Hacienda Park joint  venture  commenced
recording an additional annual depreciation charge of $250,000 in calendar 1995.
Both  adjustments  were reflected in the  Partnership's  consolidated  financial
statements  effective for the fourth quarter of fiscal 1996. Such annual charges
will continue to be recorded in future periods.  Based on management's analysis,
no changes to the  depreciation on Loehmann's  Plaza or West Ashley Shoppes were
required.

     At December 31, 1996, the Partnership and its  consolidated  joint ventures
had available cash and cash equivalents of approximately  $5,511,000.  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 (as required) 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, 1996
------------------------------------

      The Partnership reported a net loss of $224,000 for the three months ended
December 31, 1996,  as compared to a net loss of $225,000 for the same period in
the  prior  year.  This  $1,000  decrease  in  the  Partnership's  net  loss  is
attributable to a decrease in the Partnership's  operating loss of $82,000 which
was partially offset by a decrease in the Partnership's  share of unconsolidated
ventures'  income  of  $54,000  and a  decrease  in  interest  income  on  notes
receivable from unconsolidated  ventures of $27,000. The Partnership's operating
loss decreased primarily due to declines in general and administrative  expenses
and interest  expense which were partially offset by an increase in depreciation
expense.  General and administrative  expenses decreased by $152,000 mainly as a
result of  additional  legal  costs  incurred  in the prior  three-month  period
associated  with  certain  refinancing  and  sale  transactions,  as  well  as a
reduction in other professional fees. Interest expense decreased by $63,000 as a
result of scheduled monthly principal payments as well as interest  attributable
to a $2  million  short-term  loan  which was  outstanding  in the  prior  year.
Depreciation  and  amortization  expense  increased  by $109,000 for the current
three-month period primarily due to the accelerated depreciation on the Hacienda
Business Park property, as discussed further above.

    A major portion of the decrease in the Partnership's share of unconsolidated
ventures' income, as well as the decrease in interest income on notes receivable
from unconsolidated ventures,  resulted from income attributable to the Richmond
Park/Richland  Terrace  and Treat  Commons  II joint  ventures  which sold their
operating  properties  during the third quarter of fiscal 1996.  The decrease in
the Partnership's  share of  unconsolidated  ventures' income resulting from the
asset  sales was  partially  offset by improved  operating  results at all three
remaining  unconsolidated ventures for the current three-month period. The major
reason for the  improvement  at the 625 North Michigan joint venture was a lower
real estate tax expense.  The  venture's  real estate taxes  decreased  due to a
reassessment  that lowered the real estate tax bill for the current  three-month
period.  The improved operating results at The Gables and Loehmann's Plaza joint
ventures were primarily the result of higher rental income.

Nine Months Ended December 31, 1996
-----------------------------------

    The  Partnership  reported a net loss of $425,000  for the nine months ended
December 31, 1996,  as compared to a net loss of $454,000 for the same period in
the prior year.  This  decrease in the  Partnership's  net loss  resulted from a
$304,000 decrease in the Partnership's operating loss which was partially offset
by a $195,000  decrease in the Partnership's  share of unconsolidated  ventures'
income and an $80,000  decrease  in  interest  income on notes  receivable  from
unconsolidated  ventures.  A major portion of the decrease in the  Partnership's
share of  unconsolidated  ventures'  income, as well as the decrease in interest
income on notes receivable from  unconsolidated  ventures,  resulted from income
attributable  to the  Richmond  Park/Richland  Terrace and Treat  Commons  joint
ventures  which  sold their  operating  properties  during the third  quarter of
fiscal 1996.  Increases in property  operating  expenses at the Loehmann's Plaza
and 625 North Michigan joint ventures during the current  nine-month period also
contributed  to  the  decrease  in the  Partnership's  share  of  unconsolidated
ventures'  income.  Property  operating  expenses at Loehmann's  Plaza increased
mainly due to  additional  repairs and  maintenance  expenses  and  depreciation
charges  associated with the recently  completed  enhancement  program discussed
further  above.  Property  operating  expenses at 625 North  Michigan  increased
mainly due to additional  repairs and maintenance  expenditures  associated with
the  renovation  of the  building's  exterior  facade  incurred  in the  current
nine-month period. An increase in rental income from The Gables Apartments and a
decrease in real estate taxes at 625 North Michigan  partially offset the impact
of these unfavorable  changes in the current  nine-month  period.  Rental income
from The Gables Apartments increased by approximately 7% over the same period in
the prior year due to increases in rental rates  implemented  over the past year
as a  result  of the  strengthening  Richmond  apartment  market.  At 625  North
Michigan,  a property tax reassessment  resulted in a reduction in taxes for the
current nine-month period.

    The  Partnership's  operating  loss  decreased  for the  nine  months  ended
December 31, 1996,  when compared to the same period in the prior year, due to a
$375,000 increase in total revenues,  which  was  partially  offset by a $71,000
increase  in total  expenses.  Total  revenues  increased  due to an increase in
rental income and expense reimbursements from the consolidated joint ventures as
well as an increase in interest income. Rental income and expense reimbursements
increased  mainly  due to an  increase  in  average  occupancy  at the  Hacienda
Business  Park along with  higher  average  rental  rates at the Asbury  Commons
Apartments  and Hacienda  Business  Park during the current  nine-month  period.
Interest income increased due to an increase in average outstanding cash reserve
balances  resulting  from the retention of a portion of the sales  proceeds from
the  Richmond  Park/Richland  Terrace  and Treat  Commons II  properties.  Total
expenses  increased mainly due to higher  depreciation and amortization  charges
related to the consolidated joint ventures in the current nine-month period. The
increase in depreciation and amortization  expense is primarily  attributable to
the  accelerated  depreciation  on  the  Hacienda  Business  Park  property,  as
discussed  further  above.   Decreases  in  interest  expense  and  general  and
administrative   expenses   partially   offset  the  higher   depreciation   and
amortization  charges.  Interest expense  decreased by $88,000  primarily due to
scheduled  principal  amortization  as well  as  interest  attributable  to a $2
million  short-term  loan which was  outstanding in the prior year.  General and
administrative  expenses  declined  mainly as a result of a reduction in certain
professional fees.



<PAGE>



                                     PART II

                                Other Information

Item 1. Legal Proceedings

     As discussed in prior  quarterly  and annual  reports,  in November  1994 a
series of purported class actions (the "New York Limited  Partnership  Actions")
were filed in the United States District Court for the Southern  District of New
York concerning  PaineWebber  Incorporated's  sale and sponsorship of 70 limited
partnership  investments,  including  those  offered  by  the  Partnership.  The
lawsuits were brought against  PaineWebber  Incorporated  and Paine Webber Group
Inc.  (together   "PaineWebber"),   among  others,  by  allegedly   dissatisfied
partnership investors.  In March 1995, after the actions were consolidated under
the title In re  PaineWebber  Limited  Partnership  Litigation,  the  plaintiffs
amended their complaint to assert claims against a variety of other  defendants,
including  Second Equity  Partners,  Inc. and Properties  Associates  1986, L.P.
("PA1986"),  which are the General Partners of the Partnership and affiliates of
PaineWebber.  On May 30, 1995, the court certified class action treatment of the
claims asserted in the litigation.

      In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding,  PaineWebber  irrevocably  deposited  $125 million into an escrow
fund under the  supervision of the United States District Court for the Southern
District of New York to be used to resolve the  litigation in accordance  with a
definitive  settlement  agreement  and plan of  allocation.  On July  17,  1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which has been preliminarily approved by the court and provides for the complete
resolution of the class action  litigation,  including  releases in favor of the
Partnership  and the General  Partners,  and the  allocation of the $125 million
settlement  fund among  investors  in the various  partnerships  at issue in the
case.  As part of the  settlement,  PaineWebber  also  agreed to  provide  class
members with certain financial  guarantees relating to some of the partnerships.
The details of the settlement are described in a notice mailed directly to class
members at the  direction of the court.  A final  hearing on the fairness of the
proposed  settlement  was held in December  1996, and a ruling by the court as a
result of this final hearing is currently pending.

      With regard to the Abbate and Bandrowski  actions  described in the Annual
Report on Form 10-K for the year ended March 31,  1996,  in  September  1996 the
court  dismissed  many  of  the  plaintiffs'  claims  as  barred  by  applicable
securities arbitration  regulations.  Mediation with respect to both actions was
held in December  1996. As a result of such  mediation,  a tentative  settlement
between  PaineWebber  and the  plaintiffs  was reached  which would  provide for
complete resolution of such actions.  PaineWebber  anticipates that releases and
dismissals with regard to these actions will be received by February 1997.

     Under certain limited circumstances,  pursuant to the Partnership Agreement
and other contractual  obligations,  PaineWebber affiliates could be entitled to
indemnification  for expenses and  liabilities in connection with the litigation
discussed above. However, PaineWebber has agreed not to seek indemnification for
any amounts it is required to pay in connection  with the  settlement of the New
York Limited  Partnership  Actions.  At the present time,  the General  Partners
cannot estimate the impact, if any, of the potential  indemnification  claims on
the  Partnership's  financial  statements,  taken  as a whole.  Accordingly,  no
provision  for any  liability  which could result from the  eventual  outcome of
these  matters has been made in the  accompanying  financial  statements  of the
Partnership.

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, 1997