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 JUNE 30, 1997

                                       OR

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

            For the transition period from ______ to _______ .


                         Commission File Number: 0-15705


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


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


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


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


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed  by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934
during the preceding 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days. Yes |X| . No |_| .

<PAGE>


             PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

                         CONSOLIDATED BALANCE SHEETS
                 June 30, 1997 and March 31, 1996 (Unaudited)
                                (In thousands)

                                    ASSETS
                                                    June 30          March 31
                                                    -------          --------
Operating investment properties:
   Land                                           $    7,351       $    7,351
   Buildings and improvements                         40,044           40,018
                                                  ----------       ----------
                                                      47,395           47,369
   Less accumulated depreciation                     (12,650)         (12,155)
                                                  ----------       ----------
                                                      34,745           35,214

Investments in unconsolidated ventures, at equity     31,895           31,784
Cash and cash equivalents                              5,194            5,322
Escrowed cash                                            342              279
Accounts receivable                                      255              151
Prepaid expenses                                          35               50
Deferred rent receivable                                 807              832
Deferred expenses, net                                   614              646
                                                  ----------       ----------
                                                  $   73,887       $   74,278
                                                  ==========       ==========

                      LIABILITIES AND PARTNERS' CAPITAL

Accounts payable and accrued expenses             $      494       $      271
Net advances from consolidated ventures                  438              400
Tenant security deposits                                  69              116
Bonds payable                                          2,197            2,297
Mortgage notes payable                                19,582           19,650
Other liabilities                                        331              331
Partners' capital                                     50,776           51,213
                                                  ----------       ----------
                                                  $   73,887       $   74,278
                                                  ==========       ==========


        CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
          For the three months ended June 30, 1997 and 1996 (Unaudited)
                                 (In thousands)

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

Balance at March 31, 1996                        $   (494)        $  56,173
Cash distributions                                     (3)             (297)
Net loss                                               (2)             (247)
                                                 --------         ---------
Balance at June 30, 1996                         $   (499)        $  55,629
                                                 ========         =========

Balance at March 31, 1997                        $   (539)        $  51,752
Cash distributions                                     (3)             (297)
Net loss                                               (2)             (135)
                                                 --------         ---------
Balance at June 30, 1997                         $   (544)        $  51,320
                                                 ========         =========

                           See accompanying notes.


<PAGE>


               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS
          For the three months ended June 30, 1997 and 1996 (Unaudited)
                      (In thousands, except per Unit data)

                                               1997           1996
                                               ----           ----
Revenues:
   Rental income and expense reimbursements  $1,352         $1,197
   Interest and other income                    100             76
                                             ------         ------
                                              1,452          1,273

Expenses:
   Property operating expenses                  421            348
   Depreciation and amortization                519            481
   Interest expense                             473            515
   Real estate taxes                            136            116
   General and administrative                    94            138
                                             ------         ------
                                              1,643          1,598
                                             ------         ------
Operating loss                                 (191)          (325)

Partnership's share of unconsolidated
  ventures' income                               54             76
                                             ------         ------

Net loss                                     $ (137)        $ (249)
                                             ======         ======

Net loss per 1,000 Limited
  Partnership Units                          $(1.01)        $(1.86)
                                             ======         ======

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


   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 CASH FLOWS
          For the three months ended June 30, 1997 and 1996 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)

                                                       1997            1996
                                                       ----            ----
Cash flows from operating activities:
   Net loss                                        $    (137)        $   (249)
   Adjustments to reconcile net loss to net cash
     provided by operating activities:
     Partnership's share of unconsolidated 
       ventures' income                                  (54)             (76)
     Depreciation and amortization                       519              481
     Amortization of deferred financings costs            10               16
     Changes in assets and liabilities:
      Escrowed cash                                      (63)             (57)
      Accounts receivable                               (104)             149
      Prepaid expenses                                    15               18
      Deferred rent receivable                            25              (64)
      Deferred expenses                                   (2)             (70)
      Accounts payable and accrued expenses              223               94
      Advances to (from) consolidated ventures            38              346
      Tenant security deposits                           (47)              18
                                                   ---------         --------
        Total adjustments                                560              855
                                                   ---------         --------
        Net cash provided by operating activities        423              606
                                                   ---------         --------

Cash flows from investing activities:
   Distributions from unconsolidated ventures            456              600
   Additional investments in unconsolidated ventures    (513)            (512)
   Additions to operating investment properties          (26)            (112)
                                                   ---------         --------
        Net cash used in investing activities            (83)             (24)
                                                   ---------         --------

Cash flows from financing activities:
   Distributions to partners                            (300)            (300)
   Repayment of principal on long term debt             (168)             (74)
                                                   ---------         --------
        Net cash used in financing activities           (468)            (374)
                                                   ---------         --------

Net (decrease) increase in cash and cash equivalents    (128)             208

Cash and cash equivalents, beginning of period         5,322            5,126
                                                   ---------         --------

Cash and cash equivalents, end of period           $   5,194         $  5,334
                                                   =========         ========

Cash paid during the period for interest           $     463         $    476
                                                   =========         ========








                           See accompanying notes.


<PAGE>


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


1.  General

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

    The  accompanying  financial  statements  have been  prepared on the accrual
    basis  of  accounting  in  accordance  with  generally  accepted  accounting
    principles which requires  management to make estimates and assumptions that
    affect the reported  amounts of assets and  liabilities  and  disclosures of
    contingent assets and liabilities as of June 30, 1997 and March 31, 1997 and
    revenues  and expenses for each of the  three-month  periods  ended June 30,
    1997  and  1996.   Actual  results  could  differ  from  the  estimates  and
    assumptions used.

2.  Investments in Unconsolidated Joint Ventures

        As  of  June  30,  1997,  the   Partnership  had  investments  in  three
    unconsolidated  joint venture  partnerships  which own operating  investment
    properties  as  described  further in the  Partnership's  Annual  Report The
    unconsolidated  joint venture  partnerships  are accounted for on the equity
    method in the  Partnership's  financial  statements  because the Partnership
    does  not have a voting  control  interest  in  these  joint  ventures.  The
    Partnership's policy is to recognize its share of ventures' operations three
    months in arrears.

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

                    Condensed Combined Summary of Operations
               For the three months ended March 31, 1997 and 1996
                                 (in thousands)

                                               1997          1996
                                               ----          ----

Revenues:
   Rental revenues and expense recoveries    $2,224         $2,319
   Interest and other income                    164            160
                                             ------         ------
                                              2,388          2,479

Expenses:
   Property operating expenses                  805            778
   Real estate taxes                            503            542
   Interest expense                             204            221
   Depreciation and amortization                790            806
                                             ------         ------
                                              2,302          2,347
                                             ------         ------
Net income                                   $   86         $  132
                                             ======         ======

Net income:
   Partnership's share of combined income   $    68         $   90
   Co-venturers' share of combined income        18             42
                                            -------         ------
                                            $    86         $  132
                                            =======         ======


<PAGE>


               Reconciliation of Partnership's Share of Operations
                For the three months ended June 30, 1997 and 1996
                                 (in thousands)

                                               1997         1996
                                               ----         ----

   Partnership's share of operations,
       as shown above                       $    68      $    90
   Amortization of excess basis                 (14)         (14)
                                            -------      -------
   Partnership's share of unconsolidated
       ventures' income                     $    54      $    76
                                            =======      =======

3.  Operating Investment Properties

        The  Partnership's  balance  sheets at June 30,  1997 and March  31,1997
     include three operating  investment  properties  owned by joint ventures in
     which the Partnership has a controlling interest;  Saratoga Center and EG&G
     Plaza,  owned by Hacienda Park Associates,  the Asbury Commons  Apartments,
     owned by Atlanta Asbury  Partnership,  and the West Ashley Shoppes shopping
     center,  owned by West Ashley Shoppes Associates.  The Partnership's policy
     is to report the  operations  of these  consolidated  joint  ventures  on a
     three-month  lag.  Saratoga Center and EG&G Plaza consists of four separate
     office/R&D buildings comprising  approximately 185,000 square feet, located
     in  Pleasanton,   California.  Asbury  Commons  Apartments  is  a  204-unit
     residential apartment complex located in Atlanta,  Georgia. The West Ashley
     Shoppes  shopping center consists of  approximately  135,000 square feet of
     leasable retail space located in Charleston, South Carolina.

        The following is a combined summary of property  operating  expenses for
    Saratoga  Center and EG&G  Plaza,  Asbury  Commons  Apartments  and the West
    Ashley Shoppes shopping center for the three months ended March 31, 1997 and
    1996 (in thousands):

                                                 1997          1996
                                                 ----          ----

      Property operating expenses:
        Repairs and maintenance                $   156       $    96
        Utilities                                   53            47
        Salaries and related costs                  50            42
        Insurance                                   16            17
        Management fees                             47            39
        Administrative and other                    99           107
                                               -------       -------
                                               $   421       $   348
                                               =======       =======

4. Related Party Transactions

        Included in general and  administrative  expenses  for the three  months
     ended  June  30,  1997  and  1996 is  $59,000  and  $65,000,  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 three
     months  ended June 30,  1997 and 1996 is $6,000 and  $7,000,  respectively,
     representing fees earned by an affiliate,  Mitchell Hutchins  Institutional
     Investors, Inc., for managing the Partnership's cash assets.


<PAGE>


5.   Bonds Payable

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

6.   Mortgage Notes Payable

        Mortgage  notes  payable  on  the  consolidated  balance  sheets  of the
    Partnership at June 30, 1997 and March 31, 1997 consist of the following (in
    thousands):
                                                    June 30          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
     June 30, 1997 and March 31, 1997.             $   9,385     $   9,418

     8.75%  mortgage note payable by the
     consolidated     Atlanta     Asbury
     Partnership to an insurance company
     secured  by  the   Asbury   Commons
     operating investment property.  The
     loan requires monthly principal and
     interest  payments  of $55  through
     maturity on October 15,  2001.  The
     fair  value  of the  mortgage  note
     approximated  its carrying value at
     March  31,  1997 and  December  31,
     1996.                                             6,782         6,806

     9.04%  mortgage note payable by the
     consolidated      Hacienda     Park
     Associates to an insurance  company
     secured by the Saratoga  Center and
     EG&G  Plaza  operating   investment
     property. The loan requires monthly
     principal and interest  payments of
     $36 through maturity on January 20,
     2002.   The   fair   value  of  the
     mortgage  note   approximated   its
     carrying  value at March  31,  1997
     and December 31, 1996.                            3,415        3,426
                                                   ---------     --------
                                                   $  19,582     $ 19,650
                                                   =========     ========

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


<PAGE>


             PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

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


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

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

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

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

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

      The average  occupancy level at the Asbury Commons  Apartments was 84% for
the quarter  ended June 30, 1997,  compared to 87% for the prior quarter and 93%
for the same  period one year ago. As of June 30,  1997,  the  property  was 92%
leased,  which was equal to the local market  average.  During the quarter ended
March 31, 1997, the continued lease-up of over 3,500 new apartments in the local
area  resulted  in an  increase  in the use of  concessions  and a  decrease  in
effective rents by 5% for comparable properties. However, the use of substantial
concessions  decreased  during the current  fiscal  quarter and effective  rents
stabilized.  The  outlook for  additional  apartment  construction  in the local
market  over the  next  year is more  moderate,  with  only one new  development
breaking ground to date this year. In March 1997, a national property management
firm was hired to take over  management  at Asbury  Commons  effective  April 1,
1997. The new management  firm has completed its initial market and  positioning
surveys for Asbury  Commons.  The  property's  management  and  leasing  team is
confident  that the  property  will  perform at average  occupancies  similar to
comparable  properties in the market,  including newly constructed  communities,
once the repair program  discussed above has been  completed.  The team has also
indicated  that  effective  rents can be  increased  at Asbury  Commons  through
improved signage, targeted advertising and promotion, and selected unit interior
upgrades.

      Loehmann's  Plaza Shopping Center in Overland Park,  Kansas was 90% leased
as of June 30,  1997,  as  compared to 84% at the end of the  previous  quarter.
Physical occupancy at the Center increased to 89% from 80% the previous quarter.
As previously reported,  the property's leasing team signed a 13,410 square foot
lease,  representing 9% of the Center's leasable area, with Gateway 2000 Country
Stores to occupy the former  Loehmann's  space.  Gateway 2000 Country Stores,  a
manufacturer  and retailer of personal  computers,  opened its new store on June
30, 1997. The property's management team reports that the opening of the Gateway
2000 store is already  significantly  increasing  the number of customers in the
Center.  In addition,  a 6,102 square foot expansion of the shopping  center was
completed  during the current  quarter for an existing  7,058 square foot tenant
that  opened for  business  in late June.  With the opening of these two stores,
representing almost 20% of the Center's leasable area, the leasing team believes
that  prospective  tenant interest in the remaining 14,000 square feet available
for lease will improve.  Other tenant activity  during the quarter  included the
signing of a three-year lease extension  agreement with an existing 1,920 square
foot tenant,  the closing on the April 30, 1997 lease expiration date of a 4,289
square foot store with weak sales,  and the closing of a 2,000 square foot store
of a credit tenant whose lease expires in July 2000. It is anticipated that this
tenant  will  continue  to pay its  rental  payments  and  contractual  share of
operating  expenses  through  the  lease  expiration  date or until the space is
re-leased to another tenant.  With the July grand opening of a new grocery store
near Loehmann's Plaza,  increased shopper traffic levels along the Center's road
frontage are projected. As a result of the Gateway 2000 lease and the completion
of the expansion referred to above, the Loehmann's Plaza property should be in a
position to be marketed for a potential sale in the relatively near term.

      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.  As of August 1996, 18 months from the
date of the loan closing,  such  requirements had not been met.  Therefore,  the
lender  may apply the  balance  of the  escrow  account  to the  payment of loan
principal.  As of June 30, 1997, such  application of escrow funds by the lender
had not  occurred.  In  addition,  the  lender  required  that  the  Partnership
unconditionally guaranty up to $1,400,000 of the loan obligation.  This guaranty
will be released in the event that the joint venture  satisfies the  requirement
for the  release  of the  Renovation  and  Occupancy  Escrow  funds  or upon the
repayment, in full, of the entire outstanding mortgage loan liability.

      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. During
the current quarter, such merger plans were terminated.  Because Phar-Mor leases
52,000  square feet at West  Ashley  Shoppes,  the  property's  leasing  team is
attempting to ascertain  Phar-Mor's  future plans for their store at the Center.
The property's  leasing team  continues to focus its efforts on finding  another
national credit tenant or tenants to fill the vacant  Children's Palace space at
West Ashley  Shoppes.  During the first quarter of fiscal 1998,  the  property's
leasing team showed the former  Children's  Palace space to several  prospective
tenants, one of whom has shown serious interest.  The leasing team is cautiously
optimistic that negotiations  will result in a lease-up of this space.  Securing
an anchor  tenant  would  enhance the value of the  shopping  center and provide
stability  for the small shop tenants.  At  the June 30, 1997  quarter end, West
Ashley  Shoppes  was 64% leased  and  occupied,  compared  to 68% leased and 67%
occupied at the end of the previous  quarter.  During the period, a 1,050 square
foot tenant  moved from the Center.  Also,  a lease  expired with a 1,400 square
foot tenant  which had moved from the Center last  quarter.  At quarter end, the
Center's small shop tenant space was 74% leased.

     The 625 North Michigan Office Building in Chicago, Illinois, was 87% leased
at June 30,  1997,  compared  to 82% at the end of the prior  quarter.  Four new
tenants with a total of 8,422 square feet took occupancy during the quarter, and
one tenant expanded its space by 720 square feet. Another tenant occupying 1,509
square feet moved from the  building  at the end of its lease  term.  During the
quarter,  two leases were signed with new tenants  that will occupy 7,840 square
feet, and one existing  tenant signed a lease for a 1,023 square foot expansion.
These tenants are expected to move into their spaces during the second  quarter.
Over the  remainder of calendar year 1997,  leases with six tenants  occupying a
total of 11,594  square feet will expire.  The  property's  leasing team expects
most of these tenants to renew their leases. The modernization of the building's
elevator controls is currently  underway.  This work is expected to continue for
the remainder of calendar year 1997 at an estimated total cost of  approximately
$700,000.

      The four  buildings  comprising  the  Hacienda  Business  Park  investment
property in Pleasanton,  California, remained 100% leased to four tenants at the
end of the first quarter.  The local market continues to experience  rental rate
growth with market  occupancy  levels over 98%. During May, a new BART (Bay Area
Rapid Transit) station opened,  which will serve this Pleasanton  office market.
As previously  reported,  one of the property's  tenants,  which occupies 51,683
square feet, or 28% of the property's  leasable area,  under several leases with
expiration  dates in 1998,  1999 and 2001,  announced that it will relocate from
Hacienda  Business  Park into a new  building  under  construction  in the local
market.  One of the buildings contains 41,656 square feet and is fully leased by
this tenant. The tenant's remaining 10,027 square feet is leased in an adjoining
building.  As previously  reported,  the tenant will  consolidate its operations
into the new building  which is expected to be ready for  occupancy in September
1997.  This  tenant  will  remain   responsible  for  rental  payments  and  its
contractual  share of operating  expenses until the leases expire.  Nonetheless,
the property's leasing team is diligently working to secure replacement  tenants
for this 51,683 square feet.  Because the existing rental rates on the leases of
this tenant are significantly  below current market rates, the Partnership could
have an  opportunity  to  re-lease  any vacated  space at the higher  prevailing
market rental rates.  In any event,  provided  there is no dramatic  increase in
either planned speculative development or build-to-suit development with current
tenants  in the local  market,  the  Partnership  can be  expected  to achieve a
materially  higher sale price for the  Hacienda  Park  property as the  existing
below-market  leases approach their expiration  dates.  Accordingly,  management
plans to defer any sale  efforts  for the  immediate  future in order to capture
this expected  increase in value.  In the meantime,  management will continue to
closely monitor all planned development activity in this market.

     The average occupancy level at The Gables  Apartments  increased to 96% for
the quarter  ended June 30, 1997,  compared to 91% for the prior quarter and 94%
for the same period a year ago. The upward trend reflects a seasonal increase in
the number of prospective  tenants  looking to rent apartments and strong demand
for  apartments  resulting from strong job,  household  formation and population
growth in the Richmond,  Virginia market. As job growth is projected to continue
during the next few years, the economic outlook for Richmond remains strong. Two
significant employers include the White Oaks semiconductor plant, which is under
construction  and  projected to employ 1,500  people,  and the nearly  completed
Capital One credit  facility,  which will employ 1,000  people.  While there are
three  apartment   communities,   comprising   approximately  900  units,  under
construction  in the local  market,  only one 280-unit  community is  considered
competition  for The Gables  Apartments.  The other  communities  are located at
least five miles from The Gables and offer larger units at significantly  higher
rents.  The  primary  property  improvements  scheduled  at The  Gables  for the
remainder of calendar 1997 include exterior wood-trim replacement in preparation
for a complete painting of the building exteriors.

      At June 30, 1997, the Partnership and its consolidated  joint ventures had
available cash and cash equivalents of approximately  $5,194,000.  Such cash and
cash equivalent amounts will be utilized for the working capital requirements of
the  Partnership,  for reinvestment in certain of the  Partnership's  properties
including the  anticipated  construction  repair work at Asbury  Commons and the
capital needs of the Partnership's  commercial  properties (as discussed further
above) and for distributions to the partners. The source of future liquidity and
distributions  to the  partners is expected to be through  cash  generated  from
operations  of the  Partnership's  income-producing  investment  properties  and
proceeds received from the sale or refinancing of such properties.  Such sources
of liquidity are expected to be sufficient  to meet the  Partnership's  needs on
both a short-term and long-term basis.

Results of Operations
Three Months Ended June 30, 1997
--------------------------------

      The Partnership reported a net loss of $137,000 for the three months ended
June 30, 1997,  as compared to a net loss of $249,000 for the same period in the
prior  year.  This  decrease  in net  loss is the  result  of a  decline  in the
partnership's  operating  loss which was  partially  offset by a decrease in the
Partnership's  share  of  unconsolidated  ventures'  income.  The  Partnership's
operating  loss  decreased by $134,000,  when compared to the same period in the
prior  year,  due to an  increase  in total  revenues  of  $179,000,  which  was
partially  offset by an increase in total  expenses of $45,000.  The increase in
the Partnership's  revenue consisted of a $156,000 increase in rental income and
a $24,000 increase in interest and other income.  Rental income increased due to
an increase in rental income at the  consolidated  Hacienda Park and West Ashley
Shoppes joint  ventures.  Rental  income at Hacienda  Park  increased due to the
expansion of a major tenant and a lease renewal of another major tenant, both at
substantially  higher rates.  Rental income increased at West Ashley Shoppes due
to  substantial  increases  in common area  maintenance  reimbursements  and tax
reimbursements.  Rental income  decreased at Asbury Commons due to a decrease in
average  occupancy.  Interest and other income  increased as a result of a small
increase in the average  amount of cash and cash  equivalents  outstanding  when
compared to the same period in the prior year.

     The  $45,000  increase  in total  expenses  is  mainly  attributable  to an
increase in property  operating  expenses of $73,000.  The  increase in property
operating   expenses  is  mainly   attributable  to  increases  in  repairs  and
maintenance costs and salaries at the consolidated Asbury Commons joint venture.
Repairs  and  maintenance  costs  increased  primarily  due to  the  preliminary
investigative work related to the construction  defects discussed further above.
In addition, there were small increases in depreciation and amortization expense
and real estate tax expense of $38,000 and $20,000,  respectively.  Depreciation
and amortization expense increased due to an increase in depreciation expense at
West  Ashley  Shoppes.  Real  estate  taxes  increased  due to a higher  expense
recorded  by the  Asbury  Commons  joint  venture.  The  increases  in  property
operating  expenses,  depreciation  and  amortization and real estate taxes were
partially  offset by  decreases  in  general  and  administrative  expenses  and
interest   expense  of  $44,000   and   $42,000,   respectively.   General   and
administrative  expenses decreased as a result of a decrease in certain required
professional fees during the current quarter.  Interest expense decreased due to
scheduled amortization of the mortgage principal balances outstanding.

      The Partnership's  share of  unconsolidated  ventures' income decreased by
$22,000  primarily due to decreases in net income at the 625 North  Michigan and
Richmond Gables joint ventures of $28,000 and $29,000,  respectively. Net income
decreased at 625 North  Michigan due to a decrease in rental  income as a result
of a decline in average  occupancy.  Net income  decreased  at  Richmond  Gables
primarily due to an increase in utilities  expense.  The decreases in net income
at 625 North Michigan and Richmond  Gables were partially  offset by an increase
in net income at  Loehmann's  Plaza of $35,000 due to decreases in insurance and
repairs and maintenance expenses.


<PAGE>



                                     PART II

                                Other Information

Item 1. Legal Proceedings

                    NONE

Item 2. through 5.  NONE

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits:     NONE

(b)  Reports on Form 8-K:

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




<PAGE>





                   PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP


                                   SIGNATURES

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


                                    PAINEWEBBER EQUITY PARTNERS TWO
                                          LIMITED PARTNERSHIP


                                    By:  Second Equity Partners, Inc.
                                         Managing General Partner
 


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






Dated:  August 13, 1997