UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C.  20549
                      ----------------------------------

                                   FORM 10-Q

    X       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996

                                      OR

            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934 (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
              September 30, 1996 and March 31, 1996 (Unaudited)
                                (In thousands)

                                    ASSETS
                                                 September 30      March 31
                                                 ------------      --------

Operating investment properties:
   Land                                           $    8,808     $      8,808
   Building and improvements                          41,605           41,396
                                                 -----------     ------------
                                                      50,413           50,204
   Less accumulated depreciation                     (11,639)         (10,781)
                                                 -----------      -----------
                                                      38,774           39,423

Investments in unconsolidated joint 
  ventures, at equity                                 31,800           32,206
Cash and cash equivalents                              5,419            5,126
Escrowed cash                                            287              150
Accounts receivable                                      334              261
Accounts receivable - affiliates                          15               15
Net advances to consolidated ventures                      -               78
Prepaid expenses                                           3               29
Deferred rent receivable                                 816              731
Deferred expenses, net                                   631              703
                                                  ----------       ----------
                                                  $   78,079       $   78,722
                                                  ==========       ==========

                      LIABILITIES AND PARTNERS' CAPITAL


Accounts payable and accrued expenses             $      450       $      283
Net advances from consolidated ventures                  167                -
Tenant security deposits                                 121               96
Bonds payable                                          2,364            2,408
Mortgage notes payable                                19,750           19,907
Other liabilities                                        349              349
Partners' capital                                     54,878           55,679
                                                  ----------        ---------
                                                  $   78,079        $  78,722
                                                  ==========        =========















                           See accompanying notes.


<PAGE>


               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS
   For the three and six months ended September 30, 1996 and 1995 (Unaudited)
                      (In thousands, except per Unit data)

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

Revenues:
   Rental income and expense
     reimbursements                   $ 1,382     $1,167      $2,579   $2,266
   Interest and other income              104         67         180      118
                                      -------     ------      ------   ------
                                        1,486      1,234       2,759    2,384

Expenses:
   Property operating expenses            318        305         666      627
   Depreciation and amortization          532        408       1,013      797
   Interest expense                       483        517         998    1,023
   General and administrative             141        196         279      328
   Real estate taxes                       93        138         209      237
                                      -------    -------     -------  -------
                                        1,567      1,564       3,165    3,012
                                      -------    -------     -------  -------
Operating loss                            (81)      (330)       (406)    (628)

Investment income:
   Interest income on note receivable
     from unconsolidated venture            -         28           -       53
   Partnership's share of 
     unconsolidated ventures' income      129         86         205      346
                                     --------    --------    --------  ------

Net income (loss)                    $     48    $  (216)    $  (201)  $ (229)
                                     ========    =======     ========  ======

Net income (loss) per 1,000 Limited
  Partnership Units                     $ 0.35     $(1.59)     $(1.48)  $(1.69)
                                        ======     ======      =======  ======

Cash distributions per 1,000 Limited
  Partnership Units                     $ 2.21     $ 4.72      $ 4.42   $ 9.44
                                        ======     ======      ======   ======


   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 six months ended September 30, 1996 and 1995 (Unaudited)
                                (In thousands)

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

Balance at March 31, 1995                        $   (527)        $  61,126
Cash distributions                                    (13)           (1,269)
Net loss                                               (3)             (226)
                                                 --------         ---------
Balance at September 30, 1995                    $   (543)        $  59,631
                                                 ========         =========

Balance at March 31, 1996                        $   (494)        $  56,173
Cash distributions                                     (6)             (594)
Net loss                                               (2)             (199)
                                                 ---------       ----------
Balance at September 30, 1996                    $   (502)       $   55,380
                                                 =========       ==========

































                           See accompanying notes.


<PAGE>


               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
        For the six months ended September 30, 1996 and 1995 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)

                                                       1996             1995
                                                       ----             ----
Cash flows from operating activities:
   Net loss                                           $(201)           $ (229)
   Adjustments to reconcile net loss to net cash
   provided by operating activities:
     Partnership's share of unconsolidated 
       ventures' income                                 (205)            (346)
     Depreciation and amortization                     1,013              797
     Amortization of deferred financings costs            25               19
      Changes in assets and liabilities:
      Escrowed cash                                     (137)            (113)
      Accounts receivable                                (73)             (37)
      Accounts receivable - affiliates                     -              (68)
      Prepaid expenses                                    26               28
      Deferred rent receivable                           (85)             (89)
      Deferred expenses                                  (56)             (26)
      Accounts payable and accrued expenses              167               39
      Advances to (from) consolidated ventures           245               64
      Tenant security deposits                            25               (5)
                                                      ------           ------
        Total adjustments                                945              263
                                                      ------           ------
        Net cash provided by operating activities        744               34
                                                      ------           ------

Cash flows from investing activities:
   Distributions from unconsolidated ventures          1,358            1,271
   Additional investments in unconsolidated ventures    (747)            (487)
   Payment of leasing commissions                        (52)               -
   Additions to operating investment properties         (209)            (254)
                                                      ------          -------
        Net cash provided by investing activities        350              530
                                                      ------          -------

Cash flows from financing activities:
   Distributions to partners                            (600)          (1,282)
   Proceeds from issuance of loans                         -            2,000
   Repayment of principal on long term debt             (201)            (157)
                                                      -------         -------
        Net cash provided by (used in) 
          financing activities                          (801)             561
                                                      -------         -------

Net increase in cash and cash equivalents                293            1,125

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

Cash and cash equivalents, end of period             $ 5,419          $ 2,952
                                                     =======          =======

Cash paid during the period for interest             $   946          $ 1,029
                                                     =======          =======

                           See accompanying notes.


<PAGE>


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


1.  Organization

      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.

2. Related Party Transactions

      Included in general and  administrative  expenses for the six months ended
     September  30,  1996  and  1995 is  $106,000  and  $132,000,  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 six months
     ended  September  30,  1996 and 1995 is $7,000  and  $5,000,  respectively,
     representing fees earned by Mitchell Hutchins Institutional Investors, Inc.
     for managing the Partnership's cash assets.

      Accounts  receivable  affiliates  at September 30, 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  September  30,  1996,  the  Partnership  had  investments  in three
    unconsolidated joint venture partnerships (five at September 30, 1995) which
    own   operating   investment   properties   as  described   further  in  the
    Partnership's  Annual  Report.  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 by the
    Partnership  for potential  reinvestment  in the Loehmann's  Plaza property,
    where a significant renovation and re-leasing program is currently underway.

      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.


<PAGE>


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

                                        Three Months Ended    Six Months Ended
                                             June 30,              June 30,
                                         -----------------     ---------------
                                          1996     1995        1996     1995
                                          ----     ----        ----     ----

Revenues:
   Rental revenues and expense 
     recoveries                        $2,419     $3,096      $4,860   $6,162
   Interest and other income               10         54          48      182
                                       ------     ------      ------   ------
                                        2,429      3,150       4,908    6,344

Expenses:
   Property operating expenses            682        989       1,460    1,874
   Real estate taxes                      571        694       1,113    1,388
   Interest expense                       181        349         402      725
   Depreciation and amortization          805      1,026       1,611    1,938
                                      -------    -------     -------  -------
                                        2,239      3,058       4,586    5,925
                                      -------    -------     -------  -------
   Net income                         $   190    $    92     $   322  $   419
                                      =======    =======     =======  =======

   Net income:
     Partnership's share of 
       combined income                $   144    $   106     $  234   $   386
     Co-venturers' share of
       combined income (losses)            46        (14)        88        33
                                      --------   -------     ------   -------
      
                                      $   190    $    92     $  322   $   419
                                      =======    =======     ======   =======

               Reconciliation of Partnership's Share of Operations

           For the three and six months ended June 30, 1996 and 1995
                                 (in thousands)

                                       Three Months Ended    Six  Months Ended
                                              June 30,             June 30,
                                       ------------------    -----------------
                                          1996     1995        1996     1995
                                          ----     ----        ----     ----

   Partnership's share of operations,
       as shown above                  $  144   $  106       $  234    $  386
   Amortization of excess basis           (15)     (20)         (29)      (40)
                                       ------   ------       ------    ------
   Partnership's share of
       unconsolidated ventures' 
       income                          $  129   $   86       $  205    $  346
                                       ======   ======       ======    ======

4.  Operating Investment Properties

    At September  30, 1996,  the  Partnership's  balance  sheet  includes  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.


<PAGE>


      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 six months ended June 30,
    1996 and 1995 (in thousands):

                                       Three Months Ended    Six  Months Ended
                                              June 30,             June 30,
                                        ----------------     ----------------
                                          1996     1995        1996     1995
                                          ----     ----        ----     ----

      Property operating expenses:
        Repairs and maintenance        $  131   $   89      $  227      $ 227
        Utilities                          43       47          90         98
        Salaries and related costs         40       47          82         80
        Insurance                          16       15          33         31
        Management fees                    40       36          79         73
        Administrative and other           48       71         155        118
                                       ------   ------      ------      -----
                                       $  318   $  305      $  666      $ 627
                                       ======   ======      ======      =====

5.   Notes Payable

        Notes payable on the  consolidated  balance sheet of the  Partnership at
    September  30,  1996  and  March  31,  1996  consist  of the  following  (in
    thousands):
                                                    September 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  $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
September  30,  1996  and  March  31,
1996.                                             $ 9,482        $ 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
June 30, 1996 and  December 31, 1995.               6,820          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 June  30,  1996 and  December  31,
1995.                                               3,448          3,468
                                                  -------       --------
                                                  $19,750       $ 19,907
                                                  =======       ========


        On June 20, 1988, the  Partnership  borrowed  $17,000,000 in the form of
    zero coupon loans due in June of 1995.  These notes bore  interest at a rate
    of 10%, compounded  annually.  During fiscal 1995, the remaining balances of
    the zero coupon loans were repaid from the proceeds of five new conventional
    mortgage loans issued to the Partnership's joint venture investees, together
    with funds contributed by the Partnership, as set forth below.

        On September 27, 1994,  the  Partnership  refinanced  the portion of the
    zero coupon loan secured by the Treat Commons Phase II apartment complex, of
    approximately  $3,353,000,  with the  proceeds  of a new $7.4  million  loan
    obtained by the TCR Walnut Creek Limited Partnership joint venture. The $7.4
    million loan was secured by the Treat  Commons  Phase II apartment  complex,
    carried an annual  interest  rate of 8.54% and was  scheduled to mature in 7
    years. As discussed in Note 5, the Treat Commons  property was sold and this
    loan  obligation  was repaid in full on December 29, 1995.  On September 28,
    1994, the Partnership  repaid the portion of the zero coupon loan secured by
    the Asbury Commons apartment complex, of approximately $3,836,000,  with the
    proceeds  of a new $7  million  loan  obtained  by the  consolidated  Asbury
    Commons joint  venture,  the terms of which are set forth above.  On October
    22, 1994, the Partnership  applied a portion of the excess proceeds from the
    refinancings  of the Treat Commons and Asbury Commons  properties  described
    above and repaid the portion of the zero coupon loan which had been  secured
    by West  Ashley  Shoppes  of  approximately  $2,703,000  and made a  partial
    prepayment  toward the portion of the zero  coupon loan  secured by Hacienda
    Business Park of $3,000,000. On November 7, 1994, the Partnership repaid the
    portion of the 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 9, 1995, the Partnership repaid the portion
    of  the  zero  coupon  loan  secured  by  the  Hacienda  Business  Park,  of
    approximately  $3,583,000,  with the  proceeds  of a new $3.5  million  loan
    obtained by the consolidated  Hacienda Park  Associates,  the terms of which
    are  set  forth  above,  along  with  additional  funds  contributed  by the
    Partnership. On February 10, 1995, the Partnership repaid the portion of the
    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.

6.   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.

7.   Contingencies

      As discussed  in detail in the  Partnership's  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 the overall  improvement in operations at the  Partnership's
investment   properties,   the  Partnership   expects  to  increase  the  annual
distribution  rate.  This  potential  adjustment  would  be  effective  for  the
distribution to be paid on May 15, 1997.  Management is finalizing its review of
the  1997  operating   budgets  and   determining   the  capital  needs  of  the
Partnership's  properties.  Once  this  review  is  complete,   management  will
determine the amount of the proposed increased distribution. 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 the quarter ended September  30,1996,  management  completed a major
capital  enhancement  program at Loehmann's Plaza. 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  believed it would  significantly  enhance the value of the  shopping
center to replace 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.  Loehmann's  Plaza was 79%  leased as of
September  30, 1996,  an increase  from 74% as of the end of the first  quarter.
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.  Tenant  improvement  costs to lease the
Loehmann's  space are likely to be significant.  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  expected  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 in the near term.  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 the first quarter report. 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.

     The  625  North  Michigan  Office  Building  remained  89%  occupied  as of
September 30, 1996,  unchanged  from the prior  quarter.  Within the next twelve
months, leases with seven tenants at 625 North Michigan, totalling 27,353 square
feet,  will expire.  One of these  tenants  occupies  15,639 square feet under a
lease that  expires in  December  1996.  Efforts are  currently  underway by the
property's leasing team to retain this tenant. However, management is aware that
this tenant is  considering  other  locations and may not renew its lease at 625
North  Michigan.  Due to the size and age of the  building,  the large number of
leases and the  competitive  conditions  which exist in the market for  downtown
Chicago  office space,  capital  improvement  and leasing costs at the 625 North
Michigan are expected to continue to be significant for the foreseeable  future.
With the renovation to the building's facade now competed,  the modernization of
the elevator control systems is now set to begin with work scheduled to continue
for  approximately  one  year at an  estimated  total  cost of  $700,000.  Other
significant capital improvements planned at 625 North Michigan over the next two
years include common area  enhancements,  and a possible lobby area retail space
expansion and renovation.

     As previously  reported,  during fiscal 1995 the Partnership  secured a new
tenant,  under a seven-year  lease,  for a vacant 31,000 square foot building at
Hacienda Park.  During the first quarter of fiscal 1996, the Partnership  leased
an  additional  10,808  square foot space at Hacienda  Park to this same tenant.
During the third quarter of fiscal 1996,  the  Partnership  leased the remaining
10,027  square  feet of  available  space at Hacienda  Park to another  existing
tenant.  In addition,  during fiscal 1996 a 31,500 square foot tenant executed a
5-year renewal of its lease  obligation,  which was due to expire in March 1996.
As a result of these  developments,  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.

     The  average  occupancy  level at Asbury  Commons  Apartments  in  Atlanta,
Georgia, was unchanged at 93% for the quarter and is comparable to other similar
quality  apartment  communities in the market.  During the quarter,  the Summer
Olympic Games were held in Atlanta and Asbury Commons benefited from the premium
rental  rates  paid by  short-term  tenants  during  this  period.  Even  though
thousands of temporary  employees moved out of Atlanta after the Olympics,  the
overall  economy  remains  strong.  However,  the positive  impact of the strong
regional and local  economy on  multi-family  properties  is being offset by the
development  of  a  substantial  number  of  apartments  in  the  market.  As  a
consequence of the new building  construction, rental rates and occupancy levels
are  projected to remain flat for the next 18 months as the new  apartments  are
leased.  During the quarter, an analysis of the buildings' exterior wood-framing
sills and trim for evidence of deterioration was begun.  After the exterior wood
trim and wood-framing  replacement programs are completed,  the exteriors of the
buildings will be painted.

     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 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  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 September 30, 1996, the Partnership and its consolidated  joint ventures
had available cash and cash equivalents of approximately  $5,419,000.  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 September 30, 1996

      The Partnership  reported net income of $48,000 for the three months ended
September 30, 1996, as compared to a net loss of $216,000 for the same period in
the prior year. This favorable change in the Partnership's net operating results
is primarily  attributable to a decrease in the Partnership's  operating loss of
$249,000 and an increase in the Partnership's share of unconsolidated  ventures'
income of $43,000.  The Partnership's  operating loss decreased primarily due to
an increase in rental income and expense  reimbursements  attributable mainly to
an increase in average  occupancy at the Hacienda  Business Park for the current
three-month  period.  The  increase  in  depreciation   expense  caused  by  the
accelerated  depreciation  on the Hacienda  Business Park, as discussed  further
above,  was offset by decreases in the general and  administrative,  real estate
tax and interest expense  categories.  Interest expense decreased as a result of
the  commencement of scheduled  monthly  principal  payments as well as interest
attributable  to the $2 million  short term loan  which was  outstanding  in the
prior year. Real estate taxes  decreased due to a reassessment  that lowered the
expense of the Hacienda Park joint venture for the current  three-month  period.
General and  administrative  expenses decreased mainly as a result of additional
legal costs in the prior three-month period associated with certain  refinancing
transactions as well as a reduction in other professional fees.

The Partnership's share of unconsolidated  ventures' income increased due to the
improved operating results at all three remaining  unconsolidated  ventures. The
major  portion of the  increase  in the  Partnership's  share of  unconsolidated
ventures'  income is attributable  to lower real estate tax expense  incurred at
the 625 North Michigan joint venture during the current  three-month period. The
venture's  real estate taxes  decreased due to a  reassessment  that lowered the
real estate tax bill for the current  three-month  period.  Small  increases  in
total  revenues  at  Loehmann's  Plaza and The Gables  also  contributed  to the
favorable change in the Partnership's share of unconsolidated ventures' income.

Six Months Ended September 30, 1996

The  Partnership  reported  a net  loss of  $201,000  for the six  months  ended
September 30, 1996, as compared to a net loss of $229,000 for the same period in
the prior year.  This  decrease in the  Partnership's  net loss  resulted from a
$222,000 decrease in the Partnership's operating loss which was partially offset
by a $141,000  decrease in the Partnership's  share of unconsolidated  ventures'
income  and a $53,000  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 II 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  six-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  programs 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  facade  incurred  in the  current six 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
negative changes in the current six-month period.  Rental income from The Gables
Apartments  increased by approximately 6% over the same period in the prior year
due to  increases  in  rental  rates  over the  past  year  attributable  to the
strengthening Richmond apartment market.

    The  Partnership's  operating  loss  decreased  for  the  six  months  ended
September 30, 1996, when compared to the same period in the prior year, due to a
$375,000  increase  total  revenues,  which was  partially  offset by a $153,000
increase  in  total  expenses.  Total  revenues  increased  primarily  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 and higher  average  rental rates at the Asbury  Commons
Apartments during the current six-month period. Interest income increased due to
an increase in the 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  six-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,  general and  administrative  expenses  and real estate taxes
partially  offset the higher  depreciation and  amortization  charges.  Interest
expense decreased by $25,000 primarily due to scheduled principal  amortization.
General and  administrative  expenses declined mainly as a result of a reduction
in certain  professional fees. Real estate taxes decreased due to a reassessment
that  lowered the  expense of the  Hacienda  Park joint  venture for the current
six-month period.



<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 is scheduled to continue in November 1996.

     With regard to the Abbate  action  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  the  applicable  statutes  of
limitations.  The eventual outcome of this litigation and the potential  impact,
if any, on the Partnership's  unitholders remains  undeterminable at the present
time.

     The  status of the  other  litigation  involving  the  Partnership  and its
General  Partners  remains  unchanged  from  the  description  provided  in  the
Partnership's Annual Report on Form 10-K for the year ended March 31, 1996.

     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 indemnificaiton 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:  November 13, 1996