UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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

                                    FORM 10-Q

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

                    FOR THE QUARTER ENDED September 30, 1998

                                       OR

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

               For the transition period from ______ to _______ .


                         Commission File Number: 0-15705


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


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


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


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

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


<PAGE>

            PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

                           CONSOLIDATED BALANCE SHEETS
                September 30, 1998 and March 31, 1998 (Unaudited)
                                 (In thousands)

                                     ASSETS
                                                 September 30   March 31
                                                 ------------   --------
Operating investment properties:
   Land                                           $    7,351  $    7,351
   Building and improvements                          40,982      40,616
                                                  ----------  ----------
                                                      48,333      47,967
   Less accumulated depreciation                     (15,034)    (14,044)
                                                  ----------  ----------
                                                      33,299      33,923

Investments in unconsolidated joint ventures,
   at equity                                          30,494      30,237
Cash and cash equivalents                              5,424       6,202
Escrowed cash                                            611         398
Accounts receivable                                      223         236
Prepaid expenses                                           3          31
Deferred rent receivable                                 686         737
Net advances to consolidated ventures                    792           -
Deferred expenses, net                                   487         510
                                                  ----------  ----------
                                                  $   72,019  $   72,274
                                                  ==========  ==========

                        LIABILITIES AND PARTNERS' CAPITAL

Accounts payable and accrued expenses             $      570  $      427
Net advances from consolidated ventures                    -         115
Tenant security deposits                                  87         111
Bonds payable                                          2,118       2,171
Mortgage notes payable                                19,219      19,369
Other liabilities                                        331         331
Partners' capital                                     49,694      49,750
                                                  ----------  ----------
                                                  $   72,019  $   72,274
                                                  ==========  ==========







                             See accompanying notes.



<PAGE>


               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
                      CONSOLIDATED STATEMENTS OF OPERATIONS

         For the three and six months ended September 30, 1998 and 1997
                (Unaudited) (In thousands, except per Unit data)

                                  Three Months Ended      Six  Months Ended
                                      September 30,          September 30,
                                  ------------------      -----------------
                                    1998       1997        1998      1997
                                    ----       ----        ----      ----
Revenues:
   Rental income and expense
     reimbursements                $1,367     $1,210       $2,623   $2,562
   Interest and other income          173        100          286      200
                                  -------     ------       ------   ------
                                    1,540      1,310        2,909    2,762

Expenses:
   Property operating expenses        319        283          634      704
   Depreciation and amortization      529        531        1,051    1,050
   Interest expense                   479        475          956      948
   Real estate taxes                  137        135          273      271
   General and administrative         138        195          258      289
                                  -------     ------       ------   ------
                                    1,602      1,619        3,172    3,262
                                  -------     ------       ------   ------
Operating loss                        (62)      (309)        (263)    (500)

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

Partnership's share of 
  unconsolidated ventures' 
  income (losses)                   (139)        168          202      222
                                 -------      ------       ------   ------

Net income (loss)                $ 5,647      $ (141)      $5,787   $ (278)
                                 =======      ======       ======   ======

Net income (loss) per 1,000
  Limited Partnership Unit       $ 41.59      $(1.04)      $42.62   $(2.05)
                                 =======      ======       ======   ======

Cash distributions per 1,000 
  Limited Partnership Unit       $ 41.21      $ 2.21       $43.42   $ 4.42
                                 =======      ======       ======   ======


   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, 1998 and 1997 (Unaudited)
                                 (In thousands)

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

Balance at March 31, 1997                          $   (539)   $  51,752
Cash distributions                                       (6)        (594)
Net loss                                                 (3)        (275)
                                                   --------    ---------
Balance at September 30, 1997                      $   (548)   $  50,883
                                                   =========   =========

Balance at March 31, 1998                          $   (554)   $  50,304
Cash distributions                                       (6)      (5,837)
Net income                                               58        5,729
                                                   --------    ---------
Balance at September 30, 1998                      $   (502)   $  50,196
                                                   ========    =========























                             See accompanying notes.



<PAGE>


               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
        For the six months ended September 30, 1998 and 1997 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)

                                                       1998         1997
                                                       ----         ----
Cash flows from operating activities:
   Net income (loss)                                $ 5,787     $  (278)
   Adjustments to reconcile net income (loss)
     to net cash (used in) provided by 
     operating activities:
    Partnership's share of gain on sale of
      unconsolidated operating investment 
      property                                       (5,848)          -
     Partnership's share of unconsolidated
      ventures' income                                 (202)       (222)
     Depreciation and amortization                    1,051       1,050
     Amortization of deferred financings costs           14          26
     Changes in assets and liabilities:
      Escrowed cash                                    (213)        (94)
      Accounts receivable                                13         (75)
      Prepaid expenses                                   28           1
      Deferred rent receivable                           51          50
      Deferred expenses                                 (52)        (19)
      Accounts payable and accrued expenses             143         314
      Advances (to) from consolidated ventures         (907)        (81)
      Tenant security deposits                          (24)        (51)
                                                    -------     -------
         Total adjustments                           (5,946)        899
                                                    -------     -------
         Net cash (used in) provided by operating
          activities                                   (159)        621
                                                    -------     -------

Cash flows from investing activities:
   Distributions from unconsolidated ventures         6,445       1,153
   Additional investments in unconsolidated
    ventures                                           (652)       (744)
   Additions to operating investment properties        (366)        (97)
                                                    -------     -------
         Net cash provided by investing
          activities                                  5,427         312
                                                    -------     -------

Cash flows from financing activities:
   Distributions to partners                         (5,843)       (600)
   Repayment of principal on long term debt            (203)       (226)
                                                    -------     -------
         Net cash used in financing activities       (6,046)       (826)
                                                    -------     -------

Net (decrease) increase  in cash and cash
  equivalents                                          (778)        107
Cash and cash equivalents, beginning of period        6,202       5,322
                                                    -------     -------
Cash and cash equivalents, end of period            $ 5,424     $ 5,429
                                                    =======     =======

Cash paid during the period for interest            $   942     $   922
                                                    =======     =======

                             See accompanying notes.


<PAGE>


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


1.    General
      -------

      The accompanying financial statements,  footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in the
Partnership's Annual Report for the year ended March 31, 1998. In the opinion of
management, the accompanying financial statements,  which have not been audited,
reflect all adjustments  necessary to present fairly the results for the interim
period. All of the accounting  adjustments reflected in the accompanying interim
financial statements are of a normal recurring nature.

      The  accompanying  financial  statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting  principles
which  requires  management to make  estimates and  assumptions  that affect the
reported amounts of assets and liabilities and disclosures of contingent  assets
and  liabilities  as of  September  30, 1998 and March 31, 1998 and revenues and
expenses for each of the three-and  six-month  periods ended  September 30, 1998
and 1997. Actual results could differ from the estimates and assumptions used.

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

      Included in general and  administrative  expenses for the six months ended
September 30, 1998 and 1997 is $116,000 and $114,000, 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-month
periods ended  September 30, 1998 and 1997 is $8,000 and $10,000,  respectively,
representing  fees  earned  by an  affiliate,  Mitchell  Hutchins  Institutional
Investors, Inc., for managing the Partnership's
cash assets.

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

      As  of  September  30,  1998,  the  Partnership  had  investments  in  two
unconsolidated  joint venture  partnerships  (three at September 30, 1997) which
own operating  investment  properties as described  further in the Partnership's
Annual Report. The unconsolidated  joint venture  partnerships are accounted for
on the equity  method in the  Partnership's  financial  statements  because  the
Partnership does not have a voting control interest in these joint ventures. The
Partnership's  policy is to recognize  its share of ventures'  operations  three
months in arrears.

     On July 2, 1998,  Richmond Gables Associates,  a joint venture in which the
Partnership  held an interest,  sold The Gables at Erin Shades  Apartments to an
unrelated  third  party  for  $11,500,000.  After  deducting  closing  costs and
property  adjustments  of $320,000,  The Gables joint venture  received net sale
proceeds  of  $11,180,000.  These  net sale  proceeds  were  split  between  the
Partnership  and its  co-venture  partner  in  accordance  with the terms of The
Gables joint venture  agreement.  The Partnership  received  $10,602,000 and the
non-affiliated  co-venture  partner received $578,000 as their share of the sale
proceeds. From its share of the proceeds, the Partnership prepaid its refinanced
original  zero coupon loan secured by the  property  and the related  prepayment
fee, the sum of which was $5,449,000. The Partnership distributed the $5,153,000
of net  proceeds  from the sale of The  Gables,  along  with an  amount  of cash
reserves that exceeded  expected future  requirements,  in the form of a special
distribution  totalling  approximately  $5,243,000,  or $39 per original  $1,000
investment  on July 20, 1998.  In accordance  with the  Partnership's  policy to
recognize  significant  lag period  transactions in the period which they occur,
the Partnership accelerated the recognition of the operating results of Richmond
Gables  Associates  during the quarter ended September 30, 1998 and recognized a
gain of $5,848,000 on the sale of the Gables operating investment property.

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

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

                                    Three Months Ended     Six  Months Ended
                                        June 30,               June 30,
                                    ------------------     ------------------
                                    1998       1997        1998      1997
                                    ----       ----        ----      ----
Revenues:
   Rental revenues and expense
      recoveries                   $2,607    $2,577        $5,220    $4,940
   Interest and other income           31        25            52        50
                                   ------    ------        ------    ------
                                    2,638     2,602         5,272     4,990

Expenses:
   Property operating expenses        733       962         1,396     1,767
   Real estate taxes                  564       564           990     1,067
   Interest expense                   625       192           832       396
   Depreciation and amortization      903       692         1,727     1,482
                                   ------    ------        ------    ------
                                    2,825     2,410         4,945     4,712
                                   ------    ------        ------    ------
Operating income (loss)              (187)      192           327       278

Gain on sale of operating 
  investment property               6,433         -         6,433         -
                                   ------    ------        ------    ------
       
Net income                         $6,246    $  192        $6,760    $  278
                                   ======    ======        ======    ======

                                    Three Months Ended     Six  Months Ended
                                          June 30,               June 30,
                                    ------------------     ------------------
                                    1998       1997        1998      1997
                                    ----       ----        ----      ----
Net income:
   Partnership's share of 
     combined income               $ 5,723    $  183       $ 6,078   $   251
   Co-venturers' share of
     combined income                   523         9           682        27
                                   -------    ------       -------   -------
                                   $ 6,246    $  192       $ 6,760   $   278
                                   =======    ======       =======   =======
<PAGE>

               Reconciliation of Partnership's Share of Operations
         For the three and six months ended September 30, 1998 and 1997
                                 (in thousands)


                                    Three Months Ended     Six  Months Ended
                                       September 30,          September 30,
                                    ------------------     ------------------
                                     1998       1997        1998      1997
                                     ----       ----        ----      ----

   Partnership's share of 
     operations, as shown above     $ 5,723    $  183      $ 6,078   $   251
   Amortization of excess basis         (14)      (15)         (28)      (29)
                                    -------    ------      -------   -------
   Partnership's share of 
     unconsolidated ventures' 
     net income                     $ 5,709    $  168      $ 6,050   $   222
                                    =======    ======      =======   =======

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

                                    Three Months Ended      Six  Months Ended
                                       September 30,           September 30,
                                    --------------------   ------------------
                                    1998          1997        1998      1997
                                    ----          ----        ----      ----

   Partnership's share of
     unconsolidated ventures' 
     income (losses)               $  (139)    $  168      $   202   $   222
   Partnership's share of gain
      on sale of unconsolidated 
      operating investment 
      property                       5,848          -        5,848         -
                                   -------     ------      -------   -------
                                   $ 5,709     $  168      $ 6,050   $   222
                                   =======     ======      =======   =======

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

      The Partnership's  balance sheets at September 30, 1998 and March 31, 1998
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.
<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,  1998 and
1997 (in thousands):

                                    Three Months Ended     Six  Months Ended
                                         June 30,               June 30,
                                    ------------------     ------------------
                                      1998       1997        1998      1997
                                      ----       ----        ----      ----
     Property operating expenses:
        Repairs and maintenance     $   104    $   77      $  182     $  233
        Utilities                        43        59          84        112
        Salaries and related costs       53        29         114         79
        Insurance                        17        17          33         33
        Management fees                  40        35          75         82
        Administrative and other         62        66         146        165
                                    -------    ------      ------     ------
                                    $   319    $  283      $  634     $  704
                                    =======    ======      ======     ======

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 September  30, 1998 and March 31, 1998 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
     $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
     September  30,  1998 and  March 31,
     1998.                                        $ 9,208          $ 9,282

     8.75%  mortgage note payable by the
     consolidated     Atlanta     Asbury
     Partnership to an insurance company
     secured  by  the   Asbury   Commons
     operating investment property.  The
     loan 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
     and June 30, 1998 and  December 31,
     1997.                                          6,655            6,707

     9.04%  mortgage note payable by the
     consolidated      Hacienda     Park
     Associates to an insurance  company
     secured by the Saratoga  Center and
     EG&G  Plaza  operating   investment
     property. The loan 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, 1998 and
     December  31,  1997.                           3,356            3,380
                                                  -------          ------- 
                                                  $19,219          $19,369 
                                                  =======          =======

      On November 7, 1994,  the  Partnership  repaid  certain  outstanding  zero
coupon  loans  secured by The Gables  Apartments  and the  Richland  Terrace and
Richmond Park apartment  complexes of  approximately  $2,353,000 and $2,106,000,
respectively,  with the proceeds of a new $5.2 million loan obtained by Richmond
Gables  Associates  and secured by The Gables  Apartments.  The new $5.2 million
loan bore interest at 8.72% and was scheduled to mature in 7 years. As discussed
further  in Note 3, The  Gables  Apartments  was  sold on July 2,  1998 and this
mortgage loan was repaid in full. On February 10, 1995, the  Partnership  repaid
an outstanding  zero coupon loan secured by Gateway Plaza  (formerly  Loehmann's
Plaza), of approximately $4,093,000,  with the proceeds of a new $4 million loan
obtained by  Daniel/Metcalf  Associates  Partnership along with additional funds
contributed  by the  Partnership.  The $4 million loan is secured by the Gateway
Plaza shopping  center,  carries an annual interest rate of 9.04% and matures on
February 15, 2003. The loan requires monthly  principal and interest payments of
$34,000.  Legal  liability for the repayment of the new mortgage loan secured by
the Gateway Plaza property rests with the related  unconsolidated joint venture.
Accordingly  the  mortgage  loan  liability  is  recorded  on the  books  of the
unconsolidated  joint venture.  The Partnership  has indemnified  Daniel/Metcalf
Associates   Partnership  and  the  related  co-venture   partners  against  all
liabilities, claims and expenses associated with this borrowing.

<PAGE>

               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

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

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

      The following  discussion of financial condition includes  forward-looking
statements  which  reflect  management's  current  views with  respect to future
events and  financial  performance  of the  Partnership.  These  forward-looking
statements  are  subject to certain  risks and  uncertainties,  including  those
identified  in Item 7 of the  Partnership's  Annual  Report on Form 10-K for the
year ended March 31, 1998 under the heading  "Certain  Factors  Affecting Future
Operating  Results",  which could cause actual results to differ materially from
historical  results  or  those  anticipated.   The  words  "believe,"  "expect,"
"anticipate,"  and  similar  expressions  identify  forward-looking  statements.
Readers  are  cautioned  not to place undue  reliance  on these  forward-looking
statements,  which were made based on facts and conditions as they existed as of
the date of this report.  The  Partnership  undertakes no obligation to publicly
update or revise  any  forward-looking  statements,  whether  as a result of new
information, future events or otherwise.

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

     In light of the continued  strength in the national real estate market with
respect to multi-family  apartment properties and the recent improvements in the
office/R&D  property markets,  management believes that this may be an opportune
time to sell the Partnership's  remaining operating investment properties.  As a
result, management is currently focusing on potential disposition strategies for
the remaining investments in the Partnership's  portfolio. As part of that plan,
as discussed  further below, The Gables  Apartments was marketed for sale during
the quarter ended June 30, 1998 and sold during the quarter ended  September 30,
1998. In addition, during the first quarter the Partnership began the process of
marketing the Hacienda  Business  Park  property for sale. As discussed  further
below, this property is currently under agreement for a sale transaction that is
expected to close during the third  quarter.  With regard to the four  remaining
properties,  the  Partnership  is  working  with  each  property's  leasing  and
management team to develop and implement  programs that will protect and enhance
value and maximize cash flow at each property  while at the same time  exploring
potential  sale  opportunities.  These programs  include  pursuing a new leasing
opportunity  at 625 North  Michigan  Avenue,  which is noted  below,  completing
leasing  programs  currently  underway at Gateway Plaza and West Ashley Shoppes,
and improving operating efficiency and implementing property enhancements at the
Asbury Commons  Apartments.  Although  there are no assurances,  it is currently
contemplated that sales of the Partnership's remaining assets could be completed
prior to the end of calendar 1999.

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

      The four  buildings  comprising  the  Hacienda  Business  Park  investment
property  in  Pleasanton,  California,  were 95%  leased to four  tenants  as of
September 30, 1998 compared to 90% leased at the end of the prior quarter.  This
leasing gain was due to an existing  tenant that renewed its 31,547  square foot
lease and expanded its  operations by leasing an additional  10,027 square feet.
This  tenant is  expected  to occupy its new space by the March 31,  1999 fiscal
year-end.  The overall  Pleasanton  market remains strong with increasing rental
rates and a low  vacancy  level.  The  existing  rental  rates on the  leases at
Hacienda Park are  significantly  below current market rates.  Provided there is
not  a  dramatic   increase  in  either  planned   speculative   development  or
build-to-suit  development  with  current  tenants  in  the  local  market,  the
Partnership  would be expected to achieve a materially higher sale price for the
Hacienda Park  property as the existing  leases with  below-market  rental rates
approach their  expiration  dates. The Partnership had been planning to hold the
Hacienda  Park  property  over the near term in order to capture  this  expected
increase in value.  However,  during the quarter  ended  September  30,  1997, a
51,683  square  foot  tenant  occupying  28% of  the  property's  leasable  area
relocated from Hacienda  Business Park and  consolidated  its operations  into a
newly-constructed  building in the local market.  This tenant has several leases
with  expiration  dates in 1998,  1999 and 2001 and fully leases one of the four
buildings  comprising the Hacienda Park investment plus 10,027 square feet in an
adjoining  building.  While  this  tenant has the right to  sublease  the space,
subject to various approval rights,  it remains  responsible for rental payments
and its contractual share of operating expenses until the leases expire.  During
the prior quarter,  the Partnership  accepted a net payment of $34,000 from this
tenant in return for a release  from all of the tenant's  obligations  under the
10,027  square  foot lease that was  scheduled  to expire in  January  2001.  In
addition,  this tenant waived its sub-lease and renewal  rights on the remaining
five  leases  which  expire  within the next 12 months.  This lease  termination
agreement  is  expected  to  provide  the  property's  leasing  team  with  more
flexibility  in  re-leasing  the  space and  provided  the  Partnership  with an
opportunity  to capture a  significant  portion of the expected  increase in the
value of  Hacienda  Park  sooner  than had  been  anticipated.  In light of this
situation, and given the current strength of the local market conditions, during
the quarter ended June 30, 1998  management  interviewed  potential  real estate
brokers and  selected a national  real  estate firm that is a leading  seller of
R&D/office  properties.  A marketing  package was  subsequently  finalized,  and
comprehensive sales efforts began in June. As a result of those efforts, several
offers were  received.  After  completing  an evaluation of these offers and the
relative  strength of the prospective  purchasers,  the Partnership  selected an
offer.  A  purchase  and  sale  agreement  was  negotiated   with  an  unrelated
third-party  prospective buyer and a non-refundable  deposit was made subsequent
to the quarter end. While there can be no assurances that a transaction  will be
consummated,  this  prospective  buyer is expected to complete its due diligence
work and close on this transaction by December 1, 1998. If the sale closes,  the
net proceeds would be distributed to the Limited Partners.

     The 625 North Michigan Office Building in Chicago, Illinois, was 95% leased
and 94% occupied at September 30, 1998. Three tenants occupying a total of 4,634
square  feet  moved  from the  building  when their  leases  expired  during the
quarter.  One tenant  occupying 2,162 square feet renewed its lease and expanded
its space by an additional  1,107 square feet.  Another tenant  occupying  1,926
square feet renewed its lease. As previously  reported,  the property's  leasing
team had been  negotiating  a lease with a  prospective  new tenant  which would
occupy  approximately 22,000 square feet of space. During the quarter ended June
30,  1998,  a lease was signed with this  prospective  tenant for 24,276  square
feet.  This tenant took occupancy  during the quarter ended  September 30, 1998.
Also during the current quarter, a lease was signed with an existing tenant that
occupies  approximately  8,000 square feet. This tenant will relocate and expand
into a total of 10,200  square  feet.  The downtown  Chicago real estate  market
continues to display an improving  trend. A competitive  office  property within
the local  market has  recently  obtained  approvals to convert its lower floors
into a hotel. This should result in the removal of 290,000 square feet of office
space from the  market.  In  addition,  an office  tenant at that  property  has
recently  completed a 62,000 square foot  expansion,  which brings the occupancy
level in the  building's  office  portion to 100%. In this local  market,  where
there is no current or planned new construction of office space,  this reduction
in vacant  office space has resulted in a reduction in the market  vacancy level
and places more upward  pressure on rental  rates.  The higher  effective  rents
currently  being  achieved at 625 North  Michigan are expected to increase  cash
flow and value as new  tenants  sign  leases  and  existing  tenants  sign lease
renewals.  Retail  and hotel  development  in the  local  market  continues,  as
evidenced  by  plans  for  a  Nordstrom's-anchored  95,000  square  foot  retail
development  which recently  received  preliminary  approval from the City. This
proposed development,  which will be located two blocks from 625 North Michigan,
is part of a master plan that  includes  several new hotels,  entertainment  and
parking  facilities  encompassing  five city  blocks.  Management  continues  to
analyze a potential  project for the property  which  includes an upgrade to the
building  lobby and the addition of a major retail  component to the  building's
North Michigan Avenue frontage. Rental rates paid by high-end retailers on North
Michigan  Avenue are  substantially  greater than those paid by office  tenants.
While  the  costs of such a  project  would  be  substantial,  it  could  have a
significant  positive  effect  on the  market  value of the 625  North  Michigan
property.  During the quarter  ended June 30,  1998,  preliminary  approval  was
received from the City to enclose the arcade  sections of the first floor of the
625 North  Michigan  building,  which  opens the way for this  potential  retail
development.  Formal approval was received at the September  meeting of the City
Council. Now that this approval has been obtained,  the Partnership is exploring
potential sale opportunities for this property.

      Gateway Plaza Shopping Center (formerly  Loehmann's Plaza Shopping Center)
in Overland  Park,  Kansas was 94% leased and 92% occupied as of  September  30,
1998. As previously reported, the property's leasing team signed a 13,410 square
foot lease,  representing  9% of the Center's  leasable area,  with Gateway 2000
Country  Stores to occupy the former  Loehmann's  space.  Gateway  2000  Country
Stores, a manufacturer and retailer of personal computers,  opened its new store
on June 30, 1997. The property's  management team reports that customer  traffic
levels in the Center have increased since the openings of both the 13,410 square
foot Gateway store and the re-opening of the expanded  13,000 square foot Alpine
Hut store during the first quarter of fiscal 1998. The  property's  leasing team
is  currently  negotiating  with a  prospective  tenant which would occupy 4,289
square feet.  Over the next twelve  months,  two leases  representing a total of
9,387 square feet will expire.  One tenant which  occupies  1,557 square feet is
expected to renew its lease,  while the other tenant which occupies 7,830 square
feet will not renew its lease.  The property's  leasing team is actively working
to lease this space to a new tenant.  Another tenant occupying 6,875 square feet
is  experiencing  operational  difficulties  and has  fallen 3 months  behind in
rental  payments.  An agreement has been signed with this tenant which  provides
for a payment  schedule  that should allow the tenant to stay current with their
rent and pay the past  due  amounts  over  the  next 7  months.  Because  of the
consistent  improvement  in  occupancy  levels over the past year and the strong
performance of the Center's new anchor tenant,  the  Partnership  believes it is
the appropriate time to market the Gateway Plaza property for sale. As part of a
plan to market the property for sale, the Partnership initiated discussions with
real estate firms with a strong  background in selling  properties  like Gateway
Plaza.  The Partnership  expects to engage a national real estate firm that is a
leading seller of this property type to market Gateway Plaza for sale during the
third quarter.

      As previously  reported,  in the second quarter of fiscal 1998 the leasing
team  at the  West  Ashley  Shoppes  Shopping  Center  signed  a  lease  for the
previously vacant 36,416 square foot former Children's Palace space.  Children's
Palace closed its retail store at the center in May 1991 and subsequently  filed
for  bankruptcy  protection  from  creditors.  This anchor  space at West Ashley
Shoppes  had been  vacant  for the past six and a half  years.  The new  tenant,
Waccamaw,  a national  home goods  retailer,  opened its new store in March 1998
which brought the occupancy  level at the property up to 95%. As Waccamaw should
generate  significant  additional  customer traffic into the Center, the leasing
team anticipates  stronger  interest from prospective  tenants for the remaining
available 7,650 square feet of shop space.  During the next year, only one lease
representing a total of 2,450 square feet will expire.  With an occupancy  level
of 95% and a stable  base of  tenants,  the  Partnership  believes  it may be an
opportune  time to sell West  Ashley  Shoppes.  As part of a plan to market  the
property for sale, the Partnership  initiated discussions with real estate firms
with a specialty in selling  properties like West Ashley Shoppes.  Subsequent to
the quarter end, the Partnership  selected a national real estate firm that is a
leading seller of this type of property.

      As discussed in the Annual Report,  management discovered the existence of
certain  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.  The cost of the
repair work  required to remediate  this  situation  is  currently  estimated at
between  approximately  $1.5 to $2 million.  During the third  quarter of fiscal
1998, bid application  packages were distributed to  pre-qualified  contractors.
The  construction  contracts were executed  during the fourth  quarter,  and the
repair and  replacement  work has  commenced.  This work is now  expected  to be
completed  by December 31, 1998.  During the first  quarter of fiscal 1998,  the
Partnership   filed  a  warranty   claim   against  the   manufacturer   of  the
wood-composite siding used throughout Asbury Commons. During the second quarter,
the  Partnership  filed  a  warranty  claim  against  the  manufacturer  of  the
fiberglass-composite  roofing  shingles  installed  when the property was built.
During the quarter ended June 30, 1998, the manufacturer of the roofing shingles
agreed to provide the  Partnership  with the  materials  to replace the existing
roofing shingles.  While there can be no assurances  regarding the Partnership's
ability to successfully  recover any further damages relating to the siding, the
Partnership will diligently  pursue these and other potential  recovery sources.
During the fourth quarter of fiscal 1998, the  Partnership  reached a settlement
agreement with the original developer of the Asbury Commons property whereby the
original  developer agreed to pay the Partnership  $200,000.  Under the terms of
this agreement, the Partnership received a payment of $100,000 during the fourth
quarter of 1998,  and  received a final  payment of $100,000  during the current
quarter. The Partnership believes that it has adequate cash reserves to fund the
repair work at Asbury Commons  regardless of whether any  additional  recoveries
are realized.

      The average  occupancy level at the Asbury Commons  Apartments was 93% for
the quarter ended September 30, 1998,  compared to 92% for the prior quarter and
96% for the same  period  one year  ago.  In March  1997,  a  national  property
management  firm was hired to take over  management at Asbury Commons  effective
April 1, 1997. The 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.  In order to
attract  prospective  tenants,  the  property's  management and leasing team has
undertaken  a number of  marketing  efforts  which are  expected to increase the
number of prospective  tenants looking to lease units at the property and retain
as much of the existing  resident base as possible.  These  efforts  include the
targeting of potential tenants at area corporations and relocation  departments.
In order to minimize  tenant  turnover,  modest rental rate  increases of 2% are
being implemented as current leases are renewed.  Because of the improvements in
the apartment segment of the real estate market,  the Partnership  believes that
it is the appropriate time to take advantage of any potential sale opportunities
for Asbury Commons.  As part of that plan, the  Partnership  selected a regional
real estate firm with a strong  background  in selling  apartment  properties to
market the property for sale.  Sales materials were finalized,  and an extensive
marketing  campaign began in September  1998. As a result of these sale efforts,
seven offers were  received  subsequent  to quarter  end.  After  completing  an
evaluation  of  these  offers  and  the  relative  strength  of the  prospective
purchasers,  the Partnership and its co-venture partner will select an offer and
negotiate a purchase and sale agreement. There are no assurances,  however, that
a sale transaction will be completed.

      At September 30, 1998, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately  $5,424,000.  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.

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

Results of Operations
Three Months Ended September 30, 1998
-------------------------------------

     As noted above, the unconsolidated  Gables Apartments  operating investment
property was sold on July 2, 1998. In accordance with the  Partnership's  policy
to recognize  significant  lag period  transactions  in the period in which they
occur, the Partnership  accelerated the recognition of the operating  results of
Richmond  Gables  Associates  during the quarter  ended  September  30, 1998 and
recognized  a gain  of  $5,848,000  on the  sale  of the  Gables  property.  The
Partnership  reported  net  income  of  $5,647,000  for the three  months  ended
September 30, 1998, as compared to a net loss of $141,000 for the same period in
the prior year. The primary reason for the favorable change in the Partnership's
net operating results is the $5,848,000 recognized as the Partnership's share of
the gain from the sale of The Gables at Erin  Shades  Apartments,  as  discussed
further  above.  In addition,  the  Partnership's  operating  loss  decreased by
$247,000 when compared to the same period in the prior year.  The  Partnership's
operating  loss  decreased  due to  increases  in  rental  income  at all  three
consolidated  operating properties and an increase in interest and other income.
Rental  income  increased  mainly due to increases  in average  occupancy at the
Hacienda  Business Park and West Ashley  Shoppes  properties  and an increase in
rental rates at Asbury Commons.  Interest income increased due to an increase in
the average  amount of cash and cash  equivalents  on hand  compared to the same
period in the prior year. Average outstanding cash balances increased partly due
to the receipt and temporary  investment of the proceeds  received from the sale
of The Gables at Erin Shades  Apartments on July 2, 1998,  as discussed  further
above.

      The gain  recognized  on the sale of The Gables at Erin Shades  Apartments
and the decrease in the Partnership's operating loss were partially offset by an
unfavorable change in the Partnership's share of unconsolidated ventures' income
(losses).  The  Partnership  realized  a loss from its  share of  unconsolidated
ventures'  operations  of  $139,000  during the  current  three-month  period as
compared  to income of  $168,000  for the same  period in the prior  year.  This
$307,000  unfavorable  change in operating results was primarily the result of a
$472,000  prepayment  penalty  on the  Gables  debt and  various  write-offs  of
unamortized  deferred  expenses  associated  with the sale of The Gables at Erin
Shades  Apartments.  Net income also decreased at Gateway Plaza due to increases
in amortization expense and professional fees. Net income increased at 625 North
Michigan  Avenue due to an increase in rental  income and a reduction in repairs
and  maintenance  expenses due to the  completion of the elevator  modernization
project.

Six Months Ended September 30, 1998
-----------------------------------

     As noted above, the unconsolidated  Gables Apartments  operating investment
property was sold on July 2, 1998. In accordance with the  Partnership's  policy
to recognize  significant  lag period  transactions  in the period in which they
occur, the Partnership  accelerated the recognition of the operating  results of
Richmond  Gables  Associates  during the quarter  ended  September  30, 1998 and
recognized  a gain  of  $5,848,000  on the  sale  of the  Gables  property.  The
Partnership reported net income of $5,787,000 for the six months ended September
30, 1998, as compared to a net loss of $278,000 for the same period in the prior
year.  The primary  reason for the  favorable  change in the  Partnership's  net
operating results is the $5,848,000 recognized as the Partnership's share of the
gain from the sale of The Gables at Erin Shades Apartments, as discussed further
above. In addition, the Partnership's  operating loss decreased by $237,000 when
compared to the same period in the prior year. The Partnership's  operating loss
decreased due to higher rental income from the consolidated  joint ventures,  an
increase  in  interest   and  other   income  and  a  decrease  in  general  and
administrative expenses. Rental income increased at the consolidated West Ashley
Shoppes due to an increase in occupancy and at the  consolidated  Asbury Commons
Apartments due to an increase in rental rates.  Interest income increased due to
an increase in the average amount of cash and cash  equivalents on hand compared
to the  same  period  in the  prior  year.  Average  outstanding  cash  balances
increased  partly due to the receipt and  temporary  investment  of the proceeds
received from the sale of The Gables at Erin Shades  Apartments on July 2, 1998,
as discussed further above. General and administrative expenses decreased due to
a reduction in certain  required  professional  fees when  compared to the prior
year.

      The gain  recognized  on the sale of The Gables at Erin Shades  Apartments
and the decrease in the Partnership's  operating loss were partially offset by a
decrease in the  Partnership's  share of unconsolidated  ventures'  income.  The
Partnership's share of unconsolidated ventures' income decreased by $20,000 when
compared to the same period in the prior year.  This was primarily the result of
a $472,000  prepayment  penalty on the Gables  debt and  various  write-offs  of
unamortized  deferred  expenses  associated  with the sale of The Gables at Erin
Shades Apartments. Net income increased at 625 North Michigan Avenue and Gateway
Plaza  mainly  due to  increases  in  rental  income  at both  properties  and a
reduction in repairs and  maintenance  expenses at 625 North Michigan Avenue due
to the completion of the elevator modernization project.




<PAGE>


                                     PART II
                                Other Information

Item 1. Legal Proceedings   NONE

Item 2. through 5.          NONE

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits:    NONE

(b) Reports on Form 8-K:

     A  Current  Report on Form 8-K dated  July 2,  1998 was  filed  during  the
current  quarter to report the sale of The Gables at Erin Shades  Apartments and
is hereby incorporated herein by reference.




<PAGE>



            PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP


                                   SIGNATURES

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


                         PAINEWEBBER EQUITY PARTNERS TWO
                               LIMITED PARTNERSHIP


                             By:  Second Equity Partners, Inc.
                                  ---------------------------
                                  Managing General Partner



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






Dated:  November 6, 1998