UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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

                                    FORM 10-Q

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

               FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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
                  June 30, 1998 and March 31, 1998 (Unaudited)
                                 (In thousands)

                                     ASSETS
                                                     June 30    March 31
                                                     -------    --------
Operating investment properties:
   Land                                            $   7,351   $   7,351
   Building and improvements                          40,660      40,616
                                                   ---------   ---------
                                                      48,011      47,967
   Less accumulated depreciation                     (14,540)    (14,044)
                                                   ---------   ---------
                                                      33,471      33,923

Investments in unconsolidated joint ventures,
  at equity                                           30,031      30,237
Cash and cash equivalents                              6,140       6,202
Escrowed cash                                            533         398
Accounts receivable                                      296         236
Prepaid expenses                                          14          31
Deferred rent receivable                                 711         737
Net advances to consolidated ventures                    422           -
Deferred expenses, net                                   486         510
                                                   ---------   ---------
                                                   $  72,104   $  72,274
                                                   =========   =========

                        LIABILITIES AND PARTNERS' CAPITAL

Accounts payable and accrued expenses              $     598   $     427
Net advances from consolidated ventures                    -         115
Tenant security deposits                                 119         111
Bonds payable                                          2,171       2,171
Mortgage notes payable                                19,295      19,369
Other liabilities                                        331         331
Partners' capital                                     49,590      49,750
                                                   ---------   ---------
                                                   $  72,104   $  72,274
                                                   =========   =========







                             See accompanying notes.



<PAGE>


               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
                      CONSOLIDATED STATEMENTS OF OPERATIONS

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

                                                      1998          1997
                                                      ----          ----
Revenues:
   Rental income and expense reimbursements      $  1,256        $ 1,352
   Interest and other income                          113            100
                                                 --------        -------
                                                    1,369          1,452

Expenses:
   Property operating expenses                        315            421
   Depreciation and amortization                      522            519
   Interest expense                                   477            473
   Real estate taxes                                  136            136
   General and administrative                         120             94
                                                 --------        -------
                                                    1,570          1,643
                                                 --------        -------
Operating loss                                       (201)          (191)

Partnership's share of unconsolidated
  ventures' income                                    341             54
                                                 --------        -------

Net income (loss)                                $    140        $  (137)
                                                 ========        =======

Net income (loss) per 1,000 Limited
  Partnership Units                              $   1.03        $ (1.01)
                                                 ========        =======

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


   The above per 1,000 Limited  Partnership  Units information is based upon the
134,425,741 Limited Partnership Units outstanding during each period.







                             See accompanying notes.


<PAGE>


               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

        CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
          For the three months ended June 30, 1998 and 1997 (Unaudited)
                                 (In thousands)

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

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

Balance at March 31, 1998                           $   (554)  $  50,304
Cash distributions                                        (3)       (297)
Net income                                                 1         139
                                                    --------   ---------
Balance at June 30, 1998                            $   (556)  $  50,146
                                                    =========  =========























                             See accompanying notes.



<PAGE>


               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
         For the three months ended June 30, 1998 and 1997 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)
                                                         1998        1997
                                                         ----        ----
Cash flows from operating activities:
   Net income (loss)                                $    140     $   (137)
   Adjustments to reconcile net income (loss) to
      net cash (used in) provided by 
      operating activities:
     Partnership's share of unconsolidated
      ventures' income                                  (341)         (54)
     Depreciation and amortization                       522          519
     Amortization of deferred financings costs            10           10
     Changes in assets and liabilities:
      Escrowed cash                                     (135)         (63)
      Accounts receivable                                (60)        (104)
      Prepaid expenses                                    17           15
      Deferred rent receivable                            26           25
      Deferred expenses                                  (12)          (2)
      Accounts payable and accrued expenses              171          223
      Advances (to) from consolidated ventures          (537)          38
      Tenant security deposits                             8          (47)
                                                    --------     --------
        Total adjustments                               (331)         560
                                                    --------     --------
        Net cash (used in) provided by 
          operating activities                          (191)         423
                                                    --------     --------

Cash flows from investing activities:
   Distributions from unconsolidated ventures            740          456
   Additional investments in unconsolidated ventures    (193)        (513)
   Additions to operating investment properties          (44)         (26)
                                                    --------     --------
        Net cash provided by (used in) investing
          activities                                     503          (83)
                                                    --------     --------

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

Net decrease in cash and cash equivalents                (62)        (128)
Cash and cash equivalents, beginning of period         6,202        5,322
                                                    --------     --------
Cash and cash equivalents, end of period            $  6,140     $  5,194
                                                    ========     ========

Cash paid during the period for interest            $    467     $    463
                                                    ========     ========

                             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 June 30, 1998 and March 31, 1998 and revenues and expenses
for each of the three-month periods ended June 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 three months ended
June 30,  1998 and  1997 is  $58,000  and  $59,000,  respectively,  representing
reimbursements  to an affiliate of the Managing  General  Partner for  providing
certain  financial,  accounting  and  investor  communication  services  to  the
Partnership.

      Also included in general and  administrative  expenses for the three-month
periods  ended  June 30,  1998  and 1997 is  $4,000  and  $6,000,  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 June 30, 1998 and 1997,  the  Partnership  had  investments in three
unconsolidated   joint  venture  partnerships  which  own  operating  investment
properties  as  described  further  in  the  Partnership's  Annual  Report.  The
unconsolidated joint venture partnerships are accounted for on the equity method
in the Partnership's  financial statements because the Partnership does not have
a voting control interest in these joint ventures.  The Partnership's  policy is
to recognize its share of ventures' operations three months in arrears.

      Subsequent  to the end of the first  quarter,  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  sales
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.

      Summarized  operations  of the  unconsolidated  joint  ventures,  for  the
periods indicated, are as follows.
<PAGE>
                    Condensed Combined Summary of Operations
               For the three months ended March 31, 1998 and 1997
                                 (in thousands)

                                                       1998        1997
                                                       ----        ----
Revenues:
   Rental revenues and expense recoveries           $ 2,613      $2,363
   Interest and other income                             21          25
                                                    -------      ------
                                                      2,634       2,388

Expenses:
   Property operating expenses                          663         805
   Real estate taxes                                    426         503
   Interest expense                                     207         204
   Depreciation and amortization                        824         790
                                                    -------      ------
                                                      2,120       2,302
                                                    -------      ------
Net income                                          $   514      $   86
                                                    ========     ======
Net income:
   Partnership's share of combined income           $   355      $   68
   Co-venturers' share of combined income               159          18
                                                    -------      ------
                                                    $   514      $   86
                                                    =======      ======

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

                                                       1998        1997
                                                       ----        ----
   Partnership's share of operations,
       as shown above                               $   355     $    68
   Amortization of excess basis                         (14)        (14)
                                                    -------     -------
   Partnership's share of unconsolidated
       ventures' income                             $   341     $    54
                                                    =======     =======

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

      The  Partnership's  balance  sheets at June 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.

      The  following is a combined  summary of property  operating  expenses for
Saratoga  Center and EG&G Plaza,  Asbury Commons  Apartments and the West Ashley
Shoppes  Shopping  Center for the three months ended March 31, 1998 and 1997 (in
thousands):

                                                      1998        1997
                                                      ----        ----
      Property operating expenses:
        Repairs and maintenance                    $     78     $   156
        Utilities                                        41          53
        Salaries and related costs                       61          60
        Insurance                                        16          16
        Management fees                                  35          47
        Administrative and other                         84          89
                                                   --------     -------
                                                   $    315     $   421
                                                   ========     =======
5.   Bonds Payable
     -------------

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

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

      Mortgage  notes  payable  on  the  consolidated   balance  sheets  of  the
Partnership  at June 30, 1998 and March 31, 1998  consist of the  following  (in
thousands):
                                                June 30           March 31
                                                -------           --------
     9.125% mortgage note payable by the
     Partnership to an insurance company
     secured  by the 625 North  Michigan
     Avenue     operating     investment
     property.  The  terms  of the  note
     were  modified  effective  May  31,
     1994.  The  loan  requires  monthly
     principal and interest  payments of
     $83  through  maturity  on  May  1,
     1999.   In   addition,   the   loan
     requires   monthly  deposits  to  a
     capital   improvement  escrow.  The
     fair  value  of the  mortgage  note
     approximated  its carrying value at
     June 30, 1998 and March 31, 1998.           $   9,245       $    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 March 31, 1998 and December 31,
     1997.                                           6,682            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 March  31,  1998
     and December 31, 1997.                          3,368            3,380
                                                  --------         --------
                                                  $ 19,295         $ 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 bears interest at 8.72% and matures in 7 years.  The loan requires  monthly
principal  and  interest  payments  of  $43,000.   On  February  10,  1995,  the
Partnership  repaid an  outstanding  zero coupon loan  secured by 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 loans secured by the Gables and Gateway Plaza properties rests with the
respective   unconsolidated  joint  ventures.   Accordingly  the  mortgage  loan
liabilities  are recorded on the books of these  unconsolidated  joint ventures.
The Partnership has indemnified  Richmond Gables  Associates and  Daniel/Metcalf
Associates  Partnership  and  the  related  co-venture  partners,   against  all
liabilities, claims and expenses associated with these borrowings.

<PAGE>



               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

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

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

      The following  discussion of financial condition includes  forward-looking
statements  which  reflect  management's  current  views with  respect to future
events and  financial  performance  of the  Partnership.  These  forward-looking
statements  are  subject to certain  risks and  uncertainties,  including  those
identified  in Item 7 of the  Partnership's  Annual  Report on Form 10-K for the
year ended March 31, 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 six 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  subsequent to the  quarter-end.
In addition,  the  Partnership  has begun the process of marketing  the Hacienda
Business Park property for sale.  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
within the next 2 years.

      Subsequent  to the end of the first  quarter,  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  sales
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 90% leased to four tenants as of June
30, 1998. 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 fourth  quarter of fiscal 1998,  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 may provide 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.

      The 625 North  Michigan  Office  Building  in Chicago,  Illinois,  was 95%
leased and 87% occupied at June 30, 1998, compared to 88% leased and occupied at
the end of the prior quarter.  As discussed  further in the Annual  Report,  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.  The space is now being  renovated in  preparation  for the
tenant's  expected  occupancy in September 1998. In addition,  subsequent to the
quarter-end   a  lease  was  signed  with  an  existing   tenant  that  occupies
approximately  8,000 square feet.  This tenant will  relocated 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 is expected
to be  received  at the  September  meeting of the City  Council.  Now that this
preliminary  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 June 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.  During the third  quarter of
fiscal 1998,  negotiations  were finalized with a tenant which will occupy 4,980
square feet. This leasing was partially  offset when one tenant  occupying 1,018
square feet moved from the Center.  During the  remainder of calendar year 1998,
only one lease comes up for renewal.  The tenant,  which  occupies  1,557 square
feet, is expected to renew its lease.

      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.

      As discussed in the Annual Report,  management discovered the existence of
certain potential  construction problems at the Asbury Commons Apartments during
fiscal 1997. The initial analysis of the construction problems at Asbury Commons
revealed  extensive  deterioration  of the wood trim and  evidence of  potential
structural  problems  affecting  the exterior  breezeways,  the decks of certain
apartment unit types and the stairway towers. A design and construction team was
organized  to further  evaluate  the  potential  problems,  make  cost-effective
remediation  recommendations  and implement the repair program.  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 expected to be completed
by late fall 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 and roofing  shingles,  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 92% for
the quarter  ended June 30, 1998,  compared to 91% for the prior quarter and 84%
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.  The  property  leasing team
discontinued the use of concessions and specials during the current quarter.

      At June 30, 1998, the Partnership and its consolidated  joint ventures had
available cash and cash equivalents of approximately  $6,140,000.  Such cash and
cash equivalent amounts will be utilized for the working capital requirements of
the  Partnership,  for reinvestment in certain of the  Partnership's  properties
including the  anticipated  construction  repair work at Asbury  Commons and the
capital needs of the Partnership's  commercial  properties (as discussed further
above) and for distributions to the partners. The source of future liquidity and
distributions  to the  partners is expected to be through  cash  generated  from
operations  of the  Partnership's  income-producing  investment  properties  and
proceeds received from the sale or refinancing of such properties.  Such sources
of liquidity are expected to be sufficient  to meet the  Partnership's  needs on
both a short-term and long-term basis.

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

      The  Partnership  reported a net income of $140,000  for the three  months
ended June 30, 1998,  as compared to net loss of $137,000 for the same period in
the prior year. This favorable change in the Partnership's net operating results
is  attributable  to an increase in the  Partnership's  share of  unconsolidated
ventures' income which was partially offset by an increase in the  Partnership's
operating loss.

      The Partnership's  share of  unconsolidated  ventures' income increased by
$287,000  primarily  due to increases in combined  rental income and declines in
combined property operating expenses and real estate taxes.  Rental revenues and
expense  recoveries  at  the  625  North  Michigan,  Gateway  Plaza  and  Gables
Apartments properties increased by $135,000, $84,000 and $31,000,  respectively,
mainly due to increases in the average occupancy levels at each property for the
current three-month period. The decrease in property operating expenses resulted
mainly from declines in repairs and maintenance  costs at 625 North Michigan and
declines  in  salaries  and  management  fees at The  Gables  Apartments,  which
resulted from a change in the property  management team and fee structure.  Real
estate taxes  decreased  largely due to a increase in the real estate tax refund
received  during the current year at 625 North  Michigan as compared to the same
period in fiscal 1998.  Increases in depreciation  and amortization at 625 North
Michigan and Gateway Plaza  partially  offset the above favorable  results.  The
increases were the result of recent capital improvements at both properties.

      The  Partnership's  operating loss increased by $10,000,  when compared to
the same  period in the prior  year,  due to a  decrease  in total  revenues  of
$83,000 which was partially  offset by a decrease in total  expenses of $73,000.
The decrease in the  Partnership's  revenues  consisted of a $96,000  decline in
rental income from the consolidated joint ventures which was partially offset by
a $13,000 increase in interest and other income.  Rental income decreased mainly
due to  declines in rental  income at the  consolidated  Hacienda  Park and West
Ashley  Shoppes  joint  ventures  which was  partially  offset by an increase in
rental income at the consolidated Asbury Commons joint venture. Rental income at
Hacienda Park  decreased  mainly due to the timing in billing of the annual real
estate tax reimbursements. Rental income decreased at West Ashley Shoppes due to
substantial   decreases  in  common  area   maintenance   and  real  estate  tax
reimbursements.  Rental income  increased at Asbury Commons due to a increase in
average occupancy.  Interest and other income increased mainly as a result of an
increase  in  interest  income due to a higher  average  invested  cash  reserve
balance during the current three-month period. The decrease in total expenses is
mainly  attributable  to a decrease in repairs and  maintenance  expenses at the
consolidated  Asbury  Commons and  Hacienda  Park joint  ventures of $62,000 and
$11,000, respectively.


<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 subsequent to the
end of 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:  August 11, 1998