UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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


                                    FORM 10-Q

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

               FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996

                                       OR

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

            For the transition period from           to          .


                            Commission File Number    :  0-17150


                 PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
            (Exact name of registrant as specified in its charter)


              Texas                                          76-0147579
(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 DEVELOPMENT PARTNERS FOUR, LTD.

                           CONSOLIDATED BALANCE SHEETS
                December 31, 1996 and March 31, 1996 (Unaudited)
                                 (In thousands)

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

Operating investment properties:
   Land                                           $  18,190      $  18,190
   Buildings and improvements                        77,566         76,995
                                                  ---------      ---------
                                                     95,756         95,185
   Less accumulated depreciation                    (27,769)       (25,465)
                                                  ---------      ---------
                                                     67,987         69,720

Cash and cash equivalents                             2,419          1,390
Restricted cash                                       3,778          4,164
Accounts receivable - affiliates                         20             16
Prepaid and other assets                                 78             68
Deferred expenses, net                                  686            769
                                                  ---------      ---------
                                                  $  74,968      $  76,127
                                                  =========      =========

                        LIABILITIES AND PARTNERS' DEFICIT

Long-term debt in default                         $  86,370      $  87,489
Accounts payable and accrued expenses                   900            355
Accrued interest and fees                             5,001          4,258
Tenant security deposits                                479            477
Equity in losses of unconsolidated joint venture
  in excess of investments and advances               2,315          2,223
Long-term debt                                        9,125          9,125
Co-venturers' share of net assets of
  consolidated ventures                               1,080          1,153
Partners' deficit                                   (30,302)       (28,953)
                                                  ---------      ----------
                                                  $  74,968      $  76,127
                                                  =========      =========

             CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
        For the nine months ended December 31, 1996 and 1995 (Unaudited)
                                 (In thousands)

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

Balance at March 31, 1995                           $(2,500)      $(23,840)
Net loss                                               (102)        (1,946)
                                                    -------       --------
Balance at December 31, 1995                        $(2,602)      $(25,786)
                                                    =======       ========

Balance at March 31, 1996                           $(2,631)      $(26,322)
Net loss                                                (66)        (1,283)
                                                    --------      ---------
Balance at December 31, 1996                        $(2,697)      $(27,605)
                                                    =======       ========



                             See accompanying notes.


<PAGE>


                   PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.

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

                                   Three Months Ended      Nine Months Ended
                                       December 31,          December 31,
                                  ------------------      ------------------
                                    1996        1995         1996     1995
                                    ----        ----         ----     ----

Revenues:
   Rental income                 $  2,572     $ 2,445     $  7,545    $ 7,289
   Interest income                     36          61          166        159
   Other income                       125         109          471        327
                                 --------     -------     --------    -------
                                    2,733       2,615        8,182      7,775

Expenses:
   Property operating expenses        903       1,031        2,803      2,781
   Real estate taxes                  248          39          745        533
   Interest expense                 1,175       1,301        3,528      3,995
   Depreciation                       773         751        2,309      2,264
   General and administrative          50          62          127        186
                                 --------     -------     --------    -------
                                    3,149       3,184        9,512      9,759
                                 --------     -------     --------    -------

Operating loss                       (416)       (569)      (1,330)    (1,984)

Partnership's share of 
  unconsolidated
  venture's loss                      (31)        (24)         (92)       (68)

Co-venturers' share of 
  consolidated
  ventures' losses                     31           2           73          4
                                 --------     -------     --------    -------

Net loss                         $   (416)    $  (591)    $ (1,349)   $(2,048)
                                 ========     =======     ========    =======

Net loss per Limited 
 Partnership Unit                $ (9.53)     $(13.50)    $ (30.81)   $(46.73)
                                  =======     =======     ========    =======

The above net loss per Limited Partnership Unit is based upon the 41,644 Limited
Partnership Units outstanding for each period.













                             See accompanying notes.


<PAGE>


                   PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.

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

                                                           1996         1995
                                                           ----         ----
Cash flows from operating activities:
   Net loss                                            $  (1,349)   $  (2,048)
   Adjustments to reconcile net loss to
    net cash provided by operating activities:
     Depreciation                                          2,304        2,264
     Amortization of deferred financing costs                 83           83
     Amortization of deferred gain on forgiveness of debt   (257)        (257)
     Partnership's share of unconsolidated venture's loss     92           68
     Co-venturers' share of consolidated ventures' losses    (73)          (4)
     Changes in assets and liabilities:
      Accounts receivable - affiliates                        (4)          (4)
      Prepaid and other assets                               (10)          (7)
      Accounts payable and accrued expenses                  545           46
      Accrued interest and fees                              743          896
      Tenant security deposits                                 2          (11)
                                                       ---------    ---------
      Total adjustments                                    3,425        3,074
                                                       ---------    ---------
      Net cash provided by operating activities            2,076        1,026
                                                       ---------    ---------

Cash flows from investing activities:
   Additions to buildings and improvements                  (571)          (6)
                                                       ---------    ---------
      Net cash used in investing activities                 (571)          (6)
                                                       ---------    ---------

Cash flows from financing activities:
   Net withdrawals from restricted cash                      386          789
   Repayment of principal on long-term debt                 (862)           -
                                                       ---------    ---------
      Net cash (used in) provided by 
        financing activities                                (476)         789
                                                       ---------    ---------

Net increase in cash and cash equivalents                  1,029        1,809

Cash and cash equivalents, beginning of period             1,390        1,292
                                                       ---------    ---------

Cash and cash equivalents, end of period               $   2,419    $   3,101
                                                       =========    =========

Cash paid during the period for interest               $   2,815    $   3,273
                                                       =========    =========












                             See accompanying notes.


<PAGE>


                 PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
                  Notes to Consolidated Financial Statements
                                   (Unaudited)

1.  General

        The accompanying financial statements,  footnotes and discussions should
    be read in conjunction with the financial statements and footnotes contained
    in the Partnership's Annual Report for the year ended March 31, 1996. In the
    opinion of management, the accompanying financial statements, which have not
    been  audited,  reflect  all  adjustments  necessary  to present  fairly the
    results for the interim period. All of the accounting  adjustments reflected
    in the accompanying  interim financial  statements are of a normal recurring
    nature.

        The accompanying  financial statements have been prepared on the accrual
    basis  of  accounting  in  accordance  with  generally  accepted  accounting
    principles which requires  management to make estimates and assumptions that
    affect the reported  amounts of assets and  liabilities  and  disclosures of
    contingent assets and liabilities as of December 31, 1996 and March 31, 1996
    and  revenues and  expenses  for each of the three- and  nine-month  periods
    ended  December  31, 1996 and 1995.  Actual  results  could  differ from the
    estimates and assumptions used.

2. Related Party Transactions

        Included  in general  and  administrative  expenses  for the nine months
    ended  December  31,  1996 and 1995 is $55,000  and  $61,000,  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 both the nine
    months ended December 31, 1996 and 1995 is $3,000,  representing fees earned
    by an  affiliate,  Mitchell  Hutchins  Institutional  Investors,  Inc.,  for
    managing the Partnership's cash assets.

3.  Investment in Unconsolidated Joint Venture Partnership

        The  Partnership has an investment in one  unconsolidated  joint venture
    which owns an operating investment property (Lincoln Garden Apartments),  as
    discussed further in the Annual Report. The unconsolidated  joint venture is
    accounted for by using the equity method  because the  Partnership  does not
    have a voting control interest in the venture.  Under the equity method, the
    investment  is carried at cost adjusted for the  Partnership's  share of the
    unconsolidated   venture's   earnings,   losses   and   distributions.   The
    Partnership's  policy is to recognize its share of unconsolidated  venture's
    operations three months in arrears.


<PAGE>


    Summarized  operations of the unconsolidated  joint venture, for the periods
    indicated, are as follows:

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

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

    Rental revenues                $  277      $  279      $  836     $   876
    Interest and other income          14          18          45          41
                                   ------      ------      ------     -------
                                      291         297         881         917

    Property operating expenses       157         154         471         464
    Interest expense                  115         119         357         379
    Depreciation and amortization      64          59         189         174
                                   ------      ------      ------     -------
                                      336         332       1,017       1,017
                                   ------      ------      ------     -------
    Net loss                       $  (45)     $  (35)     $ (136)    $  (100)
                                   ======      ======      ======     =======

    Net loss:
      Partnership's share 
       of net loss                 $  (30)     $  (23)     $  (89)    $   (65)
      Co-venturer's share
       of net loss                    (15)        (12)        (47)        (35)
                                   ------      ------      ------     -------
                                   $  (45)     $  (35)     $ (136)    $  (100)
                                   ======      ======      ======     =======

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

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

     Partnership's share of
       operations, as shown above      $  (30)    $  (23)     $  (89)  $  (65)
     Amortization of excess basis          (1)        (1)         (3)      (3)
                                       ------     ------      ------   ------
     Partnership's share of
       unconsolidated venture's loss   $  (31)    $  (24)     $  (92)  $  (68)
                                       ======     ======      ======   ======

4.  Operating Investment Properties

        The  Partnership  consolidates  the  results of two  majority-owned  and
    controlled  joint ventures in its financial  statements.  The  Partnership's
    policy is to report the operations of the  consolidated  joint ventures on a
    three month lag.

        On  December  16,  1985,  the  Partnership  acquired an interest in 71st
    Street Housing  Partners,  Ltd., a joint venture formed to develop,  own and
    operate the Harbour Pointe Apartments, a 234-unit two-story garden apartment
    complex located in Bradenton,  Florida.  Pursuant to an Amended and Restated
    Agreement  of the  Limited  Partnership  dated  August 4, 1989,  the general
    partner interests of the co-venturers were converted to limited  partnership
    interests.  As a  result  of the  amendment,  the  Partnership,  as the sole
    general  partner,  assumed  control of the  operations  of the property and,
    accordingly,  presents the financial  position and the operating  results of
    the  joint  venture  on  a  consolidated  basis.  The  Lakes  Joint  Venture
    ("Venture")  was formed on May 30, 1985 in accordance with the provisions of
    the laws of the State of California  for the purpose of  developing,  owning
    and  operating  The Lakes at South Coast  Apartments,  a 770-unit  apartment
    complex  located in Costa  Mesa,  California.  As  discussed  further in the
    Annual Report,  on September 26, 1991, in conjunction with a refinancing and
    modification  of  the  Venture's   long-term   indebtedness,   the  original
    co-venture  partner  transferred  its interest in the Venture to Development
    Partners, Inc. ("DPI"), a Delaware corporation and a wholly-owned subsidiary
    of Paine Webber Group,  Inc., and withdrew from the Venture.  As a result of
    the original co-venturer's withdrawal,  the Partnership assumed control over
    the  operations  of the Venture.  Accordingly,  the  financial  position and
    results of operations of the Venture are presented on a consolidated basis.
<PAGE>
        The following is a combined summary of property  operating  expenses for
    the Harbour Pointe  Apartments  and The Lakes at South Coast  Apartments for
    the three and nine months ended September 30, 1996 and 1995 (in thousands):

                                       Three Months Ended    Nine Months Ended
                                         September 30,          September 30,
                                       -----------------     ----------------
                                         1996     1995           1996     1995
                                         ----     ----           ----     ----
      Property operating expenses:
        Repairs and maintenance       $  213  $   210        $   713   $   644
        Utilities                        147      166            447       463
        Management fees                   96       91            283       272
        Other operating and 
          administrative                 447      564          1,360     1,402
                                      ------   ------        -------   -------
                                      $  903   $1,031        $ 2,803   $ 2,781
                                      ======   ======        =======   =======

5. Long-term Debt

   Long-term  debt on the  Partnership's  balance sheet at December 31, 1996 and
   March 31, 1996 consists of the following (in thousands):

                                                      December 31    March 31
                                                      -----------    --------
    Nonrecourse mortgage note payable by
    71st Street Housing  Partners,  Ltd.
    which secures Manatee County Housing
    Finance  Authority Revenue Refunding
    Bonds.  The mortgage loan is secured
    by a  deed  to  secure  debt  and  a
    security agreement covering the real
    and personal property of the Harbour
    Pointe Apartments.                                 $ 9,125        $ 9,125

    Developer  loan payable by The Lakes
    Joint Venture  which secures  County
    of  Orange,   California  Tax-Exempt
    Apartment    Development     Revenue
    Bonds.    The   mortgage   loan   is
    nonrecourse  and  is  secured  by  a
    first  deed of trust plus all future
    rents and  income  generated  by The
    Lakes  at  South  Coast  Apartments.                75,600         75,600

    Nonrecourse   loan  payable  by  The
    Lakes   Joint   Venture  to  a  bank
    secured  by a third  deed  of  trust
    plus all  future  rents  and  income
    generated  by  The  Lakes  at  South
    Coast Apartments.                                    3,872          4,584

    Prior indebtedness principal payable
    by  The  Lakes  Joint  Venture  to a
    bank. This obligation is nonrecourse
    to the joint venture.                                3,411          3,561

    Deferred gain on forgiveness of debt
    of The Lakes Joint  Venture  (net of
    accumulated  amortization  of $1,792
    and $1,535 at September 30, 1996 and
    December  31,  1995,   respectively)                 3,487          3,744

                                                       -------        -------
                                                        95,495         96,614

    Less: Long-term debt in default (see
    discussion below)                                  (86,370)       (87,489)

                                                      --------       --------
                                                      $  9,125       $  9,125
                                                      ========       ========

    Mortgage loan secured by the Harbour Pointe Apartments:
    -------------------------------------------------------

       Original  financing for construction of the Harbour Pointe Apartments was
    provided through $9,200,000 of Multi-Family  Housing Mortgage Revenue Bonds,
    Series  1985 E due  December  1, 2007  (the  original  Bonds)  issued by the
    Manatee County Housing Finance Authority which bore interest at 8.25% plus a
    1.25%  letter of credit fee.  An amount of $75,000 was paid on the  original
    bonds prior to the  refinancing.  The original bond issue was  refinanced on
    May 1,  1990  with  $9,125,000  Weekly  Adjustable/Fixed  Rate  Multi-Family
    Housing Revenue  Refunding  Bonds,  Series 1990A,  due December 1, 2007 (the
    Bonds).  The interest rate on the Bonds is adjusted weekly to a minimum rate
    that would be  necessary  to  remarket  the Bonds in a  secondary  market as
    determined by a bank remarketing agent. The Bonds are secured by the Harbour
    Pointe Apartments.

       Interest on the  underlying  bonds is intended to be exempt from  federal
    income  tax  pursuant  to  Section  103 of the  Internal  Revenue  Code.  In
    connection  with  obtaining the mortgage,  the Harbour  Pointe joint venture
    executed a Land Use  Restriction  Agreement  with the Manatee County Housing
    Finance Authority which provides, among other things, that substantially all
    of the  proceeds of the Bonds  issued be  utilized  to finance  multi-family
    housing  of  which  20% or more of the  units  are to be  leased  to low and
    moderate income  families as established by the United States  Department of
    Housing and Urban Development. In the event that the underlying Bonds do not
    maintain  their  tax-exempt  status,  whether  by a  change  in  law  or  by
    noncompliance with the rules and regulations  related thereto,  repayment of
    the note may be accelerated.

       Pursuant to the  financing  agreement,  a bank has issued an  irrevocable
    letter  of  credit  to the Bond  trustee  in the  joint  venture's  name for
    $9,247,500.  An annual  fee equal to 1% of the  letter of credit  balance is
    payable monthly to the extent of net cash operating  income available to pay
    such fees. The letter of credit is scheduled to expire on December 15, 1997.

    Debt secured by The Lakes at South Coast Apartments:
    ----------------------------------------------------

       Original   financing  for  construction  of  The  Lakes  at  South  Coast
    Apartments  was provided from a developer  loan in the amount of $76,000,000
    funded  by  the  proceeds  of a  public  offering  of  tax-exempt  apartment
    development  revenue bonds. The Venture had been in default of the developer
    loan beginning in December 1989 for failure to make full and timely payments
    on the loan.  The  original  bond issue was  refinanced  during 1991 and the
    original  developer  loan was  extinguished.  The new  developer  loan (1991
    Developer  Loan), in the amount of $75,600,000,  is payable to the County of
    Orange and was funded by the  proceeds of a public  offering  of  tax-exempt
    apartment  development  revenues  bonds  issued,  at par,  by the  County of
    Orange,  California in September 1991. Principal is payable upon maturity on
    December 1, 2006. Interest on the bonds is variable with the rate determined
    weekly by a remarketing agent and is payable in arrears on the first of each
    month.

       The loan is secured  by a first  deed of trust plus all future  rents and
    income generated by the operating  investment  property.  Bond principal and
    interest  payments are secured by and payable from an irrevocable  letter of
    credit issued by a bank in the amount of $76,569,000,  expiring December 15,
    1998.  The Venture paid an annual  letter of credit fee equal to 1.0% of the
    outstanding  amount,  payable 60%  monthly  with the  remaining  40% (Unpaid
    Accrued  Letter of Credit  Fees)  deferred and paid in  accordance  with the
    Reimbursement  Agreement, through December 15, 1996.  Commencing on December
    16, 1996,  the annual letter of credit fee increases to 1.375%,  payable 73%
    monthly with 27% deferred. See the Partnership's Annual Report for a further
    discussion of the Reimbursement  Agreement.  Unpaid Accrued Letter of Credit
    Fees were  $1,536,000  and $1,306,000 at September 30, 1996 and December 31,
    1995, respectively. The bank letter of credit is secured by a second deed of
    trust on the operating  investment property and future rents and income from
    the operating investment property.

       The  1991  Developer  Loan  contains   several   restrictive   covenants,
    including,  among others,  a requirement that the Venture furnish the letter
    of credit  issuer  in  September  1994 and  September  1996  with  certified
    independent  appraisals of the fair market value of the operating investment
    property for amounts equal to or greater than $92,000,000 and  $100,000,000,
    respectively.  Failure  to  provide  such  appraisals  constitute  events of
    default under the Reimbursement  Agreement. To date, the Lakes Joint Venture
    has not  provided  the  lender  with an  appraisal  which  meets  either the
    $92,000,000 or  $100,000,000  requirement,  and the lender has not waived or
    modified the minimum appraised value requirements.  Accordingly, the Venture
    is technically  in default under the  Reimbursement  Agreement.  In February
    1996,  the lender  issued a formal  notice of  default to the Joint  Venture
    pursuant to the  Reimbursement  Agreement.  During fiscal 1996 and 1997, the
    Partnership has engaged in discussions  with the lender  regarding  possible
    changes  in the  appraisal  requirements,  however,  no  agreement  has been
    reached to date.  There can be no assurances  that the lender will grant any
    relief in  connection  with  these  appraisal  covenants.  Accordingly,  the
    carrying  amount of the debt  related to The Lakes  Joint  Venture  has been
    classified as long-term debt in default on the  accompanying  balance sheets
    as of December 31, 1996 and March 31, 1996.

       If management  cannot reach an agreement with The Lakes'  mortgage lender
    regarding  the  appraisal  covenants,  the lender  could  choose to initiate
    foreclosure proceedings. If such a foreclosure were to occur within the next
    2 years,  the Partnership may be unable to recover the net carrying value of
    the operating investment property. The Partnership would, however, recognize
    a net gain upon a foreclosure of The Lakes at South Coast Apartments because
    the carrying value of the related  non-recourse debt  significantly  exceeds
    the net carrying value of the operating  investment  property.  In the event
    that the ownership of The Lakes was transferred to the lender as a result of
    foreclosure  actions,  the  Partnership  would  have to weigh  the  costs of
    continued  operations against the realistic hopes for any future recovery of
    capital from the other two investments. Under any circumstances,  it appears
    unlikely at the present time that the Partnership will be able to return any
    significant   amount  of   invested   capital  to  the   Limited   Partners.
    Consequently,  the Managing General Partner might determine that it would be
    in the best  interests of the Limited  Partners to liquidate  the  remaining
    investments  and terminate the  Partnership in the near term.  Management is
    currently  evaluating  the  potential  for  disposing  of the  Partnership's
    remaining  investments  and  completing a  liquidation.  The results of such
    analysis will be  communicated  to the Limited  Partners in future  reports.
    These  conditions  raise  substantial  doubt  about  the  Venture's  and the
    Partnership's   ability  to  continue  as  going  concerns.   The  financial
    statements  do not include any  adjustments  to reflect the possible  future
    effects on the  recoverability  and  classification of assets or the amounts
    and  classification  of liabilities that may result from the outcome of this
    uncertainty.

       The  restructuring  of the Prior  Indebtedness,  the  Deferred  Letter of
    Credit Fees and the line of credit  borrowings  in 1991 was accounted for in
    accordance  with  Statement  of  Financial   Accounting  Standards  No.  15,
    "Accounting  by Debtors and  Creditors  for Troubled  Debt  Restructurings".
    Accordingly,  the  forgiveness  of debt,  aggregating  $5,279,000,  has been
    deferred  and  is  being  amortized  as  a  reduction  of  interest  expense
    prospectively  using a method  approximating  the effective  interest method
    over  the  estimated  remaining  term  of  the  Venture's  indebtedness.  At
    September  30,  1996 and  December  31,  1995,  $3,487,000  and  $3,744,000,
    respectively,  of such forgiven debt (net of  accumulated  amortization)  is
    reflected in the accompanying balance sheets.

7.  Contingencies

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


<PAGE>



                 PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.

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

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

       As previously reported, the operations of the three remaining assets, The
Lakes at South Coast  Apartments,  the Harbour Pointe Apartments and the Lincoln
Garden  Apartments,  have  been  stabilized  as  a  result  of  successful  debt
restructurings,  and the  properties  do not  currently  require  the use of the
Partnership's cash reserves to support operations.  Nonetheless,  the properties
would not operate at or above breakeven under conventional financing terms based
on the current outstanding principal amounts owed. All three of these properties
have been  financed  with  tax-exempt  revenue  bonds  issued  by local  housing
authorities.  The  interest  rates  on all  three  of  these  restructured  debt
obligations  are now  variable  rates  which  are based on  comparable  rates on
similar  tax-exempt  obligations.  Such rates have  remained 3 to 4 percent  per
annum below comparable  conventional rates over the past several years. The debt
modification  agreement for The Lakes was  structured  with certain debt service
reserves  and  accrual   features   intended  to  help  absorb   interest   rate
fluctuations.   The  Lakes  Joint  Venture  currently  has  over  $1,200,000  of
lender-controlled  reserves in place to help cover possible  future debt service
shortfalls.  The Harbour  Pointe and Lincoln Garden joint ventures would require
advances from the venture  partners,  principally the Partnership in the case of
Harbour Pointe,  if future cash flows are insufficient to cover any increases in
debt service payments.

     The letters of credit which  collateralize  the Lincoln  Garden and Harbour
Pointe  mortgage  loans are  scheduled to expire on May 1, 1997 and December 15,
1997, respectively.  Management is currently evaluating its options for renewing
these letters of credit.  The estimated  market  values of both  properties  are
likely to be insufficient to meet the loan-to-value  ratio  requirements for the
issuance of new letters of credit. If the letters of credit are not renewed, the
mortgage loans would become  immediately  due and payable upon these  expiration
dates and would need to be repaid from the proceeds of a sale or  refinancing of
the  operating  investment  properties.  If a sale or  refinancing  could not be
accomplished, the properties could be subject to foreclosure by the lenders. The
outcome of this situation cannot presently be determined.

     As  previously  reported,  the  Reimbursement  Agreement  which governs the
secured debt obligations of The Lakes Joint Venture contains certain restrictive
covenants,  including,  among others, a requirement that the venture provide the
lender,  in  September  1994 and  September  1996,  with  certified  independent
appraisals of the operating property  indicating the value of the property to be
equal to or greater than $92 million and $100 million, respectively.  Failure to
provide  such   appraisals   is  defined  as  an  event  of  default  under  the
Reimbursement  Agreement.  Based on current cash flow levels and the  prevailing
market  conditions,   the  value  of  the  property  could  be  expected  to  be
considerably  less than $92 million as of December 31, 1996.  During fiscal 1996
and 1997,  the  Managing  General  Partner has had  discussions  with the lender
regarding   possible   changes  to  the  appraisal   requirements.   Preliminary
indications  have been that the lender might  consider  waiving or modifying the
minimum  appraised value  requirements  in exchange for a  rearrangement  of the
timing  and  amounts  of  certain  payment  priorities,   as  specified  in  the
Reimbursement  Agreement.  However,  to date the  venture has not  provided  the
lender with  appraisals  which meet either of the  minimum  thresholds,  and the
lender has not waived or modified the minimum appraised value  requirements.  In
February 1996, the lender issued a formal notice of default to the Joint Venture
pursuant  to the  Reimbursement  Agreement.  At this time,  management  does not
expect the lender to take any additional  actions as long as progress  continues
to be made in negotiations  for  modification to the terms of the  Reimbursement
Agreement.  However,  there can be no assurances that the lender will ultimately
grant any relief in connection with these appraisal covenants.

     If management  cannot reach an agreement  with The Lakes'  mortgage  lender
regarding  the  appraisal  covenants,   the  lender  could  choose  to  initiate
foreclosure  proceedings.  If such a foreclosure were to occur within the next 2
years,  the  Partnership  may be unable to recover the net carrying value of The
Lakes' operating investment property. The Partnership would, however,  recognize
a net gain upon a  foreclosure  of The Lakes at South  Coast  Apartments,  which
represented 49% of the Partnership's original investment portfolio,  because the
carrying value of the related  non-recourse debt  significantly  exceeds the net
carrying  value of the  operating  investment  property.  In the event  that the
ownership of The Lakes was  transferred to the lender as a result of foreclosure
actions,  the Partnership would have to weigh the costs of continued  operations
against the  realistic  hopes for any future  recovery of capital from the other
two  investments.  Under any  circumstances,  it appears unlikely at the present
time that the  Partnership  will be able to  return  any  significant  amount of
invested  capital to the Limited  Partners.  Consequently,  the Managing General
Partner might  determine  that it would be in the best  interests of the Limited
Partners to liquidate the remaining investments and terminate the Partnership in
the near term. Management is currently evaluating the potential for disposing of
the  Partnership's  remaining  investments  and  completing a  liquidation.  The
results of such analysis will be communicated to the Limited  Partners in future
reports.

     Barring a significant  increase in tax-exempt  interest rates,  excess cash
flow  from  Harbour  Pointe  should  continue  to be  sufficient  to  cover  the
Partnership's  operating  expenses over the near term. Excess cash flow from the
Lincoln  Garden joint  venture has been minimal and is primarily  payable to the
co-venturer  for the  repayment  of  prior  advances.  To the  extent  that  the
Partnership's  operating properties generate excess cash flow after current debt
service,  a  substantial  portion  of such  amounts  will be  reinvested  in the
properties  to  make  certain  repairs  and  improvements  aimed  at  maximizing
long-term values. At The Lakes,  capital improvements for calendar 1996 included
a  continuation  of the  program to upgrade  the  hallways,  elevator  landings,
lobbies,  carpeting and signage.  As of December 31, 1996, the hallway and lobby
renovations were completed, except for the addition of furniture and accessories
which is in process.  As previously  reported,  management  reached an agreement
with the  mortgage  lender  regarding  the  release of certain  restricted  cash
amounts  to pay for these  improvements.  Improvements  at  Lincoln  Garden  for
calendar  1996  included  renovations  to  the  clubhouse,  additional  exterior
lighting and appliance  replacement on an as-needed  basis.  Improvements at the
Harbour  Pointe  Apartments  during  calendar 1996 included new pool  furniture,
repairs to the surface  area  around the  swimming  pool,  the  installation  of
additional  sidewalks  and  upgrading  the unit  interiors on a turnover  basis.
During calendar 1995, the  installation of individual  water meters in all units
at Harbour Pointe was completed,  which  transferred  the water usage costs from
the joint venture to the tenants. The full twelve-month effect of this reduction
in operating expenses improved the venture's cash flow in calendar 1996.

     At December 31, 1996, the Partnership and its  consolidated  joint ventures
had available cash and cash equivalents of approximately  $2,419,000.  Such cash
and cash  equivalents  will be used for the working capital  requirements of the
Partnership  and the  consolidated  ventures  and, to the extent  necessary  and
economically  justified, to fund the Partnership's share of any future operating
deficits  of its  remaining  joint  venture  investments.  The  source of future
liquidity  and  distributions  to the  partners  is  expected  to be  from  cash
generated  from the operations of the remaining  investment  properties and from
proceeds,  if any,  received from the sale,  refinancing or other disposition of
such properties.

Results of Operations
Three Months Ended December 31, 1996
------------------------------------

     The Partnership's net loss decreased by $175,000 for the three-month period
ended December 31, 1996, as compared to the same period in the prior year.  This
favorable   change  in  net  loss  resulted  largely  from  a  decrease  in  the
Partnership's operating loss of $153,000. Operating loss decreased mainly due to
an increase in rental  income and  decreases in interest and property  operating
expenses attributable to the consolidated joint ventures. Rental income from the
consolidated  joint ventures  increased by $127,000 primarily due to an increase
in rental rates at The Lakes at South Coast  Apartments  in the current  period.
Interest expense  decreased by $126,000 mainly due to a decrease in the variable
interest  rate on the first  mortgage  loan  secured by The Lakes at South Coast
Apartments as well as a reduction in the  outstanding  principal  balance of the
other debt  secured by The  Lakes.  Property  operating  expenses  decreased  by
$128,000  primarily due to  reductions in salaries,  utilities and various other
operating  expenses  at The Lakes at South  Coast  Apartments.  The  increase in
rental income and the decreases in interest and property operating expenses were
partially  offset by an increase in real estate taxes at the Lakes Joint Venture
for the current three-month period.

     The Partnership's share of unconsolidated  venture's loss, which represents
the operating  results of the Lincoln  Garden Joint Venture  increased by $7,000
for the  current  three-month  period,  compared  to the same  period last year,
primarily due to a slight  increase in  depreciation  charges.  Rental income at
Lincoln Garden was flat compared to the same period in the prior year.


<PAGE>


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

     The  Partnership's net loss decreased by $699,000 for the nine-month period
ended December 31, 1996, as compared to the same period in the prior year.  This
favorable  change in net loss  resulted  from a  decrease  in the  Partnership's
operating loss of $654,000.  Operating loss decreased mainly due to increases in
rental and other income and a decrease in interest expense from the consolidated
joint ventures.  Rental income increased by $256,000 for the current  nine-month
period  primarily due to an increase in rental rates at The Lakes at South Coast
Apartments.  Other income  increased by $144,000 largely due to the receipt of a
real  estate tax refund by The Lakes  Joint  Venture  during the  current  year.
Interest expense  decreased by $467,000 mainly due to a decrease in the variable
interest  rate on the first  mortgage  loan  secured by The Lakes at South Coast
Apartments as well as a reduction in the  outstanding  principal  balance of the
other debt  secured by The Lakes.  The  increases in rental and other income and
the decrease in interest  expense were  partially  offset by an increase in real
estate taxes at The Lakes Joint Venture for the current nine-month period.

     The decrease in the Partnership's operating loss was partially offset by an
increase  in the  Partnership's  share of  unconsolidated  venture's  loss.  The
Partnership's  share of  unconsolidated  venture's  loss,  which  represents the
operating   results  of  the  Lincoln   Garden  Joint   Venture,   increased  by
approximately  $24,000  for the current  nine-month  period  primarily  due to a
decrease in the  venture's  rental  income  resulting  from a decline in average
occupancy at the Lincoln Garden Apartments.



<PAGE>


                                     PART II
                                Other Information

Item 1. Legal Proceedings

     As discussed in prior  quarterly  and annual  reports,  in November  1994 a
series of purported class actions (the "New York Limited  Partnership  Actions")
were filed in the United States District Court for the Southern  District of New
York concerning  PaineWebber  Incorporated's  sale and sponsorship of 70 limited
partnership  investments,  including  those  offered  by  the  Partnership.  The
lawsuits were brought against  PaineWebber  Incorporated  and Paine Webber Group
Inc.  (together   "PaineWebber"),   among  others,  by  allegedly   dissatisfied
partnership investors.  In March 1995, after the actions were consolidated under
the title In re  PaineWebber  Limited  Partnership  Litigation,  the  plaintiffs
amended their complaint to assert claims against a variety of other  defendants,
including  Fourth  Development  Fund, Inc. and Properties  Associates 1985, L.P.
("PA1985"),  which are the General Partners of the Partnership and affiliates of
PaineWebber.  On May 30, 1995, the court certified class action treatment of the
claims asserted in the litigation.

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

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

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

Item 2. through 5.   NONE

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits: NONE

(b)  Reports on Form 8-K:

     No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.


<PAGE>






                 PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.


                                   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 DEVELOPMENT
                                    PARTNERS FOUR, LTD.


                                    By:  Fourth Development Fund Inc.
                                            Managing General Partner




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






Dated:  February 13, 1997