Form 10-QSB

[X]  QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT
     OF 1934 For the Quarterly period ended September 30, 1998

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

        For the transition period from ________________ to ______________

                         Commission file number 0-28764

                     (Exact name of small business issuer as
                            specified in its charter)
  Performance Asset Management Fund III, Ltd., A California Limited Partnership

(State or other jurisdiction                                  (IRS Employer
of incorporation or organization)                           Identification No.)
         California                                            33-0526128

                    (Address of principal executive offices)
            4100 Newport Place, Suite 400, Newport Beach, California

                           (Issuer's telephone number)
                                 (714) 261-2400


              (Former name, former address and former fiscal year,
                         if changed since last report)

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the registrant was required to file such report(s),  and (2)
has been subject to such filing requirements for the past 90 days. Yes_X_ No___

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

                   PROCEEDINGS DURING THE PRECEDING FIVE YEARS

     Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the  distribution  of
securities under a plan confirmed by court. Yes ___ No ___.

                      APPLICABLE ONLY TO CORPORATE ISSUERS

     State the number of shares  outstanding of each of the issuer's  classes of
common equity, as of the latest practicable date: N/A

         Transitional Small Business Disclosure Format (check one):

                                 Yes ___  No _X_


                                       1
<PAGE>


                  PERFORMANCE ASSET MANAGEMENT FUND III, LTD.,
                        A CALIFORNIA LIMITED PARTNERSHIP

                              INDEX TO FORM 10-QSB




                                     PART I


Item 1.  Financial Statements

Item 2.  Management's Discussion and Analysis of Plan of Operation



                                     PART II


Item 1.  Legal Proceedings

Item 2.  Exhibits and Reports


         Signatures


                                       2
<PAGE>



PERFORMANCE ASSET MANAGEMENT FUND III, LTD.,
A CALIFORNIA LIMITED PARTNERSHIP

                                     PART I



ITEM 1.  FINANCIAL STATEMENTS


Index to the Financial Statements for the Partnership:

Balance Sheets as of September 30, 1998 and December 31, 1997 ...............  4

Statements of Operations for the Three and Nine Months Ended September 30,
1998 and September 30, 1997 .................................................  5

Statements of Partners' Capital (Deficit) for the Nine Months Ended September
 30, 1998 and Year Ended December 31, 1997 ..................................  6

Statements of Cash Flows for the Nine Months Ended September 30,
1998 and September 30, 1997 .................................................  7

Notes to Financial Statements ...............................................  8


The financial statements have been prepared by Performance Asset Management Fund
III,  Ltd., A California  Limited  Partnership  ("Partnership"),  without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have been  condensed  or omitted  pursuant  to such rules and  regulations.  The
Partnership  believes that the  disclosures are adequate to make the information
presented  not  misleading  when  read in  conjunction  with  the  Partnership's
financial  statements  for the year  ended  December  31,  1997.  The  financial
information  presented  reflects  all  adjustments,  consisting  only of  normal
recurring adjustments, which are, in the opinion of management,  necessary for a
fair statement of the results for the interim periods presented.


                                       3
<PAGE>


                  PERFORMANCE ASSET MANAGEMENT FUND III, LTD.,
                        A CALIFORNIA LIMITED PARTNERSHIP

                                 BALANCE SHEETS
                    September 30, 1998 and December 31, 1997
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                     ASSETS

                                                                             9/30/98       12/31/97
                                                                           -----------    -----------
<S>                                                                        <C>            <C>        
Cash and equivalents                                                       $   385,895    $ 1,109,587
Cash held in trust                                                           2,216,480      2,141,594
Investments in distressed loan portfolios, net                               2,244,116      1,663,174
Due from affiliate                                                                  --         56,221
Other assets                                                                    64,480         64,480
                                                                           -----------    -----------
          Total assets                                                     $ 4,910,971    $ 5,035,056
                                                                           ===========    ===========

                        LIABILITIES AND PARTNERS' CAPITAL

Accounts  payable                                                          $     4,500    $     5,219
Due to affiliates, net                                                         391,150        464,128
                                                                           -----------    -----------
          Total liabilities                                                    395,650        469,347
                                                                           -----------    -----------

Commitments and contingencies

General partner's deficit (no units outstanding)                              (400,962)      (395,923)
Limited partners' capital (2,000 units authorized;
1,998 units issued and outstanding September 30,
1998, and December 31, 1997)                                                 4,916,283      4,961,632
                                                                           -----------    -----------
          Total partners' capital                                            4,515,321      4,565,709
                                                                           -----------    -----------
          Total liabilities and partners' capital                          $ 4,910,971    $ 5,035,056
                                                                           ===========    ===========
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                       4
<PAGE>

                  PERFORMANCE ASSET MANAGEMENT FUND III, LTD.,
                        A CALIFORNIA LIMITED PARTNERSHIP

                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                         For the Three                  For the Nine
                                                   Months Ended September 30      Months Ended September 30
                                                   -------------------------      -------------------------
                                                       1998           1997           1998           1997
                                                    ---------      ---------      ---------      ---------
<S>                                                  <C>            <C>            <C>            <C>      
Portfolio collections                                $190,517       $194,043       $677,782       $726,660
Less: portfolio basis recovery                        190,517        194,043        677,782        726,660
                                                    ---------      ---------      ---------      ---------
                  Net investment income                    --             --             --             --
                                                    ---------      ---------      ---------      ---------
Cost of operations:
          Collection expense                              542          8,615         34,331         37,890
          Management fee expense                       14,302         11,974         44,790         40,875
          Professional fees                            37,415          6,801         65,160         78,559
          Amortization                                     --            290             --            923
          General and administrative expense              124            667          1,322          7,155
                                                    ---------      ---------      ---------      ---------
                  Total operating expenses             52,383         28,347        145,603        165,402
                                                    ---------      ---------      ---------      ---------
Income (loss) from operations                         (52,383)       (28,347)      (145,603)      (165,402)
Other income:
          Interest                                     31,118         36,054         95,215        111,658
          Other income                                     --             --             --             84
                                                    ---------      ---------      ---------      ---------
Net income (loss)                                    ($21,265)        $7,707       ($50,388)      ($53,660)
                                                    =========      =========      =========      =========

Net income (loss) allocable to general partner        ($2,127)          $771        ($5,039)       ($5,366)
                                                    =========      =========      =========      =========
Net income (loss) allocable to limited partners      ($19,139)        $6,936       ($45,349)      ($48,294)
                                                    =========      =========      =========      =========
Net income (loss) per limited partnership unit         ($9.58)         $3.47        ($22.70)       ($24.17)
                                                    =========      =========      =========      =========
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                       5
<PAGE>

                  PERFORMANCE ASSET MANAGEMENT FUND III, LTD.,
                        A CALIFORNIA LIMITED PARTNERSHIP

                    STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
  For the Nine Months Ended September 30, 1998 and Year Ended December 31,1997
                                   (UNAUDITED)

                                    General         Limited
                                    Partner         Partners           Total
                                  -----------      -----------      -----------
Balance, December 31, 1996           (289,959)       5,916,522        5,626,563
       Distributions                  (88,800)        (800,400)        (889,200)
       Net income (loss)              (17,164)        (154,490)        (171,654)
                                  -----------      -----------      -----------
Balance, December 31, 1997        ($  395,923)     $ 4,961,632      $ 4,565,709
                                  -----------      -----------      -----------
       Net income (loss)               (5,039)         (45,349)         (50,388)
                                  -----------      -----------      -----------
Balance, September 30, 1998       ($  400,962)     $ 4,916,283      $ 4,515,321
                                  ===========      ===========      ===========


    The accompanying notes are an integral part of the financial statements.

                                       6
<PAGE>

                  PERFORMANCE ASSET MANAGEMENT FUND III, LTD.,
                        A CALIFORNIA LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS
              For the Nine Months Ended September 30, 1998 and 1997
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                        1998             1997
                                                                     -----------      -----------
<S>                                                                  <C>              <C>         
Cash flows from operating activities:
  Net income (loss)                                                  ($   50,388)     ($   53,660)
  Adjustments to reconcile net income (loss) to net cash           
    provided by operating activities:                              
      Amortization                                                            --              923
      Decrease (increase) in assets:                               
         Other assets                                                         --               (3)
         Due from affiliates                                              56,221           42,576
      Increase (decrease) in liabilities:                          
         Accounts payable                                                   (719)           3,785
         Due to affiliates                                               (72,978)        (202,456)
                                                                     -----------      -----------
      Net cash provided by (used in)                               
        operating activities                                             (67,864)        (208,835)
                                                                     -----------      -----------
Cash flows provided by (used in) investing activities:     
  Recovery of portfolio basis                                            677,782          726,660
  Purchase of investments in distressed loan portfolios               (1,258,724)         (25,475)
  Cash held in trust                                                     (74,886)         540,514
                                                                     -----------      -----------
      Net cash provided by investing activities                         (655,828)       1,241,699
                                                                     -----------      -----------
Cash flows provided by (used in) financing activities:      
  Distributions to partners                                                   --         (889,200)
                                                                     -----------      -----------
      Net cash used in financing activities                                   --         (889,200)
                                                                     -----------      -----------
Net (decrease) increase in cash                                         (723,692)         143,664
Cash at beginning of period                                            1,109,587          775,755
                                                                     -----------      -----------
Cash at end of period                                                $   385,895      $   919,419
                                                                     ===========      ===========
</TABLE>


    The accompanying notes are an integral part of the financial statements.

                                       7
<PAGE>

                  PERFORMANCE ASSET MANAGEMENT FUND III, LTD.,
                        A CALIFORNIA LIMITED PARTNERSHIP

                          Notes to Financial Statements


Organization and Description of Business

Performance  Asset Management Fund III, Ltd., A California  Limited  Partnership
("Partnership"),  was formed in  September  1992,  for the purpose of  acquiring
investments in or direct  ownership of distressed loan portfolios from financial
institutions  and other  sources.  Interests in the  Partnership  were sold in a
private  placement   offering  pursuant  to  Regulation  D  promulgated  by  the
Securities  and Exchange  Commission on a "best  efforts"  basis;  however,  the
Partnership did not begin its primary operations until October 1992. The general
partner of the  Partnership  is  Performance  Development,  Inc.,  a  California
corporation ("PDI") ("General Partner").

The  Partnership  terminates at December 31, 2005. At that time, the Partnership
will  distribute  any remaining  cash after payment of  Partnership  obligations
following the sale or collection of all assets.

Profits,  losses,  and  cash  distributions  are  allocated  90% to the  limited
partners and 10% to the General Partner until such time as the limited  partners
have  received  cash equal to 100% of their  contributions  to the  Partnership.
Thereafter, Partnership profits, losses and cash distributions will be allocated
70% to the limited partners and 30% to the General Partner.

Cash and Equivalents

The Partnership  defines cash equivalents as all highly liquid  investments with
an original maturity of three months or less. The Partnership maintains its cash
balances at one bank in accounts,  which at times, may exceed federally  insured
limits. The Partnership uses a cash management system whereby idle cash balances
are  transferred  daily into a master  account  and  invested  in high  quality,
short-term  securities  that do not enjoy the benefit of the federal  insurance.
The General  Partner  believes  that these cash  balances are not subject to any
significant  credit risk, due to the nature of the  investments and the strength
of the bank and has not  experienced  any past losses  with cash and  equivalent
investments.

The Partnership  received  interest income from these investments of $95,215 and
$111,658 for the nine months ended  September  30, 1998 and  September 30, 1997,
respectively.


                                       8
<PAGE>

Cash Held in Trust

The General  Partner was planning to reorganize  and merge the  Partnership  and
Performance  Asset  Management  Fund,  Ltd., A California  Limited  Partnership;
Performance  Asset Management Fund II, Ltd., A California  Limited  Partnership;
Performance  Asset Management Fund IV, Ltd., A California  Limited  Partnership;
Performance Asset Management Fund V, Ltd., A California Limited Partnership, all
affiliates of the Partnership ("PAM Funds"), and Performance Capital Management,
Inc., a California  corporation of another affiliate of the Partnership ("PCM"),
with and into  Performance  Asset  Management  Company,  a Delaware  Corporation
("PAMCO")  ("Rollup").  In an effort  to  accomplish  the  Rollup,  the  General
Partner,  on  behalf  of the  Partnership  and the PAM  Funds,  entered  into an
agreement on December  12,  1995,  with the State of  California  Department  of
Corporations ("Department"), pursuant to the provisions of which the Performance
Asset  Management  Fund  Trust  ("Trust")  was  created.  Certain  funds  of the
Partnership  are held by the Trust and these  funds held in trust are subject to
the terms of the Trust  agreement.  The Trust was the  recipient  of those funds
resulting  from the  settlement of certain then pending  litigation  between the
Partnership and its affiliates and West Capital Financial Services Corp. and its
affiliates.  The funds held by the Trust, until Trust  termination,  must not be
less than  $5,000,000,  which is comprised of funds from the Partnership and the
PAM Funds.  The Trust agreement  specifies that the Trust will terminate and the
trustee will distribute all of the remaining funds held by the trustee on August
16, 1998, if the Rollup is not completed by such date.  The  Department  opposed
the  termination  of the Trust on August 16, 1998. As a result,  the term of the
Trust was  extended to November 18, 1998;  and the General  Partner  anticipates
that the tem of the Trust will be extended again.  The Partnership is attempting
to reach an agreement with the Department regarding the termination of the Trust
and  the  disposition  of  the  Partnership's  funds  held  by  the  Trust.  The
Partnership's share of the Trust's funds at September 30, 1998, and December 31,
1997, was $2,216,480 and $2,141,594, respectively.

Litigations

On or about November 12, 1998,  attorneys for the General  Partner were informed
by the State of California  Commissioner of Corporations  ("Commissioner")  that
the Commissioner then intended to file an action in Los Angeles Superior Court
seeking to have appointed a receiver to take over the affairs of the Partnership
and its  affiliated  entities.  Additionally,  a hearing in Los  Angeles  County
Superior  Court is scheduled to occur at 8:30 A.M. on November 16, 1998, for the
purpose of the Court's determination whether or not such a receiver is necessary
or  appropriate.  The  General  Partner  intends,  for  and  on  behalf  of  the
Partnership, to oppose the appointment of such a receiver.

The  Commissioner  has  informed  attorneys  for the  General  Partner  that the
Commissioner has determined that certain  affiliates of the  Partnership,  i.e.,
Vincent E. Galewick;  Income Network Company, the Placement Manager of the offer
and sale of the Units in the Partnership;  Performance Asset Management Company,
a Delaware  corporation  ("PAMCO");  and Performance  Telecom  Services,  LLC, a
California   limited  liability  company  ("PTS"),   filed  documents  with  the
Commissioner   which  contained   misrepresentations   of  material  fact;  and,
additionally,  those documents  omitted to specify certain material facts which,
in the opinion of the  Commissioner,  should have been included  therein.  Those
affiliates disagree significantly with the determination of the Commissioner and
intend to oppose any  litigation or other  enforcement  action  commenced by the
Commissioner against those affiliates.

Additionally,  on or about November 6, 1998, the Commissioner  issued to Vincent
E. Galewick and Income  Network  Company two (2) cease and refrain  orders.  One
such order orders Mr.  Galewick and Income Network Company to desist and refrain
from the further  offer and sale in the State of  California  of  securities  by
means of  misrepresentation  or  omissions  of material  facts in  violation  of
Section 25401 of the California  Corporate  Securities Law of 1968 ("Law").  Mr.
Galewick  and Income  Network  Company  deny that either of them have offered or
sold  securities  in the State of California  by means of  misrepresentation  or
omissions of material  facts.  Neither Mr.  Galewick nor Income Network  Company
believe that either Income Network Company or Mr. Galewick is  participating  in
the  offer  or sale in the  State  of  California  of  securities  by  means  of
misrepresentation  or omissions of material  facts in violation of Section 25401
of the Law. The second order issued to Mr.  Galewick only orders Mr. Galewick to
desist and refrain from the further offer and sale in the State of California of
securities  unless and until  qualification  of those  securities  has been made
pursuant to the provisions of the Law.


                                       9
<PAGE>


The  Commissioner  believes that Mr. Galewick and certain of his affiliates have
made  certain  misrepresentations  and  omissions  of material  facts in certain
applications  to qualify  (register)  securities  with the  Commissioner.  Those
misrepresentations and omissions relate to (i) the affairs of Desert Hot Springs
Resort  Limited  Partners,  Series A, Ltd. and Desert Hot Springs Resort Limited
Partners,  Series  B,  Ltd.,  two  California  limited  partnerships  for  which
Performance Development,  Inc. (wholly owned by Mr. Galewick and which serves as
the  General  Partner  of  the  Partnership)   serves  as  the  General  Partner
(collectively,  "DHSRLP"); (ii) certain litigation filed by SunAmerica, Inc. and
certain of its affiliates (collectively,  "SunAmerica") against Mr. Galewick and
certain of his  affiliates  alleging  fraud and  deceit,  gross  negligence  and
violations  of Section  10(b) of the  Securities  Exchange  act of 1934 and Rule
10b-5;  and  (iii)  compensation  paid  by the  Partnership  and  other  similar
California limited partnerships to various affiliates of the General Partner and
Income Network Company.  Mr. Galewick and those  affiliates  believe that (i) no
such  misrepresentations  or omissions  of material  facts were,  in fact,  made
relating  either  to (a)  DHSRLP  or (b)  the  SunAmerica  litigation  and  (ii)
SunAmerica  has no  basis  for its  litigation  against  Mr.  Galewick  or those
affiliates.  The General Partner believes that appropriate  disclosure regarding
compensation  paid by the  Partnership  and those  other  partnerships  to those
affiliates was made.

On  November  12,  1998,  the  Commissioner  issued  an  order  pursuant  to the
provisions of Section 25531 of the California Corporations Code appointing Barry
A. Fisher as a Keeper for Income Network Company ("Keeper") ("Order").  Pursuant
to the provisions of the Order,  the Keeper shall take possessions of all books,
records, accounts and other papers of Income Network Company.  Additionally, the
Keeper is authorized,  empowered and directed to employ attorneys and such other
persons  as the  Keeper  may deem to be  necessary  to assist  the Keeper in the
performance  of his duties  contemplated  by the  provisions  of the Order.  The
Keeper is to undertake an independent review into the books,  records,  accounts
and other  papers of Income  Network  Company  and file with the  Department  an
inventory of all books,  records,  accounts  and other papers of Income  Network
Company  of  which he shall  then  have  reviewed,  observed  and/or  discovered
pursuant to the provisions of the Order.  The Order does not allow the Keeper to
take  possession  of or interfere in the  business of the  affiliates  of Income
Network  Company.  Income  Network  Company has notified the  Commissioner  that
Income  Network  Company  intends to take any and all legal action  necessary or
appropriate,  including a hearing in Los Angeles County Superior court, to cause
the Keeper to be removed  from Income  Network  Company and his powers,  granted
pursuant to the provisions of the Order, terminated.

Investments in Distressed Loan Portfolios and Revenue Recognition

Investments  in distressed  loan  portfolios are carried at the lower of cost or
estimated net realizable value.  Amounts collected are treated as a reduction to
the carrying basis of the related  investment on an individual  portfolio  basis
and are reported in the Statement of Operations as portfolio collections.  Under
the cost recovery method of revenue  recognition  used by the  Partnership,  net
investment income is not recognized until 100% recovery of the carrying value of
the  investment  in  each  portfolio  occurs.  Estimated  net  realizable  value
represents management's estimates, based on its present plans and intentions, of
the present value of future  collections.  Due to the distressed nature of these
investments,  no interest  is earned on  outstanding  balances,  and there is no


                                       10
<PAGE>


assurance  that the unpaid  balances of these  investments  will  ultimately  be
collected.  Any  adjustments  reducing  the  carrying  value  of the  individual
portfolios   are  recorded  in  the  results  of   operations   as  general  and
administrative expenses.

Organization Costs, Net

Organization costs include legal and other professional fees incurred related to
the initial  organization  of the  Partnership.  These costs are capitalized and
amortized using the  straight-line  method over five years.  Organization  costs
were fully amortized at December 31, 1997.

Professional Fees

Professional  fees are  incurred  in relation  to ongoing  accounting  and legal
assistance.

Income Taxes

No provision for income taxes has been provided for in the financial statements,
except for the Partnership's  minimum state franchise tax liability of $800. All
partners report individually on their share of Partnership operating results.

Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the reported amounts of revenue and expenses during the reported period.  Actual
results could differ from the estimates.

Item 2. Management's  Discussion and Analysis of Financial Condition and Results
of Operations.

Disclosure Regarding Forward Looking Statements.

The information  contained in this report on Form 10-QSB,  other than historical
facts, contains "forward-looking statements" (as such term is defined within the
meaning of the  Private  Securities  Litigation  Reform Act of 1995)  including,
without limitation, statements as to the Partnership's objective to grow through
future  portfolio  acquisitions,  portfolio  account  sales,  the  Partnership's
ability  to  realize   operating   efficiencies   in  the   integration  of  its
acquisitions,  trends in the  Partnership's  future operating  performance,  and
statements as to the  Partnership's  or management's  beliefs,  expectations and
opinions.  Forward  looking  statements  


                                       11
<PAGE>


may be  identified  by the use of forward  looking  terminology,  such as "may",
"will", "expect", "estimate",  "anticipate",  "probable",  "possible", "should",
"continue", or similar terms, variations of those terms or the negative of those
terms. Forward-looking statements are subject to risks and uncertainties and may
be  affected  by  various  factors  which may  cause  actual  results  to differ
materially  from those in the  forward-looking  statements.  In  addition to the
factors  discussed  in this  Report,  certain  risks,  uncertainties  and  other
factors,  including,  without limitation, the risk that the Partnership will not
be  able  to  realize   operating   efficiencies   in  the  integration  of  its
acquisitions, risks associated with growth and future acquisitions, fluctuations
in quarterly  operating results,  and the other risks detailed from time to time
in the  Partnership's  filings  with the  Securities  and  Exchange  Commission,
including the  Partnership's  Annual  Report on Form 10-KSB,  filed on March 31,
1998, can cause actual results and developments to be materially  different from
those expressed or implied by such forward-looking statements.

Results of Operations.

Portfolio  collections  for the nine months ended  September 30, 1998  decreased
approximately  7% to $677,782,  from  $726,660 for the  comparable  period ended
1997.  The  decrease in portfolio  collections  was due to the lack of portfolio
sales for the nine months ended September 30, 1998,  compared to $56,600 for the
same  period  of  1997.  All  collections  received  for the nine  months  ended
September 30, 1998 were reflected as portfolio recoveries and,  accordingly,  no
investment income was recorded for this period.

Portfolio collections of $677,782 were received on nine portfolios in 1998. Four
of these nine portfolios comprised 90% of the total book value in investments in
distressed  loan  portfolios,  and  accounted  for 98 % of the  total  portfolio
collections,  for the nine months ended September 30, 1998.  Collections for the
months ended July 31, August 31, and September 30 totaled $63,191,  $62,076, and
$65,250, respectively.

The Partnership  acquired three new portfolios  totaling  $1,258,724  during the
first nine months of 1998.  These  acquisitions  offset the decrease in the book
value of investments in distressed  loan  portfolios.  For the nine months ended
September 30, 1998,  investments in distressed  loan  portfolios  increased 35%.
Portfolio  collections  from the three new portfolios  represented  19% of total
portfolio collections for the nine months ended September 30, 1998.

The  Partnership  did not receive  proceeds  from  portfolio  sales for the nine
months ended  September 30, 1998. For the comparable  period ended September 30,
1997,  proceeds  from  portfolio  sales of $54,711 were received and recorded as
recoveries of investment  basis. The General Partner believes that proceeds from
both collection and portfolio account sales will continue in subsequent periods.


                                       12
<PAGE>


Total  operating  expenses  decreased  12% to $145,603 for the nine months ended
September  30,  1998,   from  $165,402  for  the  comparable   period  in  1997.
Professional fees decreased 17% to $65,160 from $78,559,  primarily related to a
reduction in  accounting  fees  associated  with the  Partnership's  audit and a
reduction  in  legal  fees.  General  and   administrative   expenses  decreased
approximately  82% from  $7,155  to  $1,322.  This is  primarily  attributed  to
printing expenses related to the annual report sent to the investors,  which the
Partnership  has yet to incur this year.  Operating  expenses as a percentage of
portfolio  collections  totaled  approximately  22% for the  nine  months  ended
September 30, 1998, as compared to 23% for the comparable  period in 1997.  This
decrease relates  primarily to a reduction in professional  fees and general and
administrative expenses.

Total  operating  expenses  increased  85% to $52,383 for the three months ended
September 30, 1998, compared to $28,347 for the three months ended September 30,
1997.  This is  primarily  attributed  to an increase in legal fees.  Collection
expense decreased 94% to $542 for the three months ended September 30, 1998 from
$8,615 for the comparable period ended September 30, 1997, due to the absence of
any  acquisitions of distressed  loan  portfolios and costs  associated with the
acquisitions.  Professional  fees  rose  450% in the  third  quarter  of 1998 to
$37,415,  from $6,801 in the similar  period  ended 1997,  due  primarily  to an
increase in legal expenses. General and administrative expenses decreased 19% to
$124 for the three months ended September 30, 1998 from $ 667 for the comparable
period  1997,  due to the absence of postage  expense in 1998,  associated  with
sending  investor  distributions.  Management  fees  increased 20% for the three
months  ended  September  30, 1998 to $14,302  from $11,974 for the three months
ended  September  30, 1997,  due to an increase of net assets under  management.
Operating expenses as a percentage of portfolio collections increased 13% to 28%
for the three months  ended  September  30, 1998,  from 15% for the three months
ended September 30, 1997, due to increased professional fees.

Financial Condition, Liquidity and Capital Resources.

The  Partnership's  total assets decreased  approximately 2% to $4,910,971 as of
September  30, 1998,  from  $5,035,056  at December  31, 1997.  The decrease was
primarily  attributed to the reduction of cash and  equivalents  in order to pay
amounts due to the Partnership's  affiliates.  The decrease in due to affiliates
of $72,978 was due primarily to payment of management fees and the reimbursement
of legal expenses to the General Partner.

The Partnership acquired three new distressed loan portfolio assets in the first
three quarters of 1998 from third party financial institutions, which specialize
in  credit  card  organizations.   The  General  Partner  anticipates  that  the
Partnership


                                       13
<PAGE>


will acquire additional  portfolios in the near future. Future acquisitions will
depend on the asset market,  which continues to grow in size and diversity.  The
General  Partner   believes  that  the  Partnership  will  continue  to  acquire
low-end-priced distressed portfolios; however, the General Partner will continue
to evaluate assets with different pricing and debtor account structures in order
to determine  whether such portfolios can generate  strong  immediate cash flows
and provide additional liquidity to the Partnership.

The Partnership has made no future  commitments with credit card originators and
other financial  institutions to acquire portfolio  assets.  The General Partner
and  Performance  Capital  Management,  Inc.,  a California  corporation  and an
affiliate of the General Partner ("PCM"), plan to use their present contacts and
relationships to identify and acquire  additional assets at optimal prices,  and
believe that they will have no difficulty  in  identifying  and  acquiring  such
assets.  The General  Partner  believes  that current  cash  reserves and future
portfolio  collection proceeds will be sufficient to acquire portfolio assets in
the next twelve months.

At this time the General Partner has withdrawn the application for the Rollup of
the  Partnership  with the PAM Funds into PAMCO.  This is due to the  continuing
regulatory  delays and  complexity  of the  reorganization  of the  Rollup.  The
General Partner has resumed distributions to its investors in the fourth quarter
of 1998.

Impact of Additional Partnership Acquisitions and Resources on Operations.

The General Partner  anticipates that additional  future portfolio  acquisitions
and continued expansion will improve the Partnership's liquidity,  profitability
and financial  condition,  as a result of increased  portfolio  collections  and
sales.  The General  Partner  believes  that PCM must  continue to increase  the
amount  of its  collection  representatives  and  human  resources  in  order to
supplement  such growth.  PCM has signed a lease for over 18,000  square feet of
office space into which,  it plans to move and expand its facilities  during the
fourth quarter of 1998. The General Partner believes that this move provides the
adequate  operating  facilities  for  the  future  growth  of  PCM,  which  will
subsequently increase portfolio collections for the Partnership.

The  proposal  by the General  Partner,  pursuant to which the PAM Funds and the
Partnership  would merge with and into PAMCO,  has been  withdrawn.  The General
Partner has re-evaluated its objectives due to the lengthy delays that have been
experienced  in  accomplishing  the  Rollup.  Due to the change of plans for the
Rollup, the General Partner has resumed investor distributions during the fourth
quarter of 1998.


                                       14
<PAGE>


Year 2000 Compliance.

The General Partner  recognizes that the arrival of the Year 2000 poses a unique
challenge to the ability of the computer systems of PCM used to service,  manage
and  collect  the  portfolios  in which  the  Partnership  has an  interest,  to
recognize  properly and process date sensitive  information  related to the date
change from  December  31, 1999 to January 1, 2000.  As the century  date change
occurs,  date-sensitive  systems may  recognize the Year 2000 as 1900, or not at
all. This inability to recognize or treat properly the Year 2000 may cause PCM's
computer systems to process financial and operational  information  incorrectly,
which  could  have a material  adverse  effect on the  Partnership's  results of
operations.  PCM has assessed and begun remedial work relating to PCM's computer
software  programs  and  business  processes  to  provide  for PCM's  ability to
continue to function effectively.

In 1997,  PCM began the  process of  identifying,  evaluating  and  implementing
changes to PCM's computer programs necessary to address the Year 2000 issue. The
General  Partner is currently  addressing the  Partnership's  internal Year 2000
issue by coordinating with PCM in connection with PCM's modification of existing
programs  and  conversions  to new  programs.  The  General  Partner  is also in
communication with financial  institutions and other entities with which PCM and
the Partnership conduct business to help them identify and resolve the Year 2000
issue as it relates to the Partnership's  business operations.  An assessment of
the  readiness of those third party  institutions  and  entities  with which the
Partnership  does  business  is ongoing.  While PCM and the General  Partner are
confident that PCM will complete  assessment  and  remediation of PCM's computer
software,  there  can be no  assurance  that  the  necessary  modifications  and
conversions  by those third party  institutions  and entities with which PCM and
the  Partnership  conduct  business will be completed in a timely manner,  which
could have a material adverse effect on the Partnership's results of operations.
The total cost to the Partnership associated with the required modifications and
conversions  is not  expected  to be material  to the  Partnership's  results of
operations and financial position and is being expensed as incurred.


                                       15
<PAGE>


                                     PART II

Item 1. Legal Proceedings

On or about November 12, 1998,  attorneys for the General  Partner were informed
by the State of California  Commissioner of Corporations  ("Commissioner")  that
the Commissioner then intended to file an action in Los Angeles Superior Court
seeking to have appointed a receiver to take over the affairs of the Partnership
and its  affiliated  entities.  Additionally,  a hearing in Los  Angeles  County
Superior  Court is scheduled to occur at 8:30 A.M. on November 16, 1998, for the
purpose of the Court's determination whether or not such a receiver is necessary
or  appropriate.  The  General  Partner  intends,  for  and  on  behalf  of  the
Partnership, to oppose the appointment of such a receiver.

The  Commissioner  has  informed  attorneys  for the  General  Partner  that the
Commissioner has determined that certain  affiliates of the  Partnership,  i.e.,
Vincent E. Galewick;  Income Network Company, the Placement Manager of the offer
and sale of the Units in the Partnership;  Performance Asset Management Company,
a Delaware  corporation  ("PAMCO");  and Performance  Telecom  Services,  LLC, a
California   limited  liability  company  ("PTS"),   filed  documents  with  the
Commissioner   which  contained   misrepresentations   of  material  fact;  and,
additionally,  those documents  omitted to specify certain material facts which,
in the opinion of the  Commissioner,  should have been included  therein.  Those
affiliates disagree significantly with the determination of the Commissioner and
intend to oppose any  litigation or other  enforcement  action  commenced by the
Commissioner against those affiliates.

Additionally,  on or about November 6, 1998, the Commissioner  issued to Vincent
E. Galewick and Income  Network  Company two (2) cease and refrain  orders.  One
such order orders Mr.  Galewick and Income Network Company to desist and refrain
from the further  offer and sale in the State of  California  of  securities  by
means of  misrepresentation  or  omissions  of material  facts in  violation  of
Section 25401 of the California  Corporate  Securities Law of 1968 ("Law").  Mr.
Galewick  and Income  Network  Company  deny that either of them have offered or
sold  securities  in the State of California  by means of  misrepresentation  or
omissions of material  facts.  Neither Mr.  Galewick nor Income Network  Company
believe that either Income Network Company or Mr. Galewick is  participating  in
the  offer  or sale in the  State  of  California  of  securities  by  means  of
misrepresentation  or omissions of material  facts in violation of Section 25401
of the Law. The second order issued to Mr.  Galewick only orders Mr. Galewick to
desist and refrain from the further offer and sale in the State of California of
securities  unless and until  qualification  of those  securities  has been made
pursuant to the provisions of the Law.


                                       16
<PAGE>


The  Commissioner  believes that Mr. Galewick and certain of his affiliates have
made  certain  misrepresentations  and  omissions  of material  facts in certain
applications  to qualify  (register)  securities  with the  Commissioner.  Those
misrepresentations and omissions relate to (i) the affairs of Desert Hot Springs
Resort  Limited  Partners,  Series A, Ltd. and Desert Hot Springs Resort Limited
Partners,  Series  B,  Ltd.,  two  California  limited  partnerships  for  which
Performance Development,  Inc. (wholly owned by Mr. Galewick and which serves as
the  General  Partner  of  the  Partnership)   serves  as  the  General  Partner
(collectively,  "DHSRLP"); (ii) certain litigation filed by SunAmerica, Inc. and
certain of its affiliates (collectively,  "SunAmerica") against Mr. Galewick and
certain of his  affiliates  alleging  fraud and  deceit,  gross  negligence  and
violations  of Section  10(b) of the  Securities  Exchange  act of 1934 and Rule
10b-5;  and  (iii)  compensation  paid  by the  Partnership  and  other  similar
California limited partnerships to various affiliates of the General Partner and
Income Network Company.  Mr. Galewick and those  affiliates  believe that (i) no
such  misrepresentations  or omissions  of material  facts were,  in fact,  made
relating  either  to (a)  DHSRLP  or (b)  the  SunAmerica  litigation  and  (ii)
SunAmerica  has no  basis  for its  litigation  against  Mr.  Galewick  or those
affiliates.  The General Partner believes that appropriate  disclosure regarding
compensation  paid by the  Partnership  and those  other  partnerships  to those
affiliates was made.

On  November  12,  1998,  the  Commissioner  issued  an  order  pursuant  to the
provisions of Section 25531 of the California Corporations Code appointing Barry
A. Fisher as a Keeper for Income Network Company ("Keeper") ("Order").  Pursuant
to the provisions of the Order,  the Keeper shall take possessions of all books,
records, accounts and other papers of Income Network Company.  Additionally, the
Keeper is authorized,  empowered and directed to employ attorneys and such other
persons  as the  Keeper  may deem to be  necessary  to assist  the Keeper in the
performance  of his duties  contemplated  by the  provisions  of the Order.  The
Keeper is to undertake an independent review into the books,  records,  accounts
and other  papers of Income  Network  Company  and file with the  Department  an
inventory of all books,  records,  accounts  and other papers of Income  Network
Company  of  which he shall  then  have  reviewed,  observed  and/or  discovered
pursuant to the provisions of the Order.  The Order does not allow the Keeper to
take  possession  of or interfere in the  business of the  affiliates  of Income
Network  Company.  Income  Network  Company has notified the  Commissioner  that
Income  Network  Company  intends to take any and all legal action  necessary or
appropriate,  including a hearing in Los Angeles County Superior court, to cause
the Keeper to be removed  from Income  Network  Company and his powers,  granted
pursuant to the provisions of the Order, terminated.

Other than as specified  above,  no additional  proceedings  have occurred since
August 12,  1998,  the date of the  latest  report  provided.  In  addition,  no
material  developments are noted with respect to those matters  described in the
latest report dated August 12, 1998.  Reference is made to the registrant's Form
10-KSB dated March  31,1998,  in which such legal  proceedings  were reported in
Part I, Item 3. Legal Proceedings. The registrant, by this reference, makes that
disclosure a part of this Form 10-QSB.

Item 2. Exhibits and Reports.


(a)  Exhibits

     Exhibit Number                              Exhibit
     --------------                              -------

          1                         Certificate of Limited Partnership Form LP-1
                                    (Charter  Document)*

          2                         Agreement of Limited Partnership (Instrument
                                    defining the rights of Security Holders)**


*    Reference is made to the Partnership's  Form 10-KSB,  dated March 31, 1997,
     in which  that  Certificate  of  Limited  Partnership  was  included  as an
     exhibit.  The  Partnership,  by this reference,  makes that  Certificate of
     Limited Partnership a part of this Form 10-QSB.

**   Reference is made to the Partnership's  Form 10-KSB,  dated March 31, 1997,
     in which that Agreement of Limited  Partnership was included as an exhibit.
     The  Partnership,  by this  reference,  makes  that  Agreement  of  Limited
     Partnership a part of this Form 10-QSB.


                                       17
<PAGE>


                                   SIGNATURES



In  accordance  with  Section 13 or 15(d) of the Exchange  Act, the  Partnership
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


Dated: November 10, 1998            Performance Asset Management Fund III, Ltd.,
                                            A California Limited Partnership
                                            --------------------------------
                                                      (Registrant)


By: 
     -------------------------------------
Vincent E. Galewick
President of the General Partner,
Performance Development, Inc.


                                       18