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, 1997

                                       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:  0-17881


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


            Virginia                                           04-2985890
            --------                                           ----------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                              Identification No.)


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


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


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

<PAGE>

           
           PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

                           CONSOLIDATED BALANCE SHEETS
                December 31, 1997 and March 31, 1997 (Unaudited)
                              (In thousands)

                                  ASSETS
                                                  December 31    March 31
                                                  -----------    --------
Operating investment properties, at cost:
   Land                                            $   4,208     $   4,208
   Building and improvements                          14,015        14,153
                                                   ---------     ---------
                                                      18,223        18,361
   Less accumulated depreciation                      (4,262)       (3,893)
                                                   ---------     ---------
                                                      13,961        14,468

Investments in unconsolidated ventures, at equity     12,894        13,881
Cash and cash equivalents                              5,643         4,615
Accrued interest and other receivables                   113           101
Prepaid expenses                                          13             7
Deferred expenses, net                                   116           133
                                                   ---------     ---------
                                                   $  32,740     $  33,205
                                                   =========     =========


                        LIABILITIES AND PARTNERS' CAPITAL

Notes payable and deferred interest, including 
  amounts in default                               $  12,686     $  12,043
Accounts payable and accrued expenses                     47            98
Tenant security deposits                                  17            14
Accrued real estate taxes                                 75            14
Advances from consolidated ventures                      198           195
Other liabilities                                          2             2
Partners' capital                                     19,715        20,839
                                                   ---------     ---------
                                                   $  32,740     $  33,205
                                                   =========     =========








                             See accompanying notes.


<PAGE>


           PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

                   CONSOLIDATED  STATEMENTS OF OPERATIONS
 For the three and nine months ended December 31, 1997 and 1996 (Unaudited)
                   (In thousands, except per Unit data)

                                   Three Months Ended       Nine Months Ended
                                      December 31,             December 31,
                                  -------------------      ------------------
                                     1997       1996        1997       1996
                                     ----       ----        ----       -----

Revenues:
   Rental income and expense
     reimbursements                $  542     $   615      $1,679     $1,774
   Interest and other income           78          56         219        154
                                   ------     -------      ------     ------
                                      620         671       1,898      1,928

Expenses:
   Interest expense                   317         302         940        901
   Property operating expenses        139         114         370        348
   Real estate taxes                   38          37         115        112
   General and administrative          90          45         212        219
   Depreciation and amortization      126         136         381        430
                                   ------     -------      ------     ------
                                      710         634       2,018      2,010
                                   ------     -------      ------     ------
Operating income (loss)               (90)         37        (120)       (82)

Partnership's share of 
   unconsolidated
   ventures' income (losses)            5          25         (48)      (188)
                                   ------     -------      ------     ------
Net income (loss)                  $  (85)    $    62      $ (168)    $ (270)
                                   ======     =======      ======     ======

Net income (loss) per
   Limited Partnership Unit        $(1.67)    $  1.21      $(3.30)    $(5.29)
                                   ======     =======      ======     ======

Cash distributions per
   Limited Partnership Unit        $ 6.25     $  5.00      $18.75     $15.00
                                   ======     =======      ======     ======

      The above per  Limited  Partnership  Unit  information  is based  upon the
50,468 Limited Partnership Units outstanding during each period.




                             See accompanying notes.


<PAGE>


              PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

        CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
        For the nine months ended December 31, 1997 and 1996 (Unaudited)
                                 (In thousands)


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

Balance at March 31, 1996                          $ (218)      $ 22,548
Cash distributions                                     (8)          (757)
Net loss                                               (3)          (267)
                                                   ------       --------
Balance at December 31, 1996                       $ (229)      $ 21,524
                                                   ======       ========

Balance at March 31, 1997                          $ (234)      $ 21,073
Cash distributions                                    (10)          (946)
Net loss                                               (2)          (166)
                                                   ------       --------
Balance at December 31, 1997                       $ (246)      $ 19,961
                                                   ======       ========





















                             See accompanying notes.

<PAGE>

              PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
        For the nine months ended December 31, 1997 and 1996 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)
                                                        1997          1996
                                                        ----          ----
Cash flows from operating activities:
   Net loss                                           $  (168)      $  (270)
   Adjustments to reconcile net loss to net
     cash provided by operating activities:
      Partnership's share of unconsolidated 
       ventures' losses                                    48           188
      Depreciation and amortization                       381           430
      Amortization of deferred loan costs                   7            29
      Interest expense on zero coupon loan                675           610
      Changes in assets and liabilities:
      Accrued interest and other receivables              (12)           88
      Prepaid expenses                                     (6)          (18)
      Deferred expenses                                    (2)           (7)
      Accounts payable and accrued expenses               (51)           (4)
      Accrued real estate taxes                            61           (31)
      Tenant security deposits                              3             1
      Advances from consolidated ventures                   3           (90)
                                                      -------       -------
        Total adjustments                               1,107         1,196
                                                      -------       -------
        Net cash provided by operating activities         939           926

Cash flows from investing activities:
   Additions to operating investment properties            (2)            -
   Receipt of master lease payments                       140             -
   Distributions from unconsolidated joint ventures       939           624
                                                      -------       -------
        Net cash provided by investing activities       1,077           624
                                                      -------       --------

Cash flows from financing activities:
   Cash distributions to partners                        (956)         (765)
   Payments of principal on notes payable                 (32)          (29)
                                                      -------        ------
        Net cash used in financing activities            (988)         (794)
                                                      -------        ------

Net increase in cash and cash equivalents               1,028           756
Cash and cash equivalents, beginning of period          4,615         3,439
                                                      -------       -------
Cash and cash equivalents, end of period              $ 5,643       $ 4,195
                                                      =======       =======

Cash paid during the period for interest              $   258       $   262
                                                      =======       =======
                             See accompanying notes.


<PAGE>


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

1.    General
      -------

      The accompanying financial statements, footnotes, and discussion should be
read in conjunction with the financial statements and footnotes contained in the
Partnership's Annual Report for the year ended March 31, 1997. 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, 1997 and March 31, 1997 and  revenues  and
expenses for each of the three and  nine-month  periods ended  December 31, 1997
and 1996. Actual results could differ from the estimates and assumptions used.

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

      Included in general and administrative expenses for the nine-month periods
ended  December  31,  1997  and  1996  is  $70,000  and  $65,000,  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 of the
nine-month  periods  ended  December 31, 1997 and 1996 is $12,000,  representing
fees earned by an affiliate,  Mitchell Hutchins Institutional  Investors,  Inc.,
for managing the Partnership's cash assets.

3.    Investments in Unconsolidated Joint Venture Partnerships
      --------------------------------------------------------

      As  of  December  31,  1997,  the   Partnership  had  investments  in  two
unconsolidated joint venture partnerships which own operating properties as more
fully described in the Partnership's  Annual Report.  The  unconsolidated  joint
ventures are accounted for by using the equity  method  because the  Partnership
does not have a voting  control  interest  in these  ventures.  Under the equity
method, the assets, liabilities,  revenues and expenses of the joint ventures do
not appear in the Partnership's  financial statements.  Instead, the investments
are  carried at cost  adjusted  for the  Partnership's  share of each  venture's
earnings,  losses  and  distributions.  The  Partnership  reports  its  share of
unconsolidated  joint  venture  earnings  or losses  three  months  in  arrears.
Subsequent to the end of the quarter,  on January 30, 1998, the Richmond Paragon
Partnership,  which  owned  the One  Paragon  Place  Office  Building,  sold its
operating  investment property to an unrelated third party for $16,500,000.  The
Partnership received net proceeds of approximately $8,055,000 in connection with
the  sale  after  the  release  of  certain  lender  escrow  accounts  totalling
approximately  $555,000, the assumption of the outstanding mortgage loan secured
by the property of  approximately  $8,500,000,  closing  costs of  approximately
$400,000  and closing  proration  adjustments  of  approximately  $100,000.  The
Partnership expects to distribute the net proceeds from this sale transaction to
the Limited Partners in February 1998.

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

                    Condensed Combined Summary of Operations
         For the three and nine months ended September 30, 1997 and 1996
                                 (in thousands)

                                    Three Months Ended   Nine Months Ended
                                       September 30,       September 30,
                                    ------------------   -----------------
                                      1997      1996      1997       1996
                                      ----      ----      ----       ----
Revenues:
   Rental revenues and expense
     recoveries                    $1,223    $1,124     $3,562   $  3,183
   Interest and other income            9         6         35         27
                                   ------    ------     ------   --------
                                    1,232     1,130      3,597      3,210
Expenses:
   Property operating expenses        434       356      1,312      1,178
   Real estate taxes                   36        24        108        111
   Interest expense                   275       291        835        790
   Depreciation and amortization      439       429      1,316      1,291
                                   ------    ------     ------   --------
                                    1,184     1,100      3,571      3,370
                                   ------    ------     ------   --------
Net income (loss)                  $   48    $   30     $   26   $   (160)
                                   ======    ======     ======   ========

Net income (loss):
   Partnership's share of
     combined income (losses)      $   10    $   30     $  (33)  $   (173)
   Co-venturers' share of
     combined income (losses)          38         -         59         13
                                   ------    ------     ------   --------
                                   $   48    $   30     $   26   $   (160)
                                   ======    ======     ======   ========

               Reconciliation of Partnership's Share of Operations
         For the three and nine months ended December 31, 1997 and 1996
                                 (in thousands)

                                    Three Months Ended     Nine Months Ended
                                        December 31,          December 31,
                                    ------------------    ------------------
                                      1997      1996       1997      1996
                                      ----      ----       ----      ----
   Partnership's share of
      operations, as shown above     $  10    $  30      $  (33)    $ (173)
   Amortization of excess basis         (5)      (5)        (15)       (15)
                                     -----    -----      ------     ------
   Partnership's share of
      unconsolidated ventures' 
      income (losses)                $   5    $  25      $  (48)    $ (188)
                                     =====    =====      ======     ======

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

      The  Partnership  has  investments  in  two  consolidated   joint  venture
partnerships which own operating  investment  properties as more fully described
in the Partnership's  Annual Report. The consolidated  ventures have December 31
year-ends  for both  tax and  financial  reporting  purposes.  Accordingly,  the
Partnership's policy is to report the financial position,  results of operations
and cash flows of these ventures on a three-month lag. All material transactions
between the  Partnership  and these joint  ventures  have been  eliminated  upon
consolidation,  except for  lag-period  cash  transfers.  Such lag  period  cash
transfers  are  accounted  for as  advances  from  consolidated  ventures on the
accompanying balance sheets.

      As discussed in the  Partnership's  Annual Report,  the Partnership owns a
controlling interest in the Colony Plaza General  Partnership,  which was formed
to acquire and  operate the Colony  Plaza  Shopping  Center  located in Augusta,
Georgia.  The shopping center,  which consists of  approximately  217,000 square
feet of leasable retail space,  was acquired by the joint venture on January 18,
1990.

      On January 27,  1995,  the  Partnership  purchased  99% of its  co-venture
partner's  interest  in  Portland  Pacific  Associates  Two  for  $233,000.  The
remaining 1% interest of the co-venturer was assigned to Third Equity  Partners,
Inc., the Managing General Partner of the  Partnership,  in return for a release
from any further  obligations  or duties called for under the terms of the joint
venture agreement. As a result, the Partnership assumed control over the affairs
of the joint  venture.  Portland  Pacific  Associates  Two owns the Willow Grove
Apartments, a 119-unit complex located in Beaverton, Oregon.
<PAGE>

      The following is a combined summary of property operating expenses for the
consolidated  joint  ventures for the three and nine months ended  September 30,
1997 and 1996 (in thousands):

                                    Three Months Ended     Nine Months Ended
                                       September 30,         September 30,
                                    ------------------    ------------------
                                      1997      1996         1997      1996
                                      ----      ----         ----      ----

      Common area maintenance      $    39     $   31      $    92    $    93
      Utilities                         24         22           67         65
      Management fees                   23         21           68         68
      Administrative and other          53         40          143        122
                                   -------     ------      -------    -------
                                   $   139     $  114      $   370    $   348
                                   =======     ======      =======    =======

5.    Notes payable

      Notes  payable and  deferred  interest at December  31, 1997 and March 31,
1997 consist of the following (in thousands):

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

 10.5%     nonrecourse    loan
 payable by the Partnership to
 a finance  company,  which is
 secured by the  Colony  Plaza
 operating          investment
 property.  All  interest  and
 principal    was    due    at
 maturity,   on  December  29,
 1996.  Interest is compounded
 semi-annually.        Accrued
 interest at December 31, 1997
 and March 31,  1997  amounted
 to   $5,133    and    $4,458,
 respectively.   It   is   not
 practicable for management to
 estimate  the  fair  value of
 this  mortgage  note  payable
 due  to its  current  default
 status    (see     discussion
 below).                                    $  9,183            $  8,508

 9.59%     nonrecourse    loan
 payable  by the  consolidated
 Portland  Pacific  Associates
 Two  to  a  finance  company,
 which  is   secured   by  the
 Willow    Grove     operating
 investment property. The note
 requires  monthly   principal
 and interest  payments of $32
 from   April   1995   through
 maturity in March  2002.  The
 fair  value  of the  mortgage
 note     approximated     its
 carrying  value at  September
 30,  1997  and  December  31,
 1996.                                         3,503               3,535
                                            --------            --------
                                            $ 12,686            $ 12,043
                                            ========            ========

      The  borrowing  secured by Colony Plaza  matured on December 29, 1996,  at
which time total  principal  and  accrued  interest  of  $8,290,190  was due and
payable.  Although  the  Partnership  did not make its  scheduled  payment  upon
maturity,  no formal  default  notices  have been issued to date and  management
continues to negotiate with the existing lender regarding a potential  extension
and  modification  of the  outstanding  first mortgage  loan.  The  Partnership,
however, is accruing interest at a default rate of 15%, as per the original loan
agreement.  A refinancing  transaction with a new lender would require a sizable
principal paydown by the Partnership in order to reduce the loan-to-value  ratio
of the  mortgage  note  payable.  If the  refinancing  or extension of this loan
cannot  be  accomplished,  the  lender  could  choose  to  initiate  foreclosure
proceedings.  Under such  circumstances,  the  Partnership may be unable to hold
this investment and recover the carrying value. The financial  statements of the
Partnership  have been  prepared  on a going  concern  basis  which  assumes the
realization  of assets and the ability to  refinance  the existing  debt.  These
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.
<PAGE>

      On  November  16,  1995,  the zero  coupon  loan issued in the name of the
Partnership  and  secured  by a  mortgage  on the One  Paragon  Place  operating
property was refinanced with proceeds of a seven-year $8,750,000 loan from a new
lender issued in the name of the  unconsolidated  Richmond Paragon  Partnership.
The zero coupon loan had an outstanding  balance of approximately  $10.4 million
at the time of the  refinancing.  Additional  funds  required  to  complete  the
refinancing  transaction were contributed from the Partnership's  cash reserves.
The new note was secured by a first  mortgage on the One  Paragon  Place  Office
Building and was recorded on the books of the unconsolidated  joint venture. The
new loan bore  interest  at 8% per  annum and  required  monthly  principal  and
interest  payments of $68,000  through  maturity,  on  December  10,  2002.  The
Partnership  had indemnified  the Richmond  Paragon  Partnership and the related
co-venture partner against all liabilities,  claims and expenses associated with
this  borrowing.  As discussed in Note 3, the One Paragon Place Office  Building
was sold to a third party in January 1998, and this mortgage loan was assumed by
the buyer of the property.



<PAGE>



           PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

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

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

      The following  discussion of financial condition includes  forward-looking
statements  which  reflect  management's  current  views with  respect to future
events and  financial  performance  of the  Partnership.  These  forward-looking
statements  are  subject to certain  risks and  uncertainties,  including  those
identified  in Item 7 of the  Partnership's  Annual  Report on Form 10-K for the
year ended March 31, 1997 under the heading  "Certain  Factors  Affecting Future
Operating  Results",  which could cause actual results to differ materially from
historical  results  or  those  anticipated.  The  words  "believe",   "expect",
"anticipate,"  and  similar  expressions  identify  forward-looking  statements.
Readers  are  cautioned  not to place undue  reliance  on these  forward-looking
statements,  which were made based on facts and conditions as they existed as of
the date of this report.  The  Partnership  undertakes no obligation to publicly
update or revise  any  forward-looking  statements,  whether  as a result of new
information, future events or otherwise.

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

      One  Paragon  Place  located  in  Richmond,  Virginia  was 91%  leased and
occupied  at the  end of the  quarter,  compared  to 92% the  previous  quarter.
Leasing activity during the quarter consisted of a 662 square foot lease and the
move-out of a 1,087 square foot tenant whose lease had expired June of 1997.  As
previously  reported,  the  Partnership  had  been  monitoring  the  development
activity  in the  Richmond,  Virginia  market  while  exploring  potential  sale
opportunities  for the One Paragon Place Office  Building and had concluded that
it was the  appropriate  time to sell the  property.  During the  quarter  ended
September 30, 1997,  management selected a national firm which began to actively
market the property for sale. As part of the marketing  process,  several offers
were received from  prospective  buyers.  During the quarter ended  December 31,
1997, the Partnership negotiated a purchase and sale agreement with one of these
prospective buyers.  Subsequent to the end of the third quarter, the One Paragon
Place Office  Building was sold to this unrelated  third party for  $16,500,000.
The Partnership received net proceeds of approximately  $8,055,000 in connection
with the sale after the  release of certain  lender  escrow  accounts  totalling
approximately  $555,000, the assumption of the outstanding mortgage loan secured
by the property of  approximately  $8,500,000,  closing  costs of  approximately
$400,000  and closing  proration  adjustments  of  approximately  $100,000.  The
Partnership expects to distribute the net proceeds from this sale transaction to
the  Limited  Partners  in  February  1998.  Because  of  the  reduction  in the
Partnership's  net cash flow  subsequent  to the sale of the One  Paragon  Place
property, the quarterly distribution rate will be reduced from 2.5% per annum to
1.75% per annum on remaining  invested capital  effective for the quarter ending
June 30, 1998.

      With the sale of One Paragon Place,  the  Partnership  has three remaining
investments: the Colony Plaza Shopping Center, in Augusta, Georgia; the DeVargas
Mall,  in Santa Fe, New Mexico;  and the Willow Grove  Apartments,  in Beaverton
(suburban Portland),  Oregon. The Partnership is currently focusing on potential
disposition strategies for these remaining assets. Although no assurances can be
given, it is currently  contemplated that sales of the  Partnership's  remaining
assets could be completed within the next 2 to 3 years. As discussed  further in
the Annual Report,  the  Partnership's  zero coupon loan which is secured by the
Colony  Plaza  Shopping  Center  matured on  December  28,  1996,  at which time
approximately  $8,290,000  became due. Although the Partnership did not make the
scheduled  payment upon maturity,  no formal default notices have been issued by
the lender to date.  Negotiations have been ongoing with the lender for the past
year regarding a possible extension and modification  agreement for the existing
loan.  Such  negotiations  have been  complicated  by the leasing  status of the
Colony Plaza property. As of December 31, 1997, the Colony Plaza Shopping Center
in Augusta,  Georgia was 93% leased and 31% occupied.  As  previously  reported,
Wal-Mart  closed its  82,000  square  foot  store at Colony  Plaza in the second
quarter of fiscal 1997 to open a  "Supercenter"  store at a new  location in the
Augusta market. Although Wal-Mart remains obligated to pay rent and its share of
operating  expenses at Colony Plaza through the term of its lease, which expires
in March 2009,  the loss of the center's  principal  anchor tenant has adversely
affected  the  Partnership's  ability to retain  existing  tenants  and to lease
vacant space at the center.  In addition,  Food Max, the Center's  47,990 square
foot  grocery  store  tenant,  closed its store on  December  1, 1996.  However,
another  grocery store chain,  Food Lion, has entered into a sublease  agreement
with Food Max to open Food Lion  stores in several  former  Food Max  locations,
including  the store at Colony Plaza.  Initially,  Food Lion planned to open its
new store at Colony  Plaza in the summer of 1997.  Food Lion now reports that it
will open its prototype store at Colony Plaza on April 1, 1998. The leasing team
is  confident  that  with  the  opening  of the Food  Lion and the  accompanying
expected increase in shoppers visiting the Center that interest in the available
small shop spaces at Colony Plaza will increase.

      The decisions by Wal-Mart and Food Max to close their stores have weakened
the sales  volumes of many of the tenants of Colony  Plaza,  which in some cases
has affected  their  ability to meet their rent  obligations.  In certain  other
cases, the Wal-Mart store closing will enable tenants to exercise  provisions in
their  leases that will permit  them to  terminate  leases or convert the rental
rate to a percentage of sales. To date, one 6,000 square foot tenant exercised a
co-tenancy clause in its lease which allowed it to close its store in the second
quarter of fiscal 1997 and pay only its share of common area maintenance,  taxes
and insurance because of the Wal-Mart vacancy. During the quarter ended June 30,
1997, this tenant notified the Partnership that it would be exercising its right
to  terminate  its lease during the quarter  ended  December 31, 1997 due to the
Wal-Mart vacancy. In addition,  during the quarter ended March 31, 1997 two shop
tenants with leases  representing  4,600 square feet closed their  stores.  Five
other  tenants,  comprising  12,900 square feet, or 6% of the Center's  leasable
area,  have lease  clauses  which permit them to  terminate  their leases if the
anchor  space is not  re-leased  within a  specified  time  frame.  Two of these
tenants also have the right to pay a specified  percentage of sales  revenues as
base rent while the anchor tenant space  remains  vacant.  In addition,  several
other  tenants  have  requested  rental  abatements  as a result of the Wal-Mart
vacancy.  During the current  quarter,  a 1,600  square  foot tenant  closed its
store.

      As a result of the current  leasing  status of the Colony Plaza  property,
obtaining a new loan to refinance the outstanding debt is not practical, and the
existing lender is concerned that its first mortgage  position could be impaired
in the event that the occupancy level at the property  cannot be  re-stabilized.
Accordingly,  the  negotiations  with the lender  have  focused  on a  potential
agreement  that would give the  Partnership  a stated  period to re-lease all or
some portion of the Wal-Mart  space at Colony  Plaza.  If the  Partnership  were
successful  in  re-leasing  the space within the required  time frame,  then the
Partnership  would be entitled to execute a long-term  extension of the existing
mortgage  loan  pursuant  to  certain  previously  agreed  upon  terms.  If  the
Partnership  were not able to re-lease the space within the required time frame,
then the lender  would be entitled to initiate  foreclosure  proceedings  on the
property.   Any  such  agreement  with  the  lender  remains  subject  to  final
negotiation and the execution of definitive modification agreements. During this
negotiation  period,  penalty interest is accruing on the outstanding  principal
balance at 15% per annum in accordance with the original loan  agreement.  If no
agreement can be reached  regarding a modification of the current mortgage loan,
the lender could choose to initiate  foreclosure  proceedings  during 1998.  The
eventual outcome of this situation cannot be determined at the present time.

      The DeVargas  Mall was 83% leased and occupied as of December 31, 1997. As
previously reported, a 27,023 square foot soft goods anchor tenant, representing
11% of the Center's  leasable  area,  closed its store during the second  fiscal
quarter.  This  tenant's  lease  expired on January  31,  1997,  and it had been
leasing on a month-to-month  basis. As interest in Santa Fe from national anchor
tenants continues to increase,  the property's  leasing team is negotiating with
two  national  anchor  replacement  tenants,  and they remain  confident  that a
replacement  tenant will be signed for this space.  During the third  quarter of
fiscal  1998,  a 491 square  foot lease was signed and the lease of a 659 square
foot tenant, which had previously vacated its space,  expired. In addition,  the
U.S. Post Office took occupancy of its 5,404 square foot space. The leasing team
at DeVargas is currently focusing their efforts on renewing the leases of 25,000
square feet of shop space which  expire in  calendar  year 1998.  Funding of the
required  tenant  improvements  for the leasing  activity  at DeVargas  has been
accomplished  by means of  advances  under the lines of credit  provided  by the
Partnership's  co-venture  partner. As of March 31, 1997, the co-venture partner
had two  outstanding  lines of credit  with the  DeVargas  joint  venture  which
permitted  the venture to borrow up to an aggregate  amount of  $5,553,000.  The
first note, which allowed the venture to borrow up to $5,000,000,  bore interest
at the greater of prime plus 1.5% or 10% per annum and was due to mature in June
1997. The second note, which allowed the venture to borrow up to $553,000,  bore
interest  at prime plus 1% and was  scheduled  to mature in November  2002.  The
outstanding  borrowings  under both lines of credit  totalled  $4,214,000  as of
March 31, 1997. In June 1997, the  Partnership  and the  co-venturer  reached an
agreement to consolidate the two lines of credit into one loan and to modify the
terms. The new loan, which allows the venture to borrow up to $5,000,000,  bears
interest  at the  greater of the prime rate or 9% per annum and is due to mature
on June 1, 1998.

      The average  occupancy level at the Willow Grove  Apartments in Beaverton,
Oregon was 96% as of December  31,  1997.  The  property's  leasing  team raised
rental rates by 4% on both new and renewal leases effective March 1, 1997, which
was the first increase in over a year. The property's  leasing team reports that
the number of building  permits for  apartments in the Beaverton  market in 1997
were down  significantly  from 1996 and 1995. As new  development  appears to be
slowing and most new  construction  is located farther out to the west of Willow
Grove,  between 5 and 15 miles away, the local  apartment  market is expected to
record strong  occupancy  levels and moderate rental rate growth during calendar
1998. The property  should also benefit from the planned opening of a light-rail
station located within walking  distance of the property in the fall of 1998. As
previously  reported,  there is one  property  currently  in  lease-up in Willow
Grove's local market.  Phase one of this two-phase  property contains 288 units.
Phase two,  which will include an additional 150 units,  is under  construction.
While this new property  offers more amenities,  its effective  rental rates are
comparable  to those at Willow  Grove.  Once both  phases of this  property  are
substantially  leased, the property's rental rates would be expected to increase
above  the rates at  Willow  Grove.  With the  number  of new  apartments  under
construction  or  permitted  down  significantly  from the two  previous  years,
combined  with the  strong  regional  economy,  the near  term  outlook  for the
Portland area apartment  market is good.  Management is currently  reviewing the
local market conditions to assess the appropriate  timing for the disposition of
the Willow  Grove  property  and expects to market the  property for sale during
calendar 1998.

      At December 31, 1997, the Partnership and its consolidated  joint ventures
had available cash and cash equivalents of approximately $5,643,000. These funds
will be  utilized  for the  working  capital  requirements  of the  Partnership,
distributions  to  partners,  refinancing  costs  related  to the  Partnership's
remaining zero coupon loan, if necessary,  and to fund capital  enhancements and
tenant improvements for the operating  investment  properties in accordance with
the  respective  joint venture  agreements.  The source of future  liquidity and
distributions  to the  partners  is expected  to be from cash  generated  by the
Partnership's  income-producing  properties and from the proceeds  received from
the sale or  refinancing  of such  properties.  Such  sources of  liquidity  are
expected to be sufficient to meet the  Partnership's  needs on both a short-term
and long-term basis.

Results of Operations
Three months ended December 31, 1997
------------------------------------

      The Partnership  reported a net loss of $85,000 for the three months ended
December 31,  1997,  as compared to net income of $62,000 for the same period in
the prior year. This  unfavorable  change of $147,000 in the  Partnership's  net
operating  results is attributable to a decrease in the  Partnership's  share of
unconsolidated  ventures'  income of $20,000  and an  unfavorable  change in the
Partnership's   operating  income  (loss)  of  $127,000.  The  decrease  in  the
Partnership's  share of  unconsolidated  ventures'  income is  mainly  due to an
increase in the net loss of the One Paragon  Place joint venture for the current
three-month  period.  The  increase  in the net loss at One  Paragon  Place  was
primarily  the  result of an  increase  in  property  operating  expenses  which
reflects  certain costs  incurred in connection  with preparing the property for
sale.

      The unfavorable change in the Partnership's operating income (loss) is the
result of a decrease  in total  revenues  of $50,000  and an  increase  in total
expenses of $77,000. General and administrative expenses increased mainly due to
the timing of certain  recurring  professional  services  compared  to the prior
year. In addition, interest expense increased due to the Colony Plaza borrowing,
which is accruing interest at a default rate of 15%, as discussed further above.
The decline in revenues  was the result of a decrease in rental  income from the
consolidated  joint  ventures  which  was  partially  offset by an  increase  in
interest and other income.  Interest income  increased due to an increase in the
average outstanding amount of the Partnership's  invested cash reserves.  Rental
income  decreased  at Colony  Plaza due to a reduction  in shop space  occupancy
related to the two anchor tenant vacancies which are discussed further above.

Nine months ended December 31, 1997
-----------------------------------

      The Partnership  reported a net loss of $168,000 for the nine months ended
December  31, 1997 as compared to a net loss of $270,000  for the same period in
the prior year. This favorable change in the Partnership's net operating results
is due to a decrease  in the  Partnership's  share of  unconsolidated  ventures'
losses  of  $140,000   which  was  partially   offset  by  an  increase  in  the
Partnership's operating loss of $38,000. The decrease in the Partnership's share
of unconsolidated  ventures' losses is primarily  attributable to an increase in
rental revenues which was partially offset by an increase in property  operating
expenses and interest expense.  The increase in rental revenues at DeVargas Mall
is a result of the addition of two new tenants  during the second half of fiscal
1997.  Revenues were also higher at One Paragon Place as a result of an increase
in rental  rates on new  leases  signed  over the past  year.  Interest  expense
increased  as a result  of an  increase  in the  average  outstanding  principal
balance of the capital and tenant improvement loan payable by the DeVargas joint
venture.  Property  operating  expenses  increased  primarily  as a result of an
increase in common area maintenance and utilities expense at One Paragon Place.

      The  Partnership's  operating loss increased by $38,000 due to an increase
in total expenses of $8,000 and a decrease in total revenues of $30,000.  Rental
income decreased at the consolidated Colony Plaza property due to a reduction in
shop space occupancy  related to the anchor tenant vacancies  discussed  further
above.  The decline in rental  revenues was  partially  offset by an increase in
interest and other income.  Interest income  increased due to an increase in the
average  outstanding  amount of the  Partnership's  invested cash reserves.  The
increase in expenses is the result of higher property  operating expenses at the
consolidated  ventures and an increase in interest  expense which were partially
offset by lower general and  administrative  and  depreciation  and amortization
expenses. Interest expense increased due to the Colony Plaza borrowing, which is
accruing interest at a default rate of 15%, as discussed further above.  General
and administrative  expenses  decreased  primarily due to certain costs incurred
during the prior year in  conjunction  with the  refinancing  of the One Paragon
Place loan.  Depreciation and amortization expense decreased as a result of some
assets having become fully depreciated during the prior year.


<PAGE>


                                     PART II
                                Other Information

Item 1. Legal Proceedings     NONE

Item 2. through 5.            NONE

Item 6. Exhibits and Reports on Form 8-K

(a)   Exhibits:               NONE

(b) Reports on Form 8-K:

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


<PAGE>



           PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP


                                SIGNATURES

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


                        PAINEWEBBER EQUITY PARTNERS THREE
                               LIMITED PARTNERSHIP


                              By:  Third Equity Partners, Inc.
                                   Managing General Partner





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



Dated:  February 12, 1998