UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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

                                    FORM 10-Q

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

                  FOR THE QUARTER ENDED December 31, 1998

                                       OR

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

            For the transition period from ______ to _______ .


                         Commission File Number: 0-17881


           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, 1998 and March 31, 1998 (Unaudited)
                                 (In thousands)

                                     ASSETS
                                                 December 31    March 31
                                                 -----------    --------
Operating investment properties, at cost:
   Land                                           $   3,281    $   3,769
   Building and improvements                          8,241       12,926
                                                  ---------    ---------
                                                     11,522       16,695
   Less accumulated depreciation                     (2,688)      (4,061)
                                                  ---------    ---------
                                                      8,834       12,634

Investments in unconsolidated ventures,
   at equity                                          6,076        6,513
Cash and cash equivalents                             6,494        5,746
Accrued interest and other receivables                   57           97
Prepaid expenses                                          -            7
Deferred expenses, net                                    7          104
                                                  ---------    ---------
                                                  $  21,468    $  25,101
                                                  =========    =========

                        LIABILITIES AND PARTNERS' CAPITAL

Notes payable and deferred interest, 
  including amounts in default                    $  11,071    $  13,432
Accounts payable and accrued expenses                    34          140
Tenant security deposits                                 10           10
Accrued real estate taxes                                63           13
Advances from consolidated ventures                     134          103
Partners' capital                                    10,156       11,403
                                                  ---------    ---------
                                                  $  21,468    $  25,101
                                                  =========    =========










                             See accompanying notes.


<PAGE>


              PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS
   For the three and ninemonths ended December 31, 1998 and 1997 (Unaudited)
                      (In thousands, except per Unit data)

                                   Three Months Ended     Nine Months Ended
                                       December 31,          December 31, 
                                   ------------------     -----------------
                                   1998        1997         1998       1997
                                   ----        ----         ----       ----
Revenues:
   Rental income and expense
     reimbursements               $ 365      $  542       $  1,472   $  1,679
   Interest and other income         85          78            287        219
                                  -----      ------       --------   --------
                                    450         620          1,759      1,898

Expenses:
   Interest expense                 399         426          1,374      1,244
   Property operating expenses      114         139            449        370
   Real estate taxes                 14          38            111        115
   General and administrative        61          90            195        212
   Depreciation and 
     amortization                    84         126            432        381
                                  -----      ------       --------   --------
                                    672         819          2,561      2,322
                                  -----      ------       --------   --------
Operating loss                     (222)       (199)          (802)      (424)

Gain on sale of operating
  investment property                 -           -          3,469          -

Partnership's share of
   unconsolidated ventures'
   income (losses)                   86           5            211        (48)
                                 ------      ------       --------   --------

Net income (loss)                $ (136)     $ (194)      $  2,878   $   (472)
                                 ======      ======       ========   ========

Net income (loss) per Limited
   Partnership Unit              $(2.63)     $(3.80)      $  56.43   $  (9.25)
                                 ======      ======       ========   ========

Cash distributions per
   Limited Partnership Unit      $ 3.68      $ 6.25       $  81.61   $  18.75
                                 ======      ======       ========   ========

      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, 1998 and 1997 (Unaudited)
                                 (In thousands)

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

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

Balance at March 31, 1998                          $ (248)      $ 11,651
Cash distributions                                     (7)        (4,118)
Net income                                             30          2,848
                                                   ------       --------
Balance at December 31, 1998                       $ (225)      $ 10,381
                                                   ======       ========






















                             See accompanying notes.


<PAGE>

              PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
    For the three and ninemonths ended December 31, 1998 and 1997 (Unaudited)
         Increase (Decrease) in Cash and Cash Equivalents (In thousands)

                                                           1998         1997
                                                           ----         ----
Cash flows from operating activities:
   Net income (loss)                                    $  2,879       $   (168)
   Adjustments to reconcile net income 
     (loss) to net cash provided
     by operating activities:
      Partnership's share of unconsolidated
      ventures' income (losses)                             (211)            48
      Gain on sale of operating investment
        property                                          (3,469)             -
      Depreciation and amortization                          432            381
      Amortization of deferred loan costs                      -              7
      Interest expense on zero coupon loan                 1,131            675
      Changes in assets and liabilities:
        Accrued interest and other receivables                40            (12)
        Prepaid expenses                                       7             (6)
        Deferred expenses                                     (8)            (2)
        Accounts payable and accrued expenses               (106)           (51)
        Accrued real estate taxes                             50             61
        Tenant security deposits                               -              3
        Advances from consolidated ventures                   31              3
                                                        --------       --------
        Total adjustments                                 (2,103)         1,107
                                                        --------       --------
        Net cash provided by operating activities            776            939
                                                        --------       --------

Cash flows from investing activities:
   Net proceeds from sale of operating 
     investment property                                   6,957              -
   Distributions from unconsolidated
     joint ventures                                          648            939
   Additions to operating investment properties              (16)            (2)
   Receipt of master lease payment                             -            140
                                                        --------       --------
        Net cash provided by investing activities          7,589          1,077
                                                        --------       --------

Cash flows from financing activities:
   Cash distributions to partners                         (4,125)          (956)
   Payments of principal on notes payable                 (3,492)           (32)
                                                        --------       --------
        Net cash used in financing activities             (7,617)          (988)
                                                        --------       --------

Net increase in cash and cash equivalents                    748          1,028
Cash and cash equivalents, beginning of period             5,746          4,615
                                                        --------       --------
Cash and cash equivalents, end of period                $  6,494       $  5,643
                                                        ========       ========
Cash paid during the period for interest                $    243       $    258
                                                        ========       ========

                             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, 1998. In the opinion of
management, the accompanying financial statements,  which have not been audited,
reflect all adjustments  necessary to present fairly the results for the interim
period. All of the accounting  adjustments reflected in the accompanying interim
financial statements are of a normal recurring nature. The results of operations
for the three and nine months  ended  December  31, 1997 have been  revised from
what was previously reported due to the retroactive  reflection of an adjustment
recorded in the fourth quarter of fiscal 1998.

      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, 1998 and March 31, 1998 and  revenues  and
expenses for each of the three-and  nine- month periods ended  December 31, 1998
and 1997. Actual results could differ from the estimates and assumptions used.

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

      Included in general and administrative expenses for the nine-month periods
ended  December  31,  1998  and  1997  is  $72,000  and  $70,000,  respectively,
representing  reimbursements to an affiliate of the Managing General Partner for
providing certain financial,  accounting and investor  communication services to
the Partnership.

      Also included in general and  administrative  expenses for the  nine-month
periods  ended  December 31, 1998 and 1997 is $8,000 and $12,000,  respectively,
representing  fees  earned  by an  affiliate,  Mitchell  Hutchins  Institutional
Investors, Inc., for managing the Partnership's
cash assets.

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

      As of  December  31,  1998,  the  Partnership  had  an  investment  in one
unconsolidated  joint venture  partnership (two at December 31, 1997) which owns
an  operating  property  as more fully  described  in the  Partnership's  Annual
Report.  The  unconsolidated  joint venture is accounted for by using the equity
method because the Partnership  does not have a voting control  interest in this
venture. 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 investment is carried at cost adjusted for the Partnership's share
of the venture's earnings, losses and distributions. The Partnership reports its
share of  unconsolidated  joint  venture  earnings  or  losses  three  months in
arrears. 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.  As a  result  of the  sale of the One
Paragon  Place  Office  Building,  a Special  Distribution  of $160 per original
$1,000 investment was made on February 13, 1998 to Limited Partners of record as
of January 30, 1998.

      Summarized  operations  of the  remaining  unconsolidated  joint  venture,
DeVargas Center Joint Venture, for the three and nine months ended September 30,
1998 and for DeVargas Center Joint Venture and Richmond Paragon  Partnership for
the three and nine months ended September 30, 1997, are as follows:
<PAGE>

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

                                    Three Months Ended    Nine  Months Ended
                                       September 30,         September 30,   
                                    ------------------    ------------------
                                      1998      1997       1998      1997
                                      ----      ----       ----      ----
Revenues:
   Rental revenues and expense
     recoveries                   $    617   $ 1,223      $1,892     $3,562
   Interest and other income             2         9           3         35
                                  --------   -------      ------     ------
                                       619     1,232       1,895      3,597
Expenses:
   Property operating expenses         239       434         686      1,312
   Real estate taxes                     9        36          28        108
   Interest expense                    102       275         308        835
   Depreciation and amortization       169       439         573      1,316
                                  --------   -------      ------     ------
                                       519     1,184       1,595      3,571
                                  --------   -------      ------     ------
Net income                        $    100   $    48      $  300     $   26
                                  ========   =======      ======     ======

Net income:
   Partnership's share of
     combined income (loss)       $     91   $    10      $  222     $  (33)
   Co-venturers' share of
     combined income (loss)              9        38          78         59
                                  --------   -------      ------     ------
                                  $    100   $    48      $  300     $   26
                                  ========   =======      ======     ======


               Reconciliation of Partnership's Share of Operations
  For the three and nine months ended December 31, 1998 and 1997 (in thousands)

                                    Three Months Ended     Nine  Months Ended
                                        December 31,          December 31,     
                                    ------------------     ------------------
                                      1998      1997       1998          1997
                                      ----      ----       ----          ----
      Partnership's share of
         operations, as 
         shown above                $    91   $    10     $   222     $   (33)
      Amortization of excess 
         basis                           (5)       (5)        (11)        (15)
                                    -------   -------     -------     -------
      Partnership's share of
         unconsolidated
         ventures' income 
         (losses)                   $    86   $     5     $   211     $   (48)
                                    =======   =======     =======     =======

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

      As of  December  31,  1998,  the  Partnership  has  an  investment  in one
consolidated  joint  venture  partnership  (two at March 31, 1998) which owns an
operating  investment  property  as more fully  described  in the  Partnership's
Annual Report. The consolidated  venture has a December 31 year-end 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 this
venture on a three-month lag. All material  transactions between the Partnership
and this joint  venture  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.  See Note 5 for a discussion  of the current  default  status of the first
mortgage loan secured by the Colony Plaza property.

      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 owned the Willow Grove
Apartments, a 119-unit complex located in Beaverton, Oregon. On August 13, 1998,
Portland Pacific Associates Two sold the Willow Grove Apartments to an unrelated
third  party  for  $7,137,000.   The   Partnership   received  net  proceeds  of
approximately $3,406,000 in connection with the sale after the assumption of the
outstanding  mortgage loan secured by the property of approximately  $3,468,000,
closing costs of $180,000 and closing  proration  adjustments  of $83,000.  As a
result of the sale of the Willow Grove Apartments, a Special Distribution of $68
per  original  $1,000  investment  was made on August  25,  1998 to the  Limited
Partners of record as of August 13, 1998. In accordance  with the  Partnership's
policy to recognize  significant lag period  transactions in the period in which
they occur, the Partnership accelerated the recognition of the operating results
of Portland  Pacific  Associates Two during the quarter ended September 30, 1998
and  recorded a gain of  $3,469,000  on the sale of the Willow  Grove  operating
investment property.

      The  following  combined  summary of property  operating  expenses for the
three and nine months  ended  September  30, 1998 (in  thousands)  includes  the
expenses of the Colony Plaza Shopping Center through  September 30, 1998 and the
expenses of the Willow Grove  Apartments  through the date of the sale on August
13, 1998. The combined property operating expenses for the three and nine months
ended  September  30,  1997  include  expenses  for the two  consolidated  joint
ventures.

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

      Common area maintenance      $   31    $  39        $ 106       $   92
      Utilities                         9       24           59           67
      Management fees                  15       23           63           68
      Administrative and other         59       53          221          143
                                   ------    -----        -----       ------
                                   $  114    $ 139        $ 449       $  370
                                   ======    =====        =====       ======

5.    Notes payable
      -------------

      Notes  payable and  deferred  interest at December  31, 1998 and March 31,
1998 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. 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).                           $ 11,071      $  9,940

     9.59%  nonrecourse  loan payable by
     the  consolidated  Portland Pacific
     Associates Two to a finance company
     which  was  secured  by the  Willow
     Grove     operating      investment
     property. The note required 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
     December  31,  1997.  As  discussed
     further in Note 4, the Willow Grove
     property  was  sold on  August  13,
     1998,  and the  mortgage  loan  was
     assumed  by  the  buyer.                            -         3,492
                                                  --------      -------- 
                                                  $ 11,071      $ 13,432 
                                                  ========      ========

      The borrowing secured by Colony Plaza,  which is a legal obligation of the
Partnership  and not of the Colony Plaza joint venture,  matured on December 29,
1996, at which time total  principal and accrued  interest of $8,290,190 was due
and  payable.  Management  has been  engaged in  negotiations  with the existing
lender regarding an extension and modification of the outstanding first mortgage
loan  since  the  time of the loan  maturity.  However,  due to the  substantial
vacancy at the property,  the prospects for such  negotiations  are uncertain at
the present time. During this negotiation  period,  penalty interest is accruing
on the outstanding  principal  balance at 15.0% per annum in accordance with the
original loan  agreement.  If the  refinancing  or extension of this loan is not
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>

              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, 1998 under the heading  "Certain  Factors  Affecting Future
Operating  Results",  which could cause actual results to differ materially from
historical  results  or  those  anticipated.   The  words  "believe,"  "expect,"
"anticipate,"  and  similar  expressions  identify  forward-looking  statements.
Readers  are  cautioned  not to place undue  reliance  on these  forward-looking
statements,  which were made based on facts and conditions as they existed as of
the date of this report.  The  Partnership  undertakes no obligation to publicly
update or revise  any  forward-looking  statements,  whether  as a result of new
information, future events or otherwise.

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

      As discussed  further in the Annual Report, as a result of the sale of the
One Paragon Place Office Building on January 30, 1998, a Special Distribution of
$160 per  original  $1,000  investment  was made on February 13, 1998 to Limited
Partners of record as of January 30,  1998.  This Special  Capital  Distribution
represented the net proceeds from the sale of One Paragon Place as rounded up to
the nearest dollar per original $1,000 investment.  With the sale of One Paragon
Place, the Partnership's  earnings rate decreased because of a reduction in cash
flow to the Partnership. The annualized earnings rate changed from 2.5% to 1.75%
beginning  with the payment  made on August 14, 1998 for the quarter  ended June
30, 1998.

      In light of the continued strength in the national real estate market with
respect to multi-family  apartment  properties and the current  liquidity in the
capital  markets for investment in real estate in general,  management  believes
that this may be the  opportune  time to sell the  remaining  properties  in the
Partnership's portfolio. As a result,  management has been focusing on potential
disposition  strategies  for  the  remaining  investments  in the  Partnership's
portfolio.  Although there are no assurances,  it is currently contemplated that
sales of the  Partnership's  remaining  assets  could be completed by the end of
calendar year 1999. As discussed  further below,  marketing efforts for the sale
of the Willow Grove Apartments commenced during the quarter ended June 30, 1998,
and the sale of the property closed during the quarter ended September 30, 1998.
With regard to the two  remaining  retail  properties,  management  is currently
working  with  each  property's  leasing  and  management  team to  develop  and
implement programs that will protect and enhance value and maximize cash flow at
each property.  In addition,  as discussed  further below,  the Partnership must
resolve the  current  default  status of the zero coupon loan  secured by Colony
Plaza prior to implementing a disposition strategy for this asset.

      On August 13, 1998,  Portland Pacific Associates Two sold the Willow Grove
Apartments,  located in  Beaverton,  Oregon,  to an  unrelated  third  party for
$7,137,000.  During the fourth quarter of fiscal 1998, the Partnership initiated
discussions  with area real  estate  brokerage  firms  and  solicited  marketing
proposals  from  several  of  these  firms.  After  reviewing  their  respective
proposals  and  conducting  interviews,  the  Partnership  selected  a  national
brokerage firm that is a leading seller of apartment properties. Sales materials
were  prepared,  and an extensive  marketing  campaign  began in May 1998.  As a
result of those efforts, ten offers to purchase Willow Grove were received.  The
prospective purchasers were then requested to submit best and final offers. Four
of the prospective  buyers submitted best and final offers.  After completing an
evaluation  of  these  offers  and  the  relative  strength  of the  prospective
purchasers, the Partnership selected an offer. A purchase and sale agreement was
negotiated with an unrelated third-party prospective buyer and signed on July 3,
1998.  After the  prospective  buyer  completed its due diligence work, the sale
transaction  was  completed on August 13,  1998.  The  Partnership  received net
proceeds  of  approximately  $3,406,000  in  connection  with the sale after the
assumption  of  the  outstanding  mortgage  loan  secured  by  the  property  of
approximately  $3,468,000,  closing costs of approximately  $180,000 and closing
proration  adjustments of approximately  $83,000. As a result of the sale of the
Willow Grove  Apartments,  a Special  Distribution  of $68 per  original  $1,000
investment  was made on August 25, 1998 to the Limited  Partners of record as of
August 13, 1998. This Special Capital Distribution  represented the net proceeds
from the sale of Willow  Grove as rounded up to the nearest  dollar per original
$1,000 investment.

      As  previously  reported,  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. The  Partnership  has been engaged in negotiations
with the lender regarding a possible extension and modification  agreement since
the time of the loan's maturity.  Such negotiations have been complicated by the
leasing status of the Colony Plaza property. As of December 31, 1998, the Colony
Plaza Shopping  Center in Augusta,  Georgia was 90% leased and 52% 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.  As a result of the lack of
success to date in  obtaining  a  replacement  anchor  tenant or tenants for the
Wal-Mart space,  the  Partnership  recorded an impairment loss in fiscal 1998 in
the amount of  $1,204,000  to write down the carrying  value of the Colony Plaza
operating  investment  property to  management's  estimate  of its current  fair
value.  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,  subsequently  entered into a sublease agreement with Food Max
to open Food Lion stores in several former Food Max locations,  including Colony
Plaza.  During the quarter  ended June 30,  1998,  Food Lion opened its store at
Colony Plaza after  spending a significant  amount of its own funds to refit the
former Food Max premises for Food Lion's new prototype store in this market. The
increase  in  occupancy  from the  opening of the Food Lion store was  partially
offset when two tenants  with a total of 4,200  square feet closed  their stores
and one tenant  leasing  1,600  square feet moved from the Center when its lease
expired  during the first quarter.  Notwithstanding  these store  closings,  the
property's  leasing  team is confident  that,  with the opening of the Food Lion
store and the  accompanying  increase  in the number of  shoppers  visiting  the
Center, interest in leasing the available small shop spaces will improve. During
the third quarter,  one tenant occupying 1,500 square feet moved from its space.
Currently,   the  property's   leasing  team  is  in  discussions  with  several
prospective  tenants to lease the Center's  vacant space.  They also continue to
negotiate  with the U.S.  Postal  Service for a 26,000  square foot post office,
which would be located in a portion of the former Wal-Mart space.  Over the next
year, seven leases  representing a total of 49,000 square feet will expire.  The
lease for  Goody's,  the  largest  of the seven  tenants,  has a May 1999  lease
expiration  and  represents  32,000  square  feet  of  this  total.   While  the
Partnership  has not  received  official  notice that Goody's will not renew its
lease, it has started  construction of a new store at another site in the market
area.  Consequently,  the  property's  leasing  term has  begun a  search  for a
replacement tenant.

      As a result of the current  leasing  status of the Colony Plaza  property,
the  stability of the Center's  future  rental  income is  uncertain,  which may
result in the  Partnership  being  unable to negotiate  an  economically  viable
refinancing  agreement  with the current lender or to refinance the current loan
balance  with  a  new  third-party   financing  source.   Any  restructuring  or
refinancing  transaction is likely to require a significant  cash payment by the
Partnership in order to reduce the outstanding obligation to the lender in light
of the current  loan-to-value  ratio.  During the  negotiation  period,  penalty
interest is accruing on the  outstanding  principal  balance at 15% per annum in
accordance  with the original loan  agreement.  If the  Partnership is unable to
successfully  restructure  or refinance the current  mortgage  loan,  management
expects that the lender will likely choose to initiate foreclosure  proceedings.
The eventual outcome of this situation cannot be determined at the present time.

      The DeVargas Mall was 92% leased and 91% occupied as of December 31, 1998,
up from 90%  leased and  occupied  at the end of the prior  quarter.  During the
quarter, two tenants occupying a total of 1,941 square feet renewed their leases
while a new  tenant,  Starbucks,  signed a lease  for 1,764  square  feet and is
expected to take  occupancy  by March 31, 1999.  Subsequent  to quarter end, the
property's  leasing team signed two new leases. One lease is with GNC which will
occupy 1,395 square feet and is expected to take occupancy by June 30, 1999. The
other  tenant  signed a lease for 1,030  square feet and will take  occupancy by
March 31, 1999. In addition, the property's leasing team is actively negotiating
with an existing tenant that occupies approximately 16,300 square feet to expand
its space by a total of 7,500  square  feet.  This  expansion  is expected to be
completed by December 31, 1999. In order to accommodate this expansion,  it will
be necessary to relocate  several  tenants to other  locations  within the Mall.
These relocations and the increase in leasing activity are all part of an effort
to  improve  the  quality  of the tenant mix at  DeVargas  Mall.  As  previously
reported,  the property's leasing team had been negotiating with two prospective
tenants for the 27,023  square  feet  formerly  occupied by a soft goods  anchor
tenant that closed its store in July 1997. During the first quarter, a lease was
signed with one of these  prospective  tenants,  Office Depot,  to occupy 29,615
square feet. To provide for the larger Office Depot store size requirements, one
tenant  formerly  occupying  15,000  square feet  downsized  its  operations  by
approximately  10,000 square feet and relocated to another area within the Mall.
The Office Depot store opened for business  during the current  quarter.  During
the next 12 months,  eight leases  representing a total of approximately  22,000
square feet, or  approximately 9% of the Mall's total rentable area, come up for
renewal.  The  property's  leasing team  expects most of these  tenants to renew
their leases.  As  previously  reported,  Montgomery  Ward closed its store that
abuts  DeVargas Mall as part of a Chapter 11 bankruptcy  filing made last summer
and had  undertaken  plans to sell its store and the  related  land.  During the
fourth  quarter of fiscal 1998, a major  grocery  chain which is a 39,000 square
foot  anchor  tenant at  DeVargas  Mall  purchased  the former  Montgomery  Ward
location and plans to relocate to the  Montgomery  Ward site. The grocery tenant
plans to demolish  the  existing  Montgomery  Ward  building and replace it with
their new 55,000 square foot prototypical  Super Store which is expected to open
in the fall of 1999.  The  DeVargas  property  was  unable to  accommodate  this
tenant's  expansion  plans  for a 55,000  square  foot  store  at their  current
location.  Nonetheless,  the planned grocery tenant  relocation will result in a
unified  center  because  the  Montgomery  Ward  and  DeVargas  properties  have
cross-easements,  and it is also  expected  to  have a  positive  impact  on the
long-term  value of the  DeVargas  Mall  because  the changes  should  result in
additional  destination  shopper traffic to the Mall, add an additional retailer
to the current  tenant mix once the grocery  tenant's  space is  re-leased,  and
allow for the future  re-leasing of retail spaces at higher rents than the rates
paid by former tenants.  The property's  leasing team will work with the grocery
tenant to secure a new tenant to occupy its space when they close their store in
the fall of 1999.  Funding  for  required  tenant  improvements  for the leasing
activity at DeVargas has been  accomplished  by means of advances  under certain
lines  of  credit  provided  by the  Partnership's  co-venture  partner.  At the
beginning of fiscal 1998, 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.  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 allowed the venture to borrow
up to $5,000,000, bore interest at the greater of the prime rate or 9% per annum
and was due to mature on June 1, 1998. On May 26, 1998,  the venture  executed a
renewal and extension of the loan. Under the terms of the renewal and extension,
the venture may borrow up to  $6,500,000 at a rate equal to the lesser of 9% per
annum or the prime rate, and the maturity date was extended to June 1, 1999.

      At December 31, 1998, the Partnership and its consolidated  joint ventures
had available cash and cash equivalents of approximately $6,494,000. These funds
will be  utilized  for the  working  capital  requirements  of the  Partnership,
distributions to partners,  refinancing  costs and debt service payments related
to the Partnership's remaining zero coupon loan, if necessary under the terms of
the original zero coupon loan agreement or any future modification  thereof, 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.

      As noted above, the Partnership  expects to be liquidated prior to the end
of calendar 1999.  Notwithstanding  this, the  Partnership  believes that it has
made all necessary  modifications to its existing systems to make them year 2000
compliant and does not expect that  additional  costs  associated with year 2000
compliance,  if any, will be material to the Partnership's results of operations
or financial position.

Results of Operations
Three Months Ended December 31, 1998
------------------------------------

      The Partnership reported a net loss of $134,000 for the three months ended
December 31, 1998,  as compared to a net loss of $194,000 for the same period in
the prior  year.  This  decrease  of $60,000 in the  Partnership's  net loss was
primarily a result of an increase in the  Partnership's  share of unconsolidated
ventures' income of $81,000.  The favorable change in the Partnership's share of
unconsolidated  ventures' operating results was primarily due to the sale of the
One Paragon  Place  Office  Building on January 30, 1998,  as discussed  further
above.  The One Paragon Place joint venture had a net operating  loss of $45,000
during the prior three-month period. In addition, the Partnership's share of the
net income from the DeVargas joint venture  increased by $36,000 for the current
three-month  period mainly due to the method of allocating  income in accordance
with the joint venture agreement.

      The  favorable  change  in  the  Partnership's   share  of  unconsolidated
ventures' income was partially offset by a $23,000 increase in the Partnership's
operating loss. The increase in the  Partnership's  operating loss was primarily
the result of a decrease in rental  income and expense  reimbursements  from the
Willow  Grove  Apartments  due to the sale of the  property.  The  Partnership's
operating  loss also  increased due to the decrease in rental income and expense
reimbursements  from the  consolidated  Colony Plaza  property.  The decrease in
rental income and expense  reimbursements at Colony Plaza was primarily due to a
reduction in shop space occupancy  compared to the same period in the prior year
related to the anchor tenant vacancies  discussed further above. The decrease in
rental income and expense  reimbursements was partially offset by an increase in
interest  income earned on the  Partnership's  cash  reserves.  Interest  income
increased  partly due to interest  earned on the  proceeds  from the sale of the
Willow Grove  Apartments,  which were  temporarily  invested pending the special
distribution to the Limited Partners which was made on August 25, 1998.

Nine Months Ended December 31, 1998
-----------------------------------

      The  Partnership  reported  net income of  $2,878,000  for the nine months
ended  December  31,  1998,  as compared to a net loss of $472,000  for the same
period  in  the  prior  year.  This  favorable   change  of  $3,350,000  in  the
Partnership's  net operating results was primarily due to the gain from the sale
of the Willow Grove  Apartments.  As noted above, the consolidated  Willow Grove
operating  investment  property was sold on August 13, 1998, and the Partnership
recorded a gain of  $3,469,000 on the sale.  The gain  recognized on the sale of
Willow Grove was partially offset by an increase in the Partnership's  operating
loss of $378,000. The increase in the Partnership's operating loss was primarily
the result of a decrease in rental  income and expense  reimbursements  from the
consolidated  Colony Plaza property and an increase in interest  expense related
to the Colony  Plaza debt  obligation,  which is accruing  interest at a default
rate of 15%, as  discussed  further  above.  The  decrease in rental  income and
expense  reimbursements was also due to the sale of the Willow Grove Apartments.
The  decrease in rental  income and expense  reimbursements  at Colony Plaza was
primarily due to a reduction in shop space occupancy compared to the same period
in the prior year  related  to the anchor  tenant  vacancies  discussed  further
above. The decrease in rental income and expense reimbursements and the increase
in interest  expense  were  partially  offset by an increase in interest  income
earned on the Partnership's cash reserves.  Interest income increased partly due
to interest earned on the proceeds from the sale of the Willow Grove Apartments,
which were temporarily  invested pending the special distribution to the Limited
Partners which was made on August 25, 1998.

      A   favorable   change  of  $259,000   in  the   Partnership's   share  of
unconsolidated  ventures' income (losses) also contributed to the  Partnership's
improved net operating results for the current  nine-month period. The favorable
change in the Partnership's share of unconsolidated  ventures' operating results
was  primarily  due to the sale of the One  Paragon  Place  Office  Building  on
January 30,  1998,  as  discussed  further  above.  The One Paragon  Place joint
venture had a net operating loss of $258,000 during the prior nine-month period.


<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 9, 1999