UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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

                                    FORM 10-Q

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

               FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998

                                       OR

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

                    For the transition period from_______ to _______.

                         Commission File Number: 0-17881

           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
                  June 30, 1998 and March 31, 1998 (Unaudited)
                                 (In thousands)

                                     ASSETS
                                                    June 30     March 31
                                                    -------     --------
Operating investment properties, at cost:
   Land                                          $    3,769    $   3,769
   Building and improvements                         12,926       12,926
                                                 ----------    ---------
                                                     16,695       16,695
   Less accumulated depreciation                     (4,181)      (4,061)
                                                 ----------    ---------
                                                     12,514       12,634

Investments in unconsolidated ventures, at equity     6,347        6,513
Cash and cash equivalents                             6,031        5,746
Accrued interest and other receivables                   61           97
Prepaid expenses                                         53            7
Deferred expenses, net                                  104          104
                                                 ----------    ---------
                                                 $   25,110    $  25,101
                                                 ==========    =========

                        LIABILITIES AND PARTNERS' CAPITAL

Notes payable and deferred interest, including
 amounts in default                              $   13,780    $  13,432
Accounts payable and accrued expenses                    67          140
Tenant security deposits                                 19           10
Accrued real estate taxes                                80           13
Advances from consolidated ventures                     175          103
Partners' capital                                    10,989       11,403
                                                 ----------    ---------
                                                 $   25,110    $  25,101
                                                 ==========    =========
                                                       








                             See accompanying notes.


<PAGE>


              PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

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

                                                  1998        1997
                                                  ----        ----
Revenues:
   Rental income and expense
     reimbursements                           $    542   $     592
   Interest income                                  85          68
                                              --------   ---------
                                                   627         660

Expenses:
   Interest expense                                449         397
   Property operating expenses                     110         108
   Real estate taxes                                40          40
   General and administrative                       54          47
   Depreciation and amortization                   120         127
                                              --------   ---------
                                                   773         719
                                              --------   ---------
Operating loss                                    (146)        (59)

Partnership's share of unconsolidated
   ventures' income                                 50           9
                                              --------   ---------

Net loss                                      $    (96)  $     (50)
                                              ========   =========

Net loss per Limited Partnership Unit         $  (1.88)  $   (0.98)
                                              ========   =========

Cash distributions per
   Limited Partnership Unit                   $   6.25   $    6.25
                                              ========   =========

      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 three months ended June 30, 1998 and 1997 (Unaudited)
                                 (In thousands)

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

Balance at March 31, 1997                          $ (234)      $ 21,073
Cash distributions                                     (3)          (315)
Net loss                                               (1)           (49)
                                                   ------       --------
Balance at June 30, 1997                           $ (238)      $ 20,709
                                                   ======       ========

Balance at March 31, 1998                          $ (248)      $ 11,651
Cash distributions                                     (3)          (315)
Net loss                                               (1)           (95)
                                                   ------       --------
Balance at June 30, 1998                           $ (252)      $ 11,241
                                                   ======       ========






















                             See accompanying notes.


<PAGE>


              PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
          For the three months ended June 30, 1998 and 1997 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)

                                                      1998           1997
                                                      ----           ----
Cash flows from operating activities:
   Net loss                                       $   (96)      $    (50)
   Adjustments to reconcile net loss to net 
     cash provided by operating activities:
      Partnership's share of unconsolidated
        ventures' income                              (50)            (9)
      Depreciation and amortization                   120            126
      Amortization of deferred loan costs               2              2
      Interest expense on zero coupon loan            359            308
      Changes in assets and liabilities:
      Accrued interest and other receivables           36            (35)
      Prepaid expenses                                (46)             2
      Deferred expenses                                (2)             -
      Accounts payable and accrued expenses           (73)           (32)
      Accrued real estate taxes                        67              4
      Tenant security deposits                          9              3
      Advances from consolidated ventures              72            (22)
                                                  -------       --------
        Total adjustments                             494            347
                                                  -------       --------
        Net cash provided by operating activities     398            297
                                                  -------       --------

Cash flows from investing activities:
   Distributions from unconsolidated joint
      ventures                                        216            307
                                                  -------       --------
Cash flows from financing activities:
   Cash distributions to partners                    (318)          (318)
   Payments of principal on notes payable             (11)           (10)
                                                  -------       --------
        Net cash used in financing activities        (329)          (328)
                                                  -------       --------

Net increase in cash and cash equivalents             285            276

Cash and cash equivalents, beginning of period      5,746          4,615
                                                  -------       --------
Cash and cash equivalents, end of period          $ 6,031       $  4,891
                                                  =======       ========

Cash paid during the period for interest          $    88       $     87
                                                  =======       ========



                             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  months  ended  June 30,  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 June 30, 1998 and March 31, 1998 and revenues and expenses
for each of the three-month periods ended June 30, 1998 and 1997. Actual results
could differ from the estimates and assumptions used.

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

     Included in general and administrative expenses for both of the three-month
periods ended June 30, 1998 and 1997 is $24,000,  representing reimbursements to
an affiliate of the Managing  General Partner for providing  certain  financial,
accounting and investor communication services to the Partnership.

     Also included in general and  administrative  expenses for the  three-month
periods  ended  June 30,  1998  and 1997 is  $1,000  and  $6,000,  respectively,
representing  fees  earned  by an  affiliate,  Mitchell  Hutchins  Institutional
Investors, Inc., for managing the Partnership's cash assets.

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

     As  of  June  30,  1998,  the   Partnership   had  an  investments  in  one
unconsolidated  joint venture  partnership  (two at June 30, 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 months ended March 31, 1998 and for
DeVargas  Center Joint Venture and Richmond  Paragon  Partnership  for the three
months ended March 31, 1997, are as follows:
<PAGE>

                    Condensed Combined Summary of Operations
               For the three months ended March 31, 1998 and 1997
                                 (in thousands)

                                                  1998       1997
                                                  ----       ----
Revenues:
   Rental revenues and expense recoveries     $    632     $ 1,209
   Interest and other income                         -          15
                                              --------     -------
                                                   632       1,224
Expenses:
   Property operating expenses                     216         454
   Real estate taxes                                 9          37
   Interest expense                                102         278
   Depreciation and amortization                   202         438
                                              --------     -------
                                                   529       1,207
                                              --------     -------
Net income                                    $    103     $    17
                                              ========     =======

Net income:
   Partnership's share of combined income     $     54     $    14
   Co-venturers' share of combined income           49           3
                                              --------     -------
                                              $    103     $    17
                                              ========     =======

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

                                                   1998        1997
                                                   ----        ----
      Partnership's share of operations,
         as shown above                         $     54     $    14
      Amortization of excess basis                    (4)         (5)
                                                --------     -------
      Partnership's share of
         unconsolidated ventures' income        $     50     $     9
                                                ========     =======

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.  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 owns the Willow Grove
Apartments, a 119-unit complex located in Beaverton, Oregon.

      The following is a combined summary of property operating expenses for the
consolidated  joint  ventures for the three months ended March 31, 1998 and 1997
(in thousands):

                                                 1998        1997
                                                 ----        ----

      Common area maintenance                  $    25     $    30
      Utilities                                     21          21
      Management fees                               22          22
      Administrative and other                      42          35
                                               -------     -------
                                               $   110     $   108
                                               =======     =======
<PAGE>

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

      Notes  payable and  deferred  interest at June 30, 1998 and March 31, 1998
consist of the following (in thousands):

                                                June 30          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).                           $ 10,299       $  9,940

     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
     March  31,  1998 and  December  31,
     1997.                                           3,481          3,492   
                                                  --------       --------   
                                                  $ 13,780       $ 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 has decreased because of the reduction in
cash flow to the Partnership. The annualized earnings rate will change from 2.5%
to 1.75% on a Limited  Partner's  remaining capital account of $840 per original
$1,000 investment.  The annual distribution rate will be adjusted beginning with
the payment to be 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  Partnership's  portfolio  of
properties.   As  a  result,  management  is  currently  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 within the next 2
years.  The  multi-family  apartment  property in which the  Partnership  has an
interest  continues to experience  strong occupancy levels and increasing rental
rates. As discussed further below,  marketing efforts for the sale of the Willow
Grove  Apartments  commenced  during the quarter  ended June 30,  1998,  and the
property is currently  under contract for sale. 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.

     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 June 30,  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,  has 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.  In
anticipation  of Food Lion's grand opening,  the property's  management team had
the Center  repainted with a new color scheme.  Based on initial  responses from
shoppers,  these  changes are expected to enhance the appeal of the Center.  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.
Currently,  the property's  leasing team is in discussions with four prospective
tenants  interested in leasing  approximately  17,000 square feet. Over the next
year,  four leases  representing a total of 41,600 square feet will expire.  The
largest of the four,  Goody's,  has a May 1999 lease  expiration  and represents
35,200  square  feet  of  this  total.  Management  is  aware  that  Goody's  is
considering  other  locations in the Augusta market.  Notwithstanding  this, the
property's  leasing team is  discussing  lease  renewals  with all four of these
tenants.

      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 90% leased as of June 30, 1998,  compared to 82% at
the end of the prior quarter.  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,
which will 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. In addition to finalizing  the Office Depot lease,
the  property's  leasing team  successfully  negotiated  a lease  renewal with a
tenant occupying a total of 10,018 square feet. During the remainder of calendar
year 1998, ten leases representing a total of approximately  15,000 square feet,
or approximately 6% 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 Albertson'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  Albertson's  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.

     The  average  occupancy  level for the  quarter  ended June 30, 1998 at the
Willow Grove  Apartments in  Beaverton,  Oregon was 92%.  This  occupancy  level
continues to compare  favorably  to similar  Class A quality  properties  in the
local market which  includes  approximately  2,500 units built in the last three
years and located within 4-to-6 miles of the property.  The  property's  leasing
team reports that the number of building permits for apartments in the Beaverton
market in 1997 was 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 in
the near term. As previously  reported,  a light rail station,  which is located
within walking distance of the Willow Grove Apartments, is expected to open this
fall.  The light rail line is now  operating on a test basis.  With strong local
market  conditions and the pending opening of the rail station,  the Partnership
believes it is a good time to sell the Willow Grove property.  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  have been  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 subsequent to the  quarter-end.  This
prospective  buyer is expected to complete its due diligence  work by August 31,
1998.  While there are no assurances that a sale  transaction will be completed,
the  Partnership  hopes to complete the sale of Willow  Grove by  September  30,
1998.

      At June 30, 1998, the Partnership and its consolidated  joint ventures had
available cash and cash  equivalents of  approximately  $6,031,000.  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.

Results of Operations
Three months ended June 30, 1998
--------------------------------

      The Partnership  reported a net loss of $96,000 for the three months ended
June 30,  1998,  as compared to a net loss of $50,000 for the same period in the
prior  year.  This  increase  of  $46,000  in  the  Partnership's  net  loss  is
attributable to an increase in the Partnership's operating loss of $87,000 which
was partially offset by an increase in the Partnership's share of unconsolidated
ventures' income of $41,000. The increase in the Partnership's operating loss is
primarily  the result of a decrease  of  $50,000  in rental  income and  expense
reimbursements  from the  consolidated  Colony Plaza property and an increase of
$52,000 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  at  Colony  Plaza was
primarily  due to a  reduction  in shop  space  occupancy  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 of $17,000 in interest income earned on the  Partnership's
cash  reserves.  Interest  income  increased  due to an  increase in the average
amount of cash and cash  equivalents on hand when compared to the same period in
the prior  year.  The  increase  in the  Partnership's  share of  unconsolidated
ventures'  income is 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 $61,000  during the prior  three-month
period.  The  Partnership's  share of the net  income  from the  DeVargas  joint
venture  declined  by $20,000  for the current  three-month  period,  despite an
overall  increase in the venture's  net income,  due to the method of allocating
income in accordance with the joint venture agreement.




<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:  August 11, 1998