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

                                     ASSETS
                                                 September 30   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                     (2,610)      (4,061)
                                                  ---------    ---------
                                                      8,912       12,634

Investments in unconsolidated ventures, at equity     6,204        6,513
Cash and cash equivalents                             6,223        5,746
Accrued interest and other receivables                   78           97
Prepaid expenses                                          -            7
Deferred expenses, net                                    8          104
                                                  ---------    ---------
                                                  $  21,425    $  25,101
                                                  =========    =========

                        LIABILITIES AND PARTNERS' CAPITAL

Notes payable and deferred interest, 
  including amounts in default                    $  10,685    $  13,432
Accounts payable and accrued expenses                    41          140
Tenant security deposits                                 10           10
Accrued real estate taxes                                42           13
Advances from consolidated ventures                     167          103
Partners' capital                                    10,480       11,403
                                                  ---------    ---------
                                                  $  21,425    $  25,101
                                                  =========    =========










                             See accompanying notes.


<PAGE>


              PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

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

                                  Three Months Ended     Six  Months Ended
                                     September 30,         September 30,
                                  ------------------   -------------------
                                   1998        1997       1998       1997
                                   ----        ----       ----       ----
Revenues:
   Rental income and expense
     reimbursements              $  565      $  545      $ 1,107    $ 1,137
   Interest and other income        117          73          202        141
                                 ------      ------      -------    -------
                                    682         618        1,309      1,278

Expenses:
   Interest expense                 526         420          975        818
   Property operating expenses      225         123          335        231
   Real estate taxes                 57          37           97         77
   General and administrative        80          75          134        122
   Depreciation and 
     amortization                   228         128          348        255
                                 ------      ------      -------    -------
                                  1,116         783        1,889      1,503
                                 ------      ------      -------    -------
Operating loss                     (434)       (165)        (580)      (225)

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

Partnership's share of
  unconsolidated ventures' 
  income (losses)                    75         (62)         125        (53)
                                 ------      ------      -------    -------

Net income (loss)                $3,110      $ (227)     $ 3,014    $  (278)
                                 ======      ======      =======    =======

Net income (loss) per Limited
   Partnership Unit              $60.97      $(4.45)     $ 59.09    $ (5.45)
                                 ======      ======      =======    =======

Cash distributions per
   Limited Partnership Unit      $71.68      $ 6.25      $ 77.93    $ 12.50
                                 ======      ======      ======     =======

      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 six months ended September 30, 1998 and 1997 (Unaudited)
                                 (In thousands)

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

Balance at March 31, 1997                          $ (234)      $ 21,073
Cash distributions                                     (6)          (631)
Net loss                                               (3)          (275)
                                                   ------       --------
Balance at September 30, 1997                      $ (243)      $ 20,167
                                                   ======       ========

Balance at March 31, 1998                          $ (248)      $ 11,651
Cash distributions                                     (5)        (3,932)
Net income                                             32          2,982
                                                   ------       --------
Balance at September 30, 1998                      $ (221)      $ 10,701
                                                   ======       ========























                             See accompanying notes.


<PAGE>


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

                                                      1998           1997
                                                      ----           ----
Cash flows from operating activities:
   Net income (loss)                                $ 3,014       $   (278)
   Adjustments to reconcile net income (loss)
     to net cash provided by operating activities:
      Partnership's share of unconsolidated 
        ventures' income (losses)                      (125)            53
      Gain on sale of operating investment
        property                                     (3,469)             -
      Depreciation and amortization                     348            255
      Amortization of deferred loan costs                 -              5
      Interest expense on zero coupon loan              745            645
      Changes in assets and liabilities:
      Accrued interest and other receivables             19            (45)
      Prepaid expenses                                    7            (13)
      Deferred expenses                                  (2)            (6)
      Accounts payable and accrued expenses             (99)           (21)
      Accrued real estate taxes                          29             23
      Tenant security deposits                            -              6
      Advances from consolidated ventures                64            (26)
                                                    -------       --------
        Total adjustments                            (2,483)           876
                                                    -------       --------
        Net cash provided by operating activities       531            598
                                                    -------       --------

Cash flows from investing activities:
   Net proceeds from sale of operating
     investment property                              6,957              -
   Distributions from unconsolidated joint
     ventures                                           434            534
   Additions to operating investment properties         (16)           (2)
   Receipt of master lease payment                        -            140
                                                    -------       --------
        Net cash provided by investment               7,375            672
                                                    -------       --------

Cash flows from financing activities:
   Cash distributions to partners                    (3,937)          (637)
   Payments of principal on notes payable            (3,492)           (21)
                                                    -------       --------
        Net cash used in financing activities        (7,429)          (658)
                                                    -------       --------

Net increase in cash and cash equivalents               477            612
Cash and cash equivalents, beginning of period        5,746          4,615
                                                    -------       --------
Cash and cash equivalents, end of period            $ 6,223       $  5,227
                                                    =======       ========
Cash paid during the period for interest            $   230       $    173
                                                    =======       ========


                             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 six months  ended  September  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  September  30, 1998 and March 31, 1998 and revenues and
expenses for each of the three-and  six- month periods ended  September 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 six-month
periods   ended   September   30,  1998  and  1997  is   $47,000,   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  six-month
periods ended  September  30, 1998 and 1997 is $4,000 and $9,000,  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 September  30,  1998,  the  Partnership  had an  investments  in one
unconsolidated  joint venture partnership (two at September 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 and six months ended June 30, 1998
and for DeVargas Center Joint Venture and Richmond  Paragon  Partnership for the
three and six months ended June 30, 1997, are as follows:
<PAGE>

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

                                    Three Months Ended     Six Months Ended
                                         June 30,              June 30,
                                    ------------------     -----------------
                                      1998      1997       1998      1997
                                      ----      ----       ----      ----
Revenues:
   Rental revenues and expense
      recoveries                   $   643    $ 1,130     $1,275    $2,339
   Interest and other income             1         11          1        26
                                   -------    -------     ------    ------
                                       644      1,141      1,276     2,365
Expenses:
   Property operating expenses         231        424        447       878
   Real estate taxes                    10         35         19        72
   Interest expense                    104        282        206       560
   Depreciation and amortization       202        439        404       877
                                   -------    -------     ------    ------
                                       547      1,180      1,076     2,387
                                   -------    -------     ------    ------
Net income (loss)                  $    97    $   (39)    $  200    $  (22)
                                   =======    =======     ======    ======

Net income (loss):
   Partnership's share of 
     combined income (loss)        $    78    $   (57)    $  132    $  (43)
   Co-venturers' share of 
     combined income (loss)             19         18         68        21
                                   -------    -------     ------    ------
                                   $    97    $   (39)    $  200    $  (22)
                                   =======    =======     ======    ======

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

                                  Three Months Ended     Six  Months Ended
                                     September 30,         September 30,
                                  ------------------     ------------------
                                   1998        1997       1998      1997
                                   ----        ----       ----      ----
      Partnership's share of
         operations, as shown 
         above                    $    78   $   (57)     $  132    $   (43)
      Amortization of excess 
         basis                         (3)       (5)         (7)       (10)
                                  -------   --------     ------    -------
      Partnership's share of
         unconsolidated ventures' 
         income (losses)          $    75   $   (62)     $  125    $   (53)
                                  =======   =======      ======    =======
<PAGE>

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

      As of  September  30,  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 property
known as 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 six months ended June 30, 1998 (in thousands) includes the expenses of
the Colony Plaza  Shopping  Center through June 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 six months ended June 30,
1997 include expenses for the two consolidated joint ventures.

                                  Three Months Ended     Six Months Ended
                                       June 30,               June 30,
                                  ------------------     ----------------
                                    1998      1997         1998      1997
                                    ----      ----         ----      ----

      Common area maintenance     $    49   $   23       $   74     $   53
      Utilities                        30       22           51         43
      Management fees                  26       23           48         45
      Administrative and other        120       55          162         90
                                  -------   ------       ------     ------
                                  $   225   $  123       $  335     $  231
                                  =======   ======       ======     ======
<PAGE>

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

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

                                                September 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).                           $ 10,685          $ 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
     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
                                                  --------         -------
                                                  $ 10,685         $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  represents 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 September 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,  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 quarter ended September 30, 1998, one tenant  representing 3,000 square feet
renewed its lease. Currently, the property's leasing team is in discussions with
a prospective tenant interested in leasing  approximately 6,000 square feet, and
negotiations are continuing with the U.S. Postal Service for 26,000 square feet.
Over the next year, five leases  representing a total of 44,800 square feet will
expire.  The largest of the five,  Goody's,  has a May 1999 lease expiration and
represents 35,200 square feet of this total.  During the quarter ended September
30, 1998,  management  became aware that Goody's has committed to move its store
to a new  location  in the  Augusta  market.  The  property's  leasing  team  is
discussing  lease renewals with the other four tenants and has begun to look for
replacement tenants for the Goody's space.

      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 September 30, 1998,  unchanged from
the end of the prior  quarter.  Four  tenants  occupying a total of 8,248 square
feet renewed  their  leases  during the quarter  ended  September  30, 1998.  In
addition,  two tenants  occupying  4,132 square feet moved from the Mall and the
space was leased to two new tenants.  Subsequent  to the quarter end, one tenant
representing 477 square feet renewed its lease and one tenant signed a new lease
for 1,395 square feet. 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. The Office Depot space is currently under  construction  and is
expected to be ready for occupancy by the end of the calendar  year.  During the
next 12 months, eight leases representing a total of approximately 21,000 square
feet,  or  approximately  8.5% 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 September 30, 1998, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $6,223,000. 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  within the next
one to two years.  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 September 30, 1998
-------------------------------------

      As  noted  above,  the  consolidated  Willow  Grove  operating  investment
property  was sold on 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 property.  The
Partnership  reported  net  income  of  $3,110,000  for the three  months  ended
September 30, 1998, as compared to a net loss of $227,000 for the same period in
the prior year.  This favorable  change of $3,337,000 in the  Partnership's  net
operating results is primarily due to the gain from the sale of the Willow Grove
Apartments. The gain recognized on the sale of Willow Grove was partially offset
by an increase in the  Partnership's  operating loss of $269,000 and a favorable
change in the Partnership's share of unconsolidated  ventures' operating results
of $137,000. 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 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.  In  addition,  the  inclusion  of the net loss  from the
consolidated  Willow Grove joint venture  through  August 13, 1998 increased the
Partnership's operating loss for the current three-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 $151,000  during the
prior three-month  period.  The  Partnership's  share of the net income from the
DeVargas joint venture declined by $35,000 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.

Six Months Ended September 30, 1998
-----------------------------------

      As  noted  above,  the  consolidated  Willow  Grove  operating  investment
property  was sold on 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 property.  The
Partnership reported net income of $3,014,000 for the six months ended September
30, 1998, as compared to a net loss of $278,000 for the same period in the prior
year.  This favorable  change of $3,292,000 in the  Partnership's  net operating
results  is  primarily  due to the  gain  from  the  sale  of the  Willow  Grove
Apartments. The gain recognized on the sale of Willow Grove was partially offset
by an increase in the  Partnership's  operating loss of $355,000 and a favorable
change in the Partnership's share of unconsolidated  ventures' operating results
of $178,000. 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 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.  In  addition,  the  inclusion  of the net loss  from the
consolidated  Willow Grove joint venture  through  August 13, 1998 increased the
Partnership's operating loss for the current six-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 $213,000  during the
prior  six-month  period.  The  Partnership's  share of the net income  from the
DeVargas  joint venture  declined by $38,000 for the current  six-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:

     A Current  Report on Form 8-K dated  August 13,  1998 was filed  during the
current quarter to report the sale of the Willow Grove  Apartments and is hereby
incorporated herein by reference.




<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:  November 6, 1998