<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                                   FORM 10-K
 
(Mark One)
 
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934
 
For the fiscal year ended September 30, 1998
 
                                       OR
 
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
 
For the transition period from _______________________ to ______________________
 
Commission file number 0-14397
 
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-3
--------------------------------------------------------------------------------
             (Exact name of Registrant as specified in its charter)
 
Texas                                           75-1991528
--------------------------------------------------------------------------------
(State or other jurisdiction of incorporation
or organization)                           (I.R.S. Employer Identification No.)
 
One Seaport Plaza, New York, N.Y.               10292-0128
--------------------------------------------------------------------------------
(Address of principal executive offices)        (Zip Code)
 
Registrant's telephone number, including area code (212) 214-1016
 
Securities registered pursuant to Section 12(b) of the Act:
 
      Title of Each Class          Name of Each Exchange on which Registered
 
            None                                      None
--------------------------------------------------------------------------------
 
Securities registered pursuant to Section 12(g) of the Act:
 
                     Units of Limited Partnership Interest
--------------------------------------------------------------------------------
                                (Title of class)
 
   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 CK  No _
 
   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [CK]
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
   Registrant's Annual Report to Limited Partners for the fiscal year ended
September 30, 1998 is incorporated by reference into Parts II and IV of this
Annual Report on Form 10-K
 
                                       Index to exhibits can be found on page 7.

<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-3
                            (a limited partnership)
                               TABLE OF CONTENTS
 
<TABLE>
<S>         <C>                                                                               <C>
PART I                                                                                           PAGE
Item 1      Business........................................................................        3
Item 2      Properties......................................................................        3
Item 3      Legal Proceedings...............................................................        3
Item 4      Submission of Matters to a Vote of Limited Partners.............................        4
PART II
Item 5      Market for the Registrant's Units and Related Limited Partner Matters...........        4
Item 6      Selected Financial Data.........................................................        4
Item 7      Management's Discussion and Analysis of Financial Condition and Results of
              Operations....................................................................        4
Item 8      Financial Statements and Supplementary Data.....................................        4
Item 9      Changes in and Disagreements with Accountants on Accounting and Financial
              Disclosure....................................................................        4
PART III
Item 10     Directors and Executive Officers of the Registrant..............................        5
Item 11     Executive Compensation..........................................................        6
Item 12     Security Ownership of Certain Beneficial Owners and Management..................        6
Item 13     Certain Relationships and Related Transactions..................................        6
PART IV
Item 14     Exhibits, Financial Statement Schedules and Reports on Form 8-K
            Financial Statements and Financial Statement Schedules..........................        7
            Exhibits........................................................................        7
            Reports on Form 8-K.............................................................        7
Signatures..................................................................................       12
</TABLE>
 
                                       2

<PAGE>
                                     PART I
 
Item 1. Business
 
General
 
   Prudential-Bache/Watson & Taylor, Ltd.-3 (the 'Registrant'), a Texas limited
partnership, was formed on November 13, 1984 and will terminate in accordance
with a vote of the limited partners as described below. The Registrant was
formed for the purpose of acquiring, owning, developing and operating
self-storage and office/showroom warehouse complexes; investing in unimproved
commercial properties; and investing in first lien mortgage loans on existing or
to-be-constructed commercial income-producing properties with proceeds raised
through the initial sale of units of limited partnership interest ('Units'). The
Registrant's fiscal year for book and tax purposes ends on September 30.
 
   On December 15, 1995, the Management Committee of the Registrant determined
to seek bids for all of the properties held by the Registrant. On June 13, 1996,
the Registrant entered into a contract with Public Storage, Inc., the property
manager of the Registrant's properties, for the sale of substantially all the
Registrant's properties. This sale was subject to the approval by the limited
partners holding a majority of the limited partnership units and certain other
conditions and potential price adjustments.
 
   In accordance with a consent statement dated September 17, 1996 (the 'Consent
Statement'), the limited partners approved, on October 18, 1996, the sale to
Public Storage, Inc. of all seven miniwarehouse facilities owned by the
Registrant. The properties were sold to Public Storage, Inc. and its affiliates
on October 31, 1996. The Registrant received, in cash, gross sales proceeds of
$11,050,000 reduced by certain selling expenses and pro-rations of approximately
$373,000. The sales proceeds were also reduced by the payment to third parties
of $644,000 representing the principal and accrued interest on the Registrant's
note payable secured by three of the properties sold to Public Storage, Inc. The
gross sales price was in excess of the appraised value of the properties. The
Registrant continues to own an undeveloped land parcel (I-35/I-20) located in
Dallas, Texas.
 
   A distribution of $180 per limited partnership unit was made on November 14,
1996 representing the net sales proceeds reduced by a contingency reserve and
funds required to meet anticipated current and future operating costs until the
liquidation of the Registrant. The Registrant intends to liquidate as soon as
possible, subject to the sale of the remaining undeveloped land parcel, and will
distribute any remaining funds at such time.
 
General partners
 
   The general partners of the Registrant are Prudential-Bache Properties, Inc.
('PBP'), George S. Watson and A. Starke Taylor, III (collectively, the 'General
Partners'). PBP is the Managing General Partner and is responsible for the
day-to-day operations of the Registrant and its investments. See Note E of the
financial statements in the Registrant's Annual Report which is filed as an
exhibit hereto.
 
Employees
 
   The Registrant has no employees. Management and administrative services for
the Registrant are performed by the General Partners and their affiliates
pursuant to the Partnership Agreement. See Note E of the financial statements in
the Registrant's Annual Report which is filed as an exhibit hereto.
 
Item 2. Properties
 
   As of September 30, 1998 the Registrant has sold all of its properties except
for one undeveloped land parcel (I-35/I-20) consisting of 18.6873 acres located
in Dallas, Texas.
 
Item 3. Legal Proceedings
 
   None
 
                                       3

<PAGE>
Item 4. Submission of Matters to a Vote of Limited Partners
 
   None
 
                                    PART II
 
Item 5. Market for the Registrant's Units and Related Limited Partner Matters
 
   As of December 1, 1998, there were 3,211 holders of record owning 53,855
Units, inclusive of 270, 135, and 135 equivalent limited partnership units held
by PBP and Messrs. Watson and Taylor, respectively. A significant secondary
market for the Units has not developed, and, in light of the pending liquidation
of the Partnership, it is not expected that one will develop in the future.
Consequently, holders of Units may not be able to liquidate their investments in
the event of an emergency or for any other reason.
 
   No distributions have been paid to limited partners for the fiscal years
ended September 30, 1998 and 1997. The Registrant intends to liquidate as soon
as possible, subject to the sale of the remaining undeveloped land parcel, and
will distribute any remaining funds at such time.
 
Item 6. Selected Financial Data
 
   The following table presents selected financial data of the Registrant. This
data should be read in conjunction with the financial statements of the
Registrant and the notes thereto on pages 2 through 9 of the Registrant's
Annual Report which is filed as an exhibit hereto.
 
<TABLE>
<CAPTION>
                                                      Year ended September 30,
                                ---------------------------------------------------------------------
                                   1998          1997          1996           1995           1994
<S>                             <C>           <C>           <C>            <C>            <C>
                                ----------    ----------    -----------    -----------    -----------
Total revenues                  $   *         $   *         $ 2,052,890    $ 1,987,378    $ 1,919,960
                                ----------    ----------    -----------    -----------    -----------
                                ----------    ----------    -----------    -----------    -----------
Net income (loss)               $   *         $   *         $   338,634    $(1,733,919)   $   237,617
                                ----------    ----------    -----------    -----------    -----------
                                ----------    ----------    -----------    -----------    -----------
Net income (loss) per
  limited partnership unit      $   *         $   *         $      5.64    $    (33.07)   $      3.40
                                ----------    ----------    -----------    -----------    -----------
                                ----------    ----------    -----------    -----------    -----------
Total assets                    $1,230,464    $1,364,835    $11,921,654    $12,742,033    $14,903,764
                                ----------    ----------    -----------    -----------    -----------
                                ----------    ----------    -----------    -----------    -----------
Note payable                    $       --    $       --    $   638,000    $   638,000    $   638,000
                                ----------    ----------    -----------    -----------    -----------
                                ----------    ----------    -----------    -----------    -----------
Total distributions             $       --    $9,645,300    $ 1,291,124    $   364,033    $   654,082
                                ----------    ----------    -----------    -----------    -----------
                                ----------    ----------    -----------    -----------    -----------
Limited partner
  distributions per Unit        $       --    $   180.00    $     23.66    $      6.25    $     11.23
                                ----------    ----------    -----------    -----------    -----------
                                ----------    ----------    -----------    -----------    -----------
* As of October 1, 1996, the Partnership adopted the liquidation basis of accounting in accordance
  with generally accepted accounting principles and, therefore, there is no reporting of results of
  operations for the years ended September 30, 1998 and 1997.
-----------------------------------------------------------------------------------------------------
</TABLE>
 
Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations
 
   This information is incorporated by reference to page 10 of the Registrant's
Annual Report which is filed as an exhibit hereto.
 
Item 8. Financial Statements and Supplementary Data
 
   The financial statements are incorporated by reference to pages 2 through 9
of the Registrant's Annual Report which is filed as an exhibit hereto.
 
Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure
 
   None
 
                                       4

<PAGE>
                                    PART III
 
Item 10. Directors and Executive Officers of the Registrant
 
   There are no directors or executive officers of the Registrant. The
Registrant is managed by the Managing General Partner.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
   The Registrant, the Registrant's General Partners, PBP's directors and
executive officers and any persons holding more than ten percent of the
Registrant's Units are required to report their initial ownership of such Units
and any subsequent changes in that ownership to the Securities and Exchange
Commission on Forms 3, 4 and 5. Such General Partners, executive officers,
directors and other persons who own greater than ten percent of the Registrant's
Units are required by Securities and Exchange Commission regulations to furnish
the Registrant with copies of all Forms 3, 4 or 5 they file. All of these filing
requirements were satisfied on a timely basis. In making these disclosures, the
Registrant has relied solely on written representations of the General Partners,
PBP's directors and executive officers and other persons who own greater than
ten percent of the Registrant's Units or copies of the reports they have filed
with the Securities and Exchange Commission during and with respect to its most
recent fiscal year.
 
Prudential-Bache Properties, Inc., Managing General Partner
 
   The directors and officers of PBP and their positions with regard to managing
the Registrant are as follows:
 
<TABLE>
<CAPTION>
            Name                                      Position
<S>                             <C>
Brian J. Martin                 President, Chief Executive Officer,
                                  Chairman of the Board of Directors and Director
Barbara J. Brooks               Vice President--Finance and Chief Financial Officer
Stephen A. Tolbert              Vice President and Chief Accounting Officer
Frank W. Giordano               Director
Nathalie P. Maio                Director
</TABLE>
 
   BRIAN J. MARTIN, age 48, is the President, Chief Executive Officer, Chairman
of the Board of Directors, and a Director of PBP. He is a Senior Vice President
of Prudential Securities Incorporated ('PSI'), an affiliate of PBP. Mr. Martin
also serves in various capacities for certain other affiliated companies. Mr.
Martin joined PSI in 1980. Mr. Martin is a member of the Pennsylvania Bar.
 
   BARBARA J. BROOKS, age 50, is the Vice President--Finance and Chief Financial
Officer of PBP. She is a Senior Vice President of PSI. Ms. Brooks also serves in
various capacities for other affiliated companies. She has held several
positions within PSI since 1983. Ms. Brooks is a certified public accountant.
 
   STEPHEN A. TOLBERT, age 36, is a Vice President of PBP. He is a First Vice
President of PSI. Mr. Tolbert also serves in various capacities for other
affiliated companies. He has held several positions within PSI since 1988.
 
   FRANK W. GIORDANO, age 56, is a Director of PBP. He is a Senior Vice
President and Senior Counsel of PSI. Mr. Giordano also serves in various
capacities for other affiliated companies. He has been with PSI since July 1967.
 
   NATHALIE P. MAIO, age 48, is a Director of PBP. She is a Senior Vice
President and Deputy General Counsel of PSI and supervises non-litigation legal
work for PSI. She joined PSI's Law Department in 1983; presently she also serves
in various capacities for other affiliated companies.
 
   Effective November 10, 1998, Stephen A. Tolbert replaced Eugene D. Burak as
Chief Accounting Officer for the Registrant.
 
   There are no family relationships among any of the foregoing directors or
officers. All of the foregoing officers and/or directors have indefinite terms.
 
                                       5

<PAGE>
Individual General Partners
 
   GEORGE S. WATSON, age 58, is a financial specialist and a certified public
accountant. He has been instrumental in the success of The Community Minority
Business Advancement Program sponsored by the University of Texas at Austin
College and Graduate Schools of Business. Mr. Watson is a member of the Advisory
Council of the University of Texas at Austin Business School and a member of its
Chancellor's Council. Mr. Watson attended the University of Texas at Austin,
graduating summa cum laude in 1963 with a BBA in accounting and finance. He
received his MBA in accounting and finance from the University of Texas in 1965,
graduating first in his class and summa cum laude. He also has received various
awards and scholarships and is a member of many fraternal organizations
including Phi Kappa Phi, the honorary scholastic society. Mr. Watson has over 25
years of experience in real estate and financial investments.
 
   A. STARKE TAYLOR, III, age 55, holds a bachelor of business administration
degree from Southern Methodist University, which was awarded in 1966. He is past
president of the North Dallas Chamber of Commerce. Mr. Taylor is a member of the
boards of the Dallas Theological Seminary and the Northeast Texas Regional Board
of Young Life. He is president of Sovereign Corporation, a business investment
and finance organization. Mr. Taylor has over 25 years of experience in real
estate, insurance and financial investments.
 
   The two individual General Partners are not related.
 
Item 11. Executive Compensation
 
   The Registrant does not pay or accrue any fees, salaries or any other form of
compensation to either individual General Partner or to directors and officers
of the Managing General Partner for their services. Certain officers and
directors of the Managing General Partner receive compensation from affiliates
of the Managing General Partner, not from the Registrant, for services performed
for various affiliated entities, which may include services performed for the
Registrant; however, the Managing General Partner believes that any compensation
attributable to services performed for the Registrant is immaterial. See also
Item 13 Certain Relationships and Related Transactions for information regarding
reimbursement to the General Partners for services provided to the Registrant.
 
Item 12. Security Ownership of Certain Beneficial Owners and Management
 
   As of December 1, 1998, no individual General Partner or director or officer
of the Managing General Partner owns directly or beneficially any interest in
the voting securities of the Managing General Partner.
 
   As of December 1, 1998, no individual General Partner or director or officer
of the Managing General Partner owns directly or beneficially any of the Units
issued by the Registrant. However, the General Partners have contributed to the
Registrant and, based on such contribution, they received 'equivalent units'
entitling them to participate in the distributions to the limited partners and
in the Registrant's profits and losses in the same proportion that their capital
contributions as holders of 'equivalent units' bear to the total capital
contributions of the limited partners. The Managing General Partner has retained
its right to receive funds from the Registrant, such as General Partner
distributions and reimbursement of expenses, but has waived its right to share
in any limited partner cash distributions and allocations of Registrant's
profits and losses based upon such equivalent units.
 
   As of December 1, 1998, no limited partner beneficially owns more than five
percent (5%) of the outstanding Units issued by the Registrant.
 
Item 13. Certain Relationships and Related Transactions
 
   The Registrant has and will continue to have certain relationships with the
General Partners and their affiliates. However, there have been no direct
financial transactions between the Registrant and the individual General
Partners or the directors or officers of the Managing General Partner.
 
   Reference is made to Notes A and E of the financial statements in the
Registrant's Annual Report which is filed as an exhibit hereto, which identify
the related parties and discuss the services provided by these parties and the
amounts paid or payable for their services.
 
                                       6

<PAGE>
                                    PART IV
 
<TABLE>
<CAPTION>
                                                                                             Page in
                                                                                          Annual Report
<S>   <C>  <C>                                                                            <C>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)     1. Financial Statements and Independent Auditors' Report--Incorporated by
           reference to Registrant's Annual Report which is filed as an exhibit hereto
           Report of Independent Auditors                                                       2
           Financial Statements:
           Statements of Net Assets--September 30, 1998 and 1997                                3
           Statements of Changes in Net Assets--Two years ended September 30, 1998              3
           Statement of Operations--Year ended September 30, 1996                               4
           Statement of Changes in Partners' Capital--Year ended September 30, 1996             4

           Statement of Cash Flows--Year ended September 30, 1996                               5
           Notes to Financial Statements                                                        6
        2. Financial Statement Schedules and Independent Auditors' Report on Schedules
           Consent of Independent Auditors
           Schedules:
           II-- Valuation and Qualifying Accounts and Reserves--Three years ended
               September 30, 1998
           III--Real Estate and Accumulated Depreciation at September 30, 1998
           Notes to Schedule III--Real Estate and Accumulated Depreciation
           All other schedules have been omitted because they are not applicable or the
           required information is included in the financial statements or the notes
           thereto.
        3. Exhibits
           Description:
           3.01 Amended and Restated Certificate and Agreement of Limited Partnership
                (1)
           3.02 Amendment to the Amended and Restated Certificate and Agreement of
                Limited Partnership (2)
           4.01 Certificate of Limited Partnership Interest (1)
           10.01 Contract of Sale dated June 13, 1996 by and between the Registrant and
                 Public Storage, Inc. (3)
           13.01 Annual Report to Limited Partners for the year ended September 30,
           1998 (filed herewith). (With the exception of the information and data
                 incorporated by reference in Items 7 and 8 of this Annual Report on
                 Form 10-K, no other information or data appearing in the 1998 Annual
                 Report to Limited Partners is to be deemed filed as part of this
                 report.)
           27    Financial Data Schedule (filed herewith)
(b)        Reports on Form 8-K--None
</TABLE>
------------------
 
(1)  Filed as an exhibit to Registration Statement on Form S-11 (No. 2-94976)
     and incorporated herein by reference.
(2)  Filed as an exhibit to Registrant's Form 10-K for the year ended September
     30, 1989 and incorporated herein by reference.
 
(3)  Filed as an exhibit to the Registrant's Proxy Statement on Schedule 14A on
     September 17, 1996 and incorporated herein by reference.
 
                                       7

<PAGE>
                        CONSENT OF INDEPENDENT AUDITORS
 
To the Partners
Prudential-Bache/Watson & Taylor, Ltd.-3
 
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Prudential-Bache/Watson & Taylor, Ltd.-3 of our report dated November 3,
1998, included in the 1998 Annual Report to Limited Partners of
Prudential-Bache/Watson & Taylor, Ltd.-3.
 
Our audits also included the financial statement schedules of
Prudential-Bache/Watson & Taylor, Ltd.-3 listed in Item 14(a). These schedules
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion based on our audits. In our opinion, the financial statement
schedules referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
 
------------------------------------------------------------
/s/ Ernst & Young LLP
 
New York, New York
December 22, 1998
 
                                       8

<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-3
                            (a limited partnership)
          SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
-----------------------------------------------------------------------------------------------------
Allowance for Loss on Impairment of Assets
 
<CAPTION>
                                                                  Deductions-Amounts
  Year Ended          Balance at          Additions-Amounts       Written-off During      Balance at
 September 30      Beginning of Year     Reserved During Year            Year            End of Year
---------------    -----------------     --------------------     ------------------     ------------
<S>                <C>                   <C>                      <C>                    <C>
     1996             $ 4,745,000                     --             $  (343,503)         $4,401,497
     1997             $ 4,401,497                     --             $(2,066,826)(1)      $2,334,671(2)
     1998             $ 2,334,671                     --             $         --         $2,334,671
</TABLE>
--------------------------------------------------------------------------------
 
(1) Applicable to properties which were sold during the year.
 
(2) Shown as a direct reduction of carrying value of property held for sale.
 
                                       9

<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-3
                            (a limited partnership)
             SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
                               September 30, 1998
<TABLE>
<CAPTION>
                                                                                      Amount at which carried at
                                                                                            close of period
                               Initial cost to                              -----------------------------------------------
                                  Registrant               Capitalized                                          Permanent
                        ------------------------------        costs                                           write-down of
                                         Buildings        subsequent to                      Buildings          impaired
     Description           Land       and Improvements     acquisition         Land       and Improvements       assets
---------------------   ----------    ----------------    --------------    ----------    ----------------    -------------
<S>                     <C>           <C>                 <C>               <C>           <C>                 <C>
UNIMPROVED
PROPERTIES:
I-35/I-20
Dallas, Texas           $2,583,194       $ --                $ 26,477       $2,609,671      $   --             $ 2,334,671
                        ----------    ----------------    --------------    ----------    ----------------    -------------
                        ----------    ----------------    --------------    ----------    ----------------    -------------
---------------------------------------------------------------------------------------------------------------------------
 
<CAPTION>
 
                          Total         Date
     Description        (NOTE A)      acquired
---------------------  -----------    --------
<S>                     <C>           <C>
UNIMPROVED
PROPERTIES:
I-35/I-20
Dallas, Texas          $   275,000      1985
                       -----------
                       -----------
-------------------------------------------------------
                                                 See notes on following page
</TABLE>
 
                                    10

<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-3
                            (a limited partnership)
                             NOTES TO SCHEDULE III
                               September 30, 1998
 
<TABLE>
<CAPTION>
NOTE A--RECONCILIATION SUMMARY OF TRANSACTIONS--REAL ESTATE
 
                                                                    Year ended September 30,
                                                             ---------------------------------------
                                                               1998          1997           1996
                                                             --------    ------------    -----------
<S>                                                          <C>         <C>             <C>
Balance at beginning of period............................   $275,000    $ 10,772,457    $21,169,442
Allocation of accumulated depreciation against the
  carrying amount of the properties based upon the
  reclassification of the properties as held for sale.....         --              --     (4,839,919)
Allocation of allowance for loss on impairment of assets
  against the carrying amount of the properties based upon
  the reclassification of the properties as held for
  sale....................................................         --              --     (4,401,497)
Deletions during the period...............................         --     (10,497,457)    (1,343,503)
Additions during the period...............................         --              --        187,934
                                                             --------    ------------    -----------
Balance at close of period................................   $275,000    $    275,000    $10,772,457
                                                             --------    ------------    -----------
                                                             --------    ------------    -----------
</TABLE>
 
   The deletions for the year ended September 30, 1997 was the result of the
sale on October 31, 1996 to Public Storage, Inc. of all seven miniwarehouse
facilities owned by the Partnership. See Note C to the financial statements in
the Registrant's Annual Report which is filed as an exhibit hereto. The
deletions for the year ended September 30, 1996 resulted from the sale of
certain undeveloped land located in Southlake, Texas.
 
   The Registrant continues to own an undeveloped land parcel (I-35/I-20)
located in Dallas, Texas.
 
   The aggregate cost of land for Federal income tax purposes as of September
30, 1998 was $2,989,050.
 
<TABLE>
<CAPTION>
NOTE B--RECONCILIATION SUMMARY OF TRANSACTIONS--ACCUMULATED DEPRECIATION
 
                                                                    Year ended September 30,
                                                             ---------------------------------------
                                                               1998          1997           1996
                                                             --------    ------------    -----------
<S>                                                          <C>         <C>             <C>
Balance at beginning of period............................   $     --    $         --    $ 4,703,648
Depreciation during the period charged to
  expense.................................................         --              --        136,271
Allocation of accumulated depreciation against the
  carrying amount of the properties based upon the
  reclassification of the properties as held for sale.....         --              --     (4,839,919)
                                                             --------    ------------    -----------
Balance at close of period................................   $     --    $         --    $        --
                                                             --------    ------------    -----------
                                                             --------    ------------    -----------
</TABLE>
 
   Effective December 31, 1995, the Registrant reclassified its properties from
held for use to held for sale and ceased depreciating the properties for
financial statement purposes.
 
                                       11

<PAGE>
                                   SIGNATURES
 
   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
 
Prudential-Bache/Watson & Taylor, Ltd.-3
 
By: Prudential-Bache Properties, Inc.,
    A Delaware corporation,
    Managing General Partner
 
    By: /s/ Stephen A. Tolbert                          Date: December 22, 1998
    --------------------------------------------------
    Stephen A. Tolbert
    Vice President
    Chief Accounting Officer for the Registrant
 
   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities (with respect to the General Partner) and on
the dates indicated.
 
By: Prudential-Bache Properties, Inc.,
    A Delaware corporation,
    Managing General Partner
 
    By: /s/ Brian J. Martin                             Date: December 22, 1998
    --------------------------------------------------
    Brian J. Martin
    President, Chief Executive Officer,
    Chairman of the Board of Directors and Director
    By: /s/ Barbara J. Brooks                           Date: December 22, 1998
    --------------------------------------------------
    Barbara J. Brooks
    Vice President-Finance and
    Chief Financial Officer
    By: /s/ Stephen A. Tolbert                          Date: December 22, 1998
    --------------------------------------------------
    Stephen A. Tolbert
    Vice President
    By: /s/ Frank W. Giordano                           Date: December 22, 1998
    --------------------------------------------------
    Frank W. Giordano
    Director
    By: /s/ Nathalie P. Maio                            Date: December 22, 1998
    --------------------------------------------------
    Nathalie P. Maio
    Director
 
                                       12