UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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

                                    FORM 10-Q

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

               FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1995

                                       OR

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

            For the transition period from           to          .


                            Commission File Number    :  0-17881


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


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



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


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


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



<PAGE>

            PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

                           CONSOLIDATED BALANCE SHEETS
                December 31, 1995 and March 31, 1995 (Unaudited)
                                 (In thousands)

                                     ASSETS
                                                      December 31     March 31

Operating investment properties, at cost:
   Land                                               $  4,195       $  3,720
   Buildings and improvements                           14,180          9,446
                                                      --------       --------
                                                        18,375         13,166
   Less accumulated depreciation                        (3,278)        (1,811)
                                                      --------       --------
                                                        15,097         11,355

Investments in unconsolidated joint 
  ventures, at equity                                  15,544          24,930
Cash and cash equivalents                                3,143          3,824
Accounts receivables, net                                   73             64
Accounts receivable - affiliates                             7              7
Prepaid expenses                                            23              7
Deferred expenses, net                                     281            146
                                                      --------       --------
                                                      $ 34,168       $ 40,333
                                                       =======        =======

                        LIABILITIES AND PARTNERS' CAPITAL

Notes payable and accrued interest                     $11,068        $16,707
Accounts payable and accrued expenses                      116             38
Tenant security deposits                                    13              9
Advances from consolidated ventures                        279            158
Total partners' capital                                 22,692         23,421
                                                      --------       --------
                                                       $34,168        $40,333
                                                       =======        =======


















                             See accompanying notes.




<PAGE>


            PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

      CONSOLIDATED  STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
 For the nine months ended December 31, 1995 and 1994 (Unaudited)
                                 (In thousands)


                                                     General        Limited
                                                     Partner        Partners

Balance at March 31, 1994                           $(181)         $26,213
Cash distributions                                    (15)          (1,514)
Net loss                                               (6)            (558)
                                                    ------         -------
Balance at December 31, 1994                        $(202)         $24,141
                                                    =====          =======

Balance at March 31, 1995                           $(208)         $23,629
Cash distributions                                     (7)            (757)
Net income                                              -               35
                                                    -----          -------
Balance at December 31, 1995                        $(215)         $22,907
                                                    =====          =======
































                             See accompanying notes.


<PAGE>


            PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

                    CONSOLIDATED STATEMENTS OF OPERATIONS
 For the three and nine months ended December 31, 1995 and 1994 (Unaudited)
                      (In thousands, except per Unit data)

                                      Three Months Ended      Nine Months Ended
                                        December 31,            December 31,
                                    1995        1994       1995         1994
                                    ----        ----       ----         ----

Revenues:
   Rental income and expense
     reimbursements               $ 549      $ 330       $1,636        $  988
   Interest income                   58         28          189            64
                                  -----      -----       ------        ------
                                    607        358        1,825         1,052

Expenses:
   Interest expense                 365        475        1,376         1,394
   Property operating expenses      113         41          340            97
   Real estate taxes                 41         18          117            52
   General and administrative        88        110          255           268
   Depreciation and amortization     104       107          386           326
                                 -------    -------      ------        ------
                                    711        751        2,474         2,137
                                 -------    -------      -------       -------
Operating loss                     (104)      (393)        (649)       (1,085)

Partnership's share of 
 unconsolidated
 ventures' income (losses)          (10)       183          684           521
                                 -------     ------    ---------       -------

Net income (loss)                 $(114)    $ (210)   $      35        $ (564)
                                  =====     ======    =========        ======

Net income (loss) per
   Limited Partnership Unit      $(2.23)    $(4.12)      $ 0.69       $(11.06)
                                  ======     ======       ======       =======

Cash distributions per
   Limited Partnership Unit      $ 7.50    $  5.00       $15.00       $ 30.00
                                 ======    =======       ======       =======

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














                             See accompanying notes.


<PAGE>


            PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

                    CONSOLIDATED  STATEMENTS  OF CASH FLOWS
 For the nine  months  ended December 31, 1995 and 1994 (Unaudited)
               Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)


                                                        1995            1994
                                                        ----            ----
Cash flows from operating activities:
   Net income (loss)                                 $    35         $   (564)
   Adjustments to reconcile net income (loss)
     to net cash provided by operating activities:
    Interest expense on zero coupon loans              1,159            1,394
Partnership's share of unconsolidated
      ventures' income                                  (684)            (521)
    Depreciation and amortization                        386              326
    Amortization of deferred financing costs              23                -
    Changes in assets and liabilities:
      Accounts receivable                                 (9)              10
      Prepaid expenses                                   (16)              (4)
      Deferred expenses                                    -               (6)
      Accounts payable and accrued expenses               78              100
      Tenant security deposits                             4                4
      Advances from consolidated ventures                121             (177)
                                                     -------           ------
        Total adjustments                              1,062            1,126
                                                     -------           ------
        Net cash provided by operating activities      1,097              562

Cash flows from investing activities:
   Distributions from unconsolidated joint ventures    9,818            1,817
   Additional investments in unconsolidated
     joint ventures                                     (279)            (151)
   Additions to operating investment properties          (20)             (4)
                                                     -------           -----
        Net cash provided by investing activities      9,519            1,662

Cash flows from financing activities:
   Cash distributions to partners                       (764)          (1,529)
   Payments of principal and interest on
      notes payable                                  (10,398)               -
   Payment of deferred financing costs                  (135)             (75)
        Net cash used for financing activities       (11,297)          (1,604)
                                                    --------         --------

Net increase (decrease) in cash and cash equivalents    (681)             620

Cash and cash equivalents, beginning of period         3,824            1,501
                                                    --------         --------

Cash and cash equivalents, end of period            $  3,143         $  2,121
                                                    ========         ========

Cash paid during the period for interest            $    179         $      -
                                                    ========         ========






                             See accompanying notes.


<PAGE>


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

1.  Organization

  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, 1995.

  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.

2. Related Party Transactions

   Included in general and  administrative  expenses for the nine-month  periods
   ended  December  31,  1995 and 1994 is  $21,000  and  $17,000,  respectively,
   representing  reimbursements  to an affiliate of the Managing General Partner
   for  providing  certain  financial,  accounting  and  investor  communication
   services to the Partnership.

   Also  included in general  and  administrative  expenses  for the nine months
   ended  December  31,  1995  and  1994 is  $7,000  and  $3,000,  respectively,
   representing fees earned by Mitchell Hutchins Institutional  Investors,  Inc.
   for managing the Partnership's cash assets.

3.  Investments in Unconsolidated Joint Venture Partnerships

  As of December 31, 1995, the Partnership has investments in two unconsolidated
  joint  venture  partnerships  (three at March 31,  1995)  which own  operating
  properties as more fully  described in the  Partnership's  Annual Report.  The
  unconsolidated  joint  ventures are  accounted  for by using the equity method
  because  the  Partnership  does not have a voting  control  interest  in these
  ventures.  Under the equity  method,  the assets,  liabilities,  revenues  and
  expenses of the joint  ventures do not appear in the  Partnership's  financial
  statements.  Instead,  the  investments  are carried at cost  adjusted for the
  Partnership's share of each venture's earnings, losses and distributions.  The
  Partnership  reports its share of  unconsolidated  joint  venture  earnings or
  losses three months in arrears.

  In January 1995, the Partnership acquired 99% of the co-venturer's interest in
  the Willow Grove joint  venture in return for a cash payment of  approximately
  $233,000.  The remaining 1% interest of the  co-venturer was assigned to Third
  Equity partners,  Inc., the Managing General Partner of the Partnership.  As a
  result of this  transaction,  the  Partnership  has acquired  control over the
  operations  of the joint  venture.  Accordingly,  this joint  venture has been
  presented on a consolidated basis in the Partnership's financial statements as
  of and for the nine months  ended  December  31,  1995 (see Note 4).  Prior to
  April 1, 1995,  the venture had been  accounted for on the equity  method,  as
  discussed above.


<PAGE>


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

                   Condensed  Combined  Summary of Operations  For the three and
       nine months ended September 30, 1995 and 1994
                                 (in thousands)

                                    Three Months Ended      Nine  Months  Ended
                                     September 30,            September 30,
                                    1995       1994          1995       1994
                                    ----       ----          ----       ----

Revenues:
   Rental revenues and
      expense recoveries         $ 1,058    $ 1,309       $ 3,799     $ 3,826
   Interest and other income           1          1             7           4
                                 -------    -------       -------     -------
                                  1,059       1,310         3,806       3,830
Expenses:
   Property operating expenses      466         485         1,276       1,423
   Real estate taxes                 46          70           147         211
   Interest expense                  74          59           219         144
   Depreciation and amortization    454         486         1,379       1,452
                                 ------     --------     --------    --------
                                  1,040       1,100         3,021       3,230
                                 ------     --------     --------    --------
Net income                       $   19     $    210     $    785    $    600
                                 ======     ========     ========    ========

Net income
   Partnership's share of
     combined income (losses)    $   (5)    $   188      $    699    $    536
   Co-venturers' share of
     combined income (losses)        24          22            86          64
                                 ------     --------     --------    --------
                                 $   19     $   210      $    785    $    600
                                 ======     ========     ========    ========

             Reconciliation  of Partnership's  Share of Operations
 For the three and nine months ended September 30, 1995 and 1994(in thousands)

                                       Three Months Ended    Nine Months Ended
                                           September 30,      September 30,
                                          1995     1994        1995      1994

     Partnership's share of operations,
      as shown above                    $  (5)   $ 188       $ 699      $ 536
     Amortization of excess basis          (5)      (5)        (15)       (15)
                                        -----    -----       -----      -----
     Partnership's share of
      unconsolidated ventures' 
      income (losses)                   $ (10)   $ 183       $ 684      $ 521
                                        =====    =====       =====      =====


4.  Operating Investment Properties

    At December 31, 1995, the Partnership  has  investments in two  consolidated
    joint  venture  partnerships  (one at March 31,  1995)  which own  operating
    investment properties.  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 sheet.

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

   On  January  27,  1995,  the  Partnership  purchased  99% of  its  co-venture
   partner's  interest in the Willow  Grove  joint  venture  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  has
   assumed  control  over  the  affairs  of  the  joint  venture.   Due  to  the
   Partnership's  policy of reporting the  operations of the joint ventures on a
   three-month  lag, the assets,  liabilities,  results of  operations  and cash
   flows of the joint  venture  are  presented  on a  consolidated  basis in the
   financial statements of the Partnership beginning in fiscal 1996.

   The following is a combined  summary of property  operating  expenses for the
   consolidated joint ventures for the three and nine months ended September 30,
   1995 and 1994 (in thousands):

                                        Three Months Ended    Nine Months Ended
                                          September 30,        September 30,
                                         1995      1994       1995      1994
                                         ----      ----       ----      ----

      Common area maintenance        $    27     $  10     $    88    $    30
      Utilities                           22         4          59         10
      Management fees                     20        10          62         30
      Administrative and other            44        17         131         27
                                     -------    ------       -----     -------
                                     $   113    $   41       $ 340     $   97
                                     =======    ======       =====     ======

5. Notes payable

    Notes  payable  and  accrued  interest  on the books of the  Partnership  at
December 31, 1995 and March 31, 1995 consist of the following (in thousands):

                                                  December 31     March 31

10.72%  nonrecourse loan payable to an 
insurance  company,  which was secured by
the One Paragon Place operating investment
property.  All interest and principal
was  due  at  maturity,   on  November 23,
1995. Interest  was   compounded
semi-annually. Accrued interest at March 
31, 1995 amounted to $4,774.
See discussion of refinancing below.              $     -        $ 9,774

10.5%  nonrecourse  loan payable to a 
finance  company,  which is secured by the
Colony Plaza operating investment property.
All interest and principal is due at
maturity,  on December 29, 1996. Interest
is compounded  semi-annually.  Accrued
interest at December 31, 1995 and March
31, 1995 amounted to $3,434
and $2,883, respectively.                           7,484          6,933

9.59% nonrecourse  mortgage note payable
to a financial  institution  secured by
the Willow Grove operating investment  
property.  The note, issued to the Willow
Grove joint venture,  requires  monthly  
principal and interest  payments of $32
from April 1995 through
maturity in March 2002.                             3,584              -
                                                ---------       --------
                                                  $11,068        $16,707
                                                  =======        =======

    On  November  16,  1995,  the One  Paragon  Place loan was  refinanced  with
proceeds of a seven-year $8,750,000 loan from a new lender issued in the name of
the unconsolidated  Richmond Paragon  Partnership.  Additional funds required to
complete the refinancing  transaction were  contributed  from the  Partnership's
cash  reserves.  The new note is secured by a first  mortgage on the One Paragon
Place Office Building and is recorded on the books of the  unconsolidated  joint
venture.  The new loan  bears  interest  at 8% per  annum and  requires  monthly
principal and interest  payments of $68,000  through  maturity,  on December 10,
2002. The Partnership has indemnified the Richmond  Paragon  Partnership and the
related  co-venture  partner  against  all  liabilities,   claims  and  expenses
associated with this borrowing.  The net proceeds for this loan were recorded as
a distribution to the Partnership from the unconsolidated joint venture.

6. Contingencies

    The Partnership is involved in certain legal actions.  The Managing  General
Partner  believes these actions will be resolved without material adverse effect
on the Partnership's financial statements, taken as a whole.





<PAGE>



            PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

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


Liquidity and Capital Resources

    As discussed further in the Partnership's Annual Report,  management's focus
during fiscal 1996 was to complete the  refinancing  of the  Partnership's  zero
coupon loans, which were originally incurred to finance the Partnership's public
offering costs. These plans are aimed at preventing the further  accumulation of
accrued  interest by replacing the  outstanding  obligations  with  conventional
financing which would require the payment of interest and principal on a current
basis.  During the fourth quarter of fiscal 1995, the Partnership  closed on the
first of the three required refinancing  transactions  involving the zero coupon
loans.  In  March  1995,  the zero  coupon  loan  secured  by the  Willow  Grove
Apartments,  which had an outstanding balance of $2,473,000,  was repaid in full
from the proceeds of a new  $3,600,000  loan to the Willow Grove joint  venture.
The new mortgage loan is secured by the Willow Grove Apartments,  bears interest
at a rate of 9.59% and  requires  monthly  principal  and  interest  payments of
approximately  $32,000  through  maturity,  in March  2002.  Excess  refinancing
proceeds of  approximately  $1,050,000  were  distributed to the Partnership and
were  added  to the  balance  of cash  reserves.  In order  to  facilitate  this
refinancing  transaction,  in January 1995 the Partnership paid the Willow Grove
co-venturer  $233,000 to buy out its joint  venture  interest.  The Willow Grove
joint venture agreement  restricted the  Partnership's  ability to refinance the
property's  zero  coupon  loan with debt in excess of $2.5  million  without the
co-venture  partner's  consent,  which  it had  been  unwilling  to  grant.  The
Partnership  desired to employ the additional  borrowing  capacity of the Willow
Grove asset in order to secure the funds  necessary  to complete the One Paragon
Place  refinancing  discussed  further  below.  In  addition  to  affording  the
Partnership the flexibility to proceed with its refinancing plans, the buyout of
the  co-venturer's  interest  gives the  Partnership  control over the venture's
operations  and eventual  disposition  decisions  with respect to the  operating
investment  property.  The former  co-venture  partner  has been  retained  in a
property  management  capacity  under a contract  which is  cancellable  for any
reason upon 30 days' written notice from the Partnership.  The average occupancy
of the Willow Grove  Apartments  for the quarter ended December 31, 1995 was 97%
which mirrors the average occupancy levels for competing properties in the area.

    During the current quarter, on November 16, 1995 the Partnership finalized a
new loan  agreement to refinance the zero coupon loan secured by the One Paragon
Place Office Building which had a principal balance of $10.4 million at the time
of closing.  The new loan secured by the One Paragon  Place Office  Building was
issued in the name of the joint venture which owns the property,  has an initial
principal  balance of  $8,750,000,  an interest rate of 8% and requires  monthly
principal and interest  payments of $68,000.  The loan is scheduled to mature on
December  10,  2002.  The   refinancing   transaction   required  a  paydown  of
approximately  $1.6 million on the outstanding  debt balance in order to satisfy
lender loan-to-value ratio requirements. The Partnership had sufficient funds to
make such a  principal  paydown  as a result  of the  Willow  Grove  refinancing
transaction  described above. One Paragon Place was 98% occupied at December 31,
1995. The suburban Richmond, Virginia office market continues to strengthen with
high  occupancy  levels  and  improving  rental  rates  as a  result  of job and
population growth and the absence of significant new construction. Recently, the
level of new  construction  activity  has  increased  somewhat  with a number of
build-to-suit  and  speculative  buildings  in the  process of being  completed.
Nonetheless,  the market is projected to remain strong in the near term, and One
Paragon  Place is expected to compete  favorable  against both  existing and new
properties in its submarket.  During the quarter ended June 30, 1995, one of the
major  tenants of the One Paragon Place Office  Building  negotiated a buyout of
its lease  obligation  with  respect  to over  one-half  of its  prior  space of
approximately  53,000 square feet. Under the terms of the buyout agreement,  the
tenant agreed to pay a current market rental rate on its remaining 22,000 square
feet through the  remainder of its lease term,  which runs through July 1998. In
addition,  the tenant  agreed to  continue  to pay rent  through May 1995 on the
31,000 square feet of vacated space and paid a lump sum of $500,000 to the joint
venture on July 20, 1995, which should be sufficient to cover the expected costs
of re-leasing the space. During the current quarter, management re-leased 12,500
square feet,  representing  the balance of the 31,000 square feet vacated during
the first quarter,  to one national credit tenant.  The 12,500 square foot lease
signed in the current quarter and the two leases signed last quarter to re-lease
the 31,000  square feet,  on a combined  basis,  generate  substantially  higher
effective rents than the prior tenant was required to pay.

      At December  31,  1995,  the zero coupon loan  secured by the Colony Plaza
Shopping Center had an outstanding balance of $7,484,000.  The loan is scheduled
to mature in December of 1996, at which time  approximately  $8,290,000 would be
due. Management has engaged in discussions with various lenders to refinance the
Colony Plaza note payable.  At the same time,  management  had been working with
Wal-Mart on the logistics of a possible  expansion of its store at Colony Plaza.
During fiscal 1995, management learned that the cost of completing  construction
for the expansion was more than Wal-Mart had originally budgeted.  Concerns over
these estimated construction costs resulted in delays in the decision to proceed
with the original expansion  concept,  which involved an increase in the size of
the Wal-Mart  store from its current  82,000 square feet to 120,000 square feet.
Over the past several years,  Wal-Mart has  significantly  changed its prototype
store  concept,  requiring  larger  stores with  additional  expansion  space to
accommodate increasing per store sales volume. More recently, Wal-Mart has begun
building  "supercenters",  which contain up to 200,000 square feet and include a
grocery store component in addition to a Wal-Mart  discount store. This practice
reflects a broader  trend among many  retailers  to maximize  selling  areas and
reduce costs by constructing  supercenters or by emphasizing  larger  properties
and closing  smaller,  more marginal  stores.  During the quarter ended June 30,
1995,  management  was informed  that  Wal-Mart  intends to construct one of its
supercenter  stores at  another  identified  site in the  Augusta  market and to
vacate Colony Plaza upon the completion of  construction.  The construction of a
new  supercenter is not likely to be completed  until sometime in calendar 1997.
Although  Wal-Mart will remain  obligated to pay rent and its share of operating
expenses through the term of its lease, which expires in March 2009, the loss of
the  center's   principal  anchor  tenant  would  likely  adversely  affect  the
Partnership's  ability to retain  existing  tenants and to lease vacant space at
the center unless a strong replacement anchor tenant is obtained. The property's
leasing  team has begun to contact  potential  replacement  tenants to  initiate
discussions  regarding the Wal-Mart  space at Colony  Plaza.  Management is also
actively  working  with the  existing  tenants to  attempt to ensure  that these
tenants will sign renewals when their current leases expire. While the status of
the  pending  Wal-Mart  relocation  at  Colony  Plaza  will  make  completing  a
refinancing  transaction  more  difficult,  management  continues  to pursue its
refinancing plans. The Partnership may also pursue discussions with the existing
lender regarding possible modification and extension options.

    The DeVargas Mall experienced a positive trend in occupancy beginning in the
second  half of fiscal  1995 and was 89% leased as of  December  31,  1995 after
dropping to a low of 84% as of  September  1994.  During  fiscal  1996, a 10,000
square  foot  lease  with a  national  credit  drugstore  tenant  was  executed.
Currently,  there are two  significant  lease  proposals  pending with regard to
space which is currently available and space that will become available over the
next year,  for 27,000 square feet and 20,000 square feet,  respectively.  These
leases,  if  successfully  executed,   would  accomplish   management's  leasing
objectives  and  bring  the  Mall to full  occupancy.  Over  the  past 2  years,
management  has been  successful  in altering  the tenant  roster at the Mall to
obtain a more  complementary  mix of retailers.  Funding of the required  tenant
improvements  for any  significant  new leases would likely be  accomplished  by
means  of  additional  advances  under  the  lines  of  credit  provided  by the
Partnership's   co-venture  partner.  To  date,  the  co-venturer  has  provided
financing in the amount of  approximately $3 million to fund prior expansion and
leasing  costs.  The venture pays interest on such advances at the rate of prime
plus 1% per annum.

    At December 31, 1995, the  Partnership and its  consolidated  joint ventures
had available cash and cash equivalents of approximately $3,143,000. These funds
will be  utilized  for the  working  capital  requirements  of the  Partnership,
distributions to partners,  refinancing  expenses  related to the  Partnership's
remaining  zero  coupon  loan  and  to  fund  capital  enhancements  and  tenant
improvements  for  the  operating  investment  properties,   if  necessary,   in
accordance with the respective joint venture agreements.

Results of Operations
Three Months Ended December 31, 1995

    The  Partnership  reported a net loss of $114,000 for the three months ended
December 31, 1995,  as compared to a net loss of $210,000 for the same period in
the prior year. The  improvement in net operating  results for the third quarter
of fiscal 1996 resulted from a decrease in the  Partnership's  operating loss of
$289,000 which was offset by an unfavorable change in the Partnership's share of
unconsolidated ventures' income (losses) of $193,000.  Beginning in fiscal 1996,
the results of operations of the Willow Grove joint venture have been  presented
on a consolidated basis as a result of the Partnership buying out the co-venture
partner's  interest in the joint venture,  as described  above.  Therefore,  the
operating  loss for the three  months  ended  December  31, 1995 is not directly
comparable to the three months ended  December 31, 1994.  The increase in rental
revenues of $249,000 is primarily  due to the addition of Willow Grove  revenues
totalling  $220,000.  Similarly,  the increases in property operating  expenses,
real  estate  taxes  and  depreciation  expense  are  a  direct  result  of  the
consolidation of the Willow Grove joint venture.  An increase in interest income
of  $30,000,  a  decrease  in  interest  expense  of  $110,000  and a decline in
Partnership  general and administrative  expenses of $22,000 also contributed to
the decline in operating loss for the current three-month period.

      The  Partnership's  share  of  unconsolidated  venture's  income  (losses)
declined,  in part,  due to the fact that the  Willow  Grove  joint  venture  is
presented on a  consolidated  basis in the current  period.  The decrease in the
Partnership's  share of income from the joint  ventures was also partly a result
of a decrease of $70,000 in rental income at the One Paragon Place joint venture
due to the temporary decline in occupancy  discussed further above. Now that the
vacated  spaces at One  Paragon  Place has been  re-leased,  revenues  from this
venture should improve in future quarters.

Nine Months Ended December 31, 1995

      The  Partnership  reported net income of $35,000 for the nine months ended
December  31, 1995 as compared to a net loss of $564,000  for the same period in
the prior year.  The  improvement  in net operating  results for the first three
quarters of fiscal 1996 resulted from a decrease in the Partnership's  operating
loss of $436,000 and an increase in the  Partnership's  share of  unconsolidated
ventures' income of $163,000.  As discussed  above, due to the  consolidation of
the Willow Grove joint  venture,  the  operating  loss for the nine months ended
December 31, 1995 is not directly  comparable to the prior period.  The increase
in rental  revenues of $773,000 is primarily due to the addition of Willow Grove
revenues  totalling  $645,000.  Similarly,  the increases in property  operating
expenses,  real estate taxes and depreciation expense are a direct result of the
consolidation of the Willow Grove joint venture.  An increase in interest income
of $122,000 and a decrease in interest  expense of $234,000 also  contributed to
the decline in operating loss for the current nine-month period.

      The Partnership's  share of  unconsolidated  ventures' income increased in
spite  of the fact  that the  Willow  Grove  joint  venture  is  presented  on a
consolidated  basis in the current  period.  The  increase in the  Partnership's
share of income from the joint  ventures  was a direct  result of the receipt of
$500,000  by the One  Paragon  Place  joint  venture  for the lease  termination
discussed further above,  during the second quarter of fiscal 1996. The DeVargas
joint venture also had an increase in rental revenues of approximately  $181,000
for the nine  months  ended  December  31,  1995.  Rental  revenues  at DeVargas
increased  due to increases in minimum  rent,  percentage  rents and common area
maintenance and utility reimbursements resulting from the improvement in average
occupancy for the current nine-month period.





<PAGE>


                                     PART II
                                Other Information

Item 1. Legal Proceedings
      In November  1994,  a series of  purported  class  actions  (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of 70 limited  partnership  investments,  including those offered by
the Partnership.  The lawsuits were brought against PaineWebber Incorporated and
Paine Webber Group Inc.  (together  "PaineWebber"),  among others,  by allegedly
dissatisfied  partnership  investors.  In March  1995,  after the  actions  were
consolidated under the title In re PaineWebber Limited  Partnership  Litigation,
the  plaintiffs  amended their  complaint to assert claims  against a variety of
other  defendants,   including  Third  Equity  Partners,   Inc.  and  Properties
Associates 1988, L.P. ("PA1988"),  which are General Partners of the Partnership
and affiliates of PaineWebber. On May 30, 1995, the court certified class action
treatment of the claims asserted in the litigation.

    The amended  complaint in the New York Limited  Partnership  Actions alleges
that, in connection  with the sale of interests in PaineWebber  Equity  Partners
Three Limited Partnership,  PaineWebber,  Third Equity Partners, Inc. and PA1988
(1) failed to provide adequate disclosure of the risks involved;  (2) made false
and  misleading  representations  about the  safety of the  investments  and the
Partnership's  anticipated  performance;  and (3)  marketed the  Partnership  to
investors for whom such  investments  were not  suitable.  The  plaintiffs,  who
purport to be suing on behalf of all persons who invested in PaineWebber  Equity
Partners Three Limited  Partnership,  also allege that following the sale of the
partnership  interests,  PaineWebber,  Third  Equity  Partners,  Inc. and PA1988
misrepresented   financial   information  about  the  Partnership's   value  and
performance.  The amended  complaint  alleges  that  PaineWebber,  Third  Equity
Partners,  Inc.  and  PA1988  violated  the  Racketeer  Influenced  and  Corrupt
Organizations Act ("RICO") and the federal  securities laws. The plaintiffs seek
unspecified  damages,  including  reimbursement for all sums invested by them in
the  partnerships,  as well as disgorgement of all fees and other income derived
by PaineWebber from the limited partnerships.  In addition,  the plaintiffs also
seek treble damages under RICO.

     In January 1996,  PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding,  PaineWebber  irrevocably  deposited  $125 million into an escrow
fund under the  supervision of the United States District Court for the Southern
District of New York to be used to resolve the  litigation in accordance  with a
definitive  settlement agreement and plan of allocation which the parties expect
to submit  to the  court for its  consideration  and  approval  within  the next
several months. Until a definitive settlement and plan of allocation is approved
by the court,  there can be no assurance  what, if any,  payment or non-monetary
benefits  will be made  available to investors in  PaineWebber  Equity  Partners
Three Limited Partnership.  Pursuant to provisions of the Partnership  Agreement
and other contractual  obligations,  under certain circumstances the Partnership
may be required to  indemnify  Third  Equity  Partners,  Inc.,  PA1988 and their
affiliates  for costs  and  liabilities  in  connection  with  this  litigation.
Management has had discussions with representatives of PaineWebber and, based on
such discussions,  the Partnership does not believe that PaineWebber  intends to
invoke the aforementioned  indemnifications in connection with the settlement of
this litigation.

Item 2. through 5.      NONE

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits: NONE

(b)  Reports on Form 8-K:

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






<PAGE>



            PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP


                                   SIGNATURES

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


                                    PAINEWEBBER EQUITY PARTNERS THREE
                                          LIMITED PARTNERSHIP


                                    By:  Third Equity Partners, Inc.
                                         Managing General Partner





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



Dated:  February 13, 1996