UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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

                                    FORM 10-Q

|X|       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

                         SECURITIES EXCHANGE ACT OF 1934

                 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997

                                       OR

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

            For the transition period from ______ to _______ .


                            Commission File Number:  0-17881


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


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


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


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


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

<PAGE>

            PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

                           CONSOLIDATED BALANCE SHEETS
                  June 30, 1997 and March 31, 1997 (Unaudited)
                                 (In thousands)

                                     ASSETS
                                                       June 30       March 31
                                                       -------       --------
Operating investment properties, at cost:
   Land                                             $    4,208      $   4,208
   Building and improvements                            14,153         14,153
                                                    ----------      ---------
                                                        18,361         18,361
   Less accumulated depreciation                        (4,018)        (3,893)
                                                    ----------      ---------
                                                        14,343         14,468

Investments in unconsolidated ventures, at equity       13,583         13,881
Cash and cash equivalents                                4,891          4,615
Accrued interest and other receivables                     136            101
Prepaid expenses                                             5              7
Deferred expenses, net                                     130            133
                                                    ----------      ---------
                                                    $   33,088      $  33,205
                                                    ==========      =========


                        LIABILITIES AND PARTNERS' CAPITAL

Notes payable and deferred interest, including 
 amounts in default                                 $   12,265      $  12,043
Accounts payable and accrued expenses                       66             98
Tenant security deposits                                    17             14
Accrued real estate taxes                                   18             14
Advances from consolidated ventures                        173            195
Other liabilities                                            2              2
Partners' capital                                       20,547         20,839
                                                    ----------      ---------
                                                    $   33,088      $  33,205
                                                    ==========      =========

        CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
          For the three months ended June 30, 1997 and 1996 (Unaudited)
                                 (In thousands)


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

Balance at March 31, 1996                           $(218)         $22,548
Cash distributions                                     (3)            (252)
Net loss                                               (2)            (191)
                                                    -----          -------
Balance at June 30, 1996                            $(223)         $22,105
                                                    =====          =======

Balance at March 31, 1997                           $(234)         $21,073
Cash distributions                                     (3)            (315)
Net income                                              -               26
                                                    -----          -------
Balance at June 30, 1997                            $(237)         $20,784
                                                    =====          =======


                             See accompanying notes.


<PAGE>


              PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS
         For the three months ended June 30, 1997 and 1996 (Unaudited)
                      (In thousands, except per Unit data)


                                              1997           1996
                                              ----           ----

Revenues:
   Rental income and expense
     reimbursements                           $ 592          $ 563
   Interest income                               68             47
                                              -----          -----
                                                660            610

Expenses:
   Interest expense                             321            295
   Property operating expenses                  108            131
   Real estate taxes                             40             37
   General and administrative                    47             84
   Depreciation and amortization                127            134
                                              -----          -----
                                                643            681
                                              -----          -----
Operating income (loss)                          17            (71)

Partnership's share of unconsolidated
   ventures' income (losses)                      9           (122)
                                              -----          -----

Net income (loss)                             $  26          $(193)
                                              =====          =====

Net income (loss) per
   Limited Partnership Unit                   $0.52         $(3.78)
                                              =====         ======

Cash distributions per
   Limited Partnership Unit                   $6.25         $ 5.00
                                              =====         ======

   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 three months ended June 30, 1997 and 1996 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)


                                                         1997           1996
                                                         ----           ----
Cash flows from operating activities:
   Net income (loss)                                $     26        $    (193)
   Adjustments to reconcile net income (loss)
   to net cash provided by operating activities:
    Partnership's share of unconsolidated
      ventures' income (losses)                           (9)             122
    Depreciation and amortization                        126              134
    Amortization of deferred loan costs                    2               10
    Interest expense on zero coupon loans                232              197
    Changes in assets and liabilities:
      Accrued interest and other receivables             (35)              64
      Prepaid expenses                                     2               (7)
      Deferred expenses                                    -               (2)
      Accounts payable and accrued expenses              (32)             (12)
      Accrued real estate taxes                            4                5
      Tenant security deposits                             3                -
      Advances from consolidated ventures                (22)             130
                                                    --------        ---------
        Total adjustments                                271              641
                                                    --------        ---------
        Net cash provided by operating activities        297              448
                                                    --------        ---------

Cash flows from investing activities:
   Net additions to escrowed cash                          -              (49)
   Additions to operating investment properties            -              (14)
   Distributions from unconsolidated joint ventures      307              216
                                                    --------        ---------
        Net cash provided by investing activities        307              153
                                                    --------        ---------

Cash flows from financing activities:
   Cash distributions to partners                       (318)            (255)
   Payments of principal on notes payable                (10)             (10)
                                                    --------        ---------
        Net cash used in financing activities           (328)            (265)
                                                    --------        ---------
Net increase in cash and cash equivalents                276              336

Cash and cash equivalents, beginning of period         4,615            3,439
                                                    --------        ---------

Cash and cash equivalents, end of period            $  4,891        $   3,775
                                                    ========        =========

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






                             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, 1997. 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  accompanying  financial  statements  have been  prepared on the accrual
    basis  of  accounting  in  accordance  with  generally  accepted  accounting
    principles which requires  management to make estimates and assumptions that
    affect the reported  amounts of assets and  liabilities  and  disclosures of
    contingent assets and liabilities as of June 30, 1997 and March 31, 1997 and
    revenues  and expenses for each of the  three-month  periods  ended June 30,
    1997  and  1996.   Actual  results  could  differ  from  the  estimates  and
    assumptions used.

2. Investments in Unconsolidated Joint Venture Partnerships

    The  Partnership  has  investments  in  two  unconsolidated   joint  venture
    partnerships  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.

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

                     Condensed Combined Summary of Operation
               For the three months ended March 31, 1997 and 1996
                                 (in thousands)

                                                1997         1996
                                                ----         ----

Revenues:
   Rental revenues and expense recoveries     $  1,209     $ 1,032
   Interest and other income                        15           9
                                              --------     -------
                                                 1,224       1,041
Expenses:
   Property operating expenses                     454         417
   Real estate taxes                                37          43
   Interest expense                                278         249
   Depreciation and amortization                   438         433
                                              --------     -------
                                                 1,207       1,142
                                              --------     -------
Net income (loss)                             $     17     $  (101)
                                              ========     =======

Net income (loss):
   Partnership's share of
     combined income (losses)                 $     14     $  (117)
   Co-venturers' share of
     combined income (losses)                        3          16
                                              --------     -------
                                              $     17     $  (101)
                                              ========     =======

               Reconciliation of Partnership's Share of Operation
        For the three months ended June 30, 1997 and 1996 (in thousands)

                                                1997        1996
                                                ----        ----

Partnership's share of operations,
   as shown above                            $    14      $ (117)
Amortization of excess basis                      (5)         (5)
                                             -------      ------
Partnership's share of
   unconsolidated ventures' income (losses)  $     9      $ (122)
                                             =======      ======

3. Operating Investment Properties

    The  Partnership  has   investments  in  two   consolidated   joint  venture
    partnerships  which  own  operating  investment  properties  as  more  fully
    described in the Partnership's Annual Report. The consolidated ventures have
    December  31  year-ends  for  both  tax and  financial  reporting  purposes.
    Accordingly,  the Partnership's  policy is to report the financial position,
    results of operations and cash flows of these ventures on a three-month lag.
    All material  transactions  between the Partnership and these joint ventures
    have  been  eliminated  upon  consolidation,   except  for  lag-period  cash
    transfers. Such lag period cash transfers are accounted for as advances from
    consolidated ventures on the accompanying balance sheets.

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

    On  January  27,  1995,  the  Partnership  purchased  99% of its  co-venture
    partner's  interest in Portland  Pacific  Associates  Two for $233,000.  The
    remaining  1%  interest of the  co-venturer  was  assigned  to Third  Equity
    Partners,  Inc., the Managing General Partner of the Partnership,  in return
    for a release from any further  obligations  or duties  called for under the
    terms of the joint venture agreement.  As a result, the Partnership  assumed
    control over the affairs of the joint venture.  Portland Pacific  Associates
    Two  owns the  Willow  Grove  Apartments,  a  119-unit  complex  located  in
    Beaverton, Oregon.

    The following is a combined summary of property  operating  expenses for the
    consolidated  joint  ventures  for the three months ended March 31, 1997 and
    1996 (in thousands):

                                        1997           1996
                                        ----           ----

      Common area maintenance         $   30          $  35
      Utilities                           21             22
      Management fees                     22             21
      Administrative and other            35             53
                                      ------          -----
                                      $  108          $ 131
                                      ======          =====

4. Related Party Transactions

    Included in general and administrative  expenses for the three-month periods
    ended  June  30,  1997  and  1996  is  $24,000  and  $25,000,  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 three months
    ended  June  30,  1997  and  1996  is  $6,000  and   $7,000,   respectively,
    representing fees earned by an affiliate,  Mitchell  Hutchins  Institutional
    Investors, Inc., for managing the Partnership's cash assets.

5. Notes payable

    Notes  payable  and  deferred  interest  at June 30, 1997 and March 31, 1997
    consist of the following (in thousands):

                                                  June 30         March 31
                                                  -------         --------

     10.5%  nonrecourse  loan payable by
     the   Partnership   to  a   finance
     company,  which is  secured  by the
     Colony Plaza  operating  investment
     property.    All    interest    and
     principal  was due at maturity,  on
     December  29,  1996.   Interest  is
     compounded  semi-annually.  Accrued
     interest at June 30, 1997 and March
     31,  1997  amounted  to $4,690  and
     $4,458,  respectively.  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).                           $ 8,740         $ 8,508

     9.59%  nonrecourse  loan payable by
     the  consolidated  Portland Pacific
     Associates   Two   to   a   finance
     company,  which is  secured  by the
     Willow Grove  operating  investment
     property. The note requires monthly
     principal and interest  payments of
     $32   from   April   1995   through
     maturity  in March  2002.  The fair
     value   of   the   mortgage    note
     approximated  its carrying value at
     March  31,  1997 and  December  31,
     1996.                                          3,525           3,535  
                                                  -------         -------
                                                  $12,265         $12,043
                                                  =======         =======

    The borrowing secured by Colony Plaza matured on December 29, 1996, at which
    time total principal and accrued interest of $8,290,190 was due and payable.
    Although the Partnership  did not make its scheduled  payment upon maturity,
    no formal default notices have been issued to date and management  continues
    to negotiate with the existing  lender  regarding a potential  extension and
    modification  of  the   outstanding   first  mortgage  loan.  A  refinancing
    transaction with a new lender would require a sizable  principal  paydown by
    the Partnership in order to reduce the  loan-to-value  ratio of the mortgage
    note  payable.  If the  refinancing  or  extension  of this  loan  cannot be
    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.

    On  November  16,  1995,  the zero  coupon  loan  issued  in the name of the
    Partnership  and secured by a mortgage on One Paragon  Place 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. The zero coupon
    loan had an outstanding  balance of approximately  $10.4 million at the time
    of the  refinancing.  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.



<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, 1997 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,  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.  Negotiations  have been ongoing
with the lender for the past nine  months  regarding  a possible  extension  and
modification  agreement  for the  existing  loan.  Such  negotiations  have been
complicated by the leasing status of the Colony Plaza  property.  As of June 30,
1997,  the Colony Plaza Shopping  Center in Augusta,  Georgia was 97% leased and
31% 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.  In
addition, Food Max, the Center's 47,990 square foot grocery store tenant, closed
its store on December 1, 1996. However,  another grocery store chain, Food Lion,
has entered into a sublease  agreement with Food Max to open Food Lion stores in
several  former  Food  Max  locations,  including  the  store at  Colony  Plaza.
Initially, Food Lion planned to open its new store at Colony Plaza in the summer
of 1997.  Food Lion now reports that it may take longer than  expected to secure
municipal  approvals and to build their prototype store. As a result,  the store
may not be ready to open until January 1998.  Because the opening of a Food Lion
grocery store would significantly improve customer traffic levels at the Center,
the  leasing  team is working  closely  with Food Lion to achieve  the  earliest
possible opening date for the new store.  The property's  management and leasing
team  reports  that  with the  announcement  that  Food Lion will open at Colony
Plaza, a number of shop tenants in the local market have  expressed  interest in
leasing  space in the Center.  Additionally,  the leasing  team reports that two
shop  tenants in the Center  have  expressed  an  interest  in  expanding  their
existing stores.

      The decisions by Wal-Mart and Food Max to close their stores have weakened
the sales  volumes of many of the tenants of Colony  Plaza,  which in some cases
has affected  their  ability to meet their rent  obligations.  In certain  other
cases, the Wal-Mart store closing will enable tenants to exercise  provisions in
their  leases that will permit  them to  terminate  leases or convert the rental
rate to a percentage of sales. To date, one 6,000 square foot tenant exercised a
co-tenancy clause in its lease which allowed it to close its store in the second
quarter of fiscal 1997 and pay only its share of common area maintenance,  taxes
and insurance because of the Wal-Mart vacancy. During the quarter ended June 30,
1997, this tenant notified the Partnership that it would be exercising its right
to terminate its lease during the quarter  ending  September 30, 1997 due to the
Wal-Mart vacancy. In addition,  during the quarter ended March 31, 1997 two shop
tenants with leases  representing  4,600 square feet closed their  stores.  Five
other  tenants,  comprising  12,900 square feet, or 6% of the Center's  leasable
area,  have lease  clauses  which permit them to  terminate  their leases if the
anchor  space is not  re-leased  within a  specified  time  frame.  Two of these
tenants also have the right to pay a specified  percentage of sales  revenues as
base rent while the anchor tenant space  remains  vacant.  In addition,  several
other  tenants  have  requested  rental  abatements  as a result of the Wal-Mart
vacancy.

      As a result of the current  leasing  status of the Colony Plaza  property,
obtaining a new loan to refinance the outstanding debt is not practical, and the
existing lender is concerned that its first mortgage  position could be impaired
in the event that the occupancy level at the property  cannot be  re-stabilized.
Accordingly, the recent negotiations with the lender have focused on a potential
agreement  that would give the  Partnership  a stated  period to re-lease all or
some portion of the Wal-Mart  space at Colony  Plaza.  If the  Partnership  were
successful  in  re-leasing  the space within the required  time frame,  then the
Partnership  would be entitled to execute a long-term  extension of the existing
mortgage  loan  pursuant  to  certain  previously  agreed  upon  terms.  If  the
Partnership  were not able to re-lease the space within the required time frame,
then the lender  would be entitled to initiate  foreclosure  proceedings  on the
property.   Any  such  agreement  with  the  lender  remains  subject  to  final
negotiation and the execution of definitive modification agreements. During this
negotiation  period,  penalty interest is accruing on the outstanding  principal
balance at 15% per annum in accordance with the original loan  agreement.  If no
agreement can be reached  regarding a modification of the current mortgage loan,
the lender could choose to initiate foreclosure  proceedings during fiscal 1998.
The eventual outcome of this situation cannot be determined at the present time.

      The One Paragon  Place  Office  Building  was 94% leased at June 30, 1997,
compared to 98% at March 31, 1997.  Almost 3% of the 4% change resulted from the
addition of 3,702 square feet of previously  non-rentable area to the building's
leasable area. This was accomplished by moving the management and leasing office
out of One Paragon  Place and also by converting  an adjoining  janitorial  area
into leasable space.  The property's  leasing team has combined the 3,702 square
feet with a 2,389 square foot space left vacant by the downsizing of an existing
tenant,  as described  further below,  and is offering the combined 6,091 square
feet  for  rent.  Market  rental  rates  for  newly  constructed  Class A office
properties  increased by nearly 3% during the quarter  ended June 30,  1997.  As
market  rental  rates keep  moving  higher  than the rents paid by the  existing
tenants at One Paragon Place, revenues should continue to increase as new leases
or renewals are signed.  The leasing team's major  accomplishment at One Paragon
Place during the first  quarter was the signing of a five-year  renewal with one
of the building's largest tenants. As part of the renewal agreement, this tenant
will pay  approximately  17% more in annual rental  payments than was due during
its initial  lease term.  The tenant will also  downsize by 2,389 square feet to
17,759 square feet, or 12% of the building's leasable area. A three-year renewal
with a 1,662  square foot tenant was signed  during the quarter at a rental rate
nearly 13% higher  than the rental  rate  during the  initial  lease  term.  The
leasing team also re-leased a 3,171 square foot space vacated during the quarter
to two tenants.  One existing tenant relocated from 1,362 square feet into 2,285
square  feet,  and a new  tenant  leased  886  square  feet  under  a  five-year
agreement.  Other  leasing  included an expansion of an existing  tenant into an
adjoining,  previously  vacant 853 square  foot space.  During the next  fifteen
months,  leases  comprising 34% of One Paragon Place's  leasable area will be up
for renewal.  The property's  leasing team will continue to negotiate with these
tenants  to sign  renewal  agreements  at  rental  rates  higher  than the rates
currently being paid.

      As  previously  reported,  the  market  environment  for  suburban  office
properties  in Richmond,  Virginia is marked by near full  occupancy  levels and
rising rental rates justifying new construction. As also reported, approximately
800,000  square feet of  competing  Class A office  space in eight  buildings is
currently  under  construction.  To date,  70% of such space is  pre-leased.  An
additional  432,000  square feet of  comparable  office space in 5 buildings has
been proposed for potential development in this market of 5,500,000 square feet.
Absorption  of this  potential  space is  expected  to be strong  given the 1996
absorption of 316,000  square feet and the nearly  560,000 square feet leased to
date  in  1997  of the  space  under  construction.  The  Partnership  has  been
monitoring the development  activity in the market,  while  exploring  potential
sale  opportunities  for One  Paragon  Place  and has  concluded  that it is the
appropriate  time to sell the property.  During the quarter ending September 30,
1997,  regional  and  national  real  estate  brokers  will  be  interviewed  as
candidates  to market  the  property  for sale.  Management  expects to select a
broker and begin  actively  marketing  the  property  during the quarter  ending
December 31, 1997.  There are no assurances,  however,  that a sale  transaction
will be completed in the near term.

      The  DeVargas  Mall was 95% leased and 92%  occupied as of June 30,  1997.
During the fourth quarter of fiscal 1997,  the property's  leasing team signed a
lease for a 5,380 square foot space with the U.S.  Post Office.  The Post Office
is projected to take  occupancy of its space in the next quarter.  Subsequent to
the  end of the  quarter,  a  27,023  square  foot  soft  goods  anchor  tenant,
representing  11% of the Center's  leasable area,  announced that it would close
its store on July 31, 1997. This tenant's lease expired on January 31, 1997, and
it had been leasing on a month-to-month  basis.  With the closing of this 27,023
square foot tenant and the upcoming  opening of the U.S.  Post Office  facility,
the Center's  occupancy  is  projected to decrease to 84% in the quarter  ending
September  30,  1997.  As  interest  in Santa Fe from  national  anchor  tenants
continues to increase, the property's leasing team is cautiously optimistic that
they  will  secure  a  replacement  tenant.   Funding  of  the  required  tenant
improvements for the leasing activity at DeVargas has been accomplished by means
of advances under the lines of credit provided by the  Partnership's  co-venture
partner.  As of March 31, 1997, 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.  The first note,  which  allowed the
venture to borrow up to  $5,000,000,  bore interest at the greater of prime plus
1.5% or 10% per annum and was due to mature in June 1997. The second note, which
allowed the venture to borrow up to $553,000, bore interest at prime plus 1% and
was scheduled to mature in November 2002. The outstanding  borrowings under both
lines of credit  totalled  $4,214,000  as of March 31, 1997.  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
allows the venture to borrow up to $5,000,000,  bears interest at the greater of
the prime rate or 9% per annum and is due to mature on June 1, 1998.

      The average  occupancy  level for the first  quarter of fiscal 1998 at the
Willow Grove Apartments in Beaverton,  Oregon was 95%,  unchanged from the prior
quarter.  The property's  leasing team raised rental rates by 4% on both new and
renewal leases effective March 1, 1997, which is the first increase in one year.
In  addition,  the use of rental  concessions  at Willow  Grove is minimal  even
though  recently  constructed  competing  properties  are  currently  offering a
variety of rental  concessions  during  their  lease-up  phases.  As  previously
reported,  while long-term prospects for the Portland apartment market are good,
new  apartment  construction  has  softened  market  conditions  in the  overall
suburban  Portland area. Most of this new construction is located farther out to
the west of Willow  Grove,  between 5 and 15 miles away.  However,  there is one
property currently in lease-up in the local market.  Phase one of this two-phase
property  contains  288 units and was 75%  leased as of the end of fiscal  1997.
Phase two,  which will include an additional 150 units,  is under  construction.
While this new property  offers more amenities,  its effective  rental rates are
comparable  to those at Willow  Grove.  Once both  phases of this  property  are
substantially  leased, the property's rental rates would be expected to increase
above the rates at Willow  Grove.  While  Willow  Grove may be affected by these
competitive  pressures in the near term,  overall market conditions are expected
to  stabilize  over  the  next  year  due to the  region's  history  of  healthy
employment  gains  and the  resurgence  in the  growth  of the  high  technology
industries.  Any  formal  marketing  efforts  for the sale of the  Willow  Grove
property will likely be delayed until this market re-stabilization is achieved.

      At June 30, 1997, the Partnership and its consolidated  joint ventures had
available cash and cash  equivalents of  approximately  $4,891,000.  These funds
will be  utilized  for the  working  capital  requirements  of the  Partnership,
distributions  to  partners,  refinancing  costs  related  to the  Partnership's
remaining zero coupon loan, if necessary,  and to fund capital  enhancements and
tenant improvements for the operating  investment  properties in accordance with
the  respective  joint venture  agreements.  The source of future  liquidity and
distributions  to the  partners  is expected  to be from cash  generated  by the
Partnership's  income-producing  properties and from the proceeds  received from
the sale or  refinancing  of such  properties.  Such  sources of  liquidity  are
expected to be sufficient to meet the  Partnership's  needs on both a short-term
and long-term basis.

Results of Operations
Three months ended June 30, 1997
--------------------------------

      The Partnership  reported net income of $26,000 for the quarter ended June
30, 1997, as compared to a net loss of $193,000 for the same period in the prior
year.  This  favorable  change in the  Partnership's  net  operating  results is
attributable to a favorable change in the Partnership's  share of unconsolidated
ventures'   income   (losses)  of  $131,000  and  a  favorable   change  in  the
Partnership's  operating  income (loss) of $88,000.  The favorable change in the
Partnership's share of unconsolidated ventures' operations is primarily due to a
$177,000  increase in combined rental revenues and expense  recoveries which was
partially  offset by increases in the property  operating  and interest  expense
categories.  Rental  revenues at  DeVargas  increased  by $99,000  over the same
three-month  period in the prior  year due to the  addition  of two new  tenants
during the second  half of fiscal  1997.  In  addition,  rental  revenues at One
Paragon  Place  increased due to new leases signed during the past twelve months
at rates  substantially  higher than the rates on the expiring leases.  Property
operating  expenses  increased  mainly due to additional  costs  attributable to
DeVargas  Mall,   including  necessary  roof  repairs  and  higher  parking  lot
maintenance  costs  during the  current  three-month  period.  Interest  expense
increased due to additional borrowings obtained by the DeVargas joint venture to
fund capital costs associated with leasing space at the property.

      The favorable change in the  Partnership's  operating income (loss) is the
result of an increase in total  revenues  and a decrease in total  expenditures.
Rental income and expense  reimbursements  from the consolidated  joint ventures
increased  mainly due to additional  expense  reimbursements  recorded by Colony
Plaza in the current  three-month  period resulting from a timing  difference in
the billing of the reimbursements as compared to the prior year. Interest income
also  increased  by $21,000  due to an  increase  in the  Partnership's  average
outstanding  cash  reserve  balances.   Property  operating  expenses  from  the
consolidated  joint ventures  decreased due to a general  decline in maintenance
costs and other property-level  administrative expenses at both Colony Plaza and
Willow Grove. General and administrative expenses declined by $37,000 mainly due
to a  reduction  in  certain  required  professional  fees  during  the  current
three-month  period.  Partially  offsetting  the  increase in  revenues  and the
declines in property  operating and general and  administrative  expenses was an
increase in interest  expense  resulting from the 15% default rate being applied
to the zero coupon loan  secured by Colony  Plaza which  matured on December 29,
1996, as discussed further above.



<PAGE>


                                     PART II
                                Other Information

Item 1. Legal Proceedings

                    NONE

Item 2. through 5.  NONE

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits:      NONE

(b)  Reports on Form 8-K:

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


<PAGE>



            PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP


                                   SIGNATURES

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


                                    PAINEWEBBER EQUITY PARTNERS THREE
                                          LIMITED PARTNERSHIP


                                    By:  Third Equity Partners, Inc.
                                         Managing General Partner





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



Dated:  August 13, 1997