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 SEPTEMBER 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
                September 30, 1997 and March 31, 1997 (Unaudited)
                              (In thousands)

                                  ASSETS
                                                  September 30     March 31
                                                  ------------     --------
Operating investment properties, at cost:
   Land                                            $   4,208     $   4,208
   Building and improvements                          14,015        14,153
                                                   ---------     ---------
                                                      18,223        18,361
   Less accumulated depreciation                      (4,138)       (3,893)
                                                   ---------     ---------
                                                      14,085        14,468

Investments in unconsolidated ventures, at equity     13,294        13,881
Cash and cash equivalents                              5,227         4,615
Accrued interest and other receivables                   146           101
Prepaid expenses                                          20             7
Deferred expenses, net                                   124           133
                                                   ---------     ---------
                                                   $  32,896     $  33,205
                                                   =========     =========


                        LIABILITIES AND PARTNERS' CAPITAL

Notes payable and deferred interest, including
 amounts in default                                $  12,472     $  12,043
Accounts payable and accrued expenses                     77            98
Tenant security deposits                                  20            14
Accrued real estate taxes                                 37            14
Advances from consolidated ventures                      169           195
Other liabilities                                          2             2
Partners' capital                                     20,119        20,839
                                                   ---------     ---------
                                                   $  32,896     $  33,205
                                                   =========     =========








                             See accompanying notes.


<PAGE>


              PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

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

                                    Three Months Ended    Six Months Ended
                                        September 30,       September 30,
                                   -------------------   ------------------
                                    1997        1996        1997     1996
                                    ----        ----        ----     ----

Revenues:
   Rental income and expense
     reimbursements                 $ 545       $ 596   $ 1,137     $1,159
   Interest income                     73          51       141         98
                                    -----       -----   -------     ------
                                      618         647     1,278      1,257

Expenses:
   Interest expense                   302         304       623        599
   Property operating expenses        123         103       231        234
   Real estate taxes                   37          38        77         75
   General and administrative          75          90       122        174
   Depreciation and amortization      128         160       255        294
                                    -----       -----   -------     ------
                                      665         695     1,308      1,376
                                    -----       -----   -------     ------
Operating loss                        (47)        (48)      (30)      (119)

Partnership's share of 
  unconsolidated
  ventures' losses                    (62)        (91)      (53)      (213)
                                    -----       -----   -------     ------

Net loss                           $ (109)      $(139)  $   (83)    $ (332)
                                   ======       =====   =======     ======

Net loss per
   Limited Partnership Unit        $(2.15)     $(2.73)   $(1.63)    $(6.50)
                                   ======      ======    ======     ======

Cash distributions per
   Limited Partnership Unit        $ 6.25      $ 5.00    $12.50     $10.00
                                   ======      ======    ======     ======

      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 CHANGES IN PARTNERS' CAPITAL (DEFICIT)
        For the six months ended September 30, 1997 and 1996 (Unaudited)
                                 (In thousands)


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

Balance at March 31, 1996                          $ (218)      $ 22,548
Cash distributions                                     (5)          (505)
Net loss                                               (4)          (328)
                                                   ------       --------
Balance at September 30, 1996                      $ (227)      $ 21,715
                                                   ======       ========

Balance at March 31, 1997                          $ (234)      $ 21,073
Cash distributions                                     (6)          (631)
Net loss                                               (1)           (82)
                                                   ------       --------
Balance at September 30, 1997                      $ (241)      $ 20,360
                                                   ======       ========






















                             See accompanying notes.


<PAGE>


              PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
        For the six months ended September 30, 1997 and 1996 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)
                                                       1997         1996
                                                       ----         ----
Cash flows from operating activities:
   Net loss                                         $  (83)       $  (332)
   Adjustments to reconcile net loss to net 
     cash provided by operating activities:
    Partnership's share of unconsolidated 
     ventures' losses                                   53            213
    Depreciation and amortization                      255            294
    Amortization of deferred loan costs                  5             21
    Interest expense on zero coupon loans              450            403
    Changes in assets and liabilities:
      Accrued interest and other receivables           (45)            95
      Prepaid expenses                                 (13)             5
      Deferred expenses                                 (6)            (3)
      Accounts payable and accrued expenses            (21)            26
      Accrued real estate taxes                         23             24
      Tenant security deposits                           6              -
      Advances from consolidated ventures              (26)           130
                                                     -----        -------
        Total adjustments                              681          1,208
                                                     -----        -------
        Net cash provided by operating activities      598            876
                                                    ------        -------

Cash flows from investing activities:
   Net additions to escrowed cash                        -            (19)
   Additions to operating investment properties         (2)            (4)
   Receipt of master lease payments                    140              -
   Distributions from unconsolidated joint ventures    534            398
                                                    ------        -------
        Net cash provided by investing activities      672            375
                                                    ------        -------

Cash flows from financing activities:
   Cash distributions to partners                     (637)          (510)
   Payments of principal on notes payable              (21)           (19)
                                                    ------        -------
        Net cash used in financing activities         (658)          (529)
                                                    ------        -------

Net increase in cash and cash equivalents              612            722
Cash and cash equivalents, beginning of period       4,615          3,439
                                                    ------        -------
Cash and cash equivalents, end of period            $5,227        $ 4,161
                                                    ======        =======
Cash paid during the period for interest            $  173        $   175
                                                    ======        =======
                             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  September  30, 1997 and March 31, 1997 and revenues and
expenses for each of the three and six-month  periods  ended  September 30, 1997
and 1996. Actual results could differ from the estimates and assumptions used.

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

      Included in general and administrative  expenses for the six-month periods
ended  September  30,  1997  and  1996 is  $47,000  and  $41,000,  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 six months
ended  September  30,  1997  and  1996  is  $9,000  and  $7,000,   respectively,
representing  fees  earned  by an  affiliate,  Mitchell  Hutchins  Institutional
Investors, Inc., for managing the Partnership's cash assets.

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

      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.


<PAGE>

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

                    Condensed Combined Summary of Operations
            For the three and six months ended June 30, 1997 and 1996
                                 (in thousands)

                                  Three Months Ended     Six Months Ended
                                        June 30,             June 30,
                                    -----------------   ------------------
                                    1997      1996        1997       1996
                                    ----      ----        ----       ----
Revenues:
   Rental revenues and expense 
     recoveries                    $1,130    $1,027     $2,339    $ 2,059
   Interest and other income           11        12         26         21
                                   ------    ------     ------    -------
                                    1,141     1,039      2,365      2,080
Expenses:
   Property operating expenses        424       405        878        822
   Real estate taxes                   35        44         72         87
   Interest expense                   282       250        560        499
   Depreciation and amortization      439       429        877        862
                                   ------    ------     ------    -------
                                    1,180     1,128      2,387      2,270
                                   ------    ------     ------    -------
Net loss                           $  (39)   $  (89)    $  (22)   $  (190)
                                   ======    ======     ======    =======

Net income (loss):
   Partnership's share of
     combined income (losses)      $  (57)   $  (86)    $  (43)   $  (203)
   Co-venturers' share of
     combined income (losses)          18        (3)        21         13
                                   ------    ------     ------    -------
                                   $  (39)   $  (89)    $  (22)   $  (190)
                                   ======    ======     ======    =======

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

                                    Three Months Ended    Six Months Ended
                                       September 30,        September 30,
                                    ------------------   -----------------
                                      1997      1996       1997      1996
                                      ----      ----       ----      ----
   Partnership's share of 
    operations, as shown
    above                           $  (57)   $ (86)     $ (43)    $ (203)
   Amortization of excess basis         (5)      (5)       (10)       (10)
                                    ------    ------     ------    ------
   Partnership's share of
    unconsolidated ventures'
    losses                          $  (62)   $  (91)    $ (53)    $ (213)
                                    ======    ======     =====     ======


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

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

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

      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 and six months ended June 30, 1997 and
1996 (in thousands):

                                 Three Months Ended     Six Months Ended
                                      June 30,              June 30,
                                 ------------------    -----------------
                                  1997      1996          1997      1996
                                  ----      ----          ----      ----

      Common area maintenance     $ 23     $  27         $  53      $  62
      Utilities                     22        21            43         43
      Management fees               23        26            45         47
      Administrative and other      55        29            90         82
                                  ----     -----         -----       ----
                                  $123     $ 103         $ 231       $234
                                  ====     =====         =====       ====

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

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

                                                September 30     March 31
                                                ------------     --------

     10.5%  nonrecourse  loan payable by
     the   Partnership   to  a   finance
     company,  which is  secured  by the
     Colony Plaza  operating  investment
     property.    All    interest    and
     principal  was due at maturity,  on
     December  29,  1996.   Interest  is
     compounded  semi-annually.  Accrued
     interest at September  30, 1997 and
     March 31,  1997  amounted to $4,908
     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).                           $ 8,958        $ 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
     June  30,  1997  and  December  31,
     1996.                                          3,514          3,535
                                                  -------        -------
                                                  $12,472        $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.  The  Partnership,
however, is accruing interest at a default rate of 15%, as per the original loan
agreement  because no definitive  agreement to modify the loan has been executed
to date. If an extension  agreement is signed,  this penalty  interest  would be
waived  retroactively to the December 28, 1996 maturity date and the Partnership
would be required to remit a cash payment for interest  accruing  from that date
forward at the agreed upon modified rate. Colony Plaza was 93% leased,  but only
31%  occupied  as of  September  30,  1997 as a  result  of the  closing  of the
property's  Wal-Mart and Food Max anchor  stores during fiscal 1997. 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
long-term   extension  agreement  with  the  lender  remains  subject  to  final
negotiation  and the execution of  definitive  modification  agreements.  If the
modification and 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  its  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 September
30, 1997, the Colony Plaza Shopping  Center in Augusta,  Georgia was 93% leased,
but only 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.  However,  due to  unexpected  delays in the process of  obtaining  the
municipal  approvals to build their prototype store, the store will not be ready
to open until  early in calendar  year 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.  During the  quarter,  the leasing  team signed a lease with a
3,000 square foot tenant. In addition, two lease renewals were signed with 1,500
and 1,600 square foot tenants.

      Notwithstanding  the expected  Food Lion opening in the fourth  quarter of
fiscal 1998,  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  ended
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 long-term extension 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  because no definitive  agreement to modify the loan has been executed
to date. If an extension  agreement is signed,  this penalty  interest  would be
waived  retroactively to the December 28, 1996 maturity date and the Partnership
would be required to remit a cash payment for interest  accruing  from that date
forward  at the  agreed  upon  modified  rate.  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 92% leased at  September  30,
1997,  compared to 98% at March 31,  1997.  Almost 3% of the 6% 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 in Richmond,  Virginia increased by nearly
3% during the quarter  ended  September  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.
During the first quarter,  a five-year  lease renewal was signed 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. During the second quarter,
the leasing team signed a five-year lease renewal with a tenant at average rents
21% higher than due during the original lease term. As part of the renewal, this
tenant  downsized  from 6,359 square feet to 5,620 square feet.  During the next
fifteen months,  leases comprising 32% 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.  Two  fully-leased,  Class A
buildings,  totalling  450,000  square feet,  were  completed  during the second
quarter.  Approximately 570,000 square feet of competing Class A office space in
nine  buildings  is  under  construction  in the  Northwest  Quadrant,  with 18%
pre-leased. An additional 360,000 square feet of comparable office space in four
buildings has been proposed for development in the 6,043,000 square foot market.
Absorption  of the  buildings  under  construction,  as  well  as  the  proposed
construction,  is expected to remain strong,  given the calendar 1996 absorption
of 316,000 square feet and the significant  absorption to date in calendar 1997.
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  ended  September  30, 1997, a real estate broker was selected to market
the  property  for sale.  Management  expects to 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 83% leased and 80%  occupied as of  September  30,
1997, compared to 95% leased and 92% occupied for the prior quarter. As reported
last 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. 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 or tenants for this anchor space.  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 97%, up from 95% for the prior
quarter. These occupancy levels continue to compare favorably to similar Class A
quality properties in the local market, which includes approximately 2,500 units
built in the last three years and located  within 4 to 6 miles of the  property.
Building permits for apartments in Beaverton to date in calendar 1997 total only
434  units,  versus  1,178  units  in 1996  and  2,034  units  in  1995.  As new
development  appears to be slowing and most new  construction is located farther
to the west of Willow Grove,  between 5 and 15 miles away,  the local  apartment
market should  continue to record strong  occupancy  levels and moderate  rental
rate growth. As previously reported, there is one property currently in lease-up
in the local market. Phase one of this two-phase property contains 288 units and
was 90%  leased as of  September  30,  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 rental rates of
the new property  would be expected to increase above the rates at Willow Grove.
A light-rail  station,  which will be located within walking  distance of Willow
Grove  Apartments,  is scheduled to open in the fall of 1998.  With strong local
market conditions and the pending opening of the rail station near Willow Grove,
two lower quality apartments neighboring the property are undergoing renovation.
While these  properties are not expected to compete with Willow Grove even after
they are renovated,  the upgrades will enhance the overall appeal and quality of
the immediate market.

      At September 30, 1997, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $5,227,000. 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 September 30, 1997
-------------------------------------

      The Partnership reported a net loss of $109,000 for the three months ended
September  30, 1997 as compared to a net loss of $139,000 for the same period in
the prior  year.  This  decrease  of  $30,000 in the  Partnership's  net loss is
attributable  to  a  decrease  in  the  Partnership's  share  of  unconsolidated
ventures' losses of $29,000 and a decrease in the  Partnership's  operating loss
of $1,000.  The favorable change in the  Partnership's  share of  unconsolidated
ventures'  losses is primarily  due to an increase in combined  rental  revenues
which was partially offset by increases in the property  operating  expenses and
interest expense.  Rental revenues at DeVargas  increased due to the addition of
two new tenants  during the second half of fiscal 1997.  Since the operations of
the ventures are reported on a three-month  lag, the current  period  results do
not  reflect  the loss of the major  tenant at  DeVargas  in July 1997  which is
discussed  further  above.  In  addition  rental  income  at One  Paragon  Place
increased due to new leases  signed during the past year at rates  substantially
higher than the rates on expiring leases.  Interest expense  increased due to an
increase  in the  average  outstanding  principal  balance of the line of credit
borrowings of the DeVargas  joint venture  which are  discussed  further  above.
Property  operating  expenses  increased  mainly due to an increase in marketing
expenses at One Paragon Place.

      The favorable change in the Partnership's  operating loss is the result of
a decrease in depreciation and  amortization  expense of $32,000 and an increase
in interest income of $22,000.  Depreciation and amortization  expense decreased
as a result of some assets  having  become  fully  depreciated  during the prior
year.  Interest income  increased due to an increase in interest rates earned on
invested  cash  equivalents  and an increase in the average  balance of invested
cash reserves.  The decrease in depreciation  and  amortization  expense and the
increase in interest income were partially offset by a decrease in rental income
of $51,000.  Rental income  decreased at Colony Plaza due to a reduction in shop
space occupancy  related to the two anchor tenant  vacancies  discussed  further
above.

Six Months Ended September 30, 1997
-----------------------------------

      The  Partnership  reported a net loss of $83,000 for the six months  ended
September  30, 1997 as compared to a net loss of $332,000 for the same period in
the prior year. This favorable change in the Partnership's net operating results
is due to a decrease  in the  Partnership's  share of  unconsolidated  ventures'
losses  of  $160,000  and a  decrease  in the  Partnership's  operating  loss of
$89,000.  The decrease in the Partnership's  share of  unconsolidated  ventures'
losses is primarily  attributable  to an increase in rental  revenues  which was
partially  offset by an increase in property  operating  expenses  and  interest
expense.  The  increase in rental  revenues at DeVargas  Mall is a result of the
addition of two new tenants  during the second  half of fiscal  1997.  Since the
operations of the ventures are reported on a three-month lag, the current period
results do not  reflect  the loss of the major  tenant at  DeVargas in July 1997
which is discussed further above. In addition rental income at One Paragon Place
increased due to new leases  signed during the past year at rates  substantially
higher than the rates on expiring leases. Interest expense increased as a result
of an  increase  in the  average  outstanding  principal  balance of the line of
credit  borrowings of the DeVargas joint venture.  Property  operating  expenses
increased  primarily  as a result of an  increase  in  repairs  and  maintenance
expense at DeVargas Mall due to higher snow removal  costs and roof repairs.  An
increase in  marketing  expenses at One Paragon  Place also  contributed  to the
increase in property operating expenses for the current six-month period.

      The  Partnership's  operating loss  decreased by $89,000  primarily due to
decreases in general and administrative expenses of $52,000 and depreciation and
amortization expense of $49,000.  General and administrative  expenses decreased
primarily due to certain  costs  incurred  during the prior year in  conjunction
with  the  refinancing  of  the  One  Paragon  Place  loan.   Depreciation   and
amortization  expense  decreased as a result of some assets  having become fully
depreciated  during the prior year.  


<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:  November 10, 1997