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, 1996

                                       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, 1996 and March 31, 1996 (Unaudited)
                                 (In thousands)

                                     ASSETS
                                                     December 31   March 31
                                                     -----------   --------

Operating investment properties, at cost:
   Land                                              $   4,208       $  4,208
   Buildings and improvements                           14,153         14,153
                                                     ---------       --------
                                                        18,361         18,361
   Less accumulated depreciation                        (3,811)        (3,395)
                                                     ---------       --------
                                                        14,550         14,966

Investments in unconsolidated joint ventures, 
   at equity                                            14,342         15,154
Cash and cash equivalents                                4,195          3,439
Accrued interest and other receivables                      31            119
Accounts receivable - affiliates                             7              7
Prepaid expenses                                            43              7
Deferred expenses, net                                     157            193
                                                    ----------       --------
                                                    $   33,325       $ 33,885
                                                    ==========       ========

                        LIABILITIES AND PARTNERS' CAPITAL

Notes payable and deferred interest                 $   11,836       $ 11,255
Accounts payable and accrued expenses                       71             75
Accrued real estate taxes                                    -             13
Tenant security deposits                                    15             14
Advances from consolidated ventures                        108            198
Partners' capital                                       21,295         22,330
                                                    ----------       --------
                                                    $   33,325       $ 33,885
                                                    ==========       ========


















                             See accompanying notes.


<PAGE>


            PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS
   For the three and nine months ended December 31, 1996 and 1995 (Unaudited)
                      (In thousands, except per Unit data)


                                     Three Months Ended    Nine Months Ended
                                         December 31,        December 31,
                                     -------------------   -----------------
                                        1996     1995        1996     1995
                                        ----     ----        ----     ----

Revenues:
   Rental income and expense
     reimbursements                    $  615    $ 549     $ 1,774    $ 1,636
   Interest income                         56       58         154        189
                                       ------    -----     -------    -------
                                          671      607       1,928      1,825

Expenses:
   Interest expense                       302      365         901      1,376
   Property operating expenses            114      113         348        340
   Real estate taxes                       37       41         112        117
   General and administrative              45       88         219        255
   Depreciation and amortization          136      104         430        386
                                       ------    -----     -------    -------
                                          634      711       2,010      2,474
                                       ------    -----     -------    -------
Operating income (loss)                    37     (104)        (82)      (649)

Partnership's share of unconsolidated
   ventures' income (losses)               25      (10)       (188)       684
                                       ------   ------     -------    -------

Net income (loss)                      $   62   $ (114)    $  (270)   $    35
                                       ======   ======     =======    =======

Net income (loss) per
   Limited Partnership Unit             $1.21   $(2.23)   $ (5.29)   $  0.69
                                        =====   ======     =======    =======

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

   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 nine months ended December 31, 1996 and 1995 (Unaudited)
                                 (In thousands)


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

Balance at March 31, 1995                           $(208)         $23,629
Cash distributions                                     (8)            (757)
Net income                                              -               35
                                                    -----          -------
Balance at December 31, 1995                        $(216)         $22,907
                                                    =====          =======

Balance at March 31, 1996                           $(218)         $22,548
Cash distributions                                     (8)            (757)
Net loss                                               (3)            (267)
                                                    -----          -------
Balance at December 31, 1996                        $(229)         $21,524
                                                    =====          =======


































                             See accompanying notes.


<PAGE>


              PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
        For the nine months ended December 31, 1996 and 1995 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)


                                                        1996            1995
                                                        ----            ----
Cash flows from operating activities:
   Net income (loss)                                  $ (270)           $  35
   Adjustments to reconcile net income (loss)
     to net cash provided by operating activities:
    Partnership's share of unconsolidated
      ventures' income (losses)                          188             (684)
    Depreciation and amortization                        430              386
    Amortization of deferred loan costs                   29               23
    Interest expense on zero coupon loans                610            1,159
    Changes in assets and liabilities:
      Accrued interest and other receivables              88               (9)
      Prepaid expenses                                   (18)             (16)
      Deferred expenses                                   (7)               -
      Accounts payable and accrued expenses               (4)              78
      Accrued real estate taxes                          (31)               -
      Tenant security deposits                             1                4
      Advances from consolidated ventures                (90)             121
                                                      ------            -----
        Total adjustments                              1,196            1,062
                                                      ------            -----
        Net cash provided by operating activities        926            1,097
                                                      ------            -----

Cash flows from investing activities:
   Additional investments in unconsolidated
      joint ventures                                       -             (279)
   Additions to operating investment properties            -              (20)
   Distributions from unconsolidated joint ventures      624            9,818
                                                      ------            -----
        Net cash provided by investing activities        624            9,519
                                                      ------            -----

Cash flows from financing activities:
   Cash distributions to partners                       (765)            (765)
   Payment of deferred financing costs                     -             (134)
   Payments of principal on notes payable                (29)         (10,398)
                                                      ------            -----
        Net cash used in financing activities           (794)         (11,297)
                                                      ------            -----

Net increase (decrease) in cash and cash equivalents     756             (681)

Cash and cash equivalents, beginning of period         3,439            3,824
                                                      ------            -----

Cash and cash equivalents, end of period              $4,195           $3,143
                                                      ======           ======

Cash paid during the period for interest              $  262            $ 194
                                                      ======            =====



                             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, 1996. 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 December 31, 1996 and March 31, 1996
    and  revenues and  expenses  for each of the three- and  nine-month  periods
    ended  December  31, 1996 and 1995.  Actual  results  could  differ from the
    estimates and assumptions used.

2.  Related Party Transactions

    Included in general and  administrative  expenses for the nine-month periods
    ended  December  31,  1996 and 1995 is $65,000  and  $74,000,  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,  1996 and 1995 is  $12,000  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 nine months ended September 30, 1996 and 1995
                                 (in thousands)

                                      Three Months Ended    Nine Months Ended
                                         September 30,        September 30,
                                      ------------------    -----------------
                                          1996     1995        1996     1995
                                          ----     ----        ----     ----

Revenues:
   Rental revenues and 
     expense recoveries               $ 1,124    $ 1,058   $ 3,183    $ 3,799
   Interest and other income                6          1        27          7
                                      -------    -------   -------    -------
                                        1,130      1,059     3,210      3,806

Expenses:
   Property operating expenses            356        466     1,178      1,276
   Real estate taxes                       24         46       111        147
   Interest expense                       291         74       790        219
   Depreciation and amortization          429        454     1,291      1,379
                                     --------    -------   -------    -------
                                        1,100      1,040     3,370      3,021
                                     --------    -------   -------    -------
Net income (loss)                    $     30    $    19   $  (160)   $   785
                                     ========    =======   =======    =======

Net income (loss):
   Partnership's share of
     combined income (losses)        $     30    $    (5)  $  (173)   $   699
   Co-venturers' share of
     combined income (losses)              -         24        13         86
                                     --------    -------   -------    -------
                                     $     30    $    19   $  (160)   $   785
                                     ========    =======   =======    ========

               Reconciliation of Partnership's Share of Operations
 For the three and nine months ended September 30, 1996 and 1995 (in thousands)

                                      Three Months Ended    Nine Months Ended
                                          September 30,      September  30,
                                      ------------------    -----------------
                                          1996     1995        1996     1995
                                          ----     ----        ----     ----

Partnership's share of operations,
   as shown above                      $   30     $  (5)    $  (173)  $  699
Amortization of excess basis               (5)       (5)        (15)     (15)
                                       ------     -----     -------   ------
Partnership's share of
   unconsolidated ventures' 
   income (losses)                     $   25     $ (10)    $  (188)  $  684
                                       ======     =====     =======   ======

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 nine months ended September 30,
   1996 and 1995 (in thousands):

                                      Three Months Ended    Nine Months Ended
                                         September 30,        September  30,
                                      ------------------    -----------------
                                         1996      1995        1996     1995
                                         ----      ----        ----     ----

      Common area maintenance          $  31     $  27       $   93   $   88
      Utilities                           22        22           65       59
      Management fees                     21        20           68       62
      Administrative and other            40        44          122      131
                                      ------     -----       ------   ------
                                      $  114     $ 113       $  348   $  340
                                      ======     =====       ======   ======

5. Notes payable

    Notes payable and deferred  interest at December 31, 1996 and March 31, 1996
consist of the following (in thousands):

                                                  December 31     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  December  31, 1996 and
     March 31,  1996  amounted to $4,240
     and $3,630, 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).                           $ 8,290        $ 7,680

     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
     September 30, 1996.                            3,546          3,575
                                                  -------        -------
                                                  $11,836        $11,255
                                                  =======        =======

    The  borrowing  secured by Colony Plaza was  scheduled to mature 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. In addition, management
is also pursuing  possible  alternative  financing  sources.  A  refinancing  or
modification  transaction  could  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.

6. Contingencies

    As  discussed  in more detail in the Annual  Report for the year ended March
31, 1996, the  Partnership is involved in certain legal actions.  At the present
time, the Managing  General Partner is unable to determine what impact,  if any,
the  resolution  of  these  matters  may  have  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 Annual Report, management continues to focus its
efforts on  refinancing  the  Partnership's  remaining zero coupon loan which is
secured by the Colony Plaza Shopping  Center.  This loan matured on December 28,
1996,  at  which  time   approximately   $8,290,000  became  due.  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.  In addition,  management  is also  pursuing
possible alternative financing sources.

    As of  December  31,  1996,  the Colony  Plaza  Shopping  Center in Augusta,
Georgia remained 98% leased. Physical occupancy,  however,  declined from 57% to
33%. 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 will 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. Food Max, the Center's 47,990 square foot
grocery store tenant,  closed on December 1, 1996, and a 2,400 square foot small
shop tenant also closed  during the quarter.  However,  subsequent to the end of
the quarter the Food Lion grocery  store chain  entered  into an agreement  with
Food Max to open  Food  Lion  stores  in  several  former  Food  Max  locations,
including  Colony  Plaza.  After Food Lion  completes a remodeling of the former
Food Max space, its new store will open in the summer of 1997. As with Wal-Mart,
and in keeping with the lease provisions,  Food Max will remain obligated to pay
rent and its share of  operating  expenses  through the end of its lease term in
June 2009.

    The  anchor  tenant  vacancies  at  Colony  Plaza  will make  obtaining  new
financing very  difficult.  Wal-Mart's  and Food Max's  decisions to close their
stores at the center are  weakening the other  tenant's  sales volumes which may
affect their ability to meet rent obligations.  Food Lion's  replacement of Food
Max will partially mitigate this situation. 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 has  exercised a  co-tenancy
clause in its lease which  allowed it to close its store because of the Wal-Mart
vacancy.  Unless the Wal-Mart  space is re-leased  within  twelve  months,  this
tenant will only be required to pay its share of common area maintenance,  taxes
and insurance  during this  twelve-month  period,  after which it can cancel its
entire lease  obligation,  which expires in January 1998,  upon 30 days' written
notice. 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.  During the first  quarter of fiscal 1997,  the  Partnership  hired new
property management and leasing agents to oversee this period of restabilization
for the Colony Plaza property.

    As a result of the  current  leasing  status of the Colony  Plaza  property,
management is currently  focusing its efforts on negotiations  with the existing
first mortgage lender. As a result of the Wal-Mart  vacancy,  any refinancing or
modification  transaction  could  require a  sizable  principal  paydown  by the
Partnership to reduce the loan-to-value ratio of the mortgage note payable. If a
restructuring   or   refinancing   of  the  current   mortgage  loan  cannot  be
accomplished,  the lender could choose to initiate foreclosure proceedings.  The
eventual outcome of this situation is uncertain at the present time.

      As previously  reported,  on November 16, 1995 the Partnership  refinanced
the zero coupon loan secured by the One Paragon Place Office Building, which had
a principal balance of $10.4 million,  with a new loan issued in the name of the
joint  venture which owns the  property.  The new loan had an initial  principal
balance of  $8,750,000,  bears  interest at a rate of 8% per annum and  requires
monthly  principal and interest  payments of  approximately  $68,000.  The loan,
which is recorded on the books of the unconsolidated joint venture, 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  the  lender's   loan-to-value  ratio   requirements.   The  Partnership
contributed  the funds required to complete this  refinancing  transaction.  One
Paragon  Place was 98% leased at  December  31,  1996.  The  suburban  Richmond,
Virginia office market  continues to strengthen  with high occupancy  levels and
improving  rental rates as a result of steady job and  population  growth.  As a
result of the strong market conditions,  the level of new construction  activity
in  the  Richmond  area  has  increased  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  favorably  against both existing and new  properties in its
submarket.  During the current quarter,  an existing tenant leased an additional
4,716  square  feet,  replacing a 5,634  square foot lease  which  expires  next
quarter.  The balance of 918 square feet remains available for lease. During the
third fiscal  quarter,  the leasing team also executed lease renewals with three
tenants  totalling  7,000 square feet, or 4.8% of the building's  rentable area.
Leases  comprising  29% of One  Paragon  Place's  rentable  area  will be up for
renewal during calendar 1997.  Given the current strength of the Richmond office
market,  management expects to be able to renew or re-lease this space at higher
rental rates.  These market conditions may also result in the Partnership having
a favorable opportunity to sell One Paragon Place in the near term. Management's
hold versus sell decisions with respect to One Paragon Place will be based on an
assessment of the impact on the expected total returns to the Limited Partners.

    The  DeVargas  Mall was 92% leased as of December 31,  1996.  As  previously
reported  in the  Annual  Report,  during  the  fourth  quarter  of fiscal  1996
management  signed a lease with a national  department store retailer which took
occupancy of 27,910 square feet at DeVargas  during the quarter ended  September
30,  1996.  To  accommodate  this new anchor  tenant,  leases  with two  tenants
totalling 7,007 square feet were terminated and two additional tenants totalling
12,388 square feet were relocated and downsized to spaces totalling 5,741 square
feet.  During the quarter ended  September  30, 1996,  lease  negotiations  were
finalized  with 16,000  square foot  national  drug store chain to fill a vacant
mini-anchor space at the mall. Improvements to the new drug store tenant's space
are nearly completed and the tenant is expected to open in early spring. Funding
of the required tenant improvements for the 27,910 and 16,000 square foot leases
referred to above have been  accomplished by means of additional  advances under
the lines of credit provided by the Partnership's co-venture partner.

      With  respect  to the  Partnership's  apartment  property,  the market for
multi-family properties in the Pacific Northwest in general and in the Portland,
Oregon  area in  particular  has been  strong  over the past year and  long-term
prospects  remain  favorable.  However,  at the present time the addition of new
properties  to the  market  supply has  resulted  in an  increase  in the use of
concessions by existing property owners in response to the new competition which
has lowered effective rental rates.  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.

    At December 31, 1996, the Partnership and its consolidated joint venture had
available cash and cash  equivalents of  approximately  $4,195,000.  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 December 31, 1996
------------------------------------

     The  Partnership  reported net income of $62,000 for the three months ended
December 31, 1996,  as compared to a net loss of $114,000 for the same period in
the prior year.  This  favorable  change of $176,000  in the  Partnership's  net
operating  results  is  due to an  improvement  in the  Partnership's  share  of
unconsolidated  ventures'  operations  of $35,000 and a favorable  change in the
Partnership's  operating  income (loss) of $141,000.  A portion of the change in
the Partnerships  share of  unconsolidated  ventures'  operations,  as well as a
portion  of the  change  in  the  Partnership's  operating  income  (loss),  are
attributable  to the  change  in  the  entity  reporting  the  interest  expense
associated with the borrowing  secured by the One Paragon Place Office Building.
As  discussed  further  above and in the Annual  Report,  the zero  coupon  loan
secured by the One Paragon Place Office Building,  originally issued in the name
of the  Partnership,  was refinanced with the proceeds of a new loan obtained by
the  One  Paragon  Place  joint  venture  in  November  1995.  This  refinancing
transaction  increased the interest expense at the unconsolidated  joint venture
while at the same  time  decreasing  the  Partnership's  interest  expense.  The
favorable  change  in  the  Partnership's  share  of  unconsolidated   ventures'
operations prior to the effect of the interest  expense  associated with the One
Paragon Place loan was $208,000.  The major portion of this favorable  change is
attributable  to an increase in rental  revenues  at One Paragon  Place.  Rental
revenues  increased at One Paragon Place for the current  three-month period due
to a 9% increase in the property's  average  occupancy  level and an increase in
average rental rates when compared to the same period in the prior year.

     The  Partnership's  operating  income  (loss),  prior to the  effect of the
change in the entity  reporting  the interest on the loan secured by One Paragon
Place,  improved by $16,000 for the current  three-month period primarily due to
an  increase in rental  revenues  from the  consolidated  joint  ventures  and a
decrease in general  and  administrative  expenses.  Rental  revenues  increased
slightly at Colony  Plaza due to an increase in the average  leased space in the
current  fiscal  year.  As  discussed  further  in the  notes  to the  financial
statements,  the  Partnership  reports it's share of ventures'  operations  on a
three-month lag. As a result,  the reported results for Colony Plaza are for the
period  ended  September  30,  1996,  which  is prior to the date of some of the
vacancies and rental abatements which occurred  following  Wal-Mart's  departure
from the Center.  As discussed  further  above,  revenues  from Colony Plaza are
expected to decline significantly in future periods, until the Wal-Mart space is
re-leased. General and administrative expenses declined by $43,000 for the three
months ended  December  31, 1996 mainly due to a reduction  in certain  required
professional  services.  The favorable  changes in operating  income (loss) were
partially offset by an increase in depreciation and amortization expense.

Nine months ended December 31, 1996
-----------------------------------

     The  Partnership  reported a net loss of $270,000 for the nine months ended
December 31,  1996,  as compared to net income of $35,000 for the same period in
the prior year. This  unfavorable  change of $305,000 in the  Partnership's  net
operating  results  is  due  to  a  decline  in  the   Partnership's   share  of
unconsolidated ventures' operations of $872,000, which was partially offset by a
decrease in the Partnership's operating loss of $567,000. The unfavorable change
in the Partnership's share of unconsolidated  ventures'  operations,  as well as
the decrease in the Partnership's  operating loss, are primarily attributable to
the change in the entity  reporting  the interest  expense  associated  with the
borrowing secured by the One Paragon Place Office Building, as discussed further
above.  The  unfavorable  change in the  Partnership's  share of  unconsolidated
ventures' operations prior to the effect of the interest expense associated with
the One Paragon Place loan was $320,000.  The major portion of this  unfavorable
change is  attributable  to a decrease  in rental  revenues  at both One Paragon
Place and  DeVargas.  During  fiscal 1996,  the One Paragon  Place joint venture
received  $500,000  in  connection  with a lease  termination  agreement  with a
significant  tenant,  which is  included  in rental  revenue in the prior  year.
Rental revenues decreased at DeVargas for the current nine-month period due to a
decrease in the property's average occupancy level.

     The Partnership's  operating loss, prior to the effect of the change in the
entity  reporting  the  interest  on the  loan  secured  by One  Paragon  Place,
increased  by  $41,000  for  the  current  nine-month  period  primarily  due to
increases in interest expense and  depreciation  and amortization  charges which
were  partially  offset by an  increase in rental  income from the  consolidated
joint  ventures.  Interest  expense  (excluding  the  One  Paragon  Place  loan)
increased by $74,000 due to interest  attributable  to the Willow Grove mortgage
loan obtained in March 1995.  Deprecation and amortization  expense increased by
$44,000 for the current nine-month  period.  Rental income increased by $138,000
primarily  due to increases  in the average  rental rates at Willow Grove and an
increase in the average leased area at Colony Plaza. As discussed further above,
the  Colony  Plaza  results  in the  current  year  reflect  operations  through
September  30,  1996  which is prior  to the date of some of the  vacancies  and
rental  abatements which have occurred in the wake of Wal-Mart's  departure from
the shopping center.



<PAGE>


                                     PART II
                                Other Information

Item 1. Legal Proceedings

      As discussed in the prior quarterly and annual reports, 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.

      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.  On July  17,  1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which has been preliminarily approved by the court and provides for the complete
resolution of the class action  litigation,  including  releases in favor of the
Partnership  and the General  Partners,  and the  allocation of the $125 million
settlement  fund among  investors  in the various  partnerships  at issue in the
case.  As part of the  settlement,  PaineWebber  also  agreed to  provide  class
members with certain financial  guarantees relating to some of the partnerships.
The details of the settlement are described in a notice mailed directly to class
members at the  direction of the court.  A final  hearing on the fairness of the
proposed settlement was  held in December 1996, and  a ruling by the court as a 
result of this final hearing is currently pending.

    With regard to the Abbate and  Bandrowski  actions  described  in the Annual
Report on Form 10-K for the year ended March 31,  1996,  in  September  1996 the
court  dismissed  many  of  the  plaintiffs'  claims  as  barred  by  applicable
securities arbitration  regulations.  Mediation with respect to both actions was
held in December  1996. As a result of such  mediation,  a tentative  settlement
between  PaineWebber  and the  plaintiffs  was reached  which would  provide for
complete resolution of such actions.  PaineWebber  anticipates that releases and
dismissals with regard to these actions will be received by February 1997.

    Under certain limited  circumstances,  pursuant to the Partnership Agreement
and other contractual  obligations,  PaineWebber affiliates could be entitled to
indemnification  for expenses and  liabilities in connection with the litigation
discussed above. However, PaineWebber has agreed not to seek indemnification for
any amounts it is required to pay in connection  with the  settlement of the New
York Limited  Partnership  Actions.  At the present time,  the General  Partners
cannot estimate the impact, if any, of the potential  indemnification  claims on
the  Partnership's  financial  statements,  taken  as a whole.  Accordingly,  no
provision  for any  liability  which could result from the  eventual  outcome of
these  matters has been made in the  accompanying  financial  statements  of the
Partnership.

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 12, 1997