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, 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
              September 30, 1996 and March 31, 1996 (Unaudited)
                                (In thousands)

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

Operating investment properties, at cost:
   Land                                               $  4,208       $  4,208
   Building and improvements                            14,157         14,153
                                                      --------       --------
                                                        18,365         18,361
   Less accumulated depreciation                        (3,685)        (3,395)
                                                      --------       --------
                                                        14,680         14,966

Investments in unconsolidated joint 
   ventures, at equity                                  14,543         15,154
Cash and cash equivalents                                4,161          3,439
Escrowed cash                                               19              -
Accrued interest and other receivables                      24            119
Accounts receivable - affiliates                             7              7
Prepaid expenses                                             2              7
Deferred expenses, net                                     171            193
                                                       -------       ---------
                                                       $33,607        $33,885
                                                       =======        =======

                      LIABILITIES AND PARTNERS' CAPITAL

Notes payable and deferred interest                    $11,639        $11,255
Accounts payable and accrued expenses                      101             75
Accrued real estate taxes                                   37             13
Tenant security deposits                                    14             14
Advances from consolidated ventures                        328            198
Partners' capital                                       21,488         22,330
                                                      --------       --------
                                                       $33,607        $33,885
                                                       =======        =======
















                           See accompanying notes.


<PAGE>


            PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS
   For the three and six months ended September 30, 1996 and 1995 (Unaudited)
                      (In thousands, except per Unit data)


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

Revenues:
   Rental income and expense
     reimbursements                     $ 596    $ 536     $ 1,159    $ 1,087
   Interest income                         51       68          98        131
                                        -----    -----     -------    -------
                                          647      604       1,257      1,218

Expenses:
   Interest expense                       304      540         599      1,010
   Property operating expenses            103      113         234        228
   Real estate taxes                       38       38          75         77
   General and administrative              90       92         174        167
   Depreciation and amortization          160      149         294        282
                                         -----    -----     -------    -------
                                          695      932       1,376      1,764
                                         ----     -----     -------    -------
Operating loss                            (48)    (328)       (119)      (546)

Partnership's share of unconsolidated
   ventures' income (losses)              (91)     559        (213)       694
                                        -----    -----      ------     ------

Net income (loss)                      $ (139) $   231     $  (332)   $   148
                                       ======  =======     =======    =======

Net income (loss) per
   Limited Partnership Unit            $ (2.73)  $ 4.53     $ (6.50)   $  2.90
                                       =======   ======     =======    =======

Cash distributions per
   Limited Partnership Unit            $  5.00  $  5.00      $10.00     $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, 1996 and 1995 (Unaudited)
                                 (In thousands)


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

Balance at March 31, 1995                           $(208)         $23,629
Cash distributions                                     (5)            (505)
Net income                                              2              147
                                                    ------         --------
Balance at September 30, 1995                       $(211)         $23,271
                                                    =====          =======

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


































                           See accompanying notes.


<PAGE>


              PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
        For the six months ended September 30, 1996 and 1995 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)


                                                         1996           1995
                                                         ----           ----
Cash flows from operating activities:
   Net income (loss)                                 $  (332)          $  148
   Adjustments to reconcile net income (loss)
     to net cash provided by operating activities:
    Partnership's share of unconsolidated
      ventures' income (losses)                          213             (694)
    Depreciation and amortization                        294              282
    Amortization of deferred loan costs                   21               16
    Interest expense on zero coupon loans                403              888
    Changes in assets and liabilities:
      Accrued interest and other receivables              95             (360)
      Prepaid expenses                                     5               (1)
      Deferred expense                                    (3)               -
      Accounts payable and accrued expenses               26               42
      Accrued real estate taxes                           24                -
      Tenant security deposits                             -                4
      Advances from consolidated ventures                130              152
                                                     -------          -------
        Total adjustments                              1,208              329
                                                     -------          -------
        Net cash provided by operating activities        876              477
                                                     -------          -------

Cash flows from investing activities:
   Additional investments in unconsolidated
      joint ventures                                       -             (224)
   Net additions to escrowed cash                        (19)               -
   Additions to operating investment properties           (4)             (14)
   Distributions from unconsolidated joint
      ventures                                           398            1,307
                                                    --------         --------
        Net cash provided by investing activities        375            1,069
                                                    --------         --------

Cash flows from financing activities:
   Cash distributions to partners                       (510)            (510)
   Payment of deferred financing costs                     -             (192)
   Payments of principal on notes payable                (19)               -
                                                    --------        ---------
        Net cash used in financing activities           (529)            (702)
                                                    --------        ---------

Net increase in cash and cash equivalents                722              844

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

Cash and cash equivalents, end of period             $ 4,161          $ 4,668
                                                     =======          =======

Cash paid during the period for interest             $   175         $      -
                                                     =======         ========



                           See accompanying notes.


<PAGE>


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

1.  Organization

  The accompanying  financial  statements,  footnotes,  and discussion should be
  read in conjunction with the financial  statements and footnotes  contained in
  the Partnership's Annual Report for the year ended March 31, 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.

2.  Related Party Transactions

   Included in general and  administrative  expenses for the  six-month  periods
   ended  September  30,  1996 and 1995 is $41,000  and  $50,000,  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, 1996 and 1995 is $7,000 and $6,000, respectively,  representing
   fees earned by Mitchell Hutchins Institutional  Investors,  Inc. for managing
   the Partnership's cash assets.

3.  Investments in Unconsolidated Joint Venture Partnerships

  As  of  September  30,  1996,   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, 1996 and 1995
                                 (in thousands)

                                        Three Months Ended    Six Months Ended
                                             June 30,             June 30,
                                       ------------------    ----------------
                                       1996        1995        1996     1995
                                       ----        ----        ----     ----

Revenues:
   Rental revenues and expense
 recoveries                           $ 1,027    $ 1,617    $2,059     $2,742
   Interest and other income               12          3        21          5
                                      -------    -------    ------     ------
                                        1,039      1,620     2,080      2,747

Expenses:
   Property operating expenses            405        440       822        810
   Real estate taxes                       44         52        87        101
   Interest expense                       250         74       499        145
   Depreciation and amortization          429        463       862        925
                                     --------   --------    ------    -------
                                        1,128      1,029     2,270      1,981
                                     --------   --------    ------    -------
Net income (loss)                    $    (89)  $    591    $ (190)   $   766
                                     ========   ========    ======    =======

Net income (loss):
   Partnership's share of
     combined income (losses)        $    (86)  $    564    $ (203)   $   704
   Co-venturers' share of
     combined income (losses)              (3)        27        13         62
                                    ---------   --------    ------    -------
                                    $     (89)  $    591    $ (190)   $   766
                                    =========   ========    ======    =======

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

                                        Three Months Ended    Six Months Ended
                                            June 30,            June 30,
                                     ---------------------    ----------------
                                       1996        1995        1996     1995
                                       ----        ----        ----     ----

Partnership's share of operations,
   as shown above                   $     (86)  $    564    $  (203)  $   704
Amortization of excess basis               (5)        (5)       (10)      (10)
                                    ---------   ---------   -------   -------
Partnership's share of
   unconsolidated ventures' 
   income (losses)                  $     (91)  $    559    $  (213)  $   694
                                    =========   ========    =======   =======

4.  Operating Investment Properties

    At September 30, 1996, the Partnership  has investments in two  consolidated
    joint venture  partnerships which own operating investment  properties.  The
    consolidated  ventures have December 31 year-ends for both tax and financial
    reporting purposes.  Accordingly,  the Partnership's policy is to report the
    financial  position,  results of operations and cash flows of these ventures
    on a three-month lag. All material  transactions between the Partnership and
    these joint ventures have been  eliminated  upon  consolidation,  except for
    lag-period cash transfers.  Such lag period cash transfers are accounted for
    as advances from consolidated ventures on the accompanying balance 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, 1996
   and 1995 (in thousands):

                                       Three Months Ended     Six  Months Ended
                                             June 30,              June 30,
                                        -----------------     -----------------
                                         1996      1995        1996     1995
                                         ----      ----        ----     ----

      Common area maintenance          $  27     $  36        $  62    $  62
      Utilities                           21        18           43       36
      Management fees                     26        21           47       42
      Administrative and other            29        38           82       88
                                       -----     -----        -----    -----
                                       $ 103     $ 113        $ 234    $ 228
                                       =====     =====        =====    =====

5. Notes payable

    Notes payable and deferred interest at September 30, 1996 and March 31, 1996
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
is due at  maturity,  on December 29,
1996.    Interest    is    compounded
semi-annually.  Accrued  interest  at
September 30, 1996 and March 31, 1996
amounted   to  $4,033   and   $3,630,
respectively.  The fair  value of the
mortgage   note    approximated   its
carrying  value at September 30, 1996
and March 31,  1996.  See  discussion
below.                                            $ 8,083        $ 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
June 30, 1996 and  December 31, 1995.
                                                    3,556          3,575
                                                  -------        -------
                                                  $11,639        $11,255
                                                  =======        =======


    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.

    The borrowing secured by Colony Plaza is scheduled to mature on December 29,
1996, at which time total  principal and accrued  interest of $8,290,190 will be
due and payable.  Management is currently  negotiating  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 is not  accomplished  by the stated  maturity  date,  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.

6. Contingencies

    As discussed in detail in the Partnership's 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  previously  reported,  Wal-Mart  closed its 82,000  square foot store at
Colony Plaza in July 1996 to open a "Supercenter" store at a new location in the
Augusta  market.  Although  Wal-Mart  will remain  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.  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.  Reported  tenant sales
results for August and  September  have  declined  significantly.  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.  The new  leasing  agents have
already  entered  into  preliminary  discussions  with  a  number  of  potential
replacement anchor tenants for the Wal-Mart space.

    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, which had an outstanding
balance of  $8,083,000 at September 30, 1996, is scheduled to mature in December
1996,  at  which  time  approximately  $8,290,000  would be due.  Management  is
currently  negotiating 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.  The anchor tenant
vacancy at Colony  Plaza  will make  obtaining  new  financing  very  difficult.
Accordingly,  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 by the schedule maturity date, 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 99% occupied at September  30, 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 quarter ended September 30, 1996, the property's  leasing
team signed a lease  renewal  with a tenant  occupying  3,090  square feet at an
average rental rate that was 6% higher than the rate paid under the tenant's old
lease.  During the next 15 months,  leases comprising 25% of One Paragon Place's
leasable  area will be up for renewal.  With current  market rental rates higher
than rates on the leases up for  renewal,  management  expects  revenues  at the
property to increase as new leases or renewals are signed.

    The DeVargas  Mall was 92% leased as of September  30, 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.  Funding of the required tenant  improvements for
the 27,910 and 16,000 square foot leases  referred to above will be accomplished
by means of  additional  advances  under  the lines of  credit  provided  by the
Partnership's co-venture partner.

      While the estimated  market value of the One Paragon Place Office Building
has  stabilized  over the past two  years,  it remains  significantly  below the
acquisition  price paid by the  Partnership  due to the residual  effects of the
overbuilding  which  occurred in the late 1980's and the trend toward  corporate
downsizing  and  restructurings  which occurred in the wake of the last national
recession.  While the local market conditions in Richmond are strengthening,  as
discussed  further above,  it remains to be seen whether office  building values
will fully recover to their levels of the late 1980's  within the  Partnership's
remaining  holding period.  In addition,  at the present time real estate values
for retail shopping  centers in certain markets are being adversely  impacted by
the  effects of  overbuilding  and  consolidations  among  retailers  which have
resulted in an oversupply of space. As a result of the current leasing status of
the Partnership's two retail properties,  as discussed further above, management
believes that the values of both properties might be  significantly  enhanced in
the near term if the  Partnership  is successful in  stabilizing  the respective
tenant rosters.

      With  respect to the  Partnership's  apartment  property,  the markets for
sales of multi-family  properties in the Pacific Northwest in general and in the
Portland, Oregon area in particular have been strong over the past twelve months
and remain  favorable at the present time despite the addition of new properties
to the market  supply and an  increase  in the use of  concessions  by  existing
property  owners in  response  to the new  competition.  Market  conditions  are
expected  to  remain  strong  in the near term due to the  region's  history  of
healthy employment gains and the resurgence in the growth of the high technology
industries.  Accordingly,  management is currently analyzing whether a near-term
sale  of  the  Willow  Grove  property  which  is  the  Partnership's   smallest
investment,  at 10% of the original investment  portfolio,  would be in the best
interests of the Limited Partners.  Management's hold versus sell decisions will
continue to be based on an assessment of the best  expected  overall  returns to
the Limited Partners.

    At September 30, 1996, the  Partnership and its  consolidated  joint venture
had available cash and cash equivalents of approximately $4,161,000. 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  and  to  fund  capital  enhancements  and  tenant
improvements  for  the  operating  investment  properties,   if  necessary,   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, 1996

     The Partnership  reported a net loss of $139,000 for the three months ended
September 30, 1996, as compared to net income of $231,000 for the same period in
the prior year. This  unfavorable  change of $370,000 in the  Partnership's  net
operating results is due to an unfavorable change in the Partnership's  share of
unconsolidated ventures' operations of $650,000, which was partially offset by a
decrease in the Partnership's operating loss of $280,000. The unfavorable change
in the Partnerships 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 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.  This refinancing  transaction  increased the interest expense at
the  unconsolidated  joint  venture  while  at  the  same  time  decreasing  the
Partnership's  interest  expense.  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  $476,000.  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
three-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,
decreased  by $16,000 for the current  three-month  period  primarily  due to an
increase in rental revenues and a decrease in property  operating  expenses from
the consolidated  joint ventures.  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 June 30,1996,  which
is prior to the date that  Wal-Mart  vacated 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 as a result of the impact
of the Wal-Mart vacancy on the leasing of the remainder to the Center.

Six months ended September 30, 1996

     The  Partnership  reported a net loss of  $332,000  for the  quarter  ended
September 30, 1996, as compared to net income of $148,000 for the same period in
the prior year. This  unfavorable  change of $480,000 in the  Partnership's  net
operating results is due to an unfavorable change in the Partnership's  share of
unconsolidated ventures' operations of $907,000, which was partially offset by a
decrease in the Partnership's operating loss of $427,000. 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 $558,000.  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 six-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  $97,000  for the  current  six-month  period  primarily  due to a
decrease in interest income and an increase in interest expense  attributable to
the Willow  Grove  mortgage  loan  obtained  in March 1995.  Interest  income on
Partnership  cash  reserves  declined  due to a lower  average cash balance as a
result of the cash reserves  used to complete the One Paragon Place  refinancing
transaction in the third quarter of fiscal 1996.





<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 is scheduled to continue in November 1996.

     With regard to the Abbate  action  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  the  applicable  statutes  of
limitations.  The eventual outcome of this litigation and the potential  impact,
if any, on the Partnership's  unitholders remains  undeterminable at the present
time.

     The  status of the  other  litigation  involving  the  Partnership  and its
General  Partners  remains  unchanged  from  the  description  provided  in  the
Partnership's Annual Report on Form 10-K for the year ended March 31, 1996.

     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 indemnificaiton 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 Managing  General
Partner  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:  November 13, 1996