UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C.  20549

                                  FORM 10-K

    X        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                       SECURITIES EXCHANGE ACT OF 1934

                    FOR FISCAL YEAR ENDED: AUGUST 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: 0-17147

               PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
             (Exact name of registrant as specified in its charter)

          Delaware                                            04-2798638
(State of organization)                                     (I.R.S. Employer
                                                            Identification No.)

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

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

         Securities registered pursuant to Section 12(b) of the Act:
                                                       Name of each exchange on
Title of each class                                        which registered
     None                                                        None 

Securities registered pursuant to Section 12(g) of the Act:
                    UNITS OF LIMITED PARTNERSHIP INTEREST
                               (Title of class)

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's  knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.     X

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 ____

                     DOCUMENTS INCORPORATED BY REFERENCE
Documents                                                  Form 10-K Reference
Prospectus of registrant dated                                Part IV
October 14, 1983, as supplemented




<PAGE>


             PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
                                1996 FORM 10-K

                              TABLE OF CONTENTS


Part I                                                                   Page

Item   1    Business                                                      I-1

Item   2    Properties                                                    I-3

Item   3    Legal Proceedings                                             I-3

Item   4    Submission of Matters to a Vote of Security Holders           I-4


Part  II

Item   5    Market for the Partnership's Limited Partnership Interests
               and Related Security Holder Matters                       II-1

Item   6    Selected Financial Data
II-1

Item   7    Management's Discussion and Analysis of Financial Condition
               and Results of Operations                                 II-2

Item   8    Financial Statements and Supplementary Data                  II-5

Item   9    Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosure                                  II-5


Part III

Item  10    Directors and Executive Officers of the Partnership         III-1

Item  11    Executive Compensation                                      III-3

Item  12    Security Ownership of Certain Beneficial Owners
              and Management                                            III-3

Item  13    Certain Relationships and Related Transactions              III-3


Part  IV

Item  14    Exhibits, Financial Statement Schedules and Reports 
              on Form 8-K                                                IV-1


Signatures                                                               IV-2

Index to Exhibits                                                        IV-3

Financial Statements and Supplementary Data                       F-1 to F-15


<PAGE>



                                    PART I
Item 1.  Business

      Paine Webber Qualified Plan Property Fund Three, LP (the "Partnership") is
a limited  partnership formed in June 1983 under the Uniform Limited Partnership
Act of the State of  Delaware  for the  purpose of  investing  in a  diversified
portfolio  of  existing  income-producing   operating  properties  through  land
purchase-leaseback  transactions  and first mortgage loans. The Partnership sold
$35,794,000 in Limited  Partnership Units (35,794 Units at $1,000 per Unit) from
October 14, 1983 to October 13, 1984 pursuant to a Registration  Statement filed
on Form S-11  under  the  Securities  Act of 1933  (Registration  No.  2-85347).
Limited   Partners  will  not  be  required  to  make  any  additional   capital
contributions.

      Originally,  the  Partnership  owned  land and made first  mortgage  loans
secured by buildings with respect to six operating properties.  As of August 31,
1996, the  Partnership's  mortgage loan and land lease investments on two of the
original  properties  were  still  outstanding  and the  Partnership  owned  one
operating  property  directly  as a result of  foreclosing  on a  mortgage  loan
investment.  The  Partnership's  wholly-owned  real  estate  investment  and the
security for the Partnership's other investments are described below.

Property Name          Type of Property and
and Location           Date of Investment   Size      Type of Ownership (1)
------------------     ------------------   ----      ---------------------


Appletree Apartments    Apartments        288 units;   Fee   ownership  of
Omaha, NE               5/8/84            16.2 acres   land   and    first
                                          of land      mortgage   lien  on
                                                       improvements

Woodcroft Shopping      Shopping Center   85,300       Fee   ownership  of
Center                  12/17/84          net          land   and    first
Durham, NC                                leasable     mortgage   lien  on
Phase I and Phase II                      sq. ft.;     improvements
                                          12 acres 
                                          of land

Westside Creek          Apartments        142 units;   Fee   ownership  of
Apartments (2)          7/1/85            11.4 acres   land and improvements
Little Rock, AR                           of land      


(1)   See Notes to the Financial  Statements filed with this Annual Report for a
      description of the transactions through which the Partnership has acquired
      these real estate investments.

(2)   On March  23,  1989,  the  Partnership  foreclosed  under the terms of the
      mortgage note  receivable  secured by the Westside  Creek  Apartments  for
      non-payment  of the required  monthly  payments of interest in  accordance
      with the terms of the mortgage  loan. The  Partnership  has been operating
      the property  utilizing the services of a local  management  company since
      the  date  of the  foreclosure.  See  Note 5 to the  Financial  Statements
      accompanying  this  Annual  Report  for  a  further   discussion  of  this
      investment.

      To date, the Partnership has sold or been prepaid on its investments  with
respect to three of the original  operating  properties.  On September 25, 1989,
the Partnership  liquidated its investments in a Howard Johnson's Hotel, located
in  Orlando,   Florida.  The  transaction   consisted  of  a  repayment  of  the
Partnership's  mortgage loan  receivable for $6,400,000 as well as a sale of the
related  land  at  an  amount  equal  to  the  Partnership's  original  cost  of
$1,600,000.  The repayment resulted in a loss on the mortgage loan investment of
$1,799,750  and  $750,000  of  bad  debt  expense  for  previously  accrued  but
uncollectible  interest income. On July 31, 1992, the Partnership liquidated its
investments  in the Exeter Street Theatre  Building,  when the borrower sold the
operating  property to a third party. The transaction  consisted of a prepayment
of the  mortgage  loan  receivable  at par,  for  $5,100,000,  and a sale of the
related land for $3,000,000  (prior to closing  costs).  The land had a carrying
value of $500,000,  equal to the Partnership's original investment,  at the time
of the sale. On February 20, 1990, an affiliate of the  Partnership,  which held
the mortgage loan and land lease on the Cordova Creek Apartments,  foreclosed on
the property due to non-payment of the required interest payments. The affiliate
operated the property,  using the services of a local  management  company,  for
more than five years during which time the  Partnership  received a share of the
net cash flow generated from property operations after capital improvements.  On
April  12,  1995,  the  affiliate  of the  Partnership  sold the  Cordova  Creek
property.  The Partnership,  which owned a 3.5% equity interest in the property,
received net proceeds of $311,000 and realized a gain of $61,000 on the sale.
<PAGE>
      The Partnership's investment objectives are to:

      (1)   preserve  and protect the  Limited  Partners'  capital and related
            buying power;
      (2)   provide  the  Limited  Partners  with  cash   distributions   from
            investment income; and
      (3)   achieve  long-term  appreciation in the value of the Partnership's
            investments.

      Through August 31, 1996, the Limited Partners had received cumulative cash
distributions totalling approximately $40,114,000, or $1,142 per original $1,000
investment for the  Partnership's  earliest  investors.  This return  includes a
distribution of $224 per original $1,000  investment from the liquidation of the
Howard  Johnson's  mortgage  loan and land  investment  in  September of 1989, a
distribution  of $232 per original  $1,000  investment  in October 1992 from the
liquidation of the Exeter Street Theatre Building investment in July 1992, and a
$42 distribution following the sale of the Cordova Creek Apartments in June 1995
($9 from the sale of Cordova Creek and $33 of excess Partnership  reserves).  At
August  31,  1996,  the  Partnership  retains  an  interest  in three of the six
properties underlying its original mortgage loan and land investments.

      As noted above, to date the Partnership has made  distributions of capital
proceeds to the Limited Partners  totalling $498 per original $1,000 investment.
The  Partnership's  success in meeting its capital  appreciation  objective will
depend upon the proceeds  received from the final  liquidation  of its remaining
investments.  The amount of such proceeds will ultimately  depend upon the value
of the underlying  investment properties at the time of their final liquidation,
which cannot presently be determined. The Partnership expects to finance or sell
its investments and have its mortgage loans repaid from time to time. Due to the
combination of relatively low mortgage interest rates and increased availability
of funds for sales and  mortgage  refinancings  which has existed  over the past
three  years,  the  likelihood  of the  Partnership's  loans  being  prepaid has
increased.  During fiscal 1996,  the borrowers on both of the  outstanding  loan
investments  continued to discuss  potential  prepayment  transactions  with the
Partnership.   See  Item  7  for  a  further   discussion  of  these   potential
transactions. While there are no assurances that these borrowers will be able to
finance  prepayment  transactions in the near term, if such transactions were to
be completed  the  Partnership  would be positioned  for a possible  liquidation
pending the sale of the  wholly-owned  Westside  Creek  Apartments for which the
Partnership  is  currently  in the  process of  negotiating  a  potential  sales
contract.  In  determining  the  appropriate  timing  for the sale of any of the
Partnership's investments, the General Partner will consider such factors as the
amount of appreciation in value, if any, to be realized,  the risks of continued
investment and the  anticipated  advantages to be gained from continuing to hold
the investment.

      The  property  in which the  Partnership  has an equity  interest  and the
properties  securing the Partnership's  mortgage loan investments are located in
real estate markets in which they face significant  competition for the revenues
they generate. The apartment complexes compete with numerous projects of similar
type  generally  on the  basis  of  price,  location  and  amenities.  Apartment
properties  in all markets also compete with the local single family home market
for prospective  tenants.  The availability of low home mortgage  interest rates
over the past several years has generally caused this competition to increase in
all areas of the  country.  The  shopping  center also  competes  for  long-term
commercial tenants with numerous projects of similar type generally on the basis
of location, rental rates and tenant improvement allowances. The Partnership has
no real estate investments located outside the United States. The Partnership is
engaged  solely  in  the  business  of  real  estate  investment.  Therefore,  a
presentation of information about industry segments is not applicable.

      The  Partnership  has no  employees;  it  has,  however,  entered  into an
Advisory  Contract with  PaineWebber  Properties  Incorporated  (the "Adviser"),
which is  responsible  for the  day-to-day  operations of the  Partnership.  The
Adviser is a wholly-owned  subsidiary of  PaineWebber  Incorporated  ("PWI"),  a
wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber").

      The general partners of the Partnership (the "General Partners") are Third
Qualified   Properties,   Inc.  and  Properties   Associates.   Third  Qualified
Properties,  Inc., a  wholly-owned  subsidiary of  PaineWebber,  is the Managing
General Partner of the Partnership.  The Associate General Partner is Properties
Associates,  a Massachusetts  general  partnership,  certain general partners of
which are also officers of the Adviser and the Managing General Partner. Subject
to the  Managing  General  Partner's  overall  authority,  the  business  of the
Partnership is managed by the Adviser.

      The terms of  transactions  between the  Partnership and affiliates of the
Managing  General  Partner of the  Partnership  are set forth in Items 11 and 13
below to which  reference  is hereby  made for a  description  of such terms and
transactions.

Item 2.  Properties

      As of August 31, 1996,  the  Partnership  owns, and has leased back to the
sellers,  the land related to the two investments referred to under Item 1 above
to which  reference  is made for the  name,  location  and  description  of each
investment.  Additionally,  the Partnership owns one property directly which was
acquired through foreclosure proceedings as noted in Item 1.
<PAGE>
      Occupancy  figures  for each fiscal  quarter  during  1996,  along with an
average for the year, are presented below for each property:

                                          Percent Occupied At
                              -----------------------------------------------
                                                                       Fiscal
                                                                       1996
                              11/30/95   2/29/96    5/31/96   8/31/96  Average
                              --------   -------    -------   -------  -------

Appletree Apartments           96%        97%       99%       98%       98%

Woodcroft Shopping Center
Phase I and Phase II           97%       100%      100%      100%       99%

Westside Creek Apartments      97%        97%       90%       89%       93%

Item 3.  Legal Proceedings

     In  November  1994,  a series of  purported  class  actions  (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various 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 Qualified  Properties,  Inc. and Properties
Associates  ("PA"),  which  are the  General  Partners  of the  Partnership  and
affiliates of  PaineWebber.  On May 30, 1995, the court  certified  class action
treatment of the claims asserted in the litigation.

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

      In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding,  PaineWebber  irrevocably  deposited  $125 million into an escrow
fund under the  supervision of the United States District Court for the Southern
District of New York to be used to resolve the  litigation in accordance  with a
definitive  settlement  agreement  and plan of  allocation.  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.

     In February 1996,  approximately  150 plaintiffs  filed an action  entitled
Abbate v.  PaineWebber  Inc. in  Sacramento,  California  Superior Court against
PaineWebber   Incorporated  and  various  affiliated   entities  concerning  the
plaintiffs' purchases of various limited partnership interests,  including those
offered by the  Partnership.  The complaint  alleges,  among other things,  that
PaineWebber and its related entities committed fraud and  misrepresentation  and
breached  fiduciary  duties  allegedly  owed to the  plaintiffs  by  selling  or
promoting  limited   partnership   investments  that  were  unsuitable  for  the
plaintiffs and by overstating the benefits,  understating  the risks and failing
to  state  material  facts  concerning  the  investments.  The  complaint  seeks
compensatory  damages of $15 million plus punitive damages against  PaineWebber.
In September 1996, the court dismissed many of the plaintiffs'  claims as barred
by  applicable  securities  arbitration  regulations.   Mediation  hearings  are
currently  scheduled to be held in December 1996.  The eventual  outcome of this
litigation and the potential impact,  if any, on the  Partnership's  unitholders
cannot be determined at the present time.

     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
described 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.

      The  Partnership  is not  subject  to any  other  material  pending  legal
proceedings.

Item 4.  Submission of Matters to a Vote of Security Holders

      None.


<PAGE>



                                   PART II

Item 5.  Market  for the  Partnership's  Limited  Partnership  Interests  and
Related Security Holder Matters

      At August  31,  1996,  there  were  6,055  record  holders of Units in the
Partnership. There is currently no public market for the resale of Units, and it
is not  anticipated  that a public market for Units will  develop.  The Managing
General Partner will not redeem or repurchase Units.

Item 6.  Selected Financial Data

               PaineWebber Qualified Plan Property Fund Three, LP
         For the years ended August 31, 1996, 1995, 1994, 1993 and 1992
                      (In thousands, except per Unit data)

                                   1996      1995      1994    1993     1992
                                   ----      ----      ----    ----     ----

Revenues                       $  1,218   $  1,315    $1,272  $ 1,296  $ 2,062

Operating income               $    819   $    831    $  834  $   852  $ 1,471

Gain on sale of land           $          $     -     $    -  $     -  $ 2,479

Gain on sale of
  investment in
  operating property           $      -   $    61     $    -  $     -  $    -

Income from
 investment property
 held  for sale               $    536    $   545     $  551   $  568  $   551

Net income                    $  1,355    $ 1,437     $ 1,385  $1,420  $ 4,501

Per Limited Partnership Unit:

  Net income                  $  37.47   $  39.73     $ 38.31  $ 39.26 $124.48

  Cash distributions
   from operations            $  32.64   $  35.36     $ 35.36  $ 37.94 $  45.69

  Cash distributions
   from sale, refinancing
   and other disposition
   transactions               $     -    $ 42.00      $     -  $232.00  $     -

Total assets                  $16,207    $16,030      $17,350  $17,269  $25,529

      The above selected  financial data should be read in conjunction  with the
financial  statements  and  related  notes  appearing  elsewhere  in this Annual
Report.

      The above net income and cash  distributions per Limited  Partnership Unit
are based upon the 35,794  Limited  Partnership  Units  outstanding  during each
year.


<PAGE>


Item 7.   Management's  Discussion  and Analysis of Financial  Condition  and
Results of Operations

Liquidity and Capital Resources

   The  Partnership  offered  Limited  Partnership  Interests to the public from
October 1983 to October 1984 pursuant to a  Registration  Statement  filed under
the Securities Act of 1933.  Gross proceeds of $35,794,000  were received by the
Partnership   and,  after  deducting   selling   expenses  and  offering  costs,
approximately  $31,410,000 was invested in six operating property investments in
the form of mortgage loans and land purchase-leaseback  transactions.  Since the
time that the original investments were made, the Partnership has liquidated its
Howard  Johnson's  Hotel  mortgage loan and land  investments  at a loss and has
liquidated its Exeter Street Theatre Building mortgage loan and land investments
and the investment in the Cordova Creek  Apartments at gains.  In addition,  the
Partnership  assumed  ownership of the Westside Creek Apartments  property after
foreclosing  under the  terms of the  first  mortgage  loan.  The  Partnership's
investment in the Cordova Creek  Apartments had also been converted to an equity
interest  in the  operating  property  as a result  of  foreclosure  proceedings
carried out by an affiliated partnership.

   Operations  of  the  properties  securing  the  Partnership's  two  remaining
mortgage  loan  investments  remained  strong during fiscal 1996 and continue to
fully support the debt service and land rent  payments owed to the  Partnership.
During the year ended August 31, 1996, the Partnership  received additional rent
of $25,000 under the terms of the Woodcroft Shopping Center ground lease because
cash flow from the property  was in excess of certain base amounts  specified in
the lease  agreement.  Leasing levels at the Appletree  Apartments and Woodcroft
Shopping  Center were 98% and 100%,  respectively,  as of August 31,  1996.  The
mortgage loans secured by the Appletree Apartments and Woodcroft Shopping Center
bear interest at annual rates of 11.00% and 11.25%, respectively.  As previously
reported,  since current  market  interest  rates for first  mortgage  loans are
considerably  lower than these rates,  and with the  continued  availability  of
credit in the capital  markets for real estate  transactions,  the likelihood of
the  Partnership's  mortgage loan investments  being prepaid has been high since
the time that the terms of such  mortgage  loans  allowed  for  prepayment.  The
Appletree  loan became  prepayable in April 1994.  However,  the Appletree  loan
includes a prepayment premium for any prepayment between May 1994 and April 1998
at rates between 5% and 1.25% of the mortgage loan balance.  The Woodcroft  loan
became prepayable  without penalty in December 1994. As discussed further below,
over the past year the  borrowers on both of the  outstanding  loan  investments
have approached the Partnership  regarding  potential  prepayment  transactions.
While there are no assurances  that these borrowers will be able to finance such
transactions  in  the  near  term,  if  these  transactions  are  completed  the
Partnership  could  be  positioned  for  a  possible   liquidation  pending  the
disposition  of  the  wholly-owned  Westside  Creek  Apartments  for  which  the
Partnership  is  currently  in the  process of  negotiating  a  potential  sales
contract, as discussed further below.

   During the last quarter of fiscal 1995, the Partnership  received notice from
the Appletree  borrower of its intent to prepay the Partnership's  mortgage loan
and  repurchase the underlying  land. The borrower has  represented  that it has
received the necessary  financing to complete this transaction.  The final issue
to be resolved is the amount to be received by the  Partnership  under the terms
of the ground lease as its share of the  appreciation of the Appletree  property
in accordance with the terms of the ground lease.  The terms of the ground lease
provide for the possible  resolution of disputes  between the parties over value
issues  through an  arbitration  process.  Presently,  the  Partnership  and the
borrower continue to try to resolve their differences regarding the value of the
property.  If an  agreement  cannot be  reached,  the  borrower  could force the
Partnership  to submit to  arbitration  during  fiscal 1997.  In addition to the
amount  to  be  determined  as  the   Partnership's   share  of  the  property's
appreciation  under the ground lease,  the terms of the Appletree  mortgage loan
require a  prepayment  penalty  which would be equal to 2.5% of the  outstanding
principal  balance of  $4,850,000  for any  prepayment  prior to April 30, 1997.
Subsequent to April 1997, the prepayment  penalty  declines to 1.5% for the next
twelve  months,  after  which  there  would  be no  prepayment  penalty  for the
remainder of the term until maturity in May 1999. If completed,  the proceeds of
any  prepayment  transaction  would  be  distributed  to the  Limited  Partners.
However, the transaction remains contingent on, among other things, a resolution
of the value  issue and the  closing of the  borrower's  financing  transaction.
Accordingly, there are no assurances that this transaction will be consummated.

     During the first quarter of fiscal 1996, the  Partnership  received  notice
from the  owner of the  Woodcroft  Shopping  Center  of its  intent to repay the
Partnership's   first  mortgage  loan  and  purchase  the  underlying   land  in
conjunction with a sale of the operating property to a third party. The proposed
terms of the  transaction  would  have  resulted  in the full  repayment  of the
Partnership's  mortgage  loan of  $4,335,000  and the receipt of  $1,220,000  as
payment in full for obligations  owing under the ground lease,  representing the
repayment of the $500,000  ground  investment and $720,000 as the  Partnership's
share of the  appreciation  in  value of the  underlying  property.  During  the
quarter ended February 28, 1996, it was determined that the third-party buyer of
Woodcroft was unable to secure the necessary  financing required to purchase the
property.  During the quarter ended May 31, 1996, the Partnership again received
notice from the owner of the  Woodcroft  Shopping  Center of its intent to repay
the  outstanding  first  mortgage  loan  and  purchase  the  underlying  land in
conjunction  with a sale of the operating  property to a third party. As was the
case  with the  prior  proposed  transaction,  this  sale did not  close  due to
problems with the buyer's  financing plans. The owner of the Woodcroft  Shopping
Center has been  remarketing the property in an effort to complete a sale before
the  December  1996  maturity  date of the loan.  Subsequent  to year  end,  the
Woodcroft  owner  negotiated  a contract for the sale of the property to a third
party at a lower price than the prior proposed transactions.  Based on the terms
of the potential sale  transaction,  the  Partnership's  share of the property's
appreciation would total $650,000.  The terms of the Partnership's  ground lease
require that the Partnership  agree with the borrower's  determination  of value
for purposes of calculating the Partnership's share of the appreciation in value
due under the lease before a sale of the land can be  completed.  At the present
time,  market  values for retail  shopping  centers  in many  markets  are being
adversely impacted by overbuilding and consolidations among retailers which have
resulted  in an  oversupply  of space.  While the  operations  of the  Woodcroft
Shopping  Center do not  appear to have been  affected  to date by this  general
trend,  such conditions would seem to have impacted the fair market value of the
property,  as  evidenced  by the  difficulties  that  the  Woodcroft  owner  has
encountered in the prior sale efforts.  As a result,  the Partnership has agreed
to accept the $650,000  premium for its ground lease  interest in the event that
this transaction can be completed.

     At  the  Partnership's   wholly-owned  multi-family  residential  property,
Westside Creek Apartments in Little Rock, Arkansas, the occupancy level averaged
93% for the year,  compared to 95% for the prior year.  This decrease was due to
unusually  high levels of tenant  turnover  at  Westside  Creek in the third and
fourth  quarters  of fiscal  1996  caused by the  opening of a nearby  apartment
property and by several tenants  leaving to purchase  single-family  homes.  The
construction of this nearby  apartment  community with 225 units is not expected
to have a significant impact on occupancy levels at Westside Creek over the long
term; however it is expected to limit the property  management team's ability to
raise rental  rates in the near term.  There are two more new  properties  under
construction  in the West Little Rock market and one may  directly  compete with
Westside  Creek.   The  property   management  team  has  recommended  that  the
Partnership  invest  funds in capital  improvements  at the property in order to
stay competitive with these new developments.  Property  improvements  completed
during the year  included  purchasing  a new  computer  for the leasing  office,
adding  additional  landscaping  around the  property,  exterior  painting,  and
replacing carpeting and appliances in units on an as-needed basis. Subsequent to
year end,  the  Partnership  received an offer to purchase  the  Westside  Creek
property  and entered  into  negotiations  for a potential  sales  contract.  As
previously reported, Westside Creek consists of two separately-owned phases. The
two phases  share their  amenities  with one another  and  allocate  expenses by
agreement  through a common  management  company.  The proposed sale transaction
would involve both phases, which management believes would maximize the proceeds
to the  Partnership.  The  Partnership  owns Phase I which  includes  the common
entrance,   leasing  office  and  clubhouse,  and  has  negotiated  a  favorable
allocation  of the  potential  sales  price  with the owner of Phase II based on
Phase I's physical  advantages.  In order to capitalize on this  potential for a
combined sale of both phases,  and in light of the possible near term repayments
of the Woodcroft and Appletree mortgage loans and related land sales, management
believes that pursuing a current sale of the Westside Creek property would be in
the best interests of the Limited Partners.

   At August 31, 1996, the Partnership  had available cash and cash  equivalents
of  approximately  $973,000.  Such  cash and cash  equivalents  will be used for
working capital  requirements and for distributions to the partners.  The source
of future liquidity and  distributions to the partners is expected to be through
cash generated from the Partnership's real estate investments,  repayment of the
mortgage loans receivable and the proceeds from the sales or refinancings of the
underlying  land and the  investment  property.  Such sources of  liquidity  are
expected to be adequate to meet the Partnership's needs on both a short-term and
long-term basis.  However,  to the extent that the potential loan prepayment and
sale  transactions  discussed  above  are  completed  and the net  proceeds  are
returned to the Limited Partners, the Partnership's  quarterly distribution rate
on remaining  invested  capital may have to be adjusted  downward to reflect the
reduction in cash flows which would result from such transactions.



<PAGE>


Results of Operations
1996 Compared to 1995

     The Partnership's net income decreased by $82,000 for the year ended August
31, 1996,  when compared to the prior year. The primary reason for this decrease
in net income is the gain realized by the Partnership in the prior year from the
sale of the Cordova Creek  Apartments  on April 12, 1995.  As discussed  further
above, the Partnership held a 3.5% equity interest in Cordova Creek and realized
a gain of $61,000 from the sale of the property.  In addition, a decrease in the
Partnership's  operating  income of $12,000  contributed  to the  decline in net
income for the current  year.  Operating  income  decreased  due to a decline in
revenues of $97,000.  The decline in revenues was  attributable  to decreases in
interest earned on cash equivalents of $51,000, other income of $24,000 and land
rent of $22,000. Interest earned on cash equivalents decreased due to a decrease
in the  Partnership's  average  outstanding cash reserve balances as a result of
the June 1995  distribution  to the Limited  Partners of reserves  that exceeded
expected future requirements  totalling  $1,181,000.  Other income of $24,000 in
the prior  year  represented  cash  flow  distributions  from the  Partnership's
interest in the Cordova Creek  Apartments  prior to the sale  transaction.  Land
rent decreased due to a decline in the additional  rent in excess of a specified
base amount received from the Woodcroft Shopping Center pursuant to the terms of
the ground lease.  In addition,  the  Partnership  realized a small  decrease in
income  from  investment  property  held for  sale of  $9,000  mainly  due to an
increase in capital  improvement  expenses  incurred  at  Westside  Creek in the
current year. Due to the Partnership's  policy of accounting for its assets held
for sale,  capital  improvement  costs are expensed as incurred.  A reduction in
general and administrative expenses of $79,000 partially offset the decreases in
revenues and income from  investment  property  held for sale.  The reduction in
general  and  administrative  expenses  is mainly  attributable  to a decline in
professional fees of $89,000.  Professional fees decreased  primarily due to the
legal costs incurred in conjunction with the proposed sale of the Westside Creek
Apartments in fiscal 1995.

1995 Compared to 1994

   The  Partnership's  net income increased by $52,000 for the year ended August
31, 1995,  when compared to the prior year.  The primary reason for the increase
in net  income was the gain  realized  by the  Partnership  from the sale of the
Cordova  Creek  Apartments on April 12, 1995. As discussed  further  above,  the
Partnership  held a 3.5% equity interest in Cordova Creek and realized a gain of
$61,000 from the sale of the  property.  The gain from the sale of Cordova Creek
was  partially  offset by a decrease  in the income from the  operations  of the
Westside  Creek  Apartments  of  $6,000  and a  decrease  in  the  Partnership's
operating  income of $3,000.  Income from the  operations of the Westside  Creek
Apartments  decreased  primarily  due  to an  increase  in  capital  improvement
expenses  over  the  prior  year.  Capital  improvement  expenses  increased  in
connection with preparing the property for a possible sale, as discussed further
above.  Rental  revenues at Westside  Creek were up slightly  compared to fiscal
1994. The Partnership's operating income decreased slightly, despite an increase
in revenues of $43,000,  due to an increase in professional  fees.  Professional
fees increased mainly as a result of legal expenses  incurred in connection with
the proposed Westside Creek sale transaction which failed to close during fiscal
1995.

1994 Compared to 1993

   The  Partnership's  net income decreased by $35,000 for the year ended August
31, 1994, when compared to the prior year. The decrease in net income was mainly
the result of a decrease in interest  earned on invested cash  equivalents and a
decrease in income from  operations  of the  investment  property held for sale.
Interest earned on invested cash equivalents  decreased by $21,000 during fiscal
1994 as a result of a substantial decrease in the average outstanding balance of
cash held by the  Partnership.  During the quarter ended  November 30, 1992, the
Partnership  held  the  proceeds  from  the sale of the  Exeter  Street  Theatre
Building  investment.  These  proceeds,  of over $8  million,  were  invested in
short-term  interest  bearing  instruments  prior  to being  distributed  to the
Limited Partners in October 1992. Income from investment  property held for sale
represents the net operating  income of the Westside Creek  Apartments  property
reduced by capital  improvement  expenses.  Net income  from the  operations  of
Westside Creek decreased by $17,000, mainly due to an increase in administrative
and capital  improvement  expenses.  The increases in administrative and capital
improvement  expenses were partially  offset by a slight  increase in rental and
other  income  at  Westside   Creek.  A  decline  in  Partnership   general  and
administrative  expenses of $6,000  partially  offset the  reduction in interest
income and income from Westside Creek during fiscal 1994.



<PAGE>


Inflation

   The Partnership  completed its twelfth full year of operations in fiscal 1996
and the effects of  inflation  and changes in prices on revenues and expenses to
date have not been significant.

   The impact of  inflation  in future  periods  may be offset,  in part,  by an
increase  in  revenues  because  the  Partnership's   land  leases  provide  for
additional  rent based upon  increases in the revenues of the related  operating
properties,   which  would  tend  to  rise  with  inflation.  In  addition,  the
Partnership's  wholly-owned  apartment  complex has leases which are short-term;
generally 6 to 12 months.  Rental rates on such leases could be adjusted to keep
pace with inflation,  to the extent market  conditions allow, as the leases turn
over. Such increases in revenues would be expected to at least partially  offset
the increases in  Partnership  and property  operating  expenses  resulting from
inflation.


Item 8.  Financial Statements and Supplementary Data

   The financial statements and supplementary data are included under Item 14 of
this Annual Report.

Item 9.  Changes in and  Disagreements  with  Accountants  on Accounting  and
Financial Disclosure

   None.


<PAGE>


                                   PART III

Item 10.  Directors and Executive Officers of the Partnership

      The  Managing  General  Partner  of the  Partnership  is  Third  Qualified
Properties, Inc., a Delaware corporation,  which is a wholly-owned subsidiary of
PaineWebber.  The Associate  General  Partner of the  Partnership  is Properties
Associates,  a Massachusetts  general  partnership,  certain general partners of
which are also  officers of the Adviser and the Managing  General  Partner.  The
Managing  General  Partner  has overall  authority  and  responsibility  for the
Partnership's operations, however, the day-to-day business of the Partnership is
managed by the Adviser pursuant to an advisory contract.

      (a) and (b) The names and ages of the directors  and  principal  executive
officers of the Managing General Partner of the Partnership are as follows:
                                                                    Date elected
     Name                        Office                     Age      to Office
     ----                        ------                     ---      ---------

Bruce J. Rubin       President and Director                 37       8/22/96
Terrence E. Fancher  Director                               43       10/10/96
Walter V. Arnold     Senior Vice President and
                       Chief Financial Officer              49       10/29/85
James A. Snyder      Senior Vice President                  51       7/6/92
David F. Brooks      First Vice President and Assistant
                       Treasurer                            54       6/1/83 *
Timothy J. Medlock   Vice President and Treasurer           35       8/4/89
Thomas W. Boland     Vice President                         34       12/1/91
Dorothy F. Haughey   Secretary                              70       6/1/83 *

*  The date of incorporation of the Managing General Partner

      (c) There are no other significant  employees in addition to the directors
and executive officers mentioned above.

      (d) There is no family  relationship among any of the foregoing  directors
or executive officers of the Managing General Partner of the Partnership. All of
the foregoing  directors and executive officers have been elected to serve until
the annual meeting of the Managing General Partner.

      (e) All of the directors and officers of the Managing General Partner hold
similar  positions in affiliates of the Managing General Partner,  which are the
corporate general partners of other real estate limited  partnerships  sponsored
by PWI, and for which PaineWebber Properties Incorporated ("PWPI") serves as the
Adviser.  The  business  experience  of  each  of the  directors  and  principal
executive officers of the Managing General Partner is as follows:

     Bruce J. Rubin is President and Director of the Managing  General  Partner.
Mr.  Rubin was named  President  and Chief  Executive  Officer of PWPI in August
1996. Mr. Rubin joined  PaineWebber Real Estate  Investment  Banking in November
1995 as a Senior Vice  President.  Prior to joining  PaineWebber,  Mr. Rubin was
employed by Kidder, Peabody and served as President for KP Realty Advisers, Inc.
Prior to his association with Kidder,  Mr. Rubin was a Senior Vice President and
Director of Direct  Investments at Smith Barney  Shearson.  Prior  thereto,  Mr.
Rubin  was a First  Vice  President  and a real  estate  workout  specialist  at
Shearson Lehman Brothers. Prior to joining Shearson Lehman Brothers in 1989, Mr.
Rubin  practiced  law in the Real Estate Group at Willkie Farr & Gallagher.  Mr.
Rubin is a graduate of Stanford University and Stanford Law School.

     Terrence E.  Fancher  was  appointed  a Director  of the  Managing  General
Partner in October  1996.  Mr.  Fancher is the  Managing  Director  in charge of
PaineWebber's  Real Estate Investment  Banking Group. He joined PaineWebber as a
result of the firm's acquisition of Kidder,  Peabody. Mr. Fancher is responsible
for the origination  and execution of all of  PaineWebber's  REIT  transactions,
advisory  assignments  for real  estate  clients  and certain of the firm's real
estate debt and principal  activities.  He joined  Kidder,  Peabody in 1985 and,
beginning in 1989,  was one of the senior  executives  responsible  for building
Kidder,  Peabody's real estate  department.  Mr. Fancher previously worked for a
major law firm in New York City.  He has a J.D.  from  Harvard  Law  School,  an
M.B.A. from Harvard Graduate School of Business  Administration and an A.B. from
Harvard College.

      Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Managing  General  Partner and a Senior Vice  President and Chief  Financial
Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in
1983 with the  acquisition  of Rotan  Mosle,  Inc.  where he had been First Vice
President and Controller  since 1978,  and where he continued  until joining the
Adviser.  Mr. Arnold is a Certified Public  Accountant  licensed in the state of
Texas.

      James A. Snyder is a Senior Vice President of the Managing General Partner
and a Senior Vice President of the Adviser.  Mr. Snyder re-joined the Adviser in
July 1992  having  served  previously  as an  officer  of PWPI from July 1980 to
August 1987.  From January 1991 to July 1992, Mr. Snyder was with the Resolution
Trust  Corporation where he served as the Vice President of Asset Sales prior to
re-joining  PWPI. From February 1989 to October 1990, he was President of Kan Am
Investors, Inc., a real estate investment company. During the period August 1987
to February 1989,  Mr. Snyder was Executive  Vice President and Chief  Financial
Officer  of  Southeast  Regional  Management  Inc.,  a real  estate  development
company.

      David F. Brooks is a First Vice  President and Assistant  Treasurer of the
Managing  General Partner and a First Vice President and an Assistant  Treasurer
of the Adviser.  Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980,
Mr. Brooks was an Assistant  Treasurer of Property  Capital  Advisors,  Inc. and
also, from March 1974, the Assistant Treasurer of Capital for Real Estate, which
provided real estate investment, asset management and consulting services.

      Timothy J.  Medlock is a Vice  President  and  Treasurer  of the  Managing
General  Partner and a Vice  President  and  Treasurer  of the Adviser  which he
joined  in 1986.  From  June  1988 to August  1989,  Mr.  Medlock  served as the
Controller of the Managing  General Partner and the Adviser.  From 1983 to 1986,
Mr. Medlock was associated with Deloitte Haskins & Sells. Mr. Medlock  graduated
from Colgate  University in 1983 and received his Masters in Accounting from New
York University in 1985.

      Thomas W. Boland is a Vice  President  of the Managing  General  Partner
and a Vice  President and Manager of Financial  Reporting of the Adviser which
he joined in 1988.  From 1984 to 1987, Mr. Boland was  associated  with Arthur
Young & Company.  Mr. Boland is a Certified Public Accountant  licensed in the
state of  Massachusetts.  He holds a B.S. in Accounting from Merrimack College
and an M.B.A. from Boston University.

      Dorothy  F.  Haughey  is  Secretary  of the  Managing  General  Partner,
Assistant  Secretary of  PaineWebber  and Secretary of PWI. Ms. Haughey joined
PaineWebber in 1962.

      (f) None of the directors  and officers was involved in legal  proceedings
which are  material to an  evaluation  of his or her ability or  integrity  as a
director or officer.

      (g)  Compliance  With  Exchange Act Filing  Requirements:  The  Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's  limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial  holders are required by SEC  regulations to furnish the  Partnership
with copies of all Section 16(a) forms they file.

      Based solely on its review of the copies of such forms received by it, the
Partnership  believes  that,  during the year ended August 31, 1996,  all filing
requirements  applicable to the officers and  directors of the Managing  General
Partner and ten-percent beneficial holders were complied with.


<PAGE>


Item 11.  Executive Compensation

      The directors and officers of the  Partnership's  Managing General Partner
receive no current or proposed remuneration from the Partnership.

      The  Partnership  is required to pay certain fees to the Adviser,  and the
General  Partners  are entitled to receive a share of cash  distributions  and a
share of profits and losses. These items are described in Item 13.

      The  Partnership  has paid  cash  distributions  to the  Unitholders  on a
quarterly  basis at rates  ranging  from  5.75% to 6.5% per  annum on  remaining
invested capital over the past five years.  However,  the Partnership's Units of
Limited Partnership  Interest are not actively traded on any organized exchange,
and no  efficient  secondary  market  exists.  Accordingly,  no  accurate  price
information  is  available  for  these  Units.   Therefore,  a  presentation  of
historical Unitholder total returns would not be meaningful.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

      (a) The  Partnership  is a limited  partnership  issuing  Units of Limited
Partnership  Interest,  not voting securities.  All the outstanding stock of the
Managing  General  Partner,  Third  Qualified  Properties,  Inc.,  is  owned  by
PaineWebber.   Properties  Associates,  the  Associate  General  Partner,  is  a
Massachusetts  general  partnership,  the  general  partners  of which  are also
officers of the Adviser and the Managing General Partner.  Properties Associates
was the Initial Limited Partner of the Partnership.  No limited partner is known
by the Partnership to own beneficially more than 5% of the outstanding interests
of the Partnership.

      (b) Neither the directors and officers of the Managing General Partner nor
the general partners of the Associate General Partner individually own any Units
of Limited  Partnership  Interest of the Partnership.  No director or officer of
the Managing General Partner nor the general  partners of the Associate  General
Partner  possess a right to  acquire  beneficial  ownership  of Units of Limited
Partnership Interest of the Partnership.

      (c) There exists no arrangement,  known to the Partnership,  the operation
of  which  may at a  subsequent  date  result  in a  change  in  control  of the
Partnership.

Item 13.  Certain Relationships and Related Transactions

      The  Managing  General  Partner  of the  Partnership  is  Third  Qualified
Properties,   Inc.,  a  wholly-owned   subsidiary  of  PaineWebber   Group  Inc.
("PaineWebber").  The  Associate  General  Partner is Properties  Associates,  a
Massachusetts  general  partnership,  certain general partners of which are also
officers  of the  Adviser  and the  Managing  General  Partner.  Subject  to the
Managing General Partner's overall authority, the business of the Partnership is
managed by the  Adviser  pursuant  to an  advisory  contract.  The  Adviser is a
wholly-owned  subsidiary of  PaineWebber  Incorporated  ("PWI"),  a wholly-owned
subsidiary of PaineWebber.

      The General  Partners,  the Adviser and PWI receive fees and  compensation
determined  on an  agreed-upon  basis,  in  consideration  of  various  services
performed  in  connection  with the sale of the  Units,  the  management  of the
Partnership  and the  acquisition,  management,  financing  and  disposition  of
Partnership investments.

      Distributable Cash, as defined, of the Partnership will be distributed 98%
to the Limited Partners,  1% to the General Partners and 1% to the Adviser as an
asset  management  fee.   Residual   proceeds   resulting  from  disposition  of
Partnership  investments  will be  distributed,  generally,  85% to the  Limited
Partners,  11.99% to the  Adviser  as an asset  management  fee and 3.01% to the
General  Partners  after the prior  receipt  by the  Limited  Partners  of their
original  capital  contributions  and a  cumulative  annual  return of  10%-12%,
depending upon their date of admission into the  Partnership,  as defined in the
Amended Partnership Agreement.

      In connection  with  investing  Partnership  capital,  the Adviser  earned
acquisition  fees,  paid by both the borrowers and sellers and the  Partnership,
aggregating not more than 3% of the gross proceeds of the offering.  The Adviser
received total acquisition fees of approximately  $1,074,000,  of which $306,000
was paid by the Partnership.  The Adviser may receive a commission, in an amount
not yet determinable, upon the disposition of certain Partnership investments.

      Under  the  advisory  contract,   the  Adviser  has  specific   management
responsibilities to administer  day-to-day  operations of the Partnership and to
report  periodically the performance of the Partnership to the General Partners.
The Adviser is paid a basic management fee (6% of adjusted cash flow distributed
to the  partners)  and an  incentive  management  fee (2% of adjusted  cash flow
distributed to the partners,  subordinated to a non-cumulative  annual return to
the  Limited   Partners   equal  to  9%  based  upon  their   adjusted   capital
contribution),  in  addition to the asset  management  fee  described  above for
services  rendered.  Basic and asset  management fees of $83,000 were earned for
the year ended August 31, 1996. No incentive management fees have been earned to
date.

      All taxable income or tax loss (other than from a Capital  Transaction) of
the  Partnership  will be  allocated  98.989899%  to the  Limited  Partners  and
1.010101%  to the General  Partners.  Taxable  income or tax loss arising from a
sale or  refinancing of investment  properties  will be allocated to the Limited
Partners  and the  General  Partners  in  proportion  to the amounts of residual
proceeds to which they are entitled; provided that the General Partners shall be
allocated at least 1% of taxable income arising from a sale or  refinancing.  If
there  are no  residual  proceeds,  tax loss or  taxable  income  from a sale or
refinancing  will be allocated  98.989899% to the Limited Partners and 1.010101%
to the General Partners. Allocations of the Partnership's operations between the
General Partners and the Limited Partners for financial accounting purposes have
been made in conformity with the allocations of taxable income or tax loss.

      The  Managing  General  Partner and the Adviser are  reimbursed  for their
direct expenses  relating to the offering of Units,  the  administration  of the
Partnership  and  the  acquisition  and  operations  of the  Partnership's  real
property investments.

      An affiliate of the Managing General Partner performs certain  accounting,
tax  preparation,  securities  law compliance  and investor  communications  and
relations  services  for the  Partnership.  The  total  costs  incurred  by this
affiliate in providing  such  services are  allocated  among  several  entities,
including the Partnership.  Included in general and administrative  expenses for
the year ended August 31, 1996 is $144,000,  representing reimbursements to this
affiliate for providing such services to the Partnership.

      The  Partnership  uses the  services  of Mitchell  Hutchins  Institutional
Investors,  Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a  subsidiary  of  Mitchell  Hutchins  Asset  Management,  Inc.,  an
independently operated subsidiary of PaineWebber.  Mitchell Hutchins earned fees
of $5,000 (included in general and  administrative  expenses) during fiscal 1996
for managing the  Partnership's  cash assets.  Fees charged by Mitchell Hutchins
are based on a percentage of invested  cash  reserves  which varies based on the
total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI.




<PAGE>



                                   PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K


   (a)  The following documents are filed as part of this report:

        (1) and (2)     Financial Statements and Schedules:

            The  response to this  portion of Item 14 is submitted as a separate
            section  of this  report.  See  Index to  Financial  Statements  and
            Financial Statement Schedules at page F-1.

            Financial  statements for the properties  securing the Partnership's
            mortgage loans have not been included since the  Partnership  has no
            contractual   right  to  the   information   and  cannot   otherwise
            practicably obtain the information.

        (3) Exhibits:

            The exhibits  listed on the  accompanying  index to exhibits at page
            IV-3 are filed as part of this Report.

   (b)      No reports on Form 8-K were filed  during the last quarter of fiscal
            1996.

   (c)  Exhibits

            See (a)(3) above.

   (d)  Financial Statement Schedules

        The  response  to this  portion  of Item 14 is  submitted  as a separate
        section of this report. See Index to Financial  Statements and Financial
        Statement Schedules at page F-1.







<PAGE>



                                  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.


                               PAINE WEBBER QUALIFIED PLAN
                               PROPERTY FUND THREE, LP


                      By: Third Qualified Properties, Inc.
                            Managing General Partner



                               By:  /s/ Bruce J. Rubin
                                    Bruce J. Rubin
                                    President and Chief Executive Officer



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



                               By:  /s/ Thomas W. Boland
                                    Thomas W. Boland
                                    Vice President
Dated:  November 22, 1996

      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Partnership in the capacity and on the dates indicated.



By:    /s/ Bruce J. Rubin                       Date:  November 22, 1996
      ---------------------                            -----------------
      Bruce J. Rubin
      Director



By:    /s/ Terrence E. Fancher                  Date:   November 22, 1996
      ------------------------                          -----------------
      Terrence E. Fancher
      Director



<PAGE>


                          ANNUAL REPORT ON FORM 10-K
                                Item 14(a)(3)

             PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP


                              INDEX TO EXHIBITS


                                                     Page Number in the Report
Exhibit No.    Description of Document               or Other Reference
-----------    -----------------------               --------------------------

(3) and (4) Prospectus of the Registrant             Filed with the Commission
            dated October 14, 1983, supplemented,    pursuant to Rule 424(c)
            with particular reference to the         and incorporated herein by
            Restated Certificate and Agreement       reference.
            Limited Partnership.


(10)        Material contracts previously filed as   Filed with the Commission
            exhibits to registration statements and  pursuant to Section 13 or
            amendments thereto of the registrant     15(d) of the Securities 
            together with all such contracts filed   Exchange Act of 1934 and 
            as exhibits of previously filed Forms    incorporated herein by
            8-K and Forms 10-K are hereby            reference.
            incorporated herein by reference.


(13)        Annual Reports to Limited Partners       No Annual Report for the
                                                     year ended August 31, 1996 
                                                     has been sent   to  the 
                                                     Limited Partners. Annual 
                                                     Report will be sent to the 
                                                     Limited Partners 
                                                     subsequent to this filing.


(27)        Financial Data Schedule                  Filed  as  last  page of
                                                     EDGAR submission following
                                                     the Financial Statements
                                                     and Financial Statement
                                                     Schedule required by
                                                     Item 14.




<PAGE>
                          ANNUAL REPORT ON FORM 10-K
                       Item 14(a)(1) and (2) and 14(d)

             PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP

       INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

                                                                   Reference

Paine Webber Qualified Plan Property Fund Three, LP:

      Report of independent auditors                                    F-2

      Balance sheets as of August 31, 1996 and 1995                     F-3

      Statements of income for the years ended August 31, 1996,
       1995 and 1994                                                    F-4

      Statements of changes in partners' capital for the years
        ended August 31, 1996, 1995 and 1994                            F-5

      Statements of cash flows for the years ended August 31, 1996, 
        1995 and 1994                                                   F-6

      Notes to financial statements                                     F-7

      Financial Statement Schedules:

         Schedule - III  Real Estate Owned                             F-14
         Schedule - IV Investments in Mortgage Loans on Real Estate    F-15


   Other  schedules  have been  omitted  since the required  information  is not
present or not  present  in amounts  sufficient  to  require  submission  of the
schedule,  or because the  information  required  is  included in the  financial
statements, including the notes thereto.





<PAGE>



                        REPORT OF INDEPENDENT AUDITORS




The Partners of
Paine Webber Qualified Plan Property Fund Three, LP:

      We have audited the accompanying  balance sheets of Paine Webber Qualified
Plan  Property  Fund Three,  LP as of August 31, 1996 and 1995,  and the related
statements  of income,  changes in partners'  capital and cash flows for each of
the three years in the period ended August 31,  1996.  Our audits also  included
the  financial  statement  schedules  listed in the Index at Item  14(a).  These
financial  statements and schedules are the  responsibility of the Partnership's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements and schedules based on our audits.

      We conducted our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly,
in all material respects,  the financial position of Paine Webber Qualified Plan
Property  Fund  Three,  LP at August 31,  1996 and 1995,  and the results of its
operations  and its cash flows for each of the three  years in the period  ended
August 31, 1996, in conformity with generally  accepted  accounting  principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic financial  statements taken as a whole,  present fairly
in all material respects the information set forth therein.





                                                      /s/ ERNST & YOUNG LLP
                                                      ---------------------
                                                      ERNST & YOUNG LLP




Boston, Massachusetts
November 15, 1996




<PAGE>


             PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP

                                BALANCE SHEETS
                           August 31, 1996 and 1995
                     (In thousands, except per Unit data)

                                    ASSETS
                                                          1996        1995
                                                          ----        ----

Real estate investments:
  Investment property held for sale                   $   4,720     $ 4,720
  Land                                                    1,150       1,150
  Mortgage loans receivable                               9,185       9,185
                                                      ---------     --------
                                                         15,055      15,055

Cash and cash equivalents                                   973         790
Interest receivable                                          85          85
Tax and tenant security deposit escrows                      71          73
Prepaid expenses                                             14          14
Deferred expenses, net of accumulated
  amortization of $433 ($429 in 1995)                         9          13
                                                       --------    --------
                                                       $ 16,207    $ 16,030
                                                       ========    ========

                        LIABILITIES AND PARTNERS' CAPITAL

Accounts payable - affiliates                          $     18    $     18
Accounts payable and accrued expenses                       113         110
Tenant security deposits                                     13          14
                                                       --------    --------
      Total liabilities                                     144         142

Partners' capital
  General Partners:
   Capital contributions                                      1           1
   Cumulative net income                                    339         326
   Cumulative cash distributions                           (329)       (317)

  Limited Partners ($1,000 per Unit, 35,794
     Units issued):
   Capital contributions, net of offering costs          32,130      32,130
   Cumulative net income                                 24,036      22,694
   Cumulative cash distributions                        (40,114)    (38,946)
                                                       --------    --------
      Total partners' capital                            16,063      15,888
                                                       --------    --------
                                                       $ 16,207    $ 16,030
                                                       ========    ========









                           See accompanying notes.



<PAGE>


             PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP

                             STATEMENTS OF INCOME
              For the years ended August 31, 1996, 1995 and 1994
                     (In thousands, except per Unit data)



                                              1996        1995        1994
                                              ----        ----        ----
Revenues:
   Interest from mortgage loans            $  1,021    $  1,021      $1,021
   Land rent                                    153         175         161
   Interest earned on cash equivalents           44          95          65
   Other income                                   -          24          25
                                           --------    --------      ------
                                              1,218       1,315       1,272

Expenses:
   Management fees                               83          89          90
   General and administrative                   312         391         344
   Amortization of deferred expenses              4           4           4
                                          ---------    --------      ------
                                                399         484         438
                                          ---------    --------      ------

Operating income                                819         831         834

Gain on sale of investment
  in operating property                           -          61           -

Income from investment
 property held for sale, net                    536         545         551
                                           --------    --------     -------

Net income                                 $  1,355     $ 1,437     $ 1,385
                                           ========     =======     =======

Net income per Limited
  Partnership Unit                          $ 37.47    $  39.73    $  38.31
                                            =======    ========    ========

Cash distributions per
  Limited Partnership Unit                  $ 32.64    $  77.36    $  35.36
                                            =======    ========    ========

   The above net income and cash distributions per Limited  Partnership Unit are
based upon the 35,794 Units of Limited Partnership  Interest  outstanding during
each year.














                           See accompanying notes.


<PAGE>


               PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP

                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
               For the years ended August 31, 1996, 1995 and 1994
                                 (In thousands)




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



Balance at August 31, 1993               $   7       $17,121        $17,128

Net income                                  14         1,371          1,385

Cash distributions                         (13)       (1,266)        (1,279)
                                         -----      --------        -------

Balance at August 31, 1994                   8        17,226         17,234

Net income                                  15         1,422          1,437

Cash distributions                         (13)       (2,770)        (2,783)
                                        ------      --------       --------

Balance at August 31, 1995                  10        15,878         15,888

Net income                                  13         1,342          1,355

Cash distributions                         (12)       (1,168)        (1,180)
                                        ------       -------       --------

Balance at August 31, 1996              $   11       $16,052        $16,063
                                        ======       =======        =======






















                           See accompanying notes.


<PAGE>


             PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP

                            STATEMENTS OF CASH FLOWS
               For the years ended August 31, 1996, 1995 and 1994
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)


                                                1996       1995         1994
                                                ----       ----         ----
Cash flows from operating activities:
   Net income                                $  1,355     $  1,437    $ 1,385
   Adjustments to reconcile net income to net
      cash provided by operating activities:
      Gain on sale of investment
        in operating property                      -          (61)          -
      Amortization of deferred expenses            4            4           4
      Changes in assets and liabilities:
         Prepaid expenses                          -            4          (5)
         Tax and tenant security deposit escrows   2           (2)          5
         Accounts payable - affiliates             -           (1)        (29)
         Accounts payable and accrued expenses     3           27           3
         Tenant security deposits                 (1)           -           -
                                             -------      -------      ------
            Total adjustments                      8          (29)        (22)
                                             -------      -------      ------
            Net cash provided by 
              operating activities             1,363        1,408        1,363

Cash flows from investing activities:
   Net proceeds from sale of investment
     in operating property                         -          311           -

Cash flows from financing activities:
   Distributions to partners                  (1,180)      (2,783)      (1,279)
                                            --------      -------      -------

Net increase (decrease)  in 
 cash and cash equivalents                       183       (1,064)          84

Cash and cash equivalents,
  beginning of period                            790        1,854        1,770
                                            --------      -------      -------

Cash and cash equivalents, end of period    $    973      $   790      $ 1,854
                                            ========      =======      =======













                           See accompanying notes.


<PAGE>


              PAINEWEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
                        Notes to Financial Statements


1. Organization and Nature of Operations

      Paine Webber Qualified Plan Property Fund Three, LP (the "Partnership") is
a limited partnership organized pursuant to the laws of the State of Delaware in
June 1983 for the purpose of  investing in a  diversified  portfolio of existing
income-producing  real properties through land  purchase-leaseback  transactions
and first mortgage loans. The Partnership  authorized the issuance of units (the
"Units") of  Partnership  interests,  of which  35,794 (at $1,000 per Unit) were
subscribed and issued between October 14, 1983 and October 13, 1984.

      The  Partnership  originally  owned  land and made  first  mortgage  loans
secured by buildings  with respect to six operating  investment  properties.  To
date, the Partnership  has sold or been prepaid on its investments  with respect
to three of the  original  operating  properties.  As of August  31,  1996,  the
Partnership's  mortgage loan and land lease  investments  on two of the original
properties  were  still  outstanding  and the  Partnership  owned one  operating
property  directly as a result of  foreclosing  on a mortgage loan. As discussed
further  in  Notes 4 and 5,  during  fiscal  1996 the  borrowers  on both of the
remaining loan investments  continued discussions with the Partnership regarding
potential  prepayment  transactions.  While there are no  assurances  that these
borrowers will be able to finance  prepayment  transactions in the near term, if
such transactions were to be completed the Partnership would be positioned for a
possible liquidation pending the disposition of the wholly-owned  Westside Creek
Apartments for which the  Partnership is currently in the process of negotiating
a potential sales contract.

2. Use of Estimates and Summary of Significant Accounting Policies

      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 August 31, 1996 and 1995 and  revenues  and expenses for
each of the three years in the period  ended  August 31,  1996.  Actual  results
could differ from the estimates and assumptions used.

      Investment  property  held for sale  represents  an asset  acquired by the
Partnership  through  foreclosure  proceedings  on a first  mortgage  loan.  The
Partnership's  policy is to carry this  asset at the lower of cost or  estimated
fair value (net of selling  expenses).  The Partnership's cost basis is equal to
the  fair  value  of the  asset  at the  date of  foreclosure.  Declines  in the
estimated fair value of the asset  subsequent to  foreclosure  would be recorded
through the use of a valuation allowance.  Subsequent increases in the estimated
fair value of the asset would result in a reduction of the valuation  allowance,
but not below zero.  All costs incurred to hold the asset are charged to expense
and no depreciation expense is recorded.

      The Partnership's investments in land subject to ground leases are carried
at the lower of cost or net realizable value. The net realizable value of a real
estate  investment  held for  long-term  investment  purposes is measured by the
recoverability  of the  investment  through  expected  future  cash  flows on an
undiscounted  basis,  which may exceed the property's  current market value. The
net realizable value of a property held for sale approximates its current market
value.  None of the  Partnership's  land  investments  were  held for sale as of
August 31, 1996 or 1995. The  Partnership  has reviewed FAS No. 121  "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of",  which is effective  for financial  statements  for years  beginning  after
December 15, 1995, and believes this new pronouncement  will not have a material
effect on the Partnership's financial statements.

      Mortgage loans  receivable are carried at the lower of cost or fair value.
The  Partnership's  policy is to provide for any  valuation  allowances  for its
mortgage loan  investments on a specific  identification  basis,  principally by
evaluating  the market value of the  underlying  collateral  since the loans are
collateral dependent.

      Deferred   expenses  consist  of  acquisition  fees  paid  to  PaineWebber
Properties   Incorporated   (the  "Adviser")  as  compensation   for  analyzing,
structuring and negotiating the  Partnership's  real estate  investments.  These
expenses  are being  amortized  using the  straight-line  method over twelve- to
fifteen-year periods.

      For purposes of reporting cash flows, the Partnership considers all highly
liquid  investments  with  original  maturities  of 90  days  or less to be cash
equivalents.

      The  mortgage  loans  receivable,  cash  and  cash  equivalents,  interest
receivable,  escrow deposits, accounts payable - affiliates and accounts payable
and accrued  expenses  appearing on the  accompanying  balance sheets  represent
financial   instruments  for  purposes  of  Statement  of  Financial  Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments." With
the exception of mortgage loans receivable,  the carrying amount of these assets
and liabilities  approximates  their fair value as of August 31, 1996 due to the
short-term maturities of these instruments. Information regarding the fair value
of the Partnership's mortgage loans receivable is provided in Note 4. Due to the
likelihood of near term  prepayment,  the mortgage  loans  receivable  have been
valued at the lesser of face value or the estimated fair value of the collateral
property, as determined by an independent appraisal. Such appraisals make use of
a combination of certain  generally  accepted  valuation  techniques,  including
direct capitalization,  discounted cash flows and comparable sales analysis (see
Note 4 for a further discussion).

      No  provision  for income  taxes has been made as the  liability  for such
taxes is that of the partners rather than the Partnership.

3. The Partnership Agreement and Related Party Transactions

      The  Managing  General  Partner  of the  Partnership  is  Third  Qualified
Properties,   Inc.,  a  wholly-owned   subsidiary  of  PaineWebber   Group  Inc.
("PaineWebber").  The  Associate  General  Partner is Properties  Associates,  a
Massachusetts  general  partnership,  certain general partners of which are also
officers  of the  Adviser  and the  Managing  General  Partner.  Subject  to the
Managing General Partner's overall authority, the business of the Partnership is
managed by the  Adviser  pursuant  to an  advisory  contract.  The  Adviser is a
wholly-owned  subsidiary of  PaineWebber  Incorporated  ("PWI"),  a wholly-owned
subsidiary of PaineWebber.

      The General  Partners,  the Adviser and PWI receive fees and  compensation
determined  on an  agreed-upon  basis,  in  consideration  of  various  services
performed  in  connection  with the sale of the  Units,  the  management  of the
Partnership  and the  acquisition,  management,  financing  and  disposition  of
Partnership investments.

      Distributable Cash, as defined, of the Partnership will be distributed 98%
to the Limited Partners,  1% to the General Partners and 1% to the Adviser as an
asset  management  fee.   Residual   proceeds   resulting  from  disposition  of
Partnership  investments  will be  distributed,  generally,  85% to the  Limited
Partners,  11.99% to the  Adviser  as an asset  management  fee and 3.01% to the
General  Partners  after the prior  receipt  by the  Limited  Partners  of their
original  capital  contributions  and a  cumulative  annual  return of  10%-12%,
depending upon their date of admission into the  Partnership,  as defined in the
Amended Partnership Agreement.

      In connection  with  investing  Partnership  capital,  the Adviser  earned
acquisition  fees,  paid by both the borrowers and sellers and the  Partnership,
aggregating not more than 3% of the gross proceeds of the offering.  The Adviser
received total acquisition fees of approximately  $1,074,000,  of which $306,000
was paid by the Partnership.  The Adviser may receive a commission, in an amount
not yet determinable, upon the disposition of certain Partnership investments.

      Under  the  advisory  contract,   the  Adviser  has  specific   management
responsibilities to administer  day-to-day  operations of the Partnership and to
report  periodically the performance of the Partnership to the General Partners.
The Adviser is paid a basic management fee (6% of adjusted cash flow distributed
to the  partners)  and an  incentive  management  fee (2% of adjusted  cash flow
distributed to the partners,  subordinated to a non-cumulative  annual return to
the  Limited   Partners   equal  to  9%  based  upon  their   adjusted   capital
contribution),  in  addition to the asset  management  fee  described  above for
services  rendered.  Basic and asset  management  fees of  $83,000,  $89,000 and
$90,000  were  earned  for the  years  ended  August  31,  1996,  1995 and 1994,
respectively.  No incentive  management fees have been earned to date.  Accounts
payable -  affiliates  at both August 31, 1996 and 1995  consists of  management
fees of $18,000 payable to the Adviser.

      All taxable income or tax loss (other than from a Capital  Transaction) of
the  Partnership  will be  allocated  98.989899%  to the  Limited  Partners  and
1.010101%  to the General  Partners.  Taxable  income or tax loss arising from a
sale or  refinancing of investment  properties  will be allocated to the Limited
Partners  and the  General  Partners  in  proportion  to the amounts of residual
proceeds to which they are entitled; provided that the General Partners shall be
allocated at least 1% of taxable income arising from a sale or  refinancing.  If
there  are no  residual  proceeds,  tax loss or  taxable  income  from a sale or
refinancing  will be allocated  98.989899% to the Limited Partners and 1.010101%
to the General Partners. Allocations of the Partnership's operations between the
General Partners and the Limited Partners for financial accounting purposes have
been made in conformity with the allocations of taxable income or tax loss.

      The  Managing  General  Partner and the Adviser are  reimbursed  for their
direct expenses  relating to the offering of Units,  the  administration  of the
Partnership  and  the  acquisition  and  operations  of the  Partnership's  real
property investments.

      Included in general and administrative expenses for the years ended August
31,  1996,  1995 and 1994 is  $144,000,  $178,000  and  $159,000,  respectively,
representing  reimbursements to an affiliate of the Managing General Partner for
providing certain financial,  accounting and investor  communication services to
the Partnership.

      The  Partnership  uses the  services  of Mitchell  Hutchins  Institutional
Investors,  Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a  subsidiary  of  Mitchell  Hutchins  Asset  Management,  Inc.,  an
independently operated subsidiary of PaineWebber.  Mitchell Hutchins earned fees
of $5,000, $4,000, and $5,000 (included in general and administrative  expenses)
during fiscal 1996, 1995 and 1994, respectively,  for managing the Partnership's
cash assets.

4. Mortgage Loan and Land Investments

      The following first mortgage loans were outstanding at August 31, 1996 and
1995 (in thousands):

                                                                      Date of
                                 Amount of Loan                       Loan and
         Property                1996        1995     Interest Rate   Maturity
         --------                ----        ----     -------------   --------

      Appletree Apartments     $  4,850     $ 4,850        11.00%      5/8/84
      Omaha, NE                                                        6/1/99

      Woodcroft Shopping
       Center
      Durham, NC:
         Phase I                  3,100       3,100        11.25%      12/17/84
                                                                       12/17/96

         Phase II                 1,235       1,235        11.25%      11/29/85
                                                                       12/17/96
                                -------     -------
                                $ 9,185     $ 9,185
                                =======     =======


      The loans are secured by first  mortgages on the  properties,  the owner's
leasehold  interest in the land and an  assignment of all tenant  leases,  where
applicable. Interest is payable monthly and the principal is due at maturity.

      In relation to the  above-mentioned  mortgage  loans,  the following  land
purchase-leaseback transactions had also been entered into as of August 31, 1996
and 1995 (in thousands):

                                        Cost of Land
                                    to the Partnership          Annual
            Property                1996          1995          Base Rent
            --------                ----          ----          ---------

        Appletree Apartments        $  650      $  650          $ 72

        Woodcroft Shopping Center      500         500          $ 56
                                    ------      ------
                                    $1,150      $1,150
                                    ======      ======

      The land leases have terms of 40 years.  Among the provisions of the lease
agreements,  the Partnership is entitled to additional rent based upon the gross
revenues in excess of a base amount, as defined.  For the years ended August 31,
1996,  1995  and  1994,  additional  rents  of  $25,000,  $47,000  and  $33,000,
respectively,  were earned from the Woodcroft  Shopping Center  investment.  The
lessees have the option to purchase the land for specified  periods of time at a
price based on the fair market value, as defined, but not less than the original
cost to the Partnership.

      The  objectives of the  Partnership  with respect to its mortgage loan and
land  investments  are to provide  current income from fixed  mortgage  interest
payments and base land rents,  then to provide  increases to this current income
through  participation in the annual revenues  generated by the property as they
increase  above  a  specified  base  amount.  In  addition,   the  Partnership's
investments  are  structured  to  share  in the  appreciation  in  value  of the
underlying real estate. Accordingly, upon either sale, refinancing,  maturity of
the mortgage or exercise of the option to repurchase  the land,  generally,  the
Partnership  will  receive  a 33%  to 50%  share  of the  appreciation  above  a
specified base amount.

      During the last quarter of fiscal 1995, the  Partnership  received  notice
from the Appletree  borrower of its intent to prepay the Partnership's  mortgage
loan and  repurchase  the  underlying  land.  The  borrower  reports that it has
secured the necessary  financing to complete this transaction.  The amount to be
received by the  Partnership as its share of the  appreciation  of the Appletree
property has not been agreed upon to date. The terms of the Partnership's ground
lease provide for the possible  resolution of disputes  between the parties over
value issues through an arbitration process.  Presently, the Partnership and the
borrower continue to try to resolve their differences regarding the value of the
property.  If an  agreement  cannot be  reached,  the  borrower  could force the
Partnership  to submit to  arbitration  during  fiscal 1997.  In addition to the
amount  to  be  determined  as  the   Partnership's   share  of  the  property's
appreciation  under the ground lease,  the terms of the Appletree  mortgage loan
require a  prepayment  penalty  which would be equal to 2.5% of the  outstanding
principal  balance of  $4,850,000  for any  prepayment  prior to April 30, 1997.
Subsequent to April 30, 1997,  the prepayment  penalty  declines to 1.5% for the
next twelve  months  after which  there would be no  prepayment  penalty for the
remainder of the term through  maturity in May 1999. If completed,  the proceeds
of any prepayment  transaction  would be  distributed  to the Limited  Partners.
However, the transaction remains contingent on, among other things, a resolution
of the value issue.  Accordingly,  there are no assurances that this transaction
will be consummated.

     During the first quarter of fiscal 1996, the  Partnership  received  notice
from the  owner of the  Woodcroft  Shopping  Center  of its  intent to repay the
Partnership's   first  mortgage  loan  and  purchase  the  underlying   land  in
conjunction with a sale of the operating property to a third party. The proposed
terms of the  transaction  would  have  resulted  in the full  repayment  of the
Partnership's  mortgage  loan of  $4,335,000  and the receipt of  $1,220,000  as
payment in full for obligations  owing under the ground lease,  representing the
repayment of the $500,000  ground  investment and $720,000 as the  Partnership's
share of the  appreciation  in  value of the  underlying  property.  During  the
quarter ended February 28, 1996, it was determined that the third-party buyer of
Woodcroft was unable to secure the necessary  financing required to purchase the
property.  During the quarter ended May 31, 1996, the Partnership again received
notice from the owner of the  Woodcroft  Shopping  Center of its intent to repay
the  outstanding  first  mortgage  loan  and  purchase  the  underlying  land in
conjunction  with a sale of the operating  property to a third party. As was the
case  with the  prior  proposed  transaction,  this  sale did not  close  due to
problems with the buyer's  financing plans. The owner of the Woodcroft  Shopping
Center has been  remarketing the property in an effort to complete a sale before
the  December  1996  maturity  date of the loan.  Subsequent  to year  end,  the
Woodcroft  owner  negotiated  a contract for the sale of the property to a third
party at a lower price than the prior proposed transactions.  Based on the terms
of the potential sale  transaction,  the  Partnership's  share of the property's
appreciation would total $650,000.  The terms of the Partnership's  ground lease
require that the Partnership  agree with the borrower's  determination  of value
for purposes of calculating the Partnership's share of the appreciation in value
due under the lease before a sale of the land can be  completed.  At the present
time,  market  values for retail  shopping  centers  in many  markets  are being
adversely impacted by overbuilding and consolidations among retailers which have
resulted  in an  oversupply  of space.  While the  operations  of the  Woodcroft
Shopping  Center do not  appear to have been  affected  to date by this  general
trend,  such conditions would seem to have impacted the fair market value of the
property,  as  evidenced  by the  difficulties  that  the  Woodcroft  owner  has
encountered in the prior sale efforts.  As a result,  the Partnership has agreed
to accept the $650,000  premium for its ground lease  interest in the event that
this transaction can be completed.

      As discussed  further above, the maturity date of the Woodcroft loan is in
December  1996,  and the potential  for a near term  prepayment of the Appletree
loan  is  high.  As a  result  of  these  circumstances,  based  on an  expected
short-term  maturity,  the estimated fair values of the  Partnership's  mortgage
loan instruments  approximate  their carrying values as of August 31, 1996 since
the  estimated  fair values of the  collateral  properties  exceed the principal
balances of the loans.

5. Investment Property Held for Sale

      On March  23,  1989,  the  Partnership  foreclosed  under the terms of the
mortgage  loan secured by Westside  Creek  Apartments  due to  nonpayment of the
required debt service.  The Adviser has employed a local  management  company to
operate the property,  which is a 142-unit  apartment  complex located in Little
Rock, Arkansas, on the Partnership's behalf.

      The Partnership complies with the guidelines set forth in the Statement of
Position  entitled  "Accounting  for Foreclosed  Assets," issued by the American
Institute  of  Certified  Public  Accountants,  to  account  for its  investment
properties  acquired through  foreclosures.  Under the Statement of Position,  a
foreclosed  asset is  recorded  at the lower of cost or  estimated  fair  value,
reduced by the  estimated  costs to sell the asset.  Cost is defined as the fair
value of the asset at the date of the  foreclosure.  Declines  in the  estimated
fair value of the asset  subsequent to foreclosure are recorded  through the use
of a valuation  allowance.  Subsequent  increases in the estimated fair value of
the asset result in a reduction in the valuation allowance,  but not below zero.
The Westside Creek  investment was originally made by the Partnership on July 1,
1985 and was  structured  as a ground lease and first  leasehold  mortgage.  The
total  investment by the  Partnership  was comprised of the land,  purchased for
$215,000, and a $4,635,000 mortgage loan secured by the improvements for a total
investment  of  $4,850,000.  At the  date of the  foreclosure  in  fiscal  1989,
management estimated the fair value of the property at $4,720,000 and recorded a
loss on foreclosure of $130,000.



<PAGE>


      The Partnership  recognizes  income from the investment  property held for
sale in the amount of the excess of the property's  gross revenues over property
operating expenses (including capital  improvement costs),  taxes and insurance.
Summarized  operating results for the years ended August 31, 1996, 1995 and 1994
are as follows (in thousands):

                                              1996        1995        1994
                                              ----        ----        ----

      Rental income                          $  970       $ 937       $ 924
      Other income                               33          33          34
                                             ------       -----       -----
                                              1,003         970         958

      Property operating expenses               381         338         324
      Property taxes and insurance               86          87          83
                                             ------      ------       -----
                                                467         425         407
                                             ------      ------       -----
      Income from investment
        property held for sale, net          $  536      $  545       $ 551
                                             ======      ======       =====


6. Investment in Operating Property

      On February 20, 1990,  an  affiliate  of the  Partnership,  which held the
mortgage  and land lease on the Cordova  Creek  Apartments,  located in Memphis,
Tennessee, foreclosed on the property due to nonpayment of the required interest
payments. The Partnership had held a 3.5% interest in the mortgage loan and land
investments through an agreement with this affiliate. Subsequent to foreclosure,
the  Partnership  recorded its investment at the net combined  carrying value of
its  previous  interest  in  the  land  and  mortgage  loan  of  $250,000.   The
Partnership's  investment,  which  consisted  of a 3.5% equity  ownership in the
operations  and  eventual  sales  proceeds of the Cordova  Creek  property,  was
accounted for on the cost method. Accordingly, distributions which were received
from the operations of Cordova Creek were recorded as income when  received,  to
the extent that they  represented  current  earnings.  The Partnership  received
distributions  from the current earnings of the Cordova Creek property totalling
$24,000 and $25,000 in fiscal 1995 and 1994,  respectively.  Such  amounts  have
been recorded as other income on the Partnership's statements of income.

      The affiliate which held the majority  ownership interest in the operating
property sold the Cordova Creek  Apartments  to an  unaffiliated  third party on
April 12, 1995. The Partnership's  share of the net sales proceeds was $311,000,
resulting in a $61,000  gain over the  Partnership's  cost basis of $250,000.  A
special distribution of $42 per original $1,000 investment,  or $1,503,000,  was
made to Limited  Partners on June 15, 1995,  which  represented  $9 from Cordova
Creek net sales proceeds and $33 as a distribution from cash reserves which were
deemed to be in excess of the Partnership's expected future requirements.

7. Contingencies

      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 various 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 Qualified  Properties,  Inc. and Properties
Associates  ("PA"),  which  are the  General  Partners  of the  Partnership  and
affiliates of  PaineWebber.  On May 30, 1995, the court  certified  class action
treatment of the claims asserted in the litigation.

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

      In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding,  PaineWebber  irrevocably  deposited  $125 million into an escrow
fund under the  supervision of the United States District Court for the Southern
District of New York to be used to resolve the  litigation in accordance  with a
definitive  settlement  agreement  and plan of  allocation.  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.

     In February 1996,  approximately  150 plaintiffs  filed an action  entitled
Abbate v.  PaineWebber  Inc. in  Sacramento,  California  Superior Court against
PaineWebber   Incorporated  and  various  affiliated   entities  concerning  the
plaintiffs' purchases of various limited partnership interests,  including those
offered by the  Partnership.  The complaint  alleges,  among other things,  that
PaineWebber and its related entities committed fraud and  misrepresentation  and
breached  fiduciary  duties  allegedly  owed to the  plaintiffs  by  selling  or
promoting  limited   partnership   investments  that  were  unsuitable  for  the
plaintiffs and by overstating the benefits,  understating  the risks and failing
to  state  material  facts  concerning  the  investments.  The  complaint  seeks
compensatory  damages of $15 million plus punitive damages against  PaineWebber.
In September 1996, the court dismissed many of the plaintiffs'  claims as barred
by  applicable  securities  arbitration  regulations.   Mediation  hearings  are
currently  scheduled to be held in December 1996.  The eventual  outcome of this
litigation and the potential impact,  if any, on the  Partnership's  unitholders
cannot be determined at the present time.

      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
described 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.

8. Subsequent Events

      On October 15, 1996, the Partnership  distributed  $292,000 to the Limited
Partners,  $3,000 to the General  Partners and $3,000 to the Adviser as an asset
management fee for the quarter ended August 31, 1996.



<PAGE>




Schedule III - Real Estate Owned

             PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
                               August 31, 1996
                                (In thousands)

                                        Gross Amount at
                       Cost of          Which Carried    Date of
                       Investment to    at Close of      Original    Size of    
Description            Partnership (A)  Period  (A)      Investment  Investment
-----------            ---------------  -----------      ----------  ----------

Land underlying         $  650           $  650            5/8/84     16.2 acres
Apartment Complex (B)
Omaha, NE

Land underlying            500              500            12/17/84   12 acres
Shopping Center (B)
Durham, NC

Apartment Complex        4,850            4,720  (1)       7/1/85     11.4 acres
Little Rock, AR                                                       of land;
                                                                      142 units
                        ------           ------
                        $6,000           $5,870
                        ======           ======

Notes:

   (A)These amounts  represent the cost of each  investment and the gross amount
      at which the  investment  is  carried on the  balance  sheet at August 31,
      1996.  The  aggregate  cost for federal  income tax purposes at August 31,
      1996 is approximately $6,205,000.

   (B)Senior mortgages on the properties  related to the land investments listed
      above are held by Paine Webber Qualified Plan Property Fund Three, LP. See
      Schedule IV.

   (C)      Reconciliation of real estate owned (in thousands):

                                           1996        1995        1994
                                           ----        ----        ----

       Balance at beginning of year      $ 5,870      $6,120      $6,120
       Acquisitions                            -           -           -
       Sale of investment in
         operating property (2)                -        (250)          -
                                         -------      -------     ------
        
       Balance at end of year            $ 5,870      $5,870      $6,120
                                         =======      ======      ======

(1)The  Partnership  foreclosed  on the mortgage loan secured by the property on
   March 23, 1989. A loss of $130,000 related to the foreclosure was recorded in
   fiscal 1989. The cost of the land and the face amount of the related mortgage
   loan were  adjusted  for the loss on  foreclosure  and were  reclassified  to
   investment  property held for sale. See discussion in Note 5 to the financial
   statements.

(2)See discussion in Note 6 to the accompanying  financial  statements regarding
   the sale in 1995 of the Cordova Creek Apartment complex.


<PAGE>





<TABLE>

Schedule IV - Investments in Mortgage Loans on Real Estate
                            PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
                                              August 31, 1996
                                               (In thousands)
<CAPTION>
                                                                                                               Principal
                                                                                                               amount of
                                                                                                               loans subject
                                                                              Face             Carrying        to delinquent
                                        Final maturity       Periodic         amount of        amount of       principal
Description            Interest rate         Date            payment terms    mortgage         mortgage        or interest
-----------            -------------    --------------       -------------    --------         --------        -----------
<S>                      <C>            <C>                  <C>               <C>             <C>             <C>
  First Mortgage Loans:

  Apartments             11%             May 8, 1999         Interest           $ 4,850          $ 4,850          -
  Omaha, Nebraska                                            monthly,
                                                             principal
                                                             at maturity

  Shopping Center        11.25%         December 17, 1996    Interest           $ 3,100          $ 3,100          -
  Durham, North Carolina                                     monthly,
  Phase I                                                    principal
                                                             at maturity

  Phase II               11.25%         December 17, 1996    Interest           $ 1,235          $ 1,235          -
                                                             monthly,
                                                             principal
                                                             at maturity        -------          -------
                                                                                $ 9,185          $ 9,185          -
                                                                                 =======         =======

                                      1996             1995               1994
                                      ----             ----               ----

Balance at beginning of year         $9,185           $ 9,185           $ 9,185
Reductions during year:
   Repayments                             -                 -                 -
                                     ------           -------           -------
Balance at close of year             $9,185           $ 9,185           $ 9,185
                                     ======           =======           =======


</TABLE>