UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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

                                    FORM 10-Q

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

               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996

                                       OR

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

            For the transition period from           to          .


                        Commission File Number : 0-15035

                     PAINEWEBBER GROWTH PARTNERS THREE L.P.
             (Exact name of registrant as specified in its charter)

              Delaware                                      04-2882258
(State or other jurisdiction of                            (I.R.S. Employer
incorporation or organization)                             Identification No.)

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


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


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



<PAGE>

                     PAINEWEBBER GROWTH PARTNERS THREE L.P.

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

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

Operating investment property, at cost:
   Land                                             $    670      $    670
   Buildings                                           7,932         7,932
   Equipment and improvements                            572           572
                                                    --------      ---------
                                                       9,174         9,174
   Less accumulated depreciation                      (3,472)       (3,336)
                                                    ---------     ---------
                                                       5,702         5,838

Investment in unconsolidated joint 
  venture, at equity                                      95            73
Cash and cash equivalents                                853           801
Accounts receivable                                        2             2
Prepaid expenses                                           -            16
Deferred expenses, net                                    39            67
Other assets                                             227           227
                                                   ---------     ---------
                                                   $   6,918     $   7,024
                                                   =========     =========

                        LIABILITIES AND PARTNERS' DEFICIT

Accounts payable and accrued expenses              $     131     $     107
Accrued interest payable                                 248           231
Loans payable to affiliates                              357           357
Advances from consolidated venture                        50            95
Deferred management fees payable to affiliate          1,265         1,243
Note payable                                           8,330         8,330
Partners' deficit                                     (3,463)       (3,339)
                                                   ---------     ---------
                                                   $   6,918     $   7,024
                                                   =========     =========

















                             See accompanying notes.
<PAGE>
                     PAINEWEBBER GROWTH PARTNERS THREE L.P.

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

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

Revenues:
   Rental income                   $  372     $   353      $   738     $  707
   Interest and other income           10           8           19         17
                                   ------     -------      -------     ------
                                      382         361          757        724

Expenses:
   Property operating expenses        181         186          359        352
   Interest expense                   139         148          269        288
   Depreciation                        71          68          136        135
   Partnership management fees          -          32           22         64
   General and administrative          23          46           56         87
                                   ------     -------      -------     ------
                                      414         480          842        926
                                   ------     -------      -------     ------

Operating loss                        (32)       (119)         (85)      (202)

Partnership's share of
   unconsolidated venture's loss      (14)        (61)         (39)      (111)
                                   ------     -------      -------    -------

Net loss                           $  (46)    $  (180)     $  (124)   $  (313)
                                   ======     =======      =======    =======

Net loss per Limited 
  Partnership Unit                 $(1.69)    $ (6.62)     $ (4.59)   $(11.57)
                                    ======    =======      =======    =======

   The above net loss per  Limited  Partnership  Unit is based  upon the  25,657
Limited Partnership Units outstanding during each period.






                             See accompanying notes.
<PAGE>

                     PAINEWEBBER GROWTH PARTNERS THREE L.P.

             CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
        For the six months ended September 30, 1996 and 1995 (Unaudited)
                                 (In thousands)

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

Balance at March 31, 1995                        $   (113)       $(2,616)

Net loss                                              (16)          (297)
                                                 ---------       -------

Balance at September 30, 1995                    $   (129)       $(2,913)
                                                 ========        =======

Balance at March 31, 1996                        $   (143)       $(3,196)

Net loss                                               (6)          (118)
                                                 ---------      ---------

Balance at September 30, 1996                    $   (149)       $(3,314)
                                                 ========        =======








                             See accompanying notes.
<PAGE>

                     PAINEWEBBER GROWTH PARTNERS THREE L.P.

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

                                                        1996             1995
                                                        ----             ----
Cash flows from operating activities:
   Net loss                                          $  (124)         $  (313)
   Adjustments to reconcile net loss to net
    cash provided by operating activities:
      Partnership's share of unconsolidated
        venture's loss                                    39              111
      Depreciation                                       136              135
      Deferred management fees                            22               64
      Amortization of deferred financing costs            28               28
      Changes in assets and liabilities:
        Prepaid expenses                                  16               15
        Accounts payable and accrued expenses             24               31
        Accrued interest payable                          17               17
        Advances from consolidated venture               (45)              (3)
                                                     -------          -------
            Total adjustments                            237              398
                                                     -------          -------
            Net cash provided by operating activities    113               85

Cash flows from investing activities:
   Contribution to unconsolidated venture                (61)            (164)
                                                     -------         ---------

Net increase (decrease) in cash and cash equivalents      52              (79)

Cash and cash equivalents, beginning of period           801              704
                                                    --------         --------

Cash and cash equivalents, end of period            $    853         $    625
                                                    ========         ========

Cash paid during the period for interest            $    224         $    243
                                                    ========         ========


                             See accompanying notes.


<PAGE>


                     PAINEWEBBER GROWTH PARTNERS THREE, L.P.
                  Notes to Consolidated Financial Statements
 
1.  General

    The accompanying  financial statements,  footnotes and discussions should be
    read in connection with the financial  statements and footnotes contained in
    the Partnership's Annual Report for the year ended March 31, 1996.

    In the opinion of management,  the accompanying financial statements,  which
    have not been audited,  reflect all adjustments  necessary to present fairly
    the  results  for the  interim  period.  All of the  accounting  adjustments
    reflected in the accompanying  interim financial  statements are of a normal
    recurring nature.

2.  Operating Investment Property

    The Partnership's  balance sheet includes one operating  investment property
    at September 30, 1996 and March 31, 1996; the Summerwind  Apartments,  owned
    by Tara Associates, Ltd., a majority owned and controlled joint venture. The
    balance sheet and operating  results of Tara  Associates,  Ltd. are recorded
    three months in arrears to the operating  results of the  Partnership.  Tara
    Associates,  Ltd., a Georgia limited partnership (the "joint venture"),  was
    organized on December  19, 1983 to acquire and operate a 208-unit  apartment
    complex, Summerwind Apartments, located in Jonesboro, Georgia. On October 8,
    1985, the  Partnership  acquired a 70% general  partnership  interest in the
    joint venture.  The remaining 30% general and limited partnership  interests
    were owned by John Lie-Nielson (the  "co-venturer").  Effective February 23,
    1990,  the  co-venturer's  general  partnership  interest was converted to a
    limited  partnership  interest,  thereby giving the Partnership control over
    the operating investment property.

    Subsequent to the quarter ended September 30, 1996, the Partnership signed a
    letter  of  intent  to sell its  interest  in Tara  Associates,  Ltd.  to an
    unrelated third party for $550,000. The sale could be structured as either a
    sale  of  the  venture's  operating  property  with  an  assumption  of  the
    outstanding  mortgage  debt  or as the  sale  of the  Partnership's  general
    partner  interest  in the joint  venture.The  sale  remains  subject  to the
    certain  due  diligence  procedures  and the  potential  buyer's  receipt of
    approval  of the sale from the  lender,  the  limited  partner and any other
    parties whose consent may be required by the loan  documents and the limited
    partnership agreement.  Accordingly,  there are no assurances that this sale
    transaction  will be  consummated.  If the  transaction  is  completed,  the
    Partnership expects to receive net proceeds of over $400,000.

    The following is a summary of property  operating expenses for the three and
    six months ended June 30, 1996 and 1995 (in thousands):

                                        Three Months Ended   Six Months Ended
                                              June 30,            June 30,
                                        ------------------   -----------------
                                            1996     1995      1996     1995
                                            ----     ----      ----     ----
      Property operating expenses:
         Repairs and maintenance           $  69   $   68     $  135   $  123
         Utilities                            17       17         35       33
         Property taxes                       25       24         50       49
         Management fees                      19       17         37       35
         Salaries and administrative          51       60        102      112
                                          ------   ------     ------   ------
                                          $  181   $  186     $  359   $  352
                                          ======   ======     ======   ======

3. Unconsolidated  Joint  Venture Partnership

    The Partnership has an investment in one unconsolidated  joint venture,  St.
    Louis Woodchase Associates,  which owns and operates an operating investment
    property,  as more fully described in the Partnership's  Annual Report.  The
    unconsolidated  joint  venture is accounted  for on the equity method in the
    Partnership's  financial  statements because the Partnership does not have a
    voting  control  interest  in the  venture.  Under the  equity  method,  the
    investment  is  carried  at cost  adjusted  for the  Partnership's  share of
    venture's earnings and losses and distributions.  The Partnership recognizes
    its share of the operating results of its unconsolidated joint venture based
    on  financial  results of the venture  which are three  months in arrears to
    that of the Partnership.
<PAGE>
    Summarized  operating results of the unconsolidated  joint venture,  for the
    periods indicated, are as follows:

                         Condensed Summary of Operations
            For the three and six months ended June 30, 1996 and 1995
                                 (in thousands)

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

  Revenues:
   Rental revenues                  $  376    $   378      $   734     $ 736
   Other income                         17         11           32        21
                                    ------    -------      -------     -----
                                       393        389          766       757
  Expenses:
   Interest expense                    157        216          315       433
   Property operating expenses         137        145          271       255
   Real estate taxes                    21         26           43        52
   Depreciation                         97         88          192       175
                                  --------   --------     --------   -------
                                       412        475          821       915
                                  --------   --------     --------   -------
  Net loss                        $    (19)  $    (86)    $    (55)   $ (158)
                                  ========   ========     ========    ======

  Net loss:
   Partnership's share of
      net loss                    $    (14)  $    (61)    $    (39)   $ (111)
   Co-venturer's share of
      net loss                          (5)       (25)         (16)      (47)
                                  --------   --------     --------    ------
                                  $    (19)  $    (86)    $    (55)   $ (158)
                                  ========   ========     ========    ======-

4.  Note Payable

   Note  payable  at  September  30,  1996 and March 31,  1996 consists  of the
following (in thousands):

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

   Mortgage   loan   payable  by  the
   consolidated Tara Associates, Ltd.
   which secures Housing Authority of
   Clayton   County    Collateralized
   Loan-to-Lender   Housing   Revenue
   Bonds. The  non-recourse  mortgage
   loan  is  secured  by  a  deed  to
   secure   debt   and   a   security
   agreement       covering      Tara
   Associates,    Ltd.'s   real   and
   personal property.  The loan bears
   interest at a floating  rate which
   is  reset   weekly  based  on  the
   market   rate   for   tax   exempt
   securities       with      similar
   maturities. The loan is subject to
   various   prepayment    provisions
   including a  mandatory  redemption
   on  March  16,  1997,   the  first
   scheduled   remarketing  date,  as
   defined.  The  fair  value  of the
   mortgage note payable approximated
   its carrying  value as of June 30,
   1996  and  December  31,  1995.                $   8,330           $ 8,330 
                                                  ==========          ========


<PAGE>


5. Related Party Transactions

    The Adviser earned  management fees of $22,000 and $64,000 for the six-month
    periods  ended  September 30, 1996 and 1995,  respectively.  A limitation on
    cumulative  management  fees payable to the Adviser was reached in the first
    quarter of fiscal 1997.  Deferred  management fees at September 30, 1996 and
    March 31, 1996 consist of $1,265,000 and  $1,243,000,  respectively,  due to
    PWPI. See the Partnership's Annual Report for further information  regarding
    deferred  management fees.In  connection with a potential  settlement of the
    litigation  referred to in Note 6, the Adviser has  preliminarily  agreed to
    forego payment of these deferred  management fees. Any recognition of a gain
    from the  forgiveness of these  management  fees would be deferred until the
    settlement of the litigation is finalized.

    Included in general and  administrative  expenses for the six-month  periods
    ended  September  30,  1996 and 1995 is $18,000 and  $23,000,  respectively,
    representing  reimbursements to an affiliate of the Managing General Partner
    for  providing  certain  financial,  accounting  and investor  communication
    services to the Partnership.

    Also  included  in  general  and  administrative  expenses  for  both of the
    six-month periods ended September 30, 1996 and 1995 is $1,000,  representing
    fees earned by Mitchell Hutchins Institutional Investors,  Inc. for managing
    the Partnership's cash assets.

6. Contingencies

    As discussed in detail in the Partnership's Annual Report for the year ended
    March 31, 1996, the Partnership is involved in certain legal actions. At the
    present  time,  the Managing  General  Partner is unable to  determine  what
    impact,   if  any,  the   resolution  of  these  matters  may  have  on  the
    Partnership's financial statements, taken as a whole.




<PAGE>



                     PAINEWEBBER GROWTH PARTNERS THREE L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

      As  discussed  in the  Annual  Report,  the  Summerwind  joint  venture is
currently  generating  excess cash flow from  operations  as a result of the low
level of the variable  interest rate on the venture's  first mortgage loan. Such
excess cash flow is being used to pay Partnership operating expenses, except for
Partnership  management  fees,  the  payment  of which has been  deferred  since
September of 1986. The debt secured by the Summerwind  property,  which requires
interest-only  payments on a monthly basis,  was provided by tax-exempt  revenue
bonds issued by a local housing authority. During the first half of fiscal 1997,
the interest  rate on such debt,  which is tied to  comparable  tax-exempt  bond
obligations,  averaged  approximately 6% per annum on the venture's $8.3 million
debt  obligation.  Current  cash flow  from the  venture's  operations  would be
sufficient to cover  interest-only  payments at an average rate of approximately
9%.  Nonetheless,  such cash flow  would  likely  not be  sufficient  to support
conventional  financing,  including monthly principal  amortization,  at current
market interest rates.  The revenue bonds which are secured by the mortgage loan
encumbering the Summerwind property are also secured by an irrevocable letter of
credit agreement between the lender and the Housing Authority of Clayton County.
The letter of credit,  which will expire on March 16,  1997,  is an  irrevocable
obligation of the lender up to an amount  sufficient to pay the then outstanding
principal of the bonds plus 45 days interest  calculated  at 15% per annum.  The
mortgage  loan  secured  by the  Summerwind  Apartments  is  subject  to various
prepayment  provisions  including a mandatory  redemption on March 16, 1997, the
first  scheduled  remarketing  date,  as  defined,   which  coincides  with  the
expiration  of the  letter of credit  agreement.  Unless the letter of credit is
replaced or extended,  the venture's  mortgage loan will become  immediately due
and payable upon this scheduled expiration date.

     Subsequent  to the end of the current  quarter,  the  Partnership  signed a
letter of intent with an unrelated third party to sell its interest in the joint
venture  which owns the  Summerwind  Apartments  for $550,000 in cash.  The sale
could be structured as either a sale of the venture's operating property with an
assumption of the outstanding  mortgage debt or as the sale of the Partnership's
general  partner  interest in the joint  venture.  The sale  remains  subject to
certain due diligence  procedures and the potential  buyer's receipt of approval
of the sale by the lender,  the  limited  partner  and any other  parties  whose
consent  may be  required  by the loan  documents  and the  limited  partnership
agreement.  Accordingly, there are no assurances that this sale transaction will
be  consummated.  If the transaction is completed,  the  Partnership  expects to
receive over $400,000 in net proceeds.

      On September 13, 1995, the Partnership, along with its co-venture partner,
refinanced  the mortgage  debt secured by the  Woodchase  Apartments  with a new
lender.  The new non-recourse  mortgage loan was in the initial principal amount
of  $8,200,000  and bears  interest  at a rate of 7.5% per  annum.  The new loan
requires monthly  principal and interest  payments of approximately  $57,000 and
matures on October 1, 2002.  The proceeds of the new loan were used to repay the
existing $8 million debt which encumbered the Woodchase property,  as well as to
cover a portion of the refinancing  costs. The Partnership  advanced $164,000 to
the venture to cover the  remaining  transaction  costs.  Although the principal
amount of the new loan  increased  slightly,  the venture's  annual debt service
payments have been reduced by approximately $112,000 due to the reduction in the
interest  rate,  resulting  in positive  cash flow for the joint  venture.  As a
result,  during the quarter ended December 31, 1995 the  Partnership  received a
cash flow  distribution  of $164,000  from the joint venture in repayment of the
advances referred to above which were made in connection with the September 1995
refinancing transaction.

     In refinancing the Woodchase debt obligation, management obtained assumable
financing which reduces debt service costs and enhances the marketability of the
property  for a  possible  sale.  An  analysis  of the  estimated  value  of the
Woodchase  property  places  the  potential  sale  price  above the level of the
current  debt  balance by between $2 million to $3 million.  If the  Partnership
successfully  closes the sale of its  interest in the  Summerwind,  as discussed
above, a sale of the Woodchase  investment in the near-term  would be likely.  A
sale of the two remaining real estate assets would initiate a liquidation of the
Partnership which could be accomplished during calendar 1997.

     Upon the sale or disposition of the Partnership's investments,  the taxable
gain or loss incurred will be allocated among the partners.  In the case where a
taxable  gain would be  incurred,  gain would first be  allocated to the General
Partners in an amount at least  sufficient to eliminate  their  deficit  capital
balance. Any remaining gain would then be allocated to the Limited Partners.  In
certain cases, the Limited Partners could be allocated  taxable income in excess
of any liquidation proceeds that they may receive.  Additionally, in cases where
the  disposition  of any  investment  involves a  foreclosure  by, or  voluntary
conveyance  to, the mortgage  lender,  taxable  income  could occur  without the
distribution of cash.  Income from the sale or disposition of the  Partnership's
investments would represent passive income to the partners which could be offset
by each partner's  existing passive losses,  including any carryovers from prior
years.

     At September 30, 1996, the Partnership and its  consolidated  joint venture
had available cash and cash equivalents of approximately  $853,000. As discussed
further above, the consolidated  Summerwind  joint venture  currently  generates
positive  cash  flow  because  the  variable  interest  rate  on  the  venture's
outstanding mortgage indebtedness is presently at a fairly low level. As long as
this  variable  rate remains low, the venture  should  provide  excess cash flow
sufficient to cover the Partnership's operating expenses. In the event that this
interest rate rises  significantly in the near future,  the  Partnership's  cash
flow may be impaired.  The balance of cash and cash equivalents will be used for
the working capital needs of the Partnership and its consolidated joint venture.
The source of future liquidity and  distributions to the partners is expected to
be through  proceeds,  if any,  received from the sale or refinancing of the two
remaining investment properties.

Results of Operations
Three Months Ended September 30, 1996

      The  Partnership's  net loss  decreased  by $134,000  for the three months
ended  September  30, 1996,  when compared to the same period in the prior year.
This decrease in the  Partnership's net loss was the result of a decrease in the
Partnership's  operating  loss of $87,000  and a decrease  in the  Partnership's
share of unconsolidated venture's loss of $47,000.  Operating loss decreased due
to an  increase  in  revenues  of $21,000 and a decrease in expenses of $66,000.
Revenues  increased  primarily  due to an  increase in rental  revenue  from the
consolidated  Summerwind  joint  venture of  $19,000.  This  increase  in rental
revenue  is due  to an  increase  in  average  rental  rates  at the  Summerwind
Apartments. Expenses decreased mainly due to decreases in management fee expense
of $32,000,  general and administrative expenses of $23,000 and interest expense
of $9,000.  Management  fees  decreased  as a result of the  Partnership  having
reached a limitation  during the first quarter of fiscal 1997 on the  cumulative
amount of  allowable  management  fees  payable to the  Adviser  pursuant to the
Partnership's advisory contract.  General and administrative  expenses decreased
mainly due to a decrease in certain  professional fees incurred when compared to
the prior  year.  Interest  expense  decreased  as a result of a decrease in the
average interest rate paid during the current three-month period on the variable
rate mortgage loan secured by the Summerwind Apartments.

      The Partnership's share of unconsolidated venture's loss, which represents
the operating results of the Woodchase joint venture,  decreased mainly due to a
decrease  in  the  venture's  interest  expense  of  $59,000.  Interest  expense
decreased due to the September 1995  refinancing of the venture's prior mortgage
debt, as discussed  further  above,  which resulted in a lower interest rate and
lower debt service costs.

Six Months Ended September 30, 1996

      The  Partnership's net loss decreased by $189,000 for the six months ended
September  30, 1996,  when  compared to the same period in the prior year.  This
decrease  in the  Partnership's  net loss was the  result of a  decrease  in the
Partnership's  operating  loss of $117,000  and a decrease in the  Partnership's
share of unconsolidated venture's loss of $72,000.  Operating loss decreased due
to an  increase  in  revenues  of $33,000 and a decrease in expenses of $84,000.
Revenues  increased  primarily  due to an  increase in rental  revenue  from the
consolidated  Summerwind joint venture of $31,000.  Rental revenue increased due
to an increase in average  rental rates at the Summerwind  Apartments.  Expenses
decreased mainly due to decreases in management fee expense of $42,000,  general
and  administrative  expenses  of  $31,000  and  interest  expense  of  $19,000.
Management  fees  decreased  as a result  of the  Partnership  having  reached a
limitation  during the first quarter of fiscal 1997 on the cumulative  amount of
allowable  management fees payable to the Adviser pursuant to the  Partnership's
advisory contract. General and administrative expenses decreased mainly due to a
decrease in certain  professional fees incurred when compared to the prior year.
Interest  expense  decreased  as a result of a decrease in the average  interest
rate paid during the current six-month period on the variable rate mortgage loan
secured by the Summerwind Apartments.

      The Partnership's share of unconsolidated venture's loss, which represents
the operating results of the Woodchase joint venture,  decreased mainly due to a
decrease  in the  venture's  interest  expense  of  $118,000.  Interest  expense
decreased due to the September 1995  refinancing of the venture's prior mortgage
debt, as discussed  further  above,  which resulted in a lower interest rate and
lower debt service costs.




<PAGE>


                                     PART II
                                Other Information

Item 1. Legal Proceedings

     As discussed in prior  quarterly  and annual  reports,  in November  1994 a
series of purported class actions (the "New York Limited  Partnership  Actions")
were filed in the United States District Court for the Southern  District of New
York  concerning  PaineWebber  Incorporated's  sale and  sponsorship  of 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 PW Growth Properties,  Inc. and Properties Associates 1985, L.P.
("PA1985"),  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.

    In January 1996,  PaineWebber  signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding,  PaineWebber  irrevocably  deposited  $125 million into an escrow
fund under the  supervision of the United States District Court for the Southern
District of New York to be used to resolve the  litigation in accordance  with a
definitive  settlement  agreement  and plan of  allocation.  On July  17,  1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which has been preliminarily approved by the court and provides for the complete
resolution of the class action  litigation,  including  releases in favor of the
Partnership  and the General  Partners,  and the  allocation of the $125 million
settlement  fund among  investors  in the various  partnerships  at issue in the
case.  As part of the  settlement,  PaineWebber  also  agreed to  provide  class
members with certain financial  guarantees relating to some of the partnerships.
The details of the settlement are described in a notice mailed directly to class
members at the  direction of the court.  A final  hearing on the fairness of the
proposed settlement is scheduled to continue in November 1996.

With regard to the Abbate  action  described  in the Annual  Report on Form
10-K for the year ended March 31, 1996,  in September  1996 the court  dismissed
many  of the  plaintiffs'  claims  as  barred  by  the  applicable  statutes  of
limitations.  The eventual outcome of this litigation and the potential  impact,
if any, on the Partnership's  unitholders remains  undeterminable at the present
time.

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

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

Item 2. through 5.   NONE

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits: NONE

(b)  Reports on Form 8-K:

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


<PAGE>




                     PAINEWEBBER GROWTH PARTNERS THREE L.P.


                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                     PAINEWEBBER GROWTH PARTNERS THREE L.P.


                      By: THIRD PW GROWTH PROPERTIES, INC.
                            Managing General Partner




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

Date: November 13, 1996