UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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

                                   FORM 10-Q

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

               FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996

                                      OR

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

            For the transition period from           to          .


                          Commission File Number : 0-15035

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

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

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

Investment in unconsolidated joint
   venture, at equity                                    102            73
Cash and cash equivalents                              1,162           801
Accounts receivable                                        -             2
Prepaid expenses                                           -            16
Deferred expenses, net                                     -            67
Other assets                                               -           227
                                                 -----------    ----------
                                                 $     1,264    $    7,024
                                                 ===========    ==========

                      LIABILITIES AND PARTNERS' DEFICIT

Accounts payable and accrued expenses            $        16    $      106
Accrued interest payable                                   -           231
Loans payable to affiliates                                -           357
Advances from consolidated venture                         -            95
Deferred management fees payable to affiliate          1,266         1,244
Note payable                                               -         8,330
Partners' deficit                                        (18)       (3,339)
                                                 -----------    ----------
                                                 $     1,264    $    7,024
                                                 ===========    ==========

















                           See accompanying notes.
<PAGE>

                     PAINEWEBBER GROWTH PARTNERS THREE L.P.

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

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

Revenues:
   Rental income                  $   719     $   363       $1,457     $1,070
   Interest and other income           56           8           75         25
                                  -------     -------       ------     ------
                                      775         371        1,532      1,095

Expenses:
   Property operating expenses        401         189          760        541
   Interest expense                   385         144          654        432
   Depreciation                       134          67          270        202
   Partnership management fees          -          32           22         96
   General and administrative          43          51           99        138
                                  -------     -------       ------     ------
                                      963         483        1,805      1,409
                                  -------     -------       ------     ------
 
Operating loss                       (188)       (112)        (273)      (314)

Partnership's share of
   unconsolidated venture's 
   income (loss)                        7         (40)         (32)      (151)

Gain on sale of operating 
   investment property              3,231           -        3,231          -

Co-venture partner's share of
   consolidated venture's 
   operations                         395           -          395          -
                                  -------     -------       ------     ------

Net income (loss)                  $3,445     $  (152)      $3,321    $  (465)
                                   ======     =======       ======    =======

Net income (loss) per 
  Limited Partnership Unit        $127.55     $ (5.66)     $122.96    $(17.23)
                                  =======     =======      =======    =======


   The above net income  (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' CAPITAL (DEFICIT)
        For the nine months ended December 31, 1996 and 1995 (Unaudited)
                                 (In thousands)

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

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

Net loss                                              (23)          (442)
                                                 ---------       -------

Balance at December 31, 1995                     $   (136)       $(3,058)
                                                 ========        =======

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

Net income                                            166          3,155
                                                 --------        -------

Balance at December 31, 1996                     $     23        $   (41)
                                                 ========        =======
































                           See accompanying notes.
<PAGE>

                     PAINEWEBBER GROWTH PARTNERS THREE L.P.

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

                                                        1996             1995
                                                        ----             ----
Cash flows from operating activities:
   Net income (loss)                                $  3,321          $  (465)
   Adjustments to reconcile net income 
    (loss) to net cash provided by 
     operating activities:
    Gain on sale of operating investment 
      property                                        (3,231)               -
    Co-venture partner's share of consolidated
      venture's operations                              (395)               -
     Partnership's share of unconsolidated
       venture's loss                                     32              151
     Depreciation                                        270              202
     Deferred management fees                             22               96
     Amortization of deferred financing costs             67               41
     Changes in assets and liabilities:
      Accounts receivable                                  2                -
      Prepaid expenses                                    16               15
      Accounts payable and accrued expenses              (90)              48
      Accrued interest payable                            34               26
      Advances from consolidated venture                 (95)              (5)
                                                    --------          -------
            Total adjustments                         (3,368)             574
                                                    --------          -------
            Net cash provided by operating 
              activities                                (47)              109

Cash flows from investing activities:
   Net proceeds from sale of operating 
     investment property                                 469                -
   Distribution from unconsolidated venture                -              164
   Contribution to unconsolidated venture                (61)            (164)
                                                    --------          -------
            Net cash provided by investing 
              activities                                 408                -
                                                    --------          -------

Net increase in cash and cash equivalents                361              109

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

Cash and cash equivalents, end of period            $  1,162          $   813
                                                    ========          =======

Cash paid during the period for interest            $    553          $   365
                                                    ========          =======










                           See accompanying notes.


<PAGE>


                   PAINEWEBBER GROWTH PARTNERS THREE, L.P.
                  Notes to Consolidated Financial Statements
                                 (Unaudited)


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.

     The  accompanying  financial  statements  have been prepared on the accrual
    basis  of  accounting  in  accordance  with  generally  accepted  accounting
    principles which requires  management to make estimates and assumptions that
    affect the reported  amounts of assets and  liabilities  and  disclosures of
    contingent assets and liabilities as of December 31, 1996 and March 31, 1996
    and  revenues and  expenses  for each of the three- and  nine-month  periods
    ended  December  31, 1996 and 1995.  Actual  results  could  differ from the
    estimates and assumptions used.

     As  discussed  further in Note 2, as a result of the sale of the  operating
    property  owned by the  Summerwind  joint  venture  in  December  1996,  the
    Partnership  has one  remaining  joint  venture  investment,  the  Woodchase
    Apartments  (see  Note  3).  Management  of  the  Partnership  is  currently
    evaluating  a  potential  liquidation  of the  Partnership  which  could  be
    accomplished  during calendar 1997. There are no assurances,  however,  that
    the  disposition of the  Partnership's  remaining asset will be accomplished
    within this time frame.

2. Related Party Transactions

     The  Adviser  earned  management  fees  of  $22,000  and  $96,000  for  the
    nine-month  periods  ended  December  31,  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 December
    31,  1996  and  March  31,  1996  consist  of  $1,266,000  and   $1,244,000,
    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 will be deferred until the settlement of the litigation is finalized.

     Included in general and administrative  expenses for the nine-month periods
    ended  December  31,  1996 and 1995 is $30,000  and  $35,000,  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
    nine-month periods ended December 31, 1996 and 1995 is $2,000,  representing
    fees earned by an  affiliate,  Mitchell  Hutchins  Institutional  Investors,
    Inc., for managing the Partnership's cash assets.

3.  Operating Investment Property

     As of  March  31,  1996,  the  Partnership's  balance  sheet  included  one
    operating  investment  property;  the Summerwind  Apartments,  owned by Tara
    Associates,  Ltd.,  a  majority  owned  and  controlled  joint  venture.  As
    discussed further below, the Summerwind  Apartments was sold on December 27,
    1996 to an unrelated third party.  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.

     On December 27, 1996, Tara Associates,  Ltd. sold the Summerwind Apartments
    to an unrelated  third party for a net price of $550,000 plus the assumption
    of the  outstanding  principal  balance of the mortgage  loan secured by the
    property of $8,330,000 (see Note 5). The  Partnership  received net proceeds
    of approximately $319,000 after deducting closing costs and other credits to
    the buyer. For income tax reporting  purposes,  the Summerwind joint venture
    was required to maintain its accounting records on a calendar year basis. As
    a result,  the  Partnership  had accounted for its joint venture  investment
    based on financial  information which was three months in arrears to that of
    the  Partnership.   Due  to  the  Partnership's  policy  of  accounting  for
    significant  lag-period  transactions in the period in which they occur, the
    gain on this sale  transaction  was  recognized  during  the  quarter  ended
    December 31, 1996.  Accordingly,  in addition to the operations for the nine
    months ended September 30, 1996, the Partnership's operating results for the
    third quarter of fiscal 1997 also reflect the  operations of the  Summerwind
    joint venture for the period October 1, 1996 through the date of the sale.

     The following is a summary of property  operating  expenses reported on the
    Partnership's  consolidated  statements of operations for the three and nine
    months ended December 31, 1996 and 1995 (in thousands):

                                        Three Months Ended   Nine Months Ended
                                            December 31,        December 31,
                                         ----------------    -----------------
                                          1996 (1)  1995     1996 (1)    1995
                                          -------   ----     -------    -----
      Property operating expenses:
         Repairs and maintenance          $  161   $   74      $ 296   $  197
         Utilities                            42       18         77       51
         Property taxes                       49       25         99       74
         Management fees                      37       18         74       53
         Salaries and administrative         112       54        214      166
                                          ------   ------     ------   ------
                                          $  401   $  189     $  760   $  541
                                          ======   ======     ======   ======

(1) Due  to  the  Partnership's  three-month  reporting lag and the sale of the
    Summerwind  Apartments  on  December  27,  1996,  as  discussed  above,  the
    Partnership  reported operations of the consolidated venture from October 1,
    1996  through  the date of sale in the results for the three and nine months
    ended  December  31, 1996.  Accordingly,  the  property  operating  expenses
    summarized  above for the three and nine  months  ended  December  31,  1996
    reflect almost an additional three months of operations.

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

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

  Revenues:
   Rental revenues                  $  396    $   388       $1,130    $1,124
   Other income                         18         17           50        38
                                    ------    -------       ------    ------
                                       414        405        1,180     1,162
  Expenses:
   Interest expense                    158        224          473       657
   Property operating expenses         120        123          391       378
   Real estate taxes                    22         26           65        78
   Depreciation                        104         90          296       265
                                    ------    -------       ------    ------
                                       404        463        1,225     1,378
                                    ------    -------       ------    ------
  Net income (loss)                 $   10    $   (58)      $  (45)   $ (216)
                                    ======    =======       ======    ======

  Net income (loss):
   Partnership's share of net 
     income (loss)                  $    7    $  (40)       $  (32)   $ (151)
   Co-venturer's share of net 
     income (loss)                       3       (18)          (13)      (65)
                                    ------    ------        ------    ------
     
                                    $   10    $  (58)       $  (45)   $ (216)
                                    ======    ======        ======    ======

5.  Note Payable

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

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


     Mortgage   loan   payable   by  the
    consolidated  Tara Associates,  Ltd.
    which secured  Housing  Authority of
    Clayton    County     Collateralized
    Loan-to-Lender    Housing    Revenue
    Bonds.  The  non-recourse   mortgage
    loan was secured by a deed to secure
    debt   and  a   security   agreement
    covering  Tara  Associates,   Ltd.'s
    real and personal property. The loan
    bore  interest  at a  floating  rate
    which was reset  weekly based on the
    market    rate   for   tax    exempt
    securities with similar  maturities.
    The fair value of the mortgage  note
    payable  approximated  its  carrying
    value as of December  31,  1995.  As
    discussed  further  in  Note  3,  on
    December 27, 1996  Tara  Associates,
    Ltd. sold the Summerwind  Apartments
    to an  unrelated  third  party which
    assumed   the   outstanding    first
    mortgage loan.                                   $    -         $ 8,330




<PAGE>


6. Contingencies

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




<PAGE>



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

Liquidity and Capital Resources
-------------------------------
       During the third quarter of fiscal 1997, the Partnership  signed a letter
of intent with an unrelated third party to sell the Summerwind  Apartments for a
net price of $550,000 in cash. The net purchase price reflects the assumption by
the  purchaser of the  $8,330,000  first  mortgage loan secured by the operating
investment  property.  The  Partnership  received net proceeds of  approximately
$319,000  after  deducting  closing  costs and other  credits to the buyer.  The
Partnership's  original  investment in the  Summerwind  joint  venture  totalled
approximately  $2.4 million.  Despite  recovering  less than 15% of the original
investment,  management  believes  it was the right  time to sell this  asset in
light of the  property's  estimated  market  value,  the limited  potential  for
near-term  appreciation and the uncertain prospects for extending or refinancing
the venture's long-term debt, as discussed further below.

       As discussed  further in the Annual Report,  the Summerwind joint venture
had been  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 was being used to pay Partnership operating expenses.  The debt
secured by the Summerwind property,  which required  interest-only payments on a
monthly  basis,  was  provided by  tax-exempt  revenue  bonds  issued by a local
housing authority.  The interest rate on such debt, which was tied to comparable
tax-exempt bond obligations,  was significantly lower than rates on conventional
mortgage financing.  In fact, the venture's cash flow would likely not have been
sufficient  to  support  conventional  financing,  including  monthly  principal
amortization, at current market interest rates. The mortgage loan secured by the
Summerwind  Apartments was subject to various prepayment  provisions including a
mandatory redemption on March 16, 1997, the first scheduled remarketing date, as
defined,  which coincided with the expiration of the letter of credit  agreement
which secured the underlying bonds.  Unless the letter of credit was replaced or
extended,  the  venture's  mortgage  loan  would have been  immediately  due and
payable upon this scheduled expiration date.  Management's  estimate of the fair
market value of the  Summerwind  Apartments  put the value of the property at or
slightly above the amount of the outstanding  first mortgage loan as of December
1996.  Accordingly,  it was unlikely  that the property  would have  satisfied a
letter of credit issuer's  loan-to-value  ratio  requirements  for issuing a new
letter  of  credit.  Consequently,  the  property  would  have been  subject  to
foreclosure  proceedings during fiscal 1997 if the Partnership had not completed
the sale  transaction.  The  price  that the buyer  was  willing  to pay for the
Summerwind  property was based mainly upon the ability to earn  management  fees
and to  receive  current  net cash flow  after  completing  a  modification  and
extension  agreement with the mortgage  lender.  The  modification and extension
agreement required that the buyer deposit significant additional collateral with
the mortgage lender.

       As a result of the sale of the Summerwind Apartments, the Partnership has
one remaining joint venture investment, the Woodchase Apartments.  Management of
the Partnership will now focus on achieving a near-term sale of the property and
possibly  completing a  liquidation  of the  Partnership  by the end of calendar
1997.   There  are  no  assurances,   however,   that  the  disposition  of  the
Partnership's remaining asset will be accomplished within this time frame.

       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. In refinancing  the Woodchase  debt  obligation,
management obtained assumable financing which reduced the venture's debt service
costs and enhances the marketability of the property for a possible sale. Market
conditions  for  multi-family  properties  in the St. Louis  sub-market in which
Woodchase is located are stable at the present time with a limited amount of new
construction  activity  in  progress.  Management  expects  to  begin  exploring
potential sale opportunities in the fourth quarter.

       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,  if any.  The  majority  of the  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.  Income from the sale or disposition of the  Partnership's  investments
will  represent  passive  income  to the  partners  which  can be offset by each
partner's existing passive losses, including any carryovers from prior years.

     At  December  31,  1996,  the  Partnership  had  available  cash  and  cash
equivalents of approximately $1,162,000.  Such cash and cash equivalents will be
used for the working  capital  needs of the  Partnership  through  its  expected
liquidation. The source of future liquidity and distributions to the partners is
expected to be through the proceeds received from the sale or refinancing of the
Partnership's remaining investment property.  Subsequent to the eventual sale of
the  Woodchase  investment,  the net sale  proceeds,  along  with any  remaining
Partnership reserves after the payment of all liquidation-related expenses, will
be distributed to the Limited Partners.

Results of Operations
Three Months Ended December 31, 1996
------------------------------------

      The  Partnership  reported net income of  $3,445,000  for the  three-month
period  ended  December  31, 1996 as compared to a net loss of $152,000  for the
same  period in the prior  year.  The  Partnership's  net income for the current
three-month  period  is a  result  of the gain  recognized  from the sale of the
Summerwind Apartments in December 1996, as discussed above. The gain amounted to
$3,231,000,  which represents the difference between the gross purchase price of
$8,880,000  net of  selling  costs,  and the  carrying  value  of the  operating
investment property, net of accumulated depreciation.  The sale of the operating
investment property owned by the consolidated  Summerwind joint venture was also
responsible for significant increases in both total revenues and total expenses,
of $404,000 and  $480,000,  respectively.  Operations  of the  Summerwind  joint
venture are normally reported on a three-month lag. However,  due to the sale of
the venture's  property on December 27, 1996, the  recognition of operations was
accelerated  through the date of the sale in the current period. In addition,  a
$32,000  decrease in management fees also contributed to the favorable change in
net  operating  results  for the current  three-month  period.  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.

      The  Partnership's  share  of  unconsolidated   venture's  income,   which
represents the operating  results of the Woodchase  joint  venture,  amounted to
$7,000 for the  three-month  period ended December 31, 1996 as compared to a net
loss of $40,000  for the same period in the prior  year.  The $47,000  favorable
change in the Partnership's share of the Woodchase joint venture's operations is
mainly due to a $67,000  decrease in the venture's  interest  expense.  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.

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

      The  Partnership  reported  net income of  $3,321,000  for the  nine-month
period  ended  December  31, 1996 as compared to a net loss of $465,000  for the
same  period in the prior  year.  The  Partnership's  net income for the current
nine-month  period  is a  result  of the  gain  recognized  from the sale of the
Summerwind  Apartments in December 1996, as discussed further above. The sale of
the operating  investment  property owned by the  consolidated  Summerwind joint
venture was also  responsible for  significant  increases in both total revenues
and total expenses, of $437,000 and $396,000, respectively. As discussed further
above, due to the Partnership's policy of accounting for significant  lag-period
transactions  in  the  period  in  which  they  occur,  the  recognition  of the
consolidated  venture's  operations was accelerated through the date of the sale
in the current  period.  Decreases in management fees of $74,000 and general and
administrative  expenses of $38,000 also  contributed to the favorable change in
net  operating  results  for the  current  nine-month  period.  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 required professional fees when compared to the same period in the prior
year.

      The Partnership's share of unconsolidated venture's loss, which represents
the operating results of the Woodchase joint venture,  decreased by $119,000 for
the  nine-month  period ended December 31, 1996.  This  favorable  change in the
Partnership's share of the Woodchase joint venture's operations is mainly due to
a  $184,000  decrease  in  the  venture's  interest  expense.  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 70 limited
partnership  investments,  including  those  offered  by  the  Partnership.  The
lawsuits were brought against  PaineWebber  Incorporated  and Paine Webber Group
Inc.  (together   "PaineWebber"),   among  others,  by  allegedly   dissatisfied
partnership investors.  In March 1995, after the actions were consolidated under
the title In re  PaineWebber  Limited  Partnership  Litigation,  the  plaintiffs
amended their complaint to assert claims against a variety of other  defendants,
including Third 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  was held in December  1996, and a ruling by the court as a
result of this final hearing is currently pending.

     With regard to the Abbate  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 applicable  securities  arbitration
regulations.  Mediation  with respect to the Abbate  action was held in December
1996. As a result of such mediation,  a tentative settlement between PaineWebber
and the  plaintiffs  was reached which would provide for complete  resolution of
the action.  PaineWebber anticipates that releases and dismissals with regard to
this action will be received by February 1997.

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

Item 2. through 5.  NONE

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits: NONE

(b)  Reports on Form 8-K:

     A Current  Report on Form 8-K was filed by the  registrant  on January  21,
1997 reporting the sale of Summerwind Apartments on December 27, 1996.


<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: February 13, 1997