Form N-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM N-Q


QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED MANAGEMENT INVESTMENT COMPANY

Investment Company Act file number         811-21157         

        Nuveen Arizona Dividend Advantage Municipal Fund 3         
(Exact name of registrant as specified in charter)

Nuveen Investments
        333 West Wacker Drive, Chicago, Illinois 60606         
(Address of principal executive offices) (Zip code)


Kevin J. McCarthy Vice President and Secretary
        333 West Wacker Drive, Chicago, Illinois 60606         
(Name and address of agent for service)

Registrant's telephone number, including area code:         312-917-7700        

Date of fiscal year end:            7/31          

Date of reporting period:         10/31/08         

Form N-Q is to be used by management investment companies, other than small business investment companies registered on Form N-5 (§§ 239.24 and 274.5 of this chapter), to file reports with the Commission, not later than 60 days after the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use the information provided on Form N-Q in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-Q, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-Q unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

Item 1. Schedule of Investments

    Portfolio of Investments (Unaudited)             
    Nuveen Arizona Dividend Advantage Municipal Fund 3 (NXE)             
    October 31, 2008             
Principal        Optional Call         
Amount (000)    Description (1)    Provisions (2)    Ratings (3)    Value 
    Consumer Staples – 1.1% (0.7% of Total Investments)             
$         530    Puerto Rico, The Children’s Trust Fund, Tobacco Settlement Asset-Backed Refunding Bonds,    5/12 at 100.00    BBB   $   399,700 
     Series 2002, 5.375%, 5/15/33             
    Education and Civic Organizations – 16.5% (10.3% of Total Investments)             
690    Arizona Higher Education Loan Authority, Student Loan Revenue Bonds, Series 2007B, Adjustable    3/09 at 100.00    AAA    468,336 
     Rate, 2.295%, 11/01/41 (4)             
1,250    Arizona State University, System Revenue Bonds, Series 2005, 5.000%, 7/01/20 – AMBAC Insured    7/15 at 100.00    AA    1,221,838 
1,130    Energy Management Services LLC, Arizona State University, Energy Conservation Revenue Bonds,    7/12 at 100.00    AA    1,148,735 
     Main Campus Project, Series 2002, 5.250%, 7/01/18 – MBIA Insured             
540    Pima County Industrial Development Authority, Arizona, Charter School Revenue Bonds, Noah    12/14 at 100.00    BBB–    446,882 
     Webster Basic Schools Inc., Series 2004, 6.000%, 12/15/24             
565    Tucson Industrial Development Authority, Arizona, Charter School Revenue Bonds, Arizona    9/14 at 100.00    BBB–    438,892 
     Agribusiness and Equine Center Charter School, Series 2004A, 6.125%, 9/01/34             
2,000    University of Arizona, Certificates of Participation, Series 2002B, 5.125%, 6/01/20 –    6/12 at 100.00    AA    1,997,320 
     AMBAC Insured             
6,175    Total Education and Civic Organizations            5,722,003 
    Health Care – 31.1% (19.6% of Total Investments)             
1,015    Arizona Health Facilities Authority, Hospital Revenue Bonds, Banner Health Systems, Series    1/17 at 100.00    AA–    898,305 
     2007A, 5.000%, 1/01/25             
620    Arizona Health Facilities Authority, Hospital Revenue Bonds, Banner Health Systems, Series    1/17 at 100.00    AA–    300,700 
     2007B, 3.411%, 1/02/37             
2,390    Arizona Health Facilities Authority, Hospital Revenue Bonds, Banner Health Systems, Series    1/18 at 100.00    AA–    2,087,378 
     2008D, 5.500%, 1/01/38             
625    Arizona Health Facilities Authority, Revenue Bonds, Blood Systems Inc., Series 2004,    4/14 at 100.00    A    569,400 
     5.000%, 4/01/20             
475    Glendale Industrial Development Authority, Arizona, Revenue Bonds, John C. Lincoln Health    12/15 at 100.00    BBB    326,506 
     Network, Series 2005B, 5.000%, 12/01/37             
785    Glendale Industrial Development Authority, Arizona, Revenue Bonds, John C. Lincoln Health    12/17 at 100.00    BBB    524,851 
     Network, Series 2007, 5.000%, 12/01/42             
1,825    Maricopa County Industrial Development Authority, Arizona, Health Facility Revenue Bonds,    7/14 at 100.00    A    1,609,741 
     Catholic Healthcare West, Series 2004A, 5.375%, 7/01/23             
1,985    Maricopa County Industrial Development Authority, Arizona, Health Facility Revenue Bonds,    7/17 at 100.00    A    1,619,303 
     Catholic Healthcare West, Series 2007A, 5.250%, 7/01/32             
2,000    Maricopa County Industrial Development Authority, Arizona, Hospital Revenue Bonds, Mayo Clinic    11/08 at 101.00    AA    1,735,920 
     Hospital, Series 1998, 5.250%, 11/15/37             
270    Maricopa County, Arizona, Hospital Revenue Bonds, Sun Health Corporation, Series 2005,    4/15 at 100.00    BBB    288,762 
     5.000%, 4/01/16             
1,000    Yavapai County Industrial Development Authority, Arizona, Hospital Revenue Bonds, Yavapai    8/13 at 100.00    Baa2    855,010 
     Regional Medical Center, Series 2003A, 6.000%, 8/01/33             
12,990    Total Health Care            10,815,876 
    Housing/Multifamily – 4.9% (3.1% of Total Investments)             
1,545    Phoenix Industrial Development Authority, Arizona, GNMA Collateralized Multifamily Housing    6/11 at 102.00    Aaa    1,425,525 
     Revenue Bonds, Campaigne Place on Jackson, Series 2001, 5.600%, 6/20/21 (Alternative             
     Minimum Tax)             
380    Phoenix Industrial Development Authority, Arizona, GNMA Collateralized Multifamily Housing    4/15 at 100.00    Aaa    275,800 
     Revenue Bonds, Park Lee Apartments, Series 2004A, 5.050%, 10/20/44 (Alternative Minimum Tax)             
1,925    Total Housing/Multifamily            1,701,325 
    Housing/Single Family – 7.9% (5.0% of Total Investments)             
1,170    The Industrial Development Authority of The City of Tucson, Arizona, Tax-Exempt Single Family    1/17 at 103.00    Aaa    1,008,365 
     Mortgage Revenue Bonds, Series 2007A-1, 5.100%, 7/01/38             
2,130    Tucson and Pima County Industrial Development Authority, Arizona, Joint Single Family Mortgage    6/17 at 101.00    Aaa    1,731,733 
     Revenue Bonds, Series 2007B, 5.350%, 6/01/47 (Alternative Minimum Tax)             
3,300    Total Housing/Single Family            2,740,098 
    Tax Obligation/General – 2.7% (1.7% of Total Investments)             
1,000    Pinal County Unified School District 1, Florence, Arizona, General Obligation Bonds, Series    7/18 at 100.00    A–    923,760 
     2008C, 5.250%, 7/01/28             
    Tax Obligation/Limited – 33.7% (21.2% of Total Investments)             
150    Centerra Community Facilities District, Goodyear, Arizona, General Obligation Bonds, Series    7/15 at 100.00    N/R    108,540 
     2005, 5.500%, 7/15/29             
2,250    DC Ranch Community Facilities District, Scottsdale, Arizona, General Obligation Bonds, Series    7/13 at 100.00    Aa3    2,031,683 
     2002, 5.000%, 7/15/27 – AMBAC Insured             
    Estrella Mountain Ranch Community Facilities District, Arizona, Special Assessment Bonds,             
    Montecito Assessment District, Series 2007:             
254     5.700%, 7/01/27    1/17 at 100.00    N/R    192,227 
155     5.800%, 7/01/32    1/17 at 100.00    N/R    112,978 
303    Estrella Mountain Ranch Community Facilities District, Goodyear, Arizona, Special Assessment    7/10 at 102.00    N/R    293,631 
     Lien Bonds, Series 2001A, 7.875%, 7/01/25             
525    Greater Arizona Development Authority, Infrastructure Revenue Bonds, Series 2006A, 5.000%,    8/16 at 100.00    AA    513,707 
     8/01/23 – MBIA Insured             
785    Marana, Arizona, Tangerine Farms Road Improvement District Revenue Bonds, Series 2006,    7/16 at 100.00    Baa1    574,141 
     4.600%, 1/01/26             
290    Marley Park Community Facilities District, City of Surprise, Arizona, Limited Tax General    7/17 at 100.00    N/R    217,807 
     Obligation Bonds, Series 2007, 6.100%, 7/15/32             
490    Merrill Ranch Community Facilities District 1, Florence, Arizona, General Obligation Bonds,    7/18 at 100.00    N/R    415,393 
     Series 2008A, 7.400%, 7/15/33             
2,000    Mohave County, Arizona, Certificates of Participation, Series 2004, 5.250%, 7/01/19 –    7/14 at 100.00    AA    1,968,600 
     AMBAC Insured             
640    Palm Valley Community Facility District 3, Goodyear, Arizona, General Obligation Bonds, Series    7/16 at 100.00    N/R    440,192 
     2006, 5.300%, 7/15/31             
425    Palm Valley Community Facility District 3, Goodyear, Arizona, Limited Tax General Obligation    7/17 at 100.00    N/R    311,410 
     Bonds, Series 2007, 5.800%, 7/15/32             
160    Parkway Community Facilities District 1, Prescott Valley, Arizona, General Obligation Bonds,    7/16 at 100.00    N/R    110,245 
     Series 2006, 5.350%, 7/15/31             
1,250    Pinal County Industrial Development Authority, Arizona, Correctional Facilities Contract    No Opt. Call    BBB–    1,058,950 
     Revenue Bonds, Florence West Prison LLC, Series 2002A, 5.000%, 10/01/18 – ACA Insured             
1,130    San Luis Civic Improvement Corporation, Arizona, Municipal Facilities Excise Tax Revenue    7/15 at 100.00    A–    1,030,775 
     Bonds, Series 2005, 5.000%, 7/01/25 – SYNCORA GTY Insured             
665    Tartesso West Community Facility District, Buckeye, Arizona, Limited Tax General Obligation    7/17 at 100.00    N/R    494,048 
     Bonds, Series 2007, 5.900%, 7/15/32             
1,250    Vistancia Community Facilities District, Arizona, Restricted General Obligation Bonds, Series    7/15 at 100.00    Baa1    1,058,100 
     2005, 5.750%, 7/15/24             
665    Watson Road Community Facilities District, Arizona, Special Assessment Revenue Bonds, Series    7/16 at 100.00    N/R    482,059 
     2005, 6.000%, 7/01/30             
425    Westpark Community Facilities District, Buckeye, Arizona, General Obligation Tax Increment    7/16 at 100.00    N/R    290,173 
     Bonds Series 2006, 5.250%, 7/15/31             
13,812    Total Tax Obligation/Limited            11,704,659 
    Transportation – 14.6% (9.2% of Total Investments)             
    Phoenix, Arizona, Civic Improvement Corporation, Senior Lien Airport Revenue Bonds,             
    Series 2002B:             
1,000     5.750%, 7/01/16 – FGIC Insured (Alternative Minimum Tax)    7/12 at 100.00    AA    969,220 
2,300     5.250%, 7/01/21 – FGIC Insured (Alternative Minimum Tax)    7/12 at 100.00    AA    1,994,974 
2,450    Tucson Airport Authority Inc., Arizona, Revenue Refunding Bonds, Series 2001B, 5.000%,    6/11 at 100.00    AA    2,117,070 
     6/01/20 – AMBAC Insured (Alternative Minimum Tax)             
5,750    Total Transportation            5,081,264 
    U.S. Guaranteed – 24.1% (15.1% of Total Investments) (5)             
300    Arizona Health Facilities Authority, Hospital Revenue Bonds, Catholic Healthcare West, Series    7/10 at 101.00    A (5)    323,535 
     1999A, 6.625%, 7/01/20 (Pre-refunded 7/01/10)             
1,000    Arizona Health Facilities Authority, Hospital System Revenue Bonds, John C. Lincoln Health    12/10 at 102.00    BBB (5)    1,101,100 
     Network, Series 2000, 6.875%, 12/01/20 (Pre-refunded 12/01/10)             
    Arizona Health Facilities Authority, Hospital System Revenue Bonds, Phoenix Children’s             
    Hospital, Series 1999A:             
350     6.125%, 11/15/22 (Pre-refunded 11/15/09)    11/09 at 100.00    Baa3 (5)    365,306 
520     6.250%, 11/15/29 (Pre-refunded 11/15/09)    11/09 at 100.00    Baa3 (5)    542,521 
1,575    Maricopa County Union High School District 210, Phoenix, Arizona, General Obligation Bonds,    7/14 at 100.00    AAA    1,696,669 
     Series 2004A, 5.000%, 7/01/20 (Pre-refunded 7/01/14) – FSA Insured             
1,250    Scottsdale Industrial Development Authority, Arizona, Hospital Revenue Bonds, Scottsdale    12/11 at 101.00    BBB+ (5)    1,356,463 
     Healthcare, Series 2001, 5.800%, 12/01/31 (Pre-refunded 12/01/11)             
2,770    Tempe, Arizona, Excise Tax Revenue Refunding Bonds, Series 2003, 5.000%, 7/01/22    7/13 at 100.00    AAA    2,982,569 
     (Pre-refunded 7/01/13)             
7,765    Total U.S. Guaranteed            8,368,163 
    Utilities – 10.0% (6.3% of Total Investments)             
1,250    Maricopa County Pollution Control Corporation, Arizona, Revenue Bonds, Arizona Public Service    11/12 at 100.00    AA    1,038,150 
     Company – Palo Verde Project, Series 2002A, 5.050%, 5/01/29 – AMBAC Insured             
1,660    Puerto Rico Electric Power Authority, Power Revenue Bonds, Series 2005RR, 5.000%, 7/01/26 –    7/15 at 100.00    A3    1,447,819 
     SYNCORA GTY Insured             
270    Salt River Project Agricultural Improvement and Power District, Arizona, Electric System    1/13 at 100.00    Aa1    269,981 
     Revenue Bonds, Series 2002B, 5.000%, 1/01/22             
1,165    Salt Verde Financial Corporation, Arizona, Senior Gas Revenue Bonds, Series 2007,    No Opt. Call    AA–    705,373 
     5.000%, 12/01/37             
4,345    Total Utilities            3,461,323 
    Water and Sewer – 12.5% (7.8% of Total Investments)             
405    Oro Valley Municipal Property Corporation, Arizona, Senior Lien Water Revenue Bonds, Series    7/13 at 100.00    AA    392,287 
     2003, 5.000%, 7/01/23 – MBIA Insured             
1,000    Phoenix Civic Improvement Corporation, Arizona, Junior Lien Wastewater System Revenue    7/11 at 100.00    AA+    1,000,050 
     Refunding Bonds, Series 2001, 5.125%, 7/01/21 – FGIC Insured             
2,000    Phoenix Civic Improvement Corporation, Arizona, Junior Lien Water System Revenue Bonds, Series    7/12 at 100.00    AA    2,021,880 
     2002, 5.000%, 7/01/18 – FGIC Insured             
    Surprise Municipal Property Corporation, Arizona, Wastewater System Revenue Bonds, Series 2007:             
425     4.700%, 4/01/22    4/14 at 100.00    N/R    329,923 
490     4.900%, 4/01/32    4/17 at 100.00    N/R    345,827 
330    Yuma County Industrial Development Authority, Arizona, Exempt Revenue Bonds, Far West Water &    12/17 at 100.00    N/R    236,217 
     Sewer Inc. Refunding, Series 2007A, 6.375%, 12/01/37 (Alternative Minimum Tax)             
4,650    Total Water and Sewer            4,326,184 
$    62,242    Total Investments (cost $62,456,291) – 159.1%            55,244,355 
    Other Assets Less Liabilities – 4.2%            1,488,849 
    Preferred Shares, at Liquidation Value – (63.3)% (6)            (22,000,000)
    Net Assets Applicable to Common Shares – 100%          $  34,733,204 

(1)    All percentages shown in the Portfolio of Investments are based on net assets applicable to Common 
    shares unless otherwise noted. 
(2)    Optional Call Provisions: Dates (month and year) and prices of the earliest optional call or redemption. 
    There may be other call provisions at varying prices at later dates. Certain mortgage-backed securities 
    may be subject to periodic principal paydowns. 
(3)    Ratings: Using the higher of Standard & Poor's Group ("Standard & Poor's") or Moody's Investor Service, 
    Inc. ("Moody's") rating. Ratings below BBB by Standard & Poor's or Baa by Moody's are considered to be 
    below investment grade. 
    The Portfolio of Investments may reflect the ratings on certain bonds insured by ACA, AGC, AMBAC, CIFG, 
    FGIC, FSA, MBIA, RAAI and SYNCORA as of October 31, 2008. Subsequent of October 31, 2008, and during 
    the period this Portfolio of Investments was prepared, there may have been reductions to the ratings of 
    certain bonds resulting from changes to the ratings of the underlying insurers both during the period and 
    after period end. Such reductions would likely reduce the effective rating of many of the bonds insured by 
    the insurer or insurers presented at period end. 
(4)    Investment valued at fair value using methods determined in good faith by, or at the discretion of, the 
    Board of Trustees. 
(5)    Backed by an escrow or trust containing sufficient U.S. Government or U.S. Government agency securities 
    which ensure the timely payment of principal and interest. Such investments are normally considered to 
    be equivalent to AAA rated securities. 
(6)    Preferred Shares, at Liquidation Value as a percentage of Total Investments is 39.8%. 
N/R    Not rated. 

Fair Value Measurements

During the current fiscal period, the Fund adopted the provisions of Statement of Financial Accounting Standards No. 157 (SFAS No.157) "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements. In determining the value of the Fund's investments various inputs are used. These inputs are summarized in the three broad levels listed below:

Level 1 – Quoted prices in active markets for identical securities. 
Level 2 – Other significant observable inputs (including quoted prices for similar securities, interest rates, 
              prepayment speeds, credit risk, etc.). 
Level 3 – Significant unobservable inputs (including management's assumptions in determining the fair 
              value of investments). 

The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.

The following is a summary of the Fund's fair value measurements as of October 31, 2008:

    Level 1    Level 2    Level 3    Total 
Investments    $ —    $54,776,019    $468,336    $55,244,355 

The following is a reconciliation of the Fund's Level 3 investments held at the beginning and end of the measurement period:

    Level 3 
    Investments 
Balance as of July 31, 2008    $352,949 
 Gains (losses):     
     Net realized gains (losses)    — 
     Net change in unrealized appreciation (depreciation)    115,387 
 Net purchases at cost (sales at proceeds)    — 
 Net discounts (premiums)    — 
 Net transfers in to (out of) at end of period fair value    — 
Balance as of October 31, 2008    $468,336 

Income Tax Information

The following information is presented on an income tax basis. Differences between amounts for financial statement and federal income tax purposes are primarily due to timing differences in recognizing taxable market discount and timing differences in recognizing certain gains and losses on investment transactions. To the extent that differences arise that are permanent in nature, such amounts are reclassified within the capital accounts on the Statement of Assets and Liabilities presented in the annual report, based on their federal tax basis treatment; temporary differences do not require reclassification. Temporary and permanent differences do not impact the net asset value of the Fund.

At October 31, 2008, the cost of investments was $62,450,956.

Gross unrealized appreciation and gross unrealized depreciation of investments at October 31, 2008, were as follows:

Gross unrealized:     
  Appreciation    $   506,371 
  Depreciation    (7,712,972)
Net unrealized appreciation (depreciation) of investments    $(7,206,601)

Item 2. Controls and Procedures.

  1. The registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rule 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934 (17 CFR 240.13a-15(b) or 240.15d-15(b)).
  2. There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting.

Item 3. Exhibits.

File as exhibits as part of this Form a separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the 1940 Act (17 CFR 270.30a-2(a)), exactly as set forth below: See EX-99 CERT attached hereto.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

(Registrant)         Nuveen Arizona Dividend Advantage Municipal Fund 3         

By (Signature and Title)          /s/ Kevin J. McCarthy                    
                                                  Kevin J. McCarthy
                                                  Vice President and Secretary

Date         December 30, 2008        

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By (Signature and Title)         /s/ Gifford R. Zimmerman                    
                                                 Gifford R. Zimmerman
                                                 Chief Administrative Officer (principal executive officer) 

Date         December 30, 2008        

By (Signature and Title)         /s/ Stephen D. Foy                              
                                                 Stephen D. Foy
                                                 Vice President and Controller (principal financial officer) 

Date        December 30, 2008