UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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

                                  FORM 10-K

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

                   FOR FISCAL YEAR ENDED SEPTEMBER 30, 1999

                                      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: 0-10979


           PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
            -----------------------------------------------------
            (Exact name of registrant as specified in its charter)


            Delaware                                           13-3038189
            --------                                           ----------
(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
                                                    --------------

Securities registered pursuant to Section 12(b) of the Act:

                                                     Name of each exchange on
Title of each class                                     which registered
-------------------                                  ------------------------
      None                                                    None

Securities registered pursuant to Section 12(g) of the Act:

                    UNITS OF LIMITED PARTNERSHIP INTEREST
                    -------------------------------------
                               (Title of class)

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

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

State the aggregate market value of the voting stock held by  non-affiliates  of
the registrant. Not applicable.

                       DOCUMENTS INCORPORATED BY REFERENCE

Documents                                                   Form 10-K Reference
---------                                                   -------------------
Prospectus of registrant dated                                    Part IV
December 3, 1980, as supplemented

<PAGE>

                 PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
                                       1999 FORM 10-K

                                     TABLE OF CONTENTS

                                                                        Page
                                                                        ----
Part   I

Item  1           Business                                               I-1

Item  2           Properties                                             I-4

Item  3           Legal Proceedings                                      I-4

Item  4           Submission of Matters to a Vote of Security Holders    I-5

Part  II

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

Item  6           Selected Financial Data                                II-1

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

Item  7A          Market Risk Disclosures                                II-7


Item  8           Financial Statements and Supplementary Data            II-7

Item  9           Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosure                    II-7

Part III

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

Item 11           Executive Compensation                                 III-2

Item 12           Security Ownership of Certain Beneficial Owners and
                  Management                                             III-2

Item 13           Certain Relationships and Related Transactions         III-3

Part  IV

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

Signatures                                                               IV-2

Index to Exhibits                                                        IV-3

Financial Statements and Supplementary Data                       F-1 to F-25


<PAGE>


      This Form 10-K contains  forward-looking  statements within the meaning of
Section 27A of the  Securities  Act of 1933 and  Section  21E of the  Securities
Exchange Act of 1934. The  Partnership's  actual results could differ materially
from those set forth in the  forward-looking  statements.  Certain  factors that
might cause such a difference  are  discussed in Item 7 in the section  entitled
"Certain Factors Affecting Future Operating  Results"  beginning on page II-6 of
this Form 10-K.

                                     PART I

Item 1.  Business

      Paine  Webber   Income   Properties   Three   Limited   Partnership   (the
"Partnership")  is a limited  partnership  formed in June 1980 under the Uniform
Limited Partnership Act of the State of Delaware for the purpose of investing in
a  diversified  portfolio  of  existing  income-producing  properties  including
shopping  centers and apartment  complexes.  The Partnership sold $21,550,000 in
Limited Partnership units (the "Units"), representing 21,550 Units at $1,000 per
unit,  during the offering period  pursuant to a Registration  Statement on Form
S-11 filed under the Securities Act of 1933 (Registration No. 2-68360).  Limited
Partners will not be required to make any additional contributions.

      The  Partnership  originally  invested  the  net  proceeds  of the  public
offering,  either  directly  or  through  joint  venture  partnerships,  in  six
operating properties. As discussed below, through September 30, 1999 four of the
operating  properties  had been sold, and the  Partnership  sold its interest in
another  joint  venture to its  co-venture  partner  during  fiscal 1997.  As of
September 30, 1999, the Partnership owned directly the property set forth in the
following table:
<TABLE>
<CAPTION>

Name of Joint Venture                                    Date of
Name and Type of Property                                Acquisition of              Type of
Location                                    Size         Interest                    Ownership (1)
-------------------------------------       ----         ----------                  ----------------
<S>                                         <C>          <C>                         <C>

Northeast Plaza Shopping Center             121,005       9/25/81                    Fee ownership of land
Sarasota, Florida                           gross                                    and improvements subject
                                            leasable                                 to a master lease.
                                            sq. ft.
</TABLE>


(1) See Notes to the  Financial  Statements  filed with this Annual Report for a
    description  of  the  long-term   mortgage   indebtedness   secured  by  the
    Partnership's  operating  property  investment  and for a description of the
    agreement  through  which the  Partnership  has  acquired  this real  estate
    investment.

      The Partnership previously had investment interests in the Briarwood Joint
Venture,  which owned the Briarwood  Apartments and Gatewood Apartments in Bucks
County, Pennsylvania;  Camelot Associates, which owned the Camelot Apartments in
Fairfield,  Ohio;  Pine Trail  Partnership,  which owned the Pine Trail Shopping
Center in West Palm Beach,  Florida,  and Boyer Lubbock Associates,  which owned
the Central Plaza Shopping  Center in Lubbock,  Texas. On December 20, 1984, the
Partnership  sold its  investment  in the  Briarwood  Joint  Venture for cash of
$7,490,000 and a note receivable.  See Note 6 to the financial statements of the
Partnership  accompanying  this Annual  Report for a further  discussion of this
transaction  and the  outstanding  note  receivable.  On June 19, 1996,  Camelot
Associates  sold  the  Camelot  Apartments  to  an  unrelated  third  party  for
$15,150,000.  The Partnership  received net sales proceeds of approximately $5.9
million after deducting  closing costs,  the repayment of two outstanding  first
mortgage loans, the buyout of an underlying  ground lease and the  co-venturers'
share of the net proceeds.  On August 1, 1997, the Partnership sold its interest
in the Pine Trail  Partnership  to its joint venture  partner for a net price of
$6,150,000.   See  Note  5  to  the  financial  statements  of  the  Partnership
accompanying this Annual Report for a further discussion of this transaction. On
March  3,  1998,  Boyer  Lubbock  Associates,  a  joint  venture  in  which  the
Partnership  had an  interest,  sold the  Central  Plaza  Shopping  Center to an
unrelated third party for a net price of $8,350,000.  The  Partnership  received
net sales proceeds of approximately  $2,199,000 after the buyer's  assumption of
the first  mortgage  loan,  closing  costs  and  proration  adjustments  and the
co-venturer's share of the net proceeds.  See Note 5 to the financial statements
of the Partnership  accompanying this Annual Report for a further  discussion of
this transaction

      The Partnership's original investment objectives were to:

(1) provide the Limited Partners with cash distributions  which, to some extent,
    will not constitute taxable income;
(2) preserve  and protect  Limited  Partners'  capital;
(3) achieve  long-term appreciation  in the  value of its  properties;  and
(4) provide  a build up of equity through the reduction of mortgage loans on its
    properties.

      Through  September 30, 1999, the Limited Partners had received  cumulative
cash distributions totalling approximately $39,398,000,  or approximately $1,856
per original $1,000  investment for the  Partnership's  earliest  investors.  Of
these total  distributions,  approximately  $7,516,000,  or $348.75 per original
$1,000  investment,  represents  proceeds  from  the sale of the  Briarwood  and
Gatewood Apartments in fiscal 1985;  approximately  $108,000, or $5 per original
$1,000  investment,  represents  proceeds  from the fiscal 1986  repayment of an
additional   investment  that  was  made  in  Northeast   Plaza;   approximately
$5,517,000, or $256 per original $1,000 investment, represents proceeds from the
sale of the Camelot  Apartments  in fiscal 1996;  approximately  $6,147,000,  or
$285.25 per original $1,000 investment, represents proceeds from the sale of the
Partnership's  interest in the Pine Trail  Shopping  Center  during fiscal 1997;
approximately $2,284,000, or $106.00 per original $1,000 investment,  represents
proceeds from the sale of the Central Plaza Shopping  Center during fiscal 1998;
and approximately $2,500,000, or $116 per original $1,000 investment, represents
the proceeds from the assignment of the  subordinated  mortgage note received as
part of the December 1984 sale of Briarwood and Gatewood apartment properties in
February 1999. The remaining distributions have been made from the net operating
cash flow of the Partnership.  A substantial  portion of such  distributions has
been sheltered from current taxable income. In addition to returning 100% of the
Limited  Partners'  original  invested  capital  from the  capital  transactions
completed to date, the Partnership  retains its ownership interest in one of its
six original investment properties and continues to make quarterly distributions
of $1.31 per original  $1,000  Unit.  The  Partnership's  success in meeting its
capital  appreciation  objective will depend upon the proceeds received from the
final liquidation of its remaining investment.  The amount of such proceeds will
ultimately  depend upon the value of the underlying  investment  property at the
time of its final disposition,  which cannot be determined with certainty at the
present time.

      As discussed  further in Item 7 and the notes to the financial  statements
accompanying  this Annual  Report,  management  believed that the  Partnership's
efforts to sell or  refinance  the  Northeast  Plaza  property  from fiscal 1991
through  fiscal 1998 were impeded by potential  buyer and lender  concerns of an
environmental  nature  with  respect  to  the  property.  During  1990,  it  was
discovered  that certain  underground  storage tanks of a Mobil service  station
located  adjacent  to the  shopping  center  had  leaked  and  contaminated  the
groundwater   in  the  vicinity  of  the  station.   Since  the  time  that  the
contamination was discovered,  Mobil Oil Corporation  ("Mobil") has investigated
the problem and is progressing  with efforts to remedy the soil and  groundwater
contamination  under the supervision of the Florida  Department of Environmental
Protection, which has approved Mobil's remedial action plan. During fiscal 1990,
the  Partnership  had  obtained  an  indemnification  agreement  from  Mobil Oil
Corporation  in which Mobil  agreed to bear the cost of all damages and required
clean-up expenses.  Furthermore,  Mobil indemnified the Partnership  against its
inability to sell, transfer,  or obtain financing on the property because of the
contamination. Subsequent to the discovery of the contamination, the Partnership
experienced difficulty in refinancing the mortgages on the property that matured
in  1991.  The  existence  of  contamination   on  the  property   impacted  the
Partnership's  ability to obtain  standard  market  financing.  Ultimately,  the
Partnership was able to refinance its first mortgage at a substantially  reduced
loan-to-value  ratio.  In  addition,  the  Partnership  was  unable  to sell the
property at an  uncontaminated  market  price.  The  Partnership  also  retained
outside  counsel and  environmental  consultants to review  Mobil's  remediation
efforts and incurred significant  out-of-pocket expenses in connection with this
situation.  Despite repeated requests by the Partnership for compensation  under
the terms of the  indemnification  agreement,  to date Mobil has disagreed as to
the extent of the  indemnification and has refused to compensate the Partnership
for any of its damages.

      During  the first  quarter  of fiscal  1993,  the  Partnership  filed suit
against  Mobil for breach of indemnity and property  damage.  On April 28, 1995,
Mobil was successful in obtaining a Partial  Summary  Judgment which removed the
case from the Federal  Court  system.  Subsequently,  the  Partnership  filed an
action in the  Florida  State  Court  system.  A jury  trial  against  Mobil Oil
Corporation took place during the two-week period ended April 17, 1998, in state
court in Sarasota,  Florida. The Partnership sought an injunctive order to force
Mobil to clean up the  contamination  and sought to recover damages  suffered by
the  Partnership  as a result of the  contamination.  During  the  trial,  Mobil
stipulated to the entry of an injunctive  order compelling Mobil to continue the
cleanup  until  state  water  quality  standards  are  achieved.  As  previously
reported, the Partnership had obtained a summary judgment as to liability on its
claims for trespass and nuisance.  The issues of damages on these two counts, as
well as the Partnership's  breach of contract claim, were submitted to the jury.
On April 17, 1998, the jury returned a verdict in favor of the defendant, Mobil.
The  Partnership's  subsequent  motion for a new trial was not granted.  A final
judgment  in  favor of Mobil as to the  Partnership's  damages  claims  has been
entered  with the Court.  In  addition,  a final  judgment  compelling  Mobil to
cleanup the  contamination  at the Northeast  Plaza Shopping  Center was entered
with the Court. The Partnership  subsequently began the process of appealing the
judgment  pertaining  to its  damages  claims,  and Mobil  filed a  cross-appeal
challenging the scope of the injunctive order. During the quarter ended December
31, 1998,  the  Partnership  negotiated a contract to sell the  Northeast  Plaza
property  to the master  lessee at a net price  which the  Partnership  believed
reflected  only a small  deduction  for the  stigma  associated  with the  Mobil
contamination.  The agreement was signed on November 29, 1998 and was contingent
on the master-lessee's  ability to obtain a commitment for sufficient  financing
by January 29, 1999 to pay the  Partnership  for its  ownership  interest.  This
financing commitment date was subsequently  extended to April 19, 1999. As noted
below,  the  master-lessee  has been unable to secure a commitment for financing
because of an unrelated  environmental  issue, which resulted in the termination
of the purchase  agreement.  The appeal of the Mobil litigation was stayed until
mid-December  1999 pending the resolution of this  potential  sale  transaction.
Subsequent to the year ended September 30, 1999, the Partnership  decided not to
pursue the appeal of its damages claims against Mobil. Mobil also agreed to drop
its cross-appeal  related to the scope of the injunctive  order, and the cleanup
is expected to proceed as set forth in the court order.

      During the quarter ended June 30, 1999,  the  Partnership  was notified by
the Northeast Plaza Shopping Center master-lessee of the presence of groundwater
contamination  at the Shopping  Center which  appears to have been caused by the
operation of dry cleaning equipment at the Center. The Partnership has confirmed
the presence of this contamination and is in the process of assessing the extent
of the contamination,  the anticipated cost and time to take appropriate action,
and the  feasibility  of  recovering  associated  costs from  responsible  third
parties. The Partnership accrued a liability of $1 million during fiscal 1999 to
cover expected legal and  environmental  testing and remediation costs regarding
this  contamination   based  on  the  preliminary   reports  obtained  from  the
master-lessee   and  the  work  performed  to  date  by  the  Partnership's  own
environmental  consultants.   This  represents  an  estimate  of  the  potential
liability  associated  with this  situation.  It is possible  that this estimate
could change  materially in the near term as further testing,  consultation with
appropriate state environmental agencies and actual remediation work progresses.
The  Partnership  will  continue to assess and revise  this  estimate as further
information  becomes available.  At the same time, the Partnership  continues to
work with the Northeast Plaza  master-lessee,  the current first mortgage lender
and a prospective lender in an attempt to complete a refinancing of the property
in combination with a sale of the Partnership's interest in the Center.

      The  maturity  date of the  existing  first  mortgage  loan secured by the
property  was March 29, 1999.  The  maturity  date was extended by the lender in
February 1999 to June 29, 1999 and  subsequently  extended again to December 15,
1999 to allow the  master-lessee  to  complete  its planned  acquisition  of the
Partnership's  interest  in the  property.  The current  lender has  indicated a
willingness to work with the  Partnership on a further  short-term  extension of
the maturity date to accommodate the timing of a sale transaction.  However,  as
discussed further in Item 7, in light of the most recent  environmental issue at
the property, the timing of a sale transaction is uncertain at the present time,
and no further formal  extension has been granted.  As a result,  as of December
15, 1999 the  Partnership is in default of the first mortgage  agreement.  There
can be no assurances  regarding what actions,  if any, the mortgage  lender will
take to enforce its legal remedies in light of this default situation.

      The  Partnership's one remaining  operating  property is a retail shopping
center that is located in the real estate  market in which it faces  significant
competition  for the revenues it  generates.  The shopping  center  competes for
long-term retail tenants with numerous projects of similar type generally on the
basis on location, rental rates, tenant mix and tenant improvement allowances.

      The Partnership has no real estate investments  located outside the United
States.  The  Partnership  is  engaged  solely in the  business  of real  estate
investment,  therefore,  presentation of information  about industry segments is
not applicable.

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

     The General  Partner of the  Partnership is Third Income  Properties,  Inc.
(the "General Partner"),  a wholly-owned  subsidiary of PaineWebber.  Subject to
the General  Partner's  overall  authority,  the business of the  Partnership is
managed by the Adviser.

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

Item 2.  Properties

      As of September 30, 1999,  the  Partnership  owned one property  directly.
Such  property is referred to under Item 1 above to which  reference is made for
the name, location and description of the property.

      Occupancy  figures  for each fiscal  quarter  during  1999,  along with an
average for the year, are presented below for the property:
<TABLE>
<CAPTION>

                                            Percent Leased At
                                   -----------------------------------------------------
                                                                            Fiscal 1999
                                   12/31/98   3/31/99    6/30/99   9/30/99  Average
                                   --------   -------    -------   -------  -------
<S>                                  <C>       <C>        <C>        <C>      <C>

Northeast Plaza Shopping Center      100%      100%       100%       100%     100%

</TABLE>


Item 3.  Legal Proceedings

Mobil Oil Corporation Litigation
--------------------------------

      As discussed  further in Item 7, during fiscal 1993 the Partnership  filed
suit against Mobil Oil Corporation  because of Mobil's failure to compensate the
Partnership under the terms of an indemnification  agreement between the parties
related to the soil and ground water  contamination  affecting the Partnership's
Northeast  Plaza  Shopping  Center  investment.  Management  believed  that  the
Partnership's  efforts to sell or refinance  the Northeast  Plaza  property from
fiscal 1991  through  fiscal  1998 were  impeded by  potential  buyer and lender
concerns of an environmental  nature with respect to the property.  During 1990,
it was  discovered  that certain  underground  storage  tanks of a Mobil service
station located  adjacent to the shopping center had leaked and contaminated the
ground  water  in  the  vicinity  of  the  station.  Since  the  time  that  the
contamination  was  discovered,  Mobil  has  investigated  the  problem  and  is
progressing  with efforts to remediate  the soil and ground water  contamination
under the  supervision of the Florida  Department of  Environmental  Protection,
which has approved  Mobil's  remedial  action  plan.  During  fiscal  1990,  the
Partnership  had  obtained  a formal  indemnification  agreement  from Mobil Oil
Corporation  in which Mobil  agreed to bear the cost of all damages and required
clean-up expenses.  Furthermore,  Mobil indemnified the Partnership  against its
inability to sell,  transfer or obtain  financing on the property because of the
contamination. Subsequent to the discovery of the contamination, the Partnership
experienced difficulty in refinancing the mortgages on the property that matured
in  1991.  The  existence  of  contamination   on  the  property   impacted  the
Partnership's  ability to obtain  standard  market  financing.  Ultimately,  the
Partnership was able to refinance its first mortgage at a substantially  reduced
loan-to-value  ratio.  In  addition,  the  Partnership  was  unable  to sell the
property at an  uncontaminated  market  price.  The  Partnership  also  retained
outside  counsel and  environmental  consultants to review  Mobil's  remediation
efforts and incurred significant  out-of-pocket expenses in connection with this
situation.  Despite repeated requests by the Partnership for compensation  under
the terms of the  indemnification  agreement,  to date Mobil has disagreed as to
the extent of the  indemnification and refused to compensate the Partnership for
any of its damages.  During the first  quarter of fiscal 1993,  the  Partnership
filed suit against Mobil for breach of indemnity and property  damage.  On April
28, 1995,  Mobil was  successful in obtaining a Partial  Summary  Judgment which
removed the case from the Federal Court system.  Subsequently,  the  Partnership
filed  an  action  in the  Florida  State  Court  system.  This  action  was for
substantially all of the same claims and utilized the substantial  discovery and
trial  preparation work already  completed for the Federal case. During November
1996,  the  Partnership  and  Mobil  attempted  to  settle  the  action  through
mediation.  A settlement was not achieved.  Mobil's proposal to settle the case,
which included a proposed purchase of the contaminated  portion of the Northeast
Plaza property from the Partnership, failed due to Mobil's inability to obtain a
zoning  variance  which was necessary to make such a transaction  possible.  The
Partnership  sought  judgment  against  Mobil which would award the  Partnership
compensatory damages,  costs, attorneys' fees and such other relief as the Court
may deem proper.

     A jury trial against Mobil Oil  Corporation  took place during the two-week
period  ended  April  17,  1998,  in  state  court  in  Sarasota,  Florida.  The
Partnership  sought  an  injunctive  order  to  force  Mobil  to  clean  up  the
contamination  and sought to recover  damages  suffered by the  Partnership as a
result of the  contamination.  During trial, Mobil stipulated to the entry of an
injunctive  order  compelling  Mobil to continue  the cleanup  until state water
quality  standards are achieved.  As previously  reported,  the  Partnership had
obtained a summary  judgment  as to  liability  on its claims for  trespass  and
nuisance.   The  issues  of  damages  on  these  two  counts,  as  well  as  the
Partnership's breach of contract claim, were submitted to the jury. On April 17,
1998,  the  jury  returned  a  verdict  in favor of the  defendant,  Mobil.  The
Partnership's  subsequent  motion  for a new  trial  was  not  granted.  A final
judgment  in  favor of Mobil as to the  Partnership's  damages  claims  has been
entered  with the Court.  In  addition,  a final  judgment  compelling  Mobil to
cleanup the  contamination  at the Northeast  Plaza Shopping  Center was entered
with the Court. The Partnership  subsequently began the process of appealing the
judgment  pertaining  to its  damages  claims  and  Mobil  filed a  cross-appeal
challenging the scope of the injunctive order. During the quarter ended December
31, 1998,  the  Partnership  negotiated a contract to sell the  Northeast  Plaza
property  to the master  lessee at a net price  which the  Partnership  believed
reflected  only a small  deduction  for the  stigma  associated  with the  Mobil
contamination.  The agreement was signed on November 29, 1998 and was contingent
on the master-lessee's  ability to obtain a commitment for sufficient  financing
by January 29, 1999 to pay the  Partnership  for its  ownership  interest.  This
financing  commitment  date was  subsequently  extended  to April 19,  1999.  As
discussed  further  in Item 7, the  master-lessee  has been  unable  to secure a
commitment  for financing  because of an unrelated  environmental  issue,  which
resulted in the termination of the purchase  agreement.  The appeal of the Mobil
litigation  was stayed until  mid-December  1999 pending the  resolution of this
potential sale transaction. Subsequent to the year ended September 30, 1999, the
Partnership proposed a settlement agreement which would result in a dismissal of
the appeal of its damages claims  against Mobil with both parties  bearing their
own costs and attorneys' fees. Under the proposed settlement, Mobil would remain
subject to the injunctive  order,  and the cleanup would proceed as set forth in
the  court  order.  While  the  parties  have  agreed  in  principle  to  such a
settlement,  the matter remains  subject to the  negotiation  and execution of a
definitive settlement agreement.

Briarwood/Gatewood Litigation
-----------------------------

      On June 22, 1998,  the  Partnership  initiated a lawsuit in  Massachusetts
state court in connection with the note  receivable  obtained by the Partnership
in connection  with the 1984 sale of its interest in the Briarwood joint venture
(which owned the Briarwood and Gatewood  properties).  The suit alleged that the
defendants in this  lawsuit,  acting as agents for the  Partnership,  improperly
released  six of the  ten  properties  (including  the  Briarwood  and  Gatewood
apartment  properties) from the mortgage that secured the note  receivable,  and
that they  improperly  extended the maturity date of the note by ten years.  The
defendants  denied any and all  liability  in the lawsuit.  By  Agreement  dated
December 30, 1998, the Partnership and the defendants settled the lawsuit,  with
the  defendants  and their  affiliates  admitting no liability,  and the parties
exchanged releases.  Under the terms of the Agreement,  the defendants agreed to
pay the  Partnership  the  aggregate  amount of $3 million  and the  Partnership
assigned its interest in the note to certain of the parties to the Agreement. Of
the  $3  million  settlement  amount,  the  sum  of  $500,000  was  paid  to the
Partnership  on December 30,  1998,  and the balance of $2.5 million was paid on
January 29, 1999.

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

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

      None.



<PAGE>

                                     PART II

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

      At  September  30, 1999,  there were 1,499 record  holders of Units in the
Partnership.  There is no public market for the Units, and it is not anticipated
that a public market for Units will develop.  Upon request,  the General Partner
will  endeavor to assist a  Unitholder  desiring  to transfer  his Units and may
utilize the services of PWI in this  regard.  The price to be paid for the Units
will be subject to negotiation by the  Unitholder.  The General Partner will not
redeem or repurchase Units.

      Reference is made to Item 6 below for a discussion  of cash  distributions
made to the Limited Partners during fiscal 1999.

Item 6.  Selected Financial Data

                  Paine Webber Income Properties Three Limited Partnership
                  --------------------------------------------------------
                            (In thousands, except per Unit data)
<TABLE>
<CAPTION>
                                           Years Ended September 30,
                                 ---------------------------------------------------
                                   1999       1998       1997       1996       1995
                                   ----       ----       ----       ----       ----
<S>                              <C>        <C>        <C>         <C>        <C>

Revenues                         $   534    $   714    $   579     $   562    $   492

Operating loss                   $  (913)   $  (116)   $  (130)    $   (80)   $  (246)

Partnership's share
of ventures' income (loss)             -    $  (155)   $   403     $   696    $   510

Gain on sale of joint
  venture interest                     -          -    $ 3,565           -          -

Partnership's share of gain
  on sale of operating
  investment property                  -    $ 2,391          -     $ 5,926          -

Gain on sale of operating
   investment property           $ 2,661          -          -           -          -

Net income                       $ 1,748    $ 2,120    $ 3,838     $ 6,542    $   264

Per Limited Partnership Unit:
   Net income                    $ 80.30    $ 97.41    $176.32     $300.56    $ 12.14

   Cash distributions from
     operations                  $  5.24    $  8.81    $ 19.52     $ 19.40    $ 19.40

   Cash distributions from
     sale transactions           $116.00    $106.00    $285.25     $256.00          -

Total assets                     $ 4,152    $ 4,367    $ 4,767     $ 7,645    $ 7,151

Mortgage note payable            $   967    $ 1,124    $ 1,278     $ 1,420    $ 1,549

</TABLE>

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

      The above per  Limited  Partnership  Unit  information  is based  upon the
21,550 Limited Partnership Units outstanding during each year.

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

Information Relating to Forward-Looking Statements
--------------------------------------------------

      The following  discussion of financial condition includes  forward-looking
statements  which  reflect  management's  current  views with  respect to future
events and  financial  performance  of the  Partnership.  These  forward-looking
statements  are  subject to certain  risks and  uncertainties,  including  those
identified below under the heading  "Certain Factors  Affecting Future Operating
Results," which could cause actual results to differ  materially from historical
results or those anticipated.  The words "believe," "expect,"  "anticipate," and
similar expressions identify forward-looking  statements.  Readers are cautioned
not to place undue reliance on these forward-looking statements, which were made
based on facts and conditions as they existed as of the date of this report. The
Partnership   undertakes  no  obligation  to  publicly   update  or  revise  any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.

Liquidity and Capital Resources
-------------------------------

      The Partnership offered limited  partnership  interests to the public from
December 1980 to December 1981 pursuant to a Registration  Statement filed under
the Securities Act of 1933.  Gross proceeds of $21,550,000  were received by the
Partnership   and,  after  deducting   selling   expenses  and  offering  costs,
approximately  $18,802,000 was originally  invested in six operating  investment
properties, comprised of three multi-family apartment complexes and three retail
shopping centers.  Through September 30, 1999, the three multi-family  apartment
properties  have been sold,  the  Partnership  sold its  interest  in one of the
retail  shopping  centers to its  co-venture  partner  during  fiscal 1997,  and
another  retail  shopping  center was sold to an  unrelated  third party  during
fiscal 1998. The one remaining  retail property is owned directly and is subject
to  a  master  lease.  As  discussed  further  below,  during  fiscal  1999  the
Partnership  reached a settlement  agreement which resulted in the assignment to
the borrower of a subordinated  mortgage note receivable position related to two
of the  multi-family  properties  which were sold in fiscal 1985. At the present
time, the  Partnership  does not have any  commitments  for  additional  capital
expenditures  or investments  but may be called upon to advance funds related to
its  remaining  investment  to pay for its  share of  certain  required  capital
improvement and/or environmental remediation expenses.

      During fiscal 1999, the  Partnership  settled the note  receivable that it
had received as a portion of the  proceeds  from the sale of its interest in the
Briarwood joint venture in fiscal 1985. The interest owed on the note receivable
was payable only to the extent of net cash flow from the properties securing the
note, as defined in the note  agreement.  Until the quarter ended June 30, 1998,
the  Partnership  had not received any interest  payments since the inception of
the note.  During the quarter  ended June 30,  1998,  the  Partnership  received
$149,000  from the  borrower  which  was  recorded  as  interest  income  on the
accompanying  fiscal  1998  statement  of  operations.  On June  22,  1998,  the
Partnership  initiated a lawsuit in Massachusetts state court in connection with
this note  receivable.  The suit alleged that the  defendants  in this  lawsuit,
acting  as  agents  for  the  Partnership,  improperly  released  six of the ten
properties  (including the Briarwood and Gatewood apartment properties) from the
mortgage that secured the note receivable, and that they improperly extended the
maturity  date of the  note by ten  years.  The  defendants  denied  any and all
liability in the lawsuit.  By Agreement dated December 30, 1998, the Partnership
and the defendants settled the lawsuit, with the defendants and their affiliates
admitting no liability,  and the parties exchanged releases.  Under the terms of
the Agreement, the defendants agreed to pay the Partnership the aggregate amount
of $3 million and the  Partnership  assigned its interest in the note to certain
of the parties to the Agreement. Of the $3 million settlement amount, the sum of
$500,000 was paid to the  Partnership  on December 30, 1998,  and the balance of
$2.5  million  was paid on  January  29,  1999.  The  settlement  payments  were
recognized  as  deferred  gains  on the  sale  of  the  Briarwood  and  Gatewood
properties, in keeping with the originally expected accounting for the principal
balance of the note,  net of the expenses  incurred in fiscal 1999 in connection
with the litigation.  As a result of the  settlement,  the Partnership no longer
has an interest in the note receivable.  The Partnership incurred  approximately
$500,000 of legal costs in fiscal 1998 and 1999  associated  with the litigation
and  collection  of  the  settlement  of  this  note  receivable.  Consequently,
approximately  $2,500,000 of settlement  proceeds was available to distribute to
the Limited Partners.  Accordingly, a Special Capital Distribution in the amount
of $2,499,800, or $116 per original $1,000 investment,  was paid on February 12,
1999, to holders of record on January 29, 1999, along with the regular quarterly
distribution for the quarter ended December 31, 1998.

      With the settlement of the subordinated  mortgage note receivable position
related to the Briarwood and Gatewood  properties,  the Partnership's  remaining
asset consists of the wholly-owned  Northeast Plaza Shopping Center in Sarasota,
Florida.  The Partnership's  goal during fiscal 1999 was to pursue a disposition
strategy  for  its  investment  in  Northeast   Plaza  which  would  enable  the
Partnership  to complete a  liquidation  prior to the end of calendar year 1999.
For the reasons set forth in detail further  below,  this goal was not achieved.
The Partnership still hopes to complete a liquidation during calendar year 2000.
However,  there  can be no  assurances  that the  disposition  of the  remaining
investment and a liquidation of the  Partnership  will be completed  within this
time frame.

      As previously reported, management believed that the Partnership's efforts
to sell or  refinance  the  Northeast  Plaza  property  from fiscal 1991 through
fiscal 1998 were impeded by potential lender concerns of an environmental nature
with  respect to the  property.  During  1990,  it was  discovered  that certain
underground  storage tanks at a Mobil service  station  located  adjacent to the
shopping center had leaked and  contaminated the ground water in the vicinity of
the station.  Since the time that the  contamination  was discovered,  Mobil has
investigated  the leak and is  progressing  with  efforts to remedy the soil and
ground water  contamination  under the supervision of the Florida  Department of
Environmental  Protection,  which has  approved  Mobil's  remedial  action plan.
During  fiscal  1990,  the  Partnership  had  obtained a formal  indemnification
agreement  from Mobil Oil  Corporation in which Mobil agreed to bear the cost of
all damages and required clean-up expenses.  Furthermore,  Mobil indemnified the
Partnership  against its inability to sell,  transfer or obtain financing on the
property  because  of the  contamination.  Subsequent  to the  discovery  of the
contamination,   the  Partnership  experienced  difficulty  in  refinancing  the
mortgages on the property that matured in 1991.  The existence of  contamination
on the property  impacted the  Partnership's  ability to obtain  standard market
financing.  Ultimately, the Partnership was able to refinance its first mortgage
at a substantially reduced loan-to-value ratio. In addition, the Partnership was
unable to sell the property at an  uncontaminated  market price. The Partnership
also retained  outside counsel and  environmental  consultants to review Mobil's
remediation  efforts  and  incurred   significant   out-of-pocket   expenses  in
connection with this situation. Despite repeated requests by the Partnership for
compensation under the terms of the indemnification agreement, to date Mobil has
disagreed as to the extent of the  indemnification and has refused to compensate
the Partnership for any of its damages.

      During the first  quarter of fiscal 1993,  the  Partnership  filed suit in
Federal  Court against  Mobil for breach of indemnity  and property  damage.  On
April 28, 1995,  Mobil was  successful in dismissing the action from the Federal
Court system on jurisdictional grounds.  Subsequently,  the Partnership filed an
action in the  Florida  State  Court  system.  A jury  trial  against  Mobil Oil
Corporation took place during the two-week period ended April 17, 1998, in state
court in Sarasota,  Florida. The Partnership sought an injunctive order to force
Mobil to clean up the  contamination  and sought to recover damages  suffered by
the Partnership as a result of the contamination. During trial, Mobil stipulated
to the entry of an  injunctive  order  compelling  Mobil to continue the cleanup
until state water quality standards are achieved.  As previously  reported,  the
Partnership  had  obtained a summary  judgment as to liability on its claims for
trespass and nuisance. The issues of damages on these two counts, as well as the
Partnership's breach of contract claim, were submitted to the jury. On April 17,
1998,  the  jury  returned  a  verdict  in favor of the  defendant,  Mobil.  The
Partnership's  subsequent  motion  for a new  trial  was  not  granted.  A final
judgment  in  favor of Mobil as to the  Partnership's  damages  claims  has been
entered  with the Court.  In  addition,  a final  judgment  compelling  Mobil to
cleanup the  contamination  at the Northeast  Plaza Shopping  Center was entered
with the Court. The Partnership  subsequently began the process of appealing the
judgement  pertaining  to its damages  claims,  and Mobil  filed a  cross-appeal
challenging the scope of the injunctive order.

     During the quarter ended  December 31, 1998, the  Partnership  negotiated a
contract to sell the  Northeast  Plaza  property  to the master  lessee at a net
price which the  Partnership  believed  reflected only a small deduction for the
stigma  associated  with the Mobil  contamination.  The  agreement was signed on
November 29, 1998 and was contingent on the master-lessee's  ability to obtain a
commitment for sufficient  financing by January 29, 1999 to pay the  Partnership
for its ownership  interest.  This financing  commitment  date was  subsequently
extended to April 19, 1999. As noted below, the master-lessee has been unable to
secure a commitment for financing because of an unrelated  environmental  issue,
which resulted in the termination of the purchase  agreement.  The appeal of the
Mobil  litigation was stayed until  mid-December  1999 pending the resolution of
this  potential  sale  transaction.  Subsequent to the year ended  September 30,
1999, the  Partnership  proposed a settlement  agreement which would result in a
dismissal of the appeal of its damages  claims  against  Mobil with both parties
bearing  their own costs and  attorneys'  fees.  Under the proposed  settlement,
Mobil would  remain  subject to the  injunctive  order,  and the  cleanup  would
proceed  as set  forth in the court  order.  While the  parties  have  agreed in
principle to such a settlement,  the matter remains  subject to the  negotiation
and execution of a definitive settlement agreement.

      During the quarter ended June 30, 1999,  the  Partnership  was notified by
the Northeast Plaza Shopping Center master-lessee of the presence of groundwater
contamination  at the Shopping  Center which  appears to have been caused by the
operation of dry cleaning equipment at the Center. The Partnership has confirmed
the presence of this contamination and is in the process of assessing the extent
of the contamination,  the anticipated cost and time to take appropriate action,
and the  feasibility  of  recovering  associated  costs from  responsible  third
parties.  While the  Partnership  believes  that the cleanup costs should be the
responsibility  of  the  lessee  under  the  terms  of  the  master  lease,  the
Partnership  is proceeding  on its own to begin the cleanup  process in order to
protect its investment.  The prospects for any future  recoveries of these costs
are uncertain at the present  time.  The  Partnership  accrued a liability of $1
million during fiscal 1999 to cover expected legal and environmental testing and
remediation costs regarding this contamination  based on the preliminary reports
obtained  from  the  master-lessee  and  the  work  performed  to  date  by  the
Partnership's  own  environmental  consultants.  Through September 30, 1999, the
Partnership  had incurred  actual legal and  environmental  testing  expenses of
$79,000 in connection with this situation.  The remaining balance of the accrued
liability  of $921,000  is  included  in the balance of accrued  expenses on the
accompanying  balance sheet. This amount represents an estimate of the potential
liability  associated  with this  situation.  It is possible  that this estimate
could change  materially in the near term as further  testing,  consulting  with
appropriate state environmental agencies and actual remediation work progresses.
The  Partnership  will  continue to assess and revise  this  estimate as further
information  becomes available.  At the same time, the Partnership  continues to
work with the Northeast Plaza  master-lessee,  the current first mortgage lender
and a prospective lender in an attempt to complete a refinancing of the property
in combination with a sale of the Partnership's interest in the Center.

     The  maturity  date of the  existing  first  mortgage  loan  secured by the
property  was March 29, 1999.  The  maturity  date was extended by the lender in
February  1999 to June 29, 1999 to allow for the  master-lessee  to complete its
planned  refinancing  and  acquisition  of  the  Partnership's  interest  in the
property. As noted above, however, the completion of a sale transaction has been
affected by an  environmental  issue and did not occur by June 29, 1999. On July
16, 1999,  the lender  issued a default  notice as of June 29, 1999 and assessed
default  interest  at a rate of 25% per  annum  on the  outstanding  balance  of
approximately  $998,000.  On August 31,  1999,  the  Partnership  and the lender
executed a forbearance agreement.  Under the forbearance  agreement,  the lender
agreed not to foreclose  or exercise  any remedy  available to it under the loan
agreement  until  December 15,  1999.  The  Partnership  agreed to pay a $35,000
extension fee; $10,000 of which was paid on August 31, 1999 and $25,000 of which
was payable by December  15, 1999.  Under the  forbearance  agreement,  interest
accrued  at a rate  of 18% on the  unpaid  principal  balance  of  approximately
$997,000.  Monthly  principal and interest  payments  were  increased to $30,000
beginning  August 31, 1999.  The current  lender has indicated a willingness  to
work with the Partnership on a further short-term extension of the maturity date
to accommodate the timing of a sale transaction.  However,  in light of the most
recent environmental issue at the property,  the timing of a sale transaction is
uncertain at the present time, and no further formal extension has been granted.
As a result,  as of December 15, 1999 the Partnership is in default of the first
mortgage agreement.  Management is negotiating a forbearance  agreement with the
lender  which would have terms  similar to that which  expired on  December  15,
1999. While a final agreement has not been reached,  management expects that the
forbearance period will extend at least six months, and possibly as long as nine
months, from the expiration of the prior forbearance  agreement.  Such agreement
is subject to final  negotiation  and the  execution  of  definitive  documents.
Therefore,  there can be no  assurances  regarding  what  actions,  if any,  the
mortgage  lender will take to enforce its legal remedies in light of the current
default situation.  As noted above, management still hopes to complete a sale of
the Northeast Plaza property in the near term once a formal remediation plan has
been  developed and approved to address the  environmental  problem.  Management
intends to take all reasonable steps to continue to hold the property until such
time as a sale transaction can be consummated.

      The occupancy level at Northeast Plaza remained at 100% for the year ended
September 30, 1999. The focus of the property's  leasing team during fiscal 1999
was the renewal of the leases with five  tenants  occupying  37,300  square feet
that were  scheduled to expire during fiscal 1999. All five tenants have renewed
their leases.  One of these  tenants was one of the center's two anchor  tenants
which has a 25,600  square  foot  lease that  expired  in January of 1999.  This
tenant  exercised one of its two five-year  options and renewed its lease with a
10% increase in the rental rate. A second tenant,  which operates a 6,500 square
foot discount  retail store,  exercised an option and renewed its lease for five
years at a slightly  increased  rental rate.  Additionally,  a 1,200 square foot
bookstore and a 1,600 square foot hair salon signed  one-year lease  extensions.
During the fourth  quarter of fiscal 1999,  leases with two tenants  occupying a
total of 6,800 square feet were renewed.  The property's leasing team is working
with four  tenants  occupying a total of 5,600  square feet on renewals of their
leases  which  expire   within  the  next  twelve   months.   Based  on  current
negotiations, all four tenants are expected to renew their leases.

      At  September  30,  1999,  the  Partnership  had  available  cash and cash
equivalents of $809,000. Such cash and cash equivalents will be used for working
capital  requirements and  distributions  to the partners.  The source of future
liquidity  and  distributions  to the  partners is  expected to be through  cash
generated from the operations of the Partnership's  income-producing  investment
property and proceeds  received from the sale or  refinancing  of such property.
Such  sources  of  liquidity   are  expected  to  be   sufficient  to  meet  the
Partnership's needs on both a short-term and long-term basis.

      As noted above, the Partnership expects to be liquidated in the near term.
Notwithstanding  this, the  Partnership  believes that it has made all necessary
modifications  to its existing systems to make them year 2000 compliant and does
not expect that additional costs  associated with year 2000 compliance,  if any,
will be  material  to the  Partnership's  results  of  operations  or  financial
position.

Results of Operations
1999 Compared to 1998
---------------------

      The  Partnership's  net income  decreased by $372,000  during fiscal 1999,
when  compared to the prior year.  This decrease in net income was mainly due to
an increase of $797,000 in the  Partnership's  operating  loss. This increase in
the  Partnership's  operating  loss was  primarily  the result of an increase in
general and  administrative  expenses due to the $1 million  accrual made by the
Partnership in fiscal 1999 for potential  costs  associated with the most recent
contamination issue at the Northeast Plaza Shopping Center, as described further
above. Overall general and administrative expenses increased by only $624,000 in
fiscal 1999, despite this $1 million accrual, mainly due to a reduction in legal
fees  associated  with the Mobil  litigation  referred  to above.  In  addition,
interest  income  decreased  by $180,000  for fiscal  1999,  due to the interest
earned during the prior year on the Central Plaza Shopping  Center sale proceeds
prior to the distribution to the Limited Partners which occurred in April 1998.

      A  $270,000  increase  in  gains  realized  from the  sales  of  operating
investment  properties  and a $155,000  decrease in the  Partnership's  share of
venture's losses  partially offset the unfavorable  change in operating loss for
fiscal 1999. The increase in gains on sales of operating  investment  properties
represents  the  difference  between the  $2,661,000  gain  realized  due to the
Briarwood note  settlement in fiscal 1999, as discussed  further above,  and the
$2,391,000  gain  realized on the sale of the Central Plaza  Shopping  Center in
fiscal  1998.  The  decrease  in the  Partnership's  share of  venture's  losses
resulted  from the sale of the  Central  Plaza  property  on March 3,  1998,  as
discussed further in the Annual Report. As a result, there was no income or loss
from joint venture operations for the year ended September 30, 1999.

1998 Compared to 1997
---------------------

      The  Partnership's  net income decreased by $1,718,000 during fiscal 1998,
when compared to the prior year.  The decrease in the  Partnership's  net income
for fiscal 1998 was primarily the result of the Partnership's  share of the gain
from the sale of its  interest in the Pine Trail joint  venture in fiscal  1997,
which totalled  $3,565,000.  During fiscal 1998, the Partnership realized a gain
of $2,391,000 from the sale of the Central Plaza Shopping Center. In addition to
this decrease in gain realized from sales of $1,174,000,  an unfavorable  change
in  the  Partnership's  share  of  ventures'  income  (loss)  of  $558,000  also
contributed  to the  decline  in net income for  fiscal  1998.  The  Partnership
reported a loss from its share of ventures'  operations  of $155,000  during the
year ended September 30, 1998 as compared to income of $403,000 during the prior
year. This  unfavorable  change was mainly due to the inclusion of the operating
results  of the Pine  Trail  joint  venture  in the  fiscal  1997  results.  The
Partnership sold its interest in Pine Trail in August of 1997. As a result,  the
fiscal 1998 results  reflect only the net operating  losses of the Central Plaza
joint venture prior to the sale of the property on March 3, 1998.

      The  Partnership's  operating  loss  decreased  by $14,000 in fiscal 1998.
Operating  loss  decreased  due to an increase in interest  and other  income of
$135,000 and a decline in  management  fee expense of $13,000.  Interest  income
increased due to the interest  payment  received on the Briarwood note in fiscal
1998, as discussed further above. Management fee expense decreased primarily due
to the sales of Pine Trail and  Central  Plaza which  reduced the  Partnership's
operating  cash flow,  upon which such fees are  based.  In  addition,  interest
expense decreased by $13,000 as a result of the scheduled principal amortization
on the  outstanding  mortgage  loan  payable  secured by  Northeast  Plaza.  The
increase in interest  income and the decreases in  management  fees and interest
expense  were  partially  offset by an  increase  of  $147,000  in  general  and
administrative  expenses.  General and administrative  expenses increased mainly
due to a $196,000 increase in legal fees as a result of the continued litigation
against  Mobil Oil  Corporation  and the  litigation  initiated  in fiscal  1998
related to the Briarwood/Gatewood note receivable, as discussed further above.

1997 Compared to 1996
---------------------

      The  Partnership's  net income decreased by $2,704,000 during fiscal 1997,
when compared to the prior year.  The decrease in the  Partnership's  net income
for fiscal 1997 was primarily the result of the Partnership's  share of the gain
from  the  sale  of the  Camelot  Apartments  in  fiscal  1996,  which  totalled
$5,926,000.  During fiscal 1997, the  Partnership  realized a gain of $3,565,000
from the sale of its interest in the Pine Trail joint venture. In addition,  the
Partnership's  share of ventures'  income decreased by $293,000 when compared to
fiscal 1996. The Partnership's share of ventures' income decreased due, in part,
to the $151,000 of income  allocated to the  Partnership  from the operations of
the Camelot  Apartments  in fiscal 1996 prior to the sale of that  property.  In
addition, the Partnership's share of the net income from the Central Plaza joint
venture  decreased  by $182,000 in fiscal  1997  primarily  due to the method of
allocating  income  between the venture  partners in  accordance  with the joint
venture  agreement.  Income  was  allocated  between  the  venture  partners  in
proportion to the cash  distributions  received  during the year.  During fiscal
1996, the Partnership received 100% of the distributions, whereas in fiscal 1997
the distributable  cash was split between the Partnership and the co-venturer in
a ratio of approximately 56% and 44%,  respectively.  The Partnership's share of
net income  from the Pine Trail  joint  venture  increased  by $35,000 in fiscal
1997,  despite  not  owning  the  interest  for the last two months of the year,
mainly as a result of a decrease  in  depreciation  expense  due to some  assets
which had become fully depreciated during fiscal 1996.

      An  increase  in  the   Partnership's   operating  loss  of  $50,000  also
contributed  to the  decrease  in net  income in  fiscal  1997.  Operating  loss
increased due to an increase in general and administrative  expenses of $79,000.
General  and  administrative  expenses  increased  primarily  due  to a  $92,000
increase in legal fees as a result of the continued litigation against Mobil Oil
Corporation,  as  discussed  further  above.  The  increase  in  legal  fees was
partially  offset by an  increase  in  interest  income of $17,000 and a $12,000
decrease  in  interest  expense.  Interest  income  increased  due to the higher
average outstanding cash balances resulting from the temporary investment of the
Pine Trail  sale  proceeds  pending  the  special  distribution  to the  Limited
Partners which occurred on September 15, 1997.  Interest expense  decreased as a
result of the scheduled principal  amortization on the outstanding mortgage loan
payable.

Certain Factors Affecting Future Operating Results
--------------------------------------------------

      The following factors could cause actual results to differ materially from
historical results or those anticipated:

      Real Estate  Investment  Risks.  Real property  investments are subject to
varying degrees of risk.  Revenues and property values may be adversely affected
by the  general  economic  climate,  the local  economic  climate and local real
estate conditions,  including (i) the perceptions of prospective  tenants of the
attractiveness of the property; (ii) the ability to retain qualified individuals
to provide  adequate  management  and  maintenance  of the  property;  (iii) the
inability  to  collect  rent due to  bankruptcy  or  insolvency  of  tenants  or
otherwise;  and (iv) increased  operating costs.  Real estate values may also be
adversely  affected by such  factors as  applicable  laws,  including  tax laws,
interest rate levels and the availability of financing.

      Effect of Uninsured Loss. The Partnership carries comprehensive liability,
fire,  flood,  extended  coverage and rental loss  insurance with respect to its
remaining property with insured limits and policy specifications that management
believes are customary for similar properties. There are, however, certain types
of  losses  (generally  of  a  catastrophic  nature  such  as  wars,  floods  or
earthquakes) which may be either uninsurable,  or, in management's judgment, not
economically  insurable.  Should an uninsured loss occur, the Partnership  could
lose both its invested capital in and anticipated profits from the property.

      Possible Environmental Liabilities. Under various federal, state and local
environmental laws,  ordinances and regulations,  a current or previous owner or
operator of real property may become liable for the costs of the  investigation,
removal and  remediation  of  hazardous or toxic  substances  on,  under,  in or
migrating from such property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was  responsible  for, the presence of
such hazardous or toxic substances.

      The  Partnership is not aware of any  notification by any private party or
governmental  authority  of any  non-compliance,  liability  or  other  claim in
connection with  environmental  conditions at the property that it believes will
involve any  expenditure  which would be material to the  Partnership.  However,
there can be no assurance that any  non-compliance,  liability or claim will not
arise in the future.  As discussed  further above,  the  Partnership  did become
aware in fiscal 1999 of an  environmental  problem at Northeast Plaza related to
the  operation of dry  cleaning  equipment at the Center.  The  Partnership  has
accrued a  liability  for the  estimated  legal and  environmental  testing  and
remediation costs expected to be incurred in connection with this situation.  As
noted above, however, there are no assurances that this estimate will not change
materially in the near term as further information becomes available.

      Competition. The financial performance of the Partnership's remaining real
estate  investment,  which is a retail shopping  center,  will be  significantly
impacted by the competition from comparable properties in its local market area.
The  occupancy  level and rental rates  achievable at the property are largely a
function  of supply and  demand in the  market.  The retail  segment of the real
estate  market in general  continues to suffer to some extent from an oversupply
of space in many markets  resulting  from  overbuilding  in recent years and the
trend  of  consolidations  and  bankruptcies  among  retailers  prompted  by the
generally flat rate of growth in overall  retail sales.  There are no assurances
that these competitive pressures will not adversely affect the operations and/or
market value of the Partnership's investment property in the future.

      Availability of a Pool of Qualified Buyers.  The availability of a pool of
qualified  and  interested  buyers  for the  Partnership's  remaining  asset  is
critical to the Partnership's ability to realize the estimated fair market value
of the property at the time of its final disposition. Demand by buyers of retail
properties  is affected  by many  factors,  including  the size,  quality,  age,
condition and location of the subject property, the quality and stability of the
tenant  roster,  the  terms of any  long-term  leases,  potential  environmental
liability concerns,  the existing debt structure,  the liquidity in the debt and
equity  markets for asset  acquisitions,  the general  level of market  interest
rates and the general and local economic climates.

Inflation
---------

      The Partnership completed its eighteenth full year of operations in fiscal
1999 and the effects of inflation and changes in prices on revenues and expenses
to date have not been significant.

      Inflation in future  periods may increase  revenues,  as well as operating
expenses, at the Partnership's  operating investment property.  The master lease
on the Partnership's  wholly-owned retail shopping center requires the lessee to
pay all of the expenses  associated  with  operating the property and includes a
contingent  rent  provision  based  on  increases  in the  property's  operating
revenues  above certain  base-year  expense  levels,  as adjusted for inflation.
Increases in rental  income would be expected to at least  partially  offset the
corresponding increases in Partnership and property operating expenses caused by
future inflation.

Item 7A.  Market Risk Disclosures
---------------------------------

      As  discussed   further  in  the  notes  to  the  accompanying   financial
statements, the Partnership's financial instruments are limited to cash and cash
equivalents  and a mortgage  note  payable.  The cash  equivalents  are invested
exclusively  in  short-term  money market  instruments  and the  long-term  debt
consists exclusively of a fixed rate obligation. The Partnership does not invest
in derivative financial instruments or engage in hedging transactions.  In light
of these facts, and due to the  Partnership's  expected  near-term  liquidation,
management does not believe that the  Partnership's  financial  instruments have
any material exposure to market risk factors.

Item 8.  Financial Statements and Supplementary Data

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

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

      None.


<PAGE>

                                    PART III

Item 10.  Directors and Principal Executive Officers of the Partnership

      The General Partner of the Partnership is Third Income Properties, Inc., a
Delaware  corporation,  which is a wholly-owned  subsidiary of PaineWebber.  The
General Partner has overall authority and  responsibility  for the Partnership's
operations,  however,  the day-to-day  business of the Partnership is managed by
the Adviser pursuant to an advisory contract.

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

Bruce J. Rubin          President and Director              40      8/22/96
Terrence E. Fancher     Director                            46      10/10/96
Walter V. Arnold        Senior Vice President
                          and Chief Financial Officer       52      10/29/85
David F. Brooks         First Vice President and
                          Assistant Treasurer               57      6/13/80*
Thomas W. Boland        Vice President and Controller       37      12/1/91

*  The date of incorporation of the General Partner

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

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

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

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

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

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

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

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

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

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

     Based solely on its review of the copies of such forms  received by it, the
Partnership  believes that, during the year ended September 30, 1999, all filing
requirements  applicable to the officers and  directors of the Managing  General
Partner and ten-percent beneficial holders were complied with.

Item 11.  Executive Compensation

     The directors and officers of the Partnership's  General Partner receive no
current or  proposed  remuneration  from the  Partnership.  The  Partnership  is
required to pay  certain  fees to the  Adviser,  and the  General  Partners  are
entitled  to  receive a share of cash  distributions  and a share of  profits or
losses. These items are described under Item 13.

     The  Partnership  has  paid  cash  distributions  to the  Unitholders  on a
quarterly  basis at rates ranging from 3% to 6% per annum on remaining  invested
capital over the past five years.  Despite  achieving  the return of 100% of the
Limited  Partners'   original   invested  capital   subsequent  to  the  special
distribution  in April  1998 from the sale of  Central  Plaza,  the  Partnership
continues to make  quarterly  distributions  of $1.31 per original  $1,000 Unit.
However,  the  Partnership's  Units  of  Limited  Partnership  Interest  are not
actively traded on any organized  exchange,  and no efficient  secondary  market
exists. Accordingly, no accurate price information is available for these Units.
Therefore,  a presentation of historical  Unitholder  total returns would not be
meaningful.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

     (a) The  Partnership  is a limited  partnership  issuing  Units of  limited
partnership  interest,  not voting securities.  All the outstanding stock of the
General  Partner,  Third Income  Properties,  Inc. is owned by  PaineWebber.  No
limited partner is known by the Partnership to own beneficially  more than 5% of
the outstanding interests of the Partnership.

     (b) Neither  officers and directors of the General  Partner nor the general
partners  of the  Associate  General  Partner,  individually,  own any  Units of
limited partnership  interest of the Partnership.  No director or officer of the
General Partner,  possesses a right to acquire beneficial  ownership of Units of
limited partnership interest of the Partnership.

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

Item 13.  Certain Relationships and Related Transactions

     The General  Partner of the  Partnership is Third Income  Properties,  Inc.
(the "General  Partner"),  a wholly-owned  subsidiary of PaineWebber Group, Inc.
("PaineWebber").  Subject  to  the  General  Partner's  overall  authority,  the
business of the  Partnership is managed by PaineWebber  Properties  Incorporated
(the "Adviser") pursuant to an advisory contract.  The Adviser is a wholly-owned
subsidiary of PaineWebber  Incorporated  ("PWI"),  a wholly-owned  subsidiary of
PaineWebber.  The  General  Partner,  the  Adviser  and  PWI  receive  fees  and
compensation,  determined on an agreed-upon  basis, in  consideration of various
services  performed in connection with the sale of the Units,  the management of
the Partnership and the  acquisition,  management,  financing and disposition of
Partnership investments.

     In connection  with investing  Partnership  Capital,  the Adviser  received
acquisition fees of 9% of the gross proceeds from the sale of Partnership Units.
In  connection  with  the sale of each  property,  the  Adviser  may  receive  a
disposition fee, payable upon liquidation of the Partnership, in an amount equal
to 3/4% of the selling  price of the  property,  subordinated  to the payment of
certain amounts to the Limited Partners.

     All  distributable  cash, as defined,  for each fiscal year is  distributed
quarterly  in the ratio of 99% to the  Limited  Partners  and 1% to the  General
Partner.  All sale or  refinancing  proceeds  shall be  distributed  in  varying
proportions to the Limited and General Partners, as specified in the Partnership
Agreement. In accordance with the Partnership Agreement, the General Partner has
not received any sale or refinancing proceeds to date.

     Pursuant to the terms of the Partnership  Agreement,  taxable income or tax
loss from  operations  of the  Partnership  will be allocated 99% to the Limited
Partners and 1% to the General Partner.  Taxable income or tax loss arising from
a sale or refinancing of investment  properties will be allocated to the Limited
Partners  and the  General  Partner  in  proportion  to the  amounts  of sale or
refinancing  proceeds  to which  they are  entitled  provided  that the  General
Partner will be allocated at least 1% of taxable  income  arising from a sale or
refinancing. If there are no sale or refinancing proceeds, taxable income or tax
loss from a sale or  refinancing  will be allocated 99% to the Limited  Partners
and 1% to the  General  Partner.  Allocations  of the  Partnership's  operations
between the General  Partner and the Limited  Partners for financial  accounting
purposes have been made in conformity  with the allocations of taxable income or
tax loss.

     Under  the  advisory   contract,   the  Adviser  has  specific   management
responsibilities:  to administer the day-to-day  operations of the  Partnership,
and to report  periodically  the  performance of the  Partnership to the General
Partners.  The Adviser is paid a basic management fee (4% of Adjusted Cash Flow,
as  defined)  and  an  incentive  management  fee  (5%  of  Adjusted  Cash  Flow
subordinated to a noncumulative  annual return to the Limited  Partners equal to
6% based upon their adjusted capital  contribution) for services  rendered.  The
Adviser earned basic  management fees of $4,000 for the year ended September 30,
1999. No incentive  management  fees were earned during the year ended September
30, 1999.

     An  affiliate  of the General  Partner  performs  certain  accounting,  tax
preparation, securities law compliance and investor communications and relations
services  for the  Partnership.  The total costs  incurred by this  affiliate in
providing  such  services  allocated  among  several  entities,   including  the
Partnership.  Included in general and administrative expenses for the year ended
September 30, 1999 is $74,000, representing reimbursements to this affiliate for
providing such services to the Partnership.

     The  Partnership  uses the  services  of  Mitchell  Hutchins  Institutional
Investors,  Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a  subsidiary  of  Mitchell  Hutchins  Asset  Management,  Inc.,  an
independently operated subsidiary of PaineWebber.  Mitchell Hutchins earned fees
of $2,000  (included in general and  administrative  expenses)  for managing the
Partnership's  cash assets during fiscal 1999. Fees charged by Mitchell Hutchins
are based on a percentage of invested  cash  reserves  which varies based on the
total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI.





<PAGE>



                                    PART IV



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

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

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

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

        (3)  Exhibits:

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

   (b) No  Current  Reports on Form 8-K were  filed  during the last  quarter of
fiscal 1999.


   (c)  Exhibits

             See (a) (3) above.

   (d)  Financial Statement Schedules

             See (a) (1) and (2) above.



<PAGE>

                                   SIGNATURES


   Pursuant  to the  requirements  of  Section  13 or  15(d)  of the  Securities
Exchange Act of 1934, the  Partnership  has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                                    PAINE WEBBER INCOME PROPERTIES
                                    THREE LIMITED PARTNERSHIP



                                    By:  Third Income Properties, Inc.
                                         -----------------------------
                                         General Partner



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



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



                                    By:  /s/ Thomas W. Boland
                                         --------------------
                                         Thomas W. Boland
                                         Vice President and Controller

Dated:  December 29, 1999

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




By:/s/ Bruce J. Rubin                           Date:  December 29, 1999
   -----------------------                             -----------------
   Bruce J. Rubin
   Director



By:/s/ Terrence E. Fancher                      Date:  December 29, 1999
   -----------------------                             -----------------
   Terrence E. Fancher
   Director


<PAGE>


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

               PAINE WEBBER PROPERTIES THREE LIMITED PARTNERSHIP


                               INDEX TO EXHIBITS
<TABLE>
<CAPTION>

                                                              Page Number in the Report
Exhibit No.         Description of Document                   or Other Reference
-----------         -----------------------                   -------------------------
<S>                 <C>                                       <C>

(3) and (4)         Prospectus of the Registrant              Filed with the Commission
                    dated December 3, 1980, supplemented,     pursuant to Rule 424(c)
                    with particular reference to the          and incorporated herein by
                    Restated Certificate and Agreement        reference.
                    Limited Partnership.


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


(13)                Annual Reports to Limited Partners        No Annual Report for the year
                                                              ended September 30, 1999 has  been
                                                              sent to the Limited Partners.
                                                              An Annual Report will be sent to
                                                              the Limited Partners subsequent to
                                                              this filing.


(21)                List of Subsidiaries                      Included in Item 1 of Part I of this
                                                              Report Page I-1, to which reference
                                                              is hereby made.


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



</TABLE>


<PAGE>


                           ANNUAL REPORT ON FORM 10-K

                        Item 14(a) (1) and (2) and 14(d)

            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

                                                                     Reference
                                                                     ---------

Paine Webber Income Properties Three Limited Partnership:

    Report of independent auditors - Ernst & Young LLP                  F-2

    Balance sheets at September 30, 1999 and 1998                       F-3

    Statements of income for the years ended September 30, 1999,
    1998 and 1997                                                       F-4

    Statements of changes in partners' capital for the years ended
    September 30, 1999, 1998 and 1997                                   F-5

    Statements of cash flows for the years ended September 30, 1999,
    1998 and 1997                                                       F-6

    Notes to financial statements                                       F-7

    Schedule III - Real Estate and Accumulated Depreciation             F-17

Combined Joint Ventures of PaineWebber Income Properties Three Limited
Partnership

    Report of independent auditors - Ernst & Young LLP                  F-18

    Combined balance sheet as of September 30, 1997                     F-19

    Combined  statements of income and changes in venturers' capital
    (deficit) for the period October 1, 1997 through  March 3, 1998
    and the year ended September 30, 1997                               F-20

    Combined  statements  of cash flows for the period  October 1, 1997
    through  March 3, 1998 and the year ended September 30, 1997        F-21

    Notes to combined financial statements                              F-22


    Other  schedules  have been omitted  since the required  information  is not
applicable,  or because the  information  required is included in the  financial
statements, including the notes thereto.




<PAGE>



                         REPORT OF INDEPENDENT AUDITORS




The Partners of
Paine Webber Income Properties Three Limited Partnership:

    We have  audited the  accompanying  balance  sheets of Paine  Webber  Income
Properties Three Limited  Partnership as of September 30, 1999 and 1998, and the
related statements of income,  changes in partners' capital,  and cash flows for
each of the three years in the period ended  September 30, 1999. Our audits also
included the  financial  statement  schedule  listed in the Index at Item 14(a).
These  financial   statements  and  schedule  are  the   responsibility  of  the
Partnership's  management.  Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

    In our opinion,  the financial  statements referred to above present fairly,
in all  material  respects,  the  financial  position  of  Paine  Webber  Income
Properties  Three Limited  Partnership  at September 30, 1999 and 1998,  and the
results of its  operations and its cash flows for each of the three years in the
period  ended  September  30,  1999,  in  conformity  with  generally   accepted
accounting  principles.  Also, in our opinion,  the related financial  statement
schedule, when considered in relation to the basic financial statements taken as
a whole,  presents  fairly in all material  respects the  information  set forth
therein.





                                /s/ Ernst & Young LLP
                                    -----------------
                                    ERNST & YOUNG LLP







Boston, Massachusetts
December 15, 1999



<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                                 BALANCE SHEETS
                           September 30, 1999 and 1998
                     (In thousands, except per Unit amounts)

                                     ASSETS
                                                      1999           1998
                                                      ----           ----

Operating investment property, at cost:
   Land                                           $      950      $     950
   Building and improvements                           4,088          4,088
                                                  ----------      ---------
                                                       5,038          5,038
   Less accumulated depreciation                      (1,695)        (1,593)
                                                  ----------       --------
      Net operating investment property                3,343          3,445

Cash and cash equivalents                                809            911
Deferred expenses, net of accumulated
  amortization of $95 in 1998                              -             11
Note and interest receivable, net                          -              -
                                                  ----------      ---------
                                                  $    4,152      $   4,367
                                                  ==========      =========

                        LIABILITIES AND PARTNERS' CAPITAL


Accounts payable - affiliates                     $        1      $       1
Accrued expenses                                         979            171
Mortgage note payable in default                         967          1,124
                                                  ----------      ---------
      Total liabilities                                1,947          1,296


Partners' capital:
  General Partner:
   Capital contribution                                    1              1
   Cumulative net income                                 222            205
   Cumulative cash distributions                        (155)          (154)

  Limited Partners ($1,000 per Unit; 21,550
     Units issued):
   Capital contributions, net of offering costs       19,397         19,397
   Cumulative net income                              22,138         20,407
   Cumulative cash distributions                     (39,398)       (36,785)
                                                  ----------     ----------
      Total partners' capital                          2,205          3,071
                                                  ----------     ----------
                                                  $    4,152     $    4,367
                                                  ==========     ==========












                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                              STATEMENTS OF INCOME
              For the years ended September 30, 1999, 1998 and 1997
                     (In thousands, except per Unit amounts)


                                          1999        1998         1997
                                          ----        ----         ----
Revenues:
   Rental revenues                     $     478   $     478     $     478
   Interest and other income                  56         236           101
                                       ---------   ---------     ---------
                                             534         714           579

Expenses:
   Interest expense                          123         130           143
   Management fees                             4           4            17
   Depreciation expense                      102         102           102
   General and administrative              1,218         594           447
                                       ---------   ---------     ---------
                                           1,447         830           709
                                       ---------   ---------     ---------

Operating loss                              (913)       (116)         (130)

Partnership's share of ventures'
   income (loss)                               -        (155)          403

Gain on sale of joint venture interest
  (net of write-off of unamortized
  excess basis of $50 in 1997)                 -           -         3,565

Partnership's share of gain on sale of
  operating investment property (net
  of write-off of unamortized excess
  basis of $19 in 1998)                        -       2,391             -

Gain on sale of operating investment
  property                                 2,661           -             -
                                       ---------   ---------     ---------

Net income                             $   1,748   $   2,120     $   3,838
                                       =========   =========     =========


Net income per Limited
  Partnership Unit                     $   80.30   $   97.41     $  176.32
                                       =========   =========     =========

Cash distributions per Limited
  Partnership Unit                     $  121.24   $  114.81     $  304.77
                                       =========   =========     =========


      The above net income and cash  distributions per Limited  Partnership Unit
are based upon the 21,550  Limited  Partnership  Units  outstanding  during each
year.










                                  See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
              For the years ended September 30, 1999, 1998 and 1997
                                 (In thousands)

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

Balance at September 30, 1996            $    -      $ 6,161        $ 6,161

Cash distributions                           (5)      (6,567)        (6,572)

Net income                                   38        3,800          3,838
                                         ------      -------        -------

Balance at September 30, 1997                33        3,394          3,427

Cash distributions                           (2)      (2,474)        (2,476)

Net income                                   21        2,099          2,120
                                         ------      -------        -------

Balance at September 30, 1998                52        3,019          3,071

Cash distributions                           (1)      (2,613)        (2,614)

Net income                                   17        1,731          1,748
                                         ------      -------        -------

Balance at September 30, 1999            $   68      $ 2,137        $ 2,205
                                         ======      =======        =======


























                                  See accompanying notes.


<PAGE>

<TABLE>

            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS
              For the years ended September 30, 1999, 1998 and 1997
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)
<CAPTION>

                                                            1999        1998        1997
                                                            ----        ----        ----
<S>                                                         <C>        <C>         <C>


Cash flows from operating activities:
   Net income                                               $  1,748   $   2,120    $  3,838
   Adjustments to reconcile net income
      to net cash provided by operating activities:
      Depreciation                                               102         102         102
      Amortization of deferred financing costs                    11          21          21
      Partnership's share of ventures' income (loss)               -         155        (403)
      Gain on sale of joint venture interest                       -           -      (3,565)
      Partnership's share of gain on sale
        of operating investment property                           -      (2,391)          -
      Gain on sale of operating investment property           (2,661)          -           -
      Changes in assets and liabilities:
         Accounts receivable                                       -           -          99
         Accounts payable - affiliates                             -          (3)          -
         Accrued expenses                                        808         113          (2)
                                                            --------   ---------    --------
           Total adjustments                                  (1,740)     (2,003)     (3,748)
                                                            --------   ---------    --------
           Net cash provided by operating activities               8         117          90
                                                            --------   ---------    --------

Cash flows from investing activities:
   Proceeds from sale of joint venture interest                    -           -       6,150
   Distributions from joint ventures                               -       2,451         447
   Net proceeds from collection of mortgage note receivable    2,661           -           -
                                                            --------   ---------    --------
           Net cash provided by investing activities           2,661       2,451       6,597
                                                            --------   ---------    --------

Cash flows from financing activities:
   Distributions to partners                                  (2,614)     (2,476)     (6,572)
   Principal payments on mortgage note payable                  (157)       (154)       (142)
                                                            --------   ---------    --------
           Net cash used in financing activities              (2,771)     (2,630)     (6,714)
                                                            --------   ---------    --------

Net decrease in cash and cash equivalents                       (102)        (62)        (27)

Cash and cash equivalents, beginning of year                     911         973       1,000
                                                            --------   ---------    --------

Cash and cash equivalents, end of year                      $    809   $     911    $    973
                                                            ========   =========    ========

Cash paid during the year for interest                      $    112   $     109    $    122
                                                            ========   =========    ========
</TABLE>









                                   See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                          Notes to Financial Statements


1.  Organization and Nature of Operations
    -------------------------------------

      Paine  Webber   Income   Properties   Three   Limited   Partnership   (the
"Partnership") is a limited  partnership  organized  pursuant to the laws of the
State of  Delaware in June 1980 for the purpose of  investing  in a  diversified
portfolio  of  income-producing   properties.  The  Partnership  authorized  the
issuance of units (the "Units") of partnership interests (at $1,000 per Unit) of
which  21,550  Units were  subscribed  and issued  between  December 3, 1980 and
December 10, 1981.

      The  Partnership  originally  invested  the  net  proceeds  of the  public
offering,  either  directly  or  through  joint  venture  partnerships,  in  six
operating  properties,  comprised of three multi-family  apartment complexes and
three  retail  shopping   centers.   Through   September  30,  1999,  the  three
multi-family  apartment properties have been sold, the Partnership's interest in
one of the retail  shopping  centers was sold in fiscal 1997, and another retail
shopping  center was sold during fiscal 1998 (see Note 5). The remaining  retail
property is owned directly and is subject to a master lease.

      With the settlement  achieved in fiscal 1999 of the subordinated  mortgage
note receivable  position related to the Briarwood and Gatewood properties which
were  sold in  fiscal  1985  (see Note 6),  the  Partnership's  remaining  asset
consists of the  wholly-owned  Northeast Plaza Shopping Center (see Note 4). The
Partnership's  goal during fiscal 1999 was to pursue a disposition  strategy for
its investment in Northeast Plaza which would enable the Partnership to complete
a liquidation  prior to the end of calendar year 1999. For the reasons set forth
in detail in Notes 4 and 8, this goal was not achieved.  The  Partnership  still
hopes to complete a liquidation during calendar year 2000. However, there can be
no assurances that the disposition of the remaining investment and a liquidation
of the Partnership will be completed within this time frame.

2.  Use of Estimates and Summary of Significant Accounting Policies
    ---------------------------------------------------------------

      The  accompanying  financial  statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting  principles
which require  management  to make  estimates  and  assumptions  that affect the
reported amounts of assets and liabilities and disclosures of contingent  assets
and  liabilities as of September 30, 1999 and 1998 and revenues and expenses for
each of the three years in the period ended  September 30, 1999.  Actual results
could differ from the estimates and assumptions used.

      The   accompanying   financial   statements   include  the   Partnership's
investments  in  certain  joint  venture   partnerships  which  owned  operating
properties.  The  Partnership  accounted  for its  investments  in joint venture
partnerships  using the equity  method  because the  Partnership  did not have a
voting control interest in the ventures.  Under the equity method the investment
in a joint  venture is carried at cost adjusted for the  Partnership's  share of
the venture's earnings or losses and distributions. See Note 5 for a description
of the joint venture partnerships.

      The  Partnership  deferred  a  portion  of the  gain  on the  sale  of the
Briarwood Joint Venture  property in fiscal 1985 using the cost recovery method.
The portion of the remaining gain to be recognized was represented by a note and
accrued  interest  receivable  as of September  30,  1998.  The note and accrued
interest   receivable  have  been  netted  against  the  deferred  gain  on  the
accompanying  balance  sheet.  The  Partnership  settled  the note and  interest
receivable during fiscal 1999 and recognized a gain of $2,661,000 (see Note 6).

      The Partnership carries its operating investment property at cost, reduced
by  accumulated  depreciation,  or an amount  less than  cost if  indicators  of
impairment  are present in  accordance  with  Statement of Financial  Accounting
Standards  (SFAS) No. 121,  "Accounting for the Impairment of Long-Lived  Assets
and for Long-Lived  Assets to Be Disposed Of," which was adopted in fiscal 1997.
SFAS 121 requires  impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the  undiscounted  cash
flows  estimated  to be  generated  by those  assets  are less  than the  assets
carrying amount. The Partnership  generally assesses indicators of impairment by
a review of independent  appraisal reports on the operating investment property.
Such  appraisals  make  use  of a  combination  of  certain  generally  accepted
valuation techniques, including direct capitalization, discounted cash flows and
comparable  sales  analysis.  The Partnership has assessed the future cash flows
expected from the Northeast  Plaza property,  net of the expected  environmental
remediation  costs, in light of the  environmental  problem discussed further in
Note 8. Based on such  assessment,  the  Partnership  does not believe that this
asset is impaired as of September  30, 1999.  The  Partnership  will continue to
reassess the potential  impairment of this asset in light of any future  changes
to  the  estimate  of  environmental  remediation  costs.  Depreciation  on  the
operating  investment  property has been  provided on the  straight-line  method
based  upon  an  estimated  useful  life  of  40  years  for  the  building  and
improvements.

      The Partnership's  wholly-owned  operating  investment  property is leased
under a master lease  agreement  which covers 100% of the rentable  space of the
shopping center.  The master lease is accounted for as an operating lease in the
Partnership's  financial statements.  Basic rental income under the master lease
is recorded on the straight-line basis.

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

      The cash and cash equivalents appearing on the accompanying balance sheets
represent   financial   instruments  for  purposes  of  Statement  of  Financial
Accounting  Standards  No.  107,  "Disclosures  about  Fair  Value of  Financial
Instruments."   The  carrying   amount  of  these  cash  and  cash   equivalents
approximates  their  fair  value as of  September  30,  1999 and 1998 due to the
short-term maturities of these instruments.  The mortgage note payable is also a
financial  instrument for purposes of SFAS 107.  Information  regarding the fair
value of the Partnership's mortgage note payable is provided in Note 7.

      No  provision  for income  taxes has been made as the  liability  for such
taxes  is that of the  partners  rather  than  the  Partnership.  The  principal
differences between the Partnership's accounting for federal income tax purposes
and the accompanying  financial statements prepared in accordance with generally
accepted  accounting   principals  relate  to  the  methods  used  to  calculate
depreciation  expense on the wholly-owned  operating investment property and the
accrual of interest income on the mortgage loan receivable for tax purposes.

3.  The Partnership Agreement and Related Party Transactions
    --------------------------------------------------------

      The General  Partner of the Partnership is Third Income  Properties,  Inc.
(the "General  Partner"),  a wholly-owned  subsidiary of PaineWebber Group, Inc.
("PaineWebber").  Subject  to  the  General  Partner's  overall  authority,  the
business of the  Partnership is managed by PaineWebber  Properties  Incorporated
(the "Adviser") pursuant to an advisory contract.  The Adviser is a wholly-owned
subsidiary of PaineWebber  Incorporated  ("PWI"),  a wholly-owned  subsidiary of
PaineWebber.  The  General  Partner,  the  Adviser  and  PWI  receive  fees  and
compensation,  determined on an agreed-upon  basis, in  consideration of various
services  performed in connection with the sale of the Units,  the management of
the Partnership and the  acquisition,  management,  financing and disposition of
Partnership investments.

      In connection with investing  Partnership  Capital,  the Adviser  received
acquisition fees of 9% of the gross proceeds from the sale of Partnership Units.
In  connection  with  the sale of each  property,  the  Adviser  may  receive  a
disposition fee, payable upon liquidation of the Partnership, in an amount equal
to 3/4% of the selling  price of the  property,  subordinated  to the payment of
certain amounts to the Limited Partners.

      All  distributable  cash, as defined,  for each fiscal year is distributed
quarterly  in the ratio of 99% to the  Limited  Partners  and 1% to the  General
Partner.  All sale or  refinancing  proceeds  shall be  distributed  in  varying
proportions to the Limited and General Partners, as specified in the Partnership
Agreement. In accordance with the Partnership Agreement, the General Partner has
not received any sale or refinancing proceeds to date.

      Pursuant to the terms of the Partnership Agreement,  taxable income or tax
loss from  operations  of the  Partnership  will be allocated 99% to the Limited
Partners and 1% to the General Partner.  Taxable income or tax loss arising from
a sale or refinancing of investment  properties will be allocated to the Limited
Partners  and the  General  Partner  in  proportion  to the  amounts  of sale or
refinancing  proceeds  to which  they are  entitled  provided  that the  General
Partner will be allocated at least 1% of taxable  income  arising from a sale or
refinancing. If there are no sale or refinancing proceeds, taxable income or tax
loss from a sale or  refinancing  will be allocated 99% to the Limited  Partners
and 1% to the  General  Partner.  Allocations  of the  Partnership's  operations
between the General  Partner and the Limited  Partners for financial  accounting
purposes have been made in conformity  with the allocations of taxable income or
tax loss.

      Under  the  advisory  contract,   the  Adviser  has  specific   management
responsibilities:  to administer the day-to-day  operations of the  Partnership,
and to report  periodically  the  performance of the  Partnership to the General
Partners. The Adviser earns a basic management fee (4% of Adjusted Cash Flow, as
defined) and an incentive  management fee (5% of Adjusted Cash Flow subordinated
to a non-cumulative annual return to the Limited Partners equal to 6% based upon
their adjusted capital  contribution) for services rendered.  The Adviser earned
basic  management  fees of $4,000 for both of the years ended September 30, 1999
and 1998 and  $17,000  for the year  ended  September  30,  1997.  No  incentive
management  fees were earned during the  three-year  period ended  September 30,
1999. Accounts payable - affiliates at both September 30, 1999 and 1998 consists
of management fees payable to the Adviser of $1,000.

      Included  in  general  and  administrative  expenses  for the years  ended
September 30, 1999, 1998 and 1997 is $74,000, $71,000 and $67,000, respectively,
representing reimbursements to an affiliate of the General Partner for providing
certain  financial,  accounting  and  investor  communication  services  to  the
Partnership.

      The  Partnership  uses the  services  of Mitchell  Hutchins  Institutional
Investors,  Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a  subsidiary  of  Mitchell  Hutchins  Asset  Management,  Inc.,  an
independently operated subsidiary of PaineWebber.  Mitchell Hutchins earned fees
of $2,000,  $5,000 and $7,000 (included in general and administrative  expenses)
for managing the  Partnership's  cash assets during fiscal 1999,  1998 and 1997,
respectively.

4.  Operating Investment Property
    -----------------------------

      The Partnership has one wholly-owned  operating  investment  property.  On
September 25, 1981, the Partnership  purchased  Northeast Plaza, a 67,000 square
foot  existing  shopping  center  in  Sarasota,   Florida.   Subsequent  to  the
acquisition,  the  shopping  center was  expanded to its current size of 121,005
square feet. The aggregate cash invested by the  Partnership  was  approximately
$2,888,000  (including an acquisition fee of $268,000 paid to the Adviser).  The
property was acquired  subject to a  nonrecourse  wrap-around  mortgage  loan of
approximately  $2,480,000.  On March 29, 1994,  the  Partnership  refinanced the
existing  wraparound  mortgage  note  secured by the  Northeast  Plaza  Shopping
Center,  which had been in default for over two years,  with a new  non-recourse
loan  issued by the prior  underlying  first  mortgage  lender (see Note 7). The
refinancing  was negotiated in conjunction  with a  restructuring  of the master
lease that covers the  Partnership's  interest in  Northeast  Plaza.  The master
lessee  was  also  the  holder  of  the  wraparound  mortgage.  As  part  of the
refinancing,  the wrap note  holder  applied  withheld  rental  payments,  which
totalled $661,000,  against the outstanding balance of the wraparound  mortgage.
Rental payments to the Partnership were reinstated beginning in April 1994.

      At  the  time  of  the  original  purchase  of the  shopping  center,  the
Partnership  entered into a lease  agreement with the seller of the property for
the operation and  management of the property.  The lease has an initial term of
30 years and two 5-year renewal  options.  This master lease  agreement has been
classified as an operating lease and, therefore,  rental income is reported when
earned. Under the terms of the agreement,  the Partnership receives annual basic
rent of $435,000.  The  Partnership  also receives  contingent rent equal to the
greater of (a)  approximately  47.5% of annual  increases to gross rental income
over a specified  base amount or (b) $43,000  annually.  The agreement  provides
specifically that the manager pay all costs of operating the shopping center and
all annual taxes, insurance and administrative  expenses. The manager is further
required to pay for all costs of repair and  replacement  required in connection
with the shopping  center.  Minimum lease payments under the initial term of the
lease  agreement,  including the minimum  amount of contingent  rent,  amount to
$478,000 in each year.

      Under the amended terms of the master lease,  upon the sale or refinancing
of the project,  any  remaining  proceeds,  after  repayment of the  outstanding
balance  on  the  mortgage  loan,  payment  of  certain  priority  items  to the
Partnership,   repayment  of  the  Partnership's  original  investment  and  the
reimbursement to the lessee of certain capital improvement expenditures, will be
allocated  equally to the  Partnership  and to the manager of the  property as a
return on the leasehold interest.

5.  Joint Venture Partnerships
    --------------------------

      As of September 30, 1999 and 1998,  the  Partnership  had no joint venture
partnership  investments.  As discussed  further below, on March 3, 1998,  Boyer
Lubbock  Associates,  a joint venture in which the  Partnership had an interest,
sold the Central  Plaza  Shopping  Center to an unrelated  third party for a net
price of $8,350,000. On August 1, 1997, the Partnership sold its interest in the
Pine  Trail  Shopping  Center to its joint  venture  partner  for a net price of
$6,150,000.

      The joint  ventures were  accounted for by using the equity method because
the  Partnership did not have a voting control  interest in the ventures.  Under
the equity method, the assets,  liabilities,  revenues and expenses of the joint
ventures did not appear in the  Partnership's  financial  statements.  Condensed
combined  summary of operations of these joint ventures for fiscal 1998 and 1997
(through the dates of the sales) follow.
<PAGE>

                    Condensed Combined Summary of Operations
            For the period October 1, 1997 through March 3, 1998 and
                        the year ended September 30, 1997
                                 (in thousands)
                                                            1998        1997
                                                            ----        ----
   Revenues:
     Rental revenues and expense recoveries               $   444     $ 3,232
     Interest income                                            8          25
                                                          -------     -------
                                                              452       3,257
   Expenses:
     Property operating expenses                              202       1,121
     Depreciation and amortization                            221         284
     Interest expense                                         182       1,179
                                                          -------     -------
                                                              605       2,584

   Operating income (loss)                                   (153)        673

   Gain on sale of operating investment property            5,567           -
                                                          -------     -------

   Net income                                             $ 5,414     $   673
                                                          =======     =======

   Net income:
     Partnership's share of combined income               $ 2,259     $   405
     Co-venturers' share of combined income                 3,155         268
                                                          -------     -------
                                                          $ 5,414     $   673
                                                          =======     =======

                 Reconciliation of Partnership's Share of Income

                                                            1998        1997
                                                            ----        ----

   Partnership's share of income, as shown above          $ 2,259     $   405
   Amortization of excess basis                               (23)         (2)
                                                          -------     -------
   Partnership's share of ventures' net income            $ 2,236     $   403
                                                          =======     =======

   The  Partnership's  share of ventures'  net income is presented as follows in
the statements of operations (in thousands):
                                                            1998        1997
                                                            ----        ----

        Partnership share of ventures' income (loss)      $  (155)    $   403
        Partnership's share of gain on sale
          of operating investment property                  2,391           -
                                                          -------     -------
                                                          $ 2,236     $   403
                                                          =======     =======

      The Partnership received cash distributions from the joint ventures as set
forth below:

                                                            1998        1997
                                                            ----        ----

        Boyer Lubbock Associates                          $ 2,451     $   172
        Pine Trail Partnership                                  -         275
                                                          -------     -------
           Total                                          $ 2,451     $   447
                                                          =======     =======

      A description of the joint ventures' properties and the terms of the joint
venture agreements are summarized below.

a)  Pine Trail Partnership
    ----------------------

      On November 12, 1981, the  Partnership  acquired an interest in Pine Trail
Partnership,  a Florida  general  partnership  organized to own and operate Pine
Trail Center, a 266,042 square foot shopping center in West Palm Beach, Florida.
The Partnership was a general  partner in the joint venture.  The  Partnership's
co-venturer was a partnership comprised of certain individuals.  The Partnership
invested approximately $6,236,000 (including an acquisition fee of $645,600 paid
to the Adviser) for its 50% interest.  The co-venturer  contributed its interest
in the  property  to the joint  venture.  The joint  venture  was  subject to an
institutional  nonrecourse  first mortgage which had a balance of  approximately
$8,140,000 at the time of the closing.

      On August 1, 1997,  the  Partnership  sold its  interest in the Pine Trail
Shopping  Center to its joint  venture  partner  for a net price of  $6,150,000.
Funds to complete this transaction were provided from a refinancing of the first
mortgage  debt  secured  by  the  Pine  Trail  property.  As a  result  of  this
transaction,  the Partnership made a special capital distribution to the Limited
Partners of $285.25 per original  $1,000  investment on September 15, 1997.  The
Partnership  no longer  holds an  interest  in this  property.  The  Partnership
recognized a gain of  $3,565,000  (net of the  write-off of  unamortized  excess
basis of $50,000) in connection  with this sale  transaction.  The amount of the
gain represents the difference  between the net proceeds received and the equity
method  carrying value of the  Partnership's  investment in the Pine Trail joint
venture as of the date of the sale.

      The joint venture agreement  provided that the Partnership would receive a
noncumulative annual cash distribution,  payable quarterly,  from net cash flow.
The first $515,000 of net cash flow was to be  distributed  to the  Partnership,
and the next $235,788 of net cash flow was to be distributed to the co-venturer.
Any excess cash flow was to be allocated  equally  between the Partners.  During
fiscal 1997 and 1996 the property did not generate  sufficient cash flow for the
Partnership to receive its minimum preferred distribution of $515,000.

      Taxable income and tax loss from  operations in each year was allocated to
the Partnership and the co-venturer in the same proportions as cash distribution
entitlements,  subject to  adjustments in the case of tax loss for an allocation
of a minimum to the co-venturer. Allocations of the venture's operations between
the Partnership and the co-venturer for financial  accounting purposes have been
made in conformity with the allocations of taxable income or tax loss.

      The joint venture had entered into a property  management contract with an
affiliate of the co-venturer  cancellable at the option of the Partnership  upon
the  occurrence of certain  events.  The contract  provided for a management fee
equal to 4% of gross rents  collected.  For the ten months  ended July 31, 1997,
the property manager earned fees of $63,000.  In addition,  the property manager
was  entitled  to  leasing  commissions  at  prevailing  market  rates.  Leasing
commissions earned by the property manager were $18,000 for the ten months ended
July 31, 1997.

b)  Boyer Lubbock Associates
    ------------------------

      On June 30, 1981,  the  Partnership  acquired an interest in Boyer Lubbock
Associates,  a Texas  general  partnership  organized  to  purchase  and operate
Central  Plaza,  a 151,857 square foot shopping  center in Lubbock,  Texas.  The
Partnership  is a  general  partner  in the  joint  venture.  The  Partnership's
co-venturer is an affiliate of The Boyer Company.  The aggregate cash investment
by the Partnership for its 50% interest was approximately  $2,076,000 (including
an acquisition fee of $225,000 paid to the Adviser).  The Partnership's interest
was acquired  subject to an  institutional  nonrecourse  first  mortgage  with a
balance of approximately  $4,790,000 at the time of closing.  The venture's debt
was originally scheduled to mature on December 1, 1994. During the first quarter
of fiscal 1995, the venture  obtained an extension of the maturity date from the
lender to January 1, 1995. During the second quarter of fiscal 1995, the venture
obtained a mortgage  loan from a new lender which  enabled the venture to repay,
in full, this maturing obligation. The new loan, in the initial principal amount
of  $4,200,000,  bore interest at a rate of 10% per annum.  Monthly  payments of
principal  and  interest of  approximately  $37,000  were due until  maturity in
January 2002.

      On March 3, 1998, Boyer Lubbock Associates sold the Central Plaza Shopping
Center  to an  unrelated  third  party  for  a  net  price  of  $8,350,000.  The
Partnership  received  proceeds of  approximately  $2,199,000  after the buyer's
assumption of the outstanding  first mortgage loan of $4,122,000,  closing costs
and proration adjustments of $232,000, and the co-venture partner's share of the
proceeds of $1,797,000.  In addition,  the Partnership received $82,000 upon the
liquidation of the joint venture,  which  represented  its share of the net cash
flow  from  operations  through  the  date  of the  sale.  As a  result  of this
transaction, the Partnership made a Special Distribution to the Limited Partners
of approximately $2,284,000, or $106 per original $1,000 investment, on April 3,
1998. The  Partnership  recognized a gain of $2,391,000 (net of the write-off of
unamortized  excess basis of $19,000) in connection with this sale  transaction.
The  amount of the gain  represents  the  difference  between  the net  proceeds
received and the equity method carrying value of the Partnership's investment in
the Central Plaza joint venture as of the date of the sale.

      The joint venture  agreement  between the  Partnership and the co-venturer
provided that from available cash flow the  Partnership  would receive an annual
preference,  payable monthly, of $171,000, and the co-venturer would receive the
remaining  distributable cash up to a maximum of $120,000.  Additional cash flow
was to be distributed equally to the Partnership and the co-venturer.

      Taxable  income  and  tax  loss  before  depreciation  were  allocated  in
accordance  with cash  distributions,  after equal  allocation of profits in the
amount  required to be transferred  to the capital cash reserve  accounts and to
amortize  the  indebtedness  of the  joint  venture.  Depreciation  expense  was
allocated in accordance with the tax basis of the capital  contributions  of the
Partnership and the  co-venturer,  after  adjustment for liabilities and capital
improvements.  Allocations of the venture's  operations  between the Partnership
and  the  co-venturer  for  financial  accounting  purposes  have  been  made in
conformity with the allocations of taxable income or tax loss.

      The  Central  Plaza  property  was  co-managed  by  an  affiliate  of  the
co-venturer  and an unrelated  third party.  For the period from October 1, 1997
through  the date of sale (March 3, 1998) and for the year ended  September  30,
1997,  the  affiliate  of the  co-venturer  earned fees of $16,000 and  $38,000,
respectively.

6.  Note and Interest Receivable, Net
    ---------------------------------

      On  September  15,  1981,  the  Partnership  acquired  a 35%  interest  in
Briarwood Joint Venture,  an existing  Pennsylvania  general  partnership  which
owned  a  686-unit  apartment  complex  in  Bucks  County,   Pennsylvania.   The
Partnership   originally  invested   approximately   $4,815,000   (including  an
acquisition  fee of  $500,000  paid  to  the  Adviser)  for  its  interest.  The
Partnership's  interest was acquired  subject to two  institutional  nonrecourse
first mortgages with balances totalling approximately  $8,925,000 at the time of
the closing.

      On December 20, 1984,  the joint  venture  partners  sold their  ownership
interests in the Briarwood Joint Venture for  $33,152,000.  After the payment of
mortgage obligations and closing costs, the Partnership's allocable share of the
proceeds  was  $10,935,000,  represented  by  cash  of  $7,490,000  and  a  note
receivable  of  $3,445,000.   For  financial  accounting  purposes,  a  gain  of
$7,255,000  resulted from the transaction of which  $3,810,000 was recognized at
the time of the sale and the  remainder  was  deferred  under the cost  recovery
method.  For income tax purposes,  a gain of $4,829,000 was recognized upon sale
and the remainder deferred  utilizing the installment  method. The difference in
the amount of gain recognized for financial  accounting and tax purposes results
from accounting  differences  related to the carrying value of the Partnership's
investment.

      The principal  amount of the note  receivable  of  $3,445,000  was to bear
interest at 9% annually and was  subordinated to a first mortgage.  Interest and
principal  payments on the note were payable only to the extent of net cash flow
from the  properties  sold, as defined in the sale  documents.  Any interest not
received was to accrue  additional  interest of 9% per annum. The  Partnership's
policy  was to defer  recognition  of all  interest  income  on the  note  until
collected, due to the uncertainty of its collectibility. Until the quarter ended
June 30, 1998, the Partnership had not received any interest  payments since the
inception of the note.  During the quarter ended June 30, 1998, the  Partnership
received $149,000 from the borrower which was recorded as interest income on the
accompanying  statement of operations for fiscal 1998. Per the terms of the note
agreement,  accrued interest  receivable as of December 30, 1998 would have been
approximately $8,112,000.

      On June 22, 1998,  the  Partnership  initiated a lawsuit in  Massachusetts
state court in connection with the note  receivable  obtained by the Partnership
in connection  with the 1984 sale of its interest in the Briarwood joint venture
(which owned the Briarwood and Gatewood  properties).  The suit alleged that the
defendants in this  lawsuit,  acting as agents for the  Partnership,  improperly
released  six of the  ten  properties  (including  the  Briarwood  and  Gatewood
apartment  properties) from the mortgage that secured the note  receivable,  and
that they  improperly  extended the maturity date of the note by ten years.  The
defendants  denied any and all  liability  in the lawsuit.  By  Agreement  dated
December 30, 1998, the Partnership and the defendants settled the lawsuit,  with
the defendants and their affiliates admitting no liability, and the parties have
exchanged releases.  Under the terms of the Agreement,  the defendants agreed to
pay the  Partnership  the  aggregate  amount of $3 million  and the  Partnership
assigned its interest in the note to certain of the parties to the Agreement. Of
the  $3  million  settlement  amount,  the  sum  of  $500,000  was  paid  to the
Partnership  on December 30, 1998,  and the balance of $2.5 million was received
on January 29, 1999. The settlement  payments were  recognized as deferred gains
on the sale of the  Briarwood  and  Gatewood  properties,  in  keeping  with the
originally expected accounting for the principal balance of the note, net of the
expenses incurred in fiscal 1999 in connection with the litigation.  As a result
of the  settlement,  the  Partnership  no  longer  has an  interest  in the note
receivable.  The Partnership incurred  approximately  $500,000 of legal costs in
fiscal  1998 and 1999  associated  with the  litigation  and  collection  of the
settlement of this note receivable.  Consequently,  approximately  $2,500,000 of
settlement  proceeds  was  available  to  distribute  to the  Limited  Partners.
Accordingly, a Special Capital Distribution in the amount of $2,499,800, or $116
per original  $1,000  investment,  was paid on February 12, 1999,  to holders of
record on January 29, 1999,  along with the regular  quarterly  distribution for
the quarter ended December 31, 1998.

7.  Mortgage Note Payable
    ---------------------

      The mortgage note payable at September 30, 1999 and 1998 is secured by the
Partnership's  wholly-owned  Northeast Plaza Shopping  Center.  During the first
quarter of fiscal 1999,  the  Partnership  had entered into an agreement to sell
Northeast  Plaza to the master lessee in  conjunction  with a refinancing of the
first  mortgage  debt  secured  by the  property.  The  agreement  was signed on
November 29, 1998 and was contingent on the master-lessee's  ability to obtain a
commitment for sufficient  financing by January 29, 1999 to pay the  Partnership
for its ownership  interest.  This financing  commitment  date was  subsequently
extended to April 19, 1999.  As discussed  further in Note 8, the  master-lessee
has been unable to secure a commitment for financing because of an environmental
issue, which resulted in the termination of the purchase agreement.

     On March 29, 1994,  the  Partnership  refinanced  the  existing  wraparound
mortgage note secured by Northeast Plaza, which had been in default for over two
years, with a new loan issued by the prior underlying first mortgage lender. The
new loan,  in the initial  principal  amount of  $1,722,000,  had a term of five
years and bore interest at a fixed rate of 9% per annum.  Monthly  principal and
interest payments of approximately  $22,000 were due until maturity on March 29,
1999.  While the maturity date of the existing first mortgage loan was March 29,
1999,  this date was  extended  by the lender to June 29,  1999 to allow for the
master-lessee  to  complete  its  planned  refinancing  and  acquisition  of the
Partnership's  interest in the property. As noted above, however, the completion
of a sale  transaction has been affected by an  environmental  issue and did not
occur by June 29, 1999. On July 16, 1999,  the lender issued a default notice as
of June 29, 1999 and assessed default interest at a rate of 25% per annum on the
outstanding  balance  of  approximately   $998,000.  On  August  31,  1999,  the
Partnership  and  the  lender  executed  a  forbearance  agreement.   Under  the
forbearance agreement, the lender agreed not to foreclose or exercise any remedy
available  to  it  under  the  loan  agreement  until  December  15,  1999.  The
Partnership  agreed to pay a $35,000 extension fee; $10,000 of which was paid on
August 31, 1999 and $25,000 of which was payable by December 15, 1999. Under the
forbearance agreement, interest accrued at a rate of 18% on the unpaid principal
balance.  Monthly  principal  and interest  payments  were  increased to $30,000
beginning  August 31, 1999.  The current  lender has indicated a willingness  to
work with the Partnership on a further short-term extension of the maturity date
to accommodate the timing of a sale transaction.  However,  as discussed further
in Note 8, in light of the most recent environmental issue at the property,  the
timing of a sale  transaction  is uncertain at the present time,  and no further
formal  extension  has been  granted.  As a result,  as of December 15, 1999 the
Partnership  is in  default  of the  first  mortgage  agreement.  Management  is
negotiating  a  forbearance  agreement  with the lender  which  would have terms
similar to that which expired on December 15, 1999.  While a final agreement has
not been reached,  management expects that the forbearance period will extend at
least six months,  and possibly as long as nine months,  from the  expiration of
the prior forbearance agreement.  Such agreement is subject to final negotiation
and the execution of definitive documents. Therefore, there can be no assurances
regarding  what  actions,  if any, the mortgage  lender will take to enforce its
legal  remedies  in light of the  current  default  situation.  As noted  above,
management still hopes to complete a sale of the Northeast Plaza property in the
near term once a formal  remediation  plan has been  developed  and  approved to
address the  environmental  problem.  Management  intends to take all reasonable
steps to continue to hold the property until such time as a sale transaction can
be  consummated.  It is  impracticable  for the Partnership to estimate the fair
value of this  debt  obligation  as of  September  30,  1999 as a result  of its
current default status.

8.  Legal Proceedings and Related Contingencies
    -------------------------------------------

      Management  believed that the  Partnership's  efforts to sell or refinance
the Northeast  Plaza  property from fiscal 1991 through fiscal 1998 were impeded
by potential buyer and lender concerns of an  environmental  nature with respect
to the property. During 1990, it was discovered that certain underground storage
tanks of a Mobil service  station  located  adjacent to the shopping  center had
leaked and contaminated  the ground water in the vicinity of the station.  Since
the time that the  contamination was discovered,  Mobil Oil Corporation  (Mobil)
has  investigated  the problem and is progressing  with efforts to remediate the
soil and  ground  water  contamination  under  the  supervision  of the  Florida
Department of  Environmental  Protection,  which has approved  Mobil's  remedial
action plan. During fiscal 1990, the Partnership had obtained an indemnification
agreement  from Mobil in which Mobil  agreed to bear the cost of all damages and
required  clean-up  expenses.  Furthermore,  Mobil  indemnified  the Partnership
against its  inability to sell,  transfer,  or obtain  financing on the property
because of the contamination.  Subsequent to the discovery of the contamination,
the  Partnership  experienced  difficulty  in  refinancing  the mortgages on the
property that matured in 1991.  The existence of  contamination  on the property
impacted  the  Partnership's   ability  to  obtain  standard  market  financing.
Ultimately,  the  Partnership  was able to  refinance  its first  mortgage  at a
substantially  reduced  loan-to-value  ratio.  In addition,  the Partnership was
unable to sell the property at an  uncontaminated  market price. The Partnership
also retained  outside counsel and  environmental  consultants to review Mobil's
remediation  efforts  and  incurred   significant   out-of-pocket   expenses  in
connection with this situation. Despite repeated requests by the Partnership for
compensation under the terms of the indemnification agreement, to date Mobil has
disagreed as to the extent of the  indemnification and has refused to compensate
the Partnership for any of its damages.

      During  the first  quarter  of fiscal  1993,  the  Partnership  filed suit
against  Mobil for breach of indemnity and property  damage.  On April 28, 1995,
Mobil was successful in obtaining a Partial  Summary  Judgment which removed the
case from the Federal  Court  system.  Subsequently,  the  Partnership  filed an
action in the  Florida  State  Court  system.  A jury  trial  against  Mobil Oil
Corporation took place during the two-week period ended April 17, 1998, in state
court in Sarasota,  Florida. The Partnership sought an injunctive order to force
Mobil to clean up the  contamination  and sought to recover damages  suffered by
the  Partnership  as a result of the  contamination.  During  the  trial,  Mobil
stipulated to the entry of an injunctive  order compelling Mobil to continue the
cleanup  until  state  water  quality  standards  are  achieved.  As  previously
reported, the Partnership had obtained a summary judgment as to liability on its
claims for trespass and nuisance.  The issues of damages on these two counts, as
well as the Partnership's  breach of contract claim, were submitted to the jury.
On April 17, 1998, the jury returned a verdict in favor of the defendant, Mobil.
The  Partnership's  subsequent  motion for a new trial was not granted.  A final
judgment  in  favor of Mobil as to the  Partnership's  damages  claims  has been
entered  with the Court.  In  addition,  a final  judgment  compelling  Mobil to
cleanup the  contamination  at the Northeast  Plaza Shopping  Center was entered
with the Court. The Partnership  subsequently began the process of appealing the
judgment  pertaining  to its  damages  claims,  and Mobil  filed a  cross-appeal
challenging the scope of the injunctive order.

     During the quarter ended  December 31, 1998, the  Partnership  negotiated a
contract to sell the  Northeast  Plaza  property  to the master  lessee at a net
price which the  Partnership  believed  reflected only a small deduction for the
stigma  associated  with the Mobil  contamination.  The  agreement was signed on
November 29, 1998 and was contingent on the master-lessee's  ability to obtain a
commitment for sufficient  financing by January 29, 1999 to pay the  Partnership
for its ownership  interest.  This financing  commitment  date was  subsequently
extended to April 19, 1999. As noted below, the master-lessee has been unable to
secure a commitment for financing because of an unrelated  environmental  issue,
which resulted in the termination of the purchase  agreement.  The appeal of the
Mobil  litigation was stayed until  mid-December  1999 pending the resolution of
this  potential  sale  transaction.  Subsequent to the year ended  September 30,
1999, the  Partnership  proposed a settlement  agreement which would result in a
dismissal of the appeal of its damages  claims  against  Mobil with both parties
bearing  their own costs and  attorneys'  fees.  Under the proposed  settlement,
Mobil would  remain  subject to the  injunctive  order,  and the  cleanup  would
proceed  as set  forth in the court  order.  While the  parties  have  agreed in
principle to such a settlement,  the matter remains  subject to the  negotiation
and execution of a definitive settlement agreement.

      During the quarter ended June 30, 1999,  the  Partnership  was notified by
the Northeast Plaza Shopping Center master-lessee of the presence of groundwater
contamination  at the Shopping  Center which  appears to have been caused by the
operation of dry cleaning equipment at the Center. The Partnership has confirmed
the presence of this contamination and is in the process of assessing the extent
of the contamination,  the anticipated cost and time to take appropriate action,
and the  feasibility  of  recovering  associated  costs from  responsible  third
parties.  While the  Partnership  believes  that the cleanup costs should be the
responsibility  of  the  lessee  under  the  terms  of  the  master  lease,  the
Partnership  is proceeding  on its own to begin the cleanup  process in order to
protect its investment.  The prospects for any future  recoveries of these costs
are uncertain at the present  time.  The  Partnership  accrued a liability of $1
million during fiscal 1999 to cover expected legal and environmental testing and
remediation costs regarding this contamination  based on the preliminary reports
obtained  from  the  master-lessee  and  the  work  performed  to  date  by  the
Partnership's  own  environmental  consultants.  Through September 30, 1999, the
Partnership  had incurred  actual legal and  environmental  testing  expenses of
$79,000 in connection with this situation.  The remaining balance of the accrued
liability  of $921,000  is  included  in the balance of accrued  expenses on the
accompanying  balance sheet. This amount represents an estimate of the potential
liability  associated  with this  situation.  It is possible  that this estimate
could change  materially in the near term as further  testing,  consulting  with
appropriate state environmental agencies and actual remediation work progresses.
The  Partnership  will  continue to assess and revise  this  estimate as further
information  becomes available.  At the same time, the Partnership  continues to
work with the Northeast Plaza  master-lessee,  the current first mortgage lender
and a prospective lender in an attempt to complete a refinancing of the property
in combination with a sale of the Partnership's interest in the Center.

9.  Subsequent Event
    ----------------

      On November 15, 1999, the Partnership  distributed  $28,000 to the Limited
Partners and $1,000 to the General  Partner for the quarter ended  September 30,
1999.




<PAGE>



<TABLE>

Schedule III - Real Estate and Accumulated Depreciation

                                        PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
                                       Schedule of Real Estate and Accumulated Depreciation

                                                            September 30, 1999
                                                             (In thousands)



                                                                                                                       Life on Which
                         Initial Cost to     Costs         Gross Amount at Which Carried at                            Depreciation
                         Partnership         Capitalized           Close of period                                     in Latest
                                Buildings    (Removed)          Buildings                                              Income
                                and          Subsequent to          and             Accumulated  Date of      Date     Statement
Description   Encumbrances Land Improvements Acquisition   Land Improvements Total  Depreciation Construction Acquired is Computed
-----------   ------------ ---- ------------ -----------   ---- ------------ -----  ------------ ------------ -------- -----------
<S>            <C>         <C>    <C>         <C>          <C>     <C>       <C>      <C>        <C>          <C>       <C>

Shopping
 Center
Sarasota,
 Florida       $   967     $950   $1,930      $2,158       $950    $4,088    $5,038   $1,695     1964 - 1978  9/25/81   40 years
               =======     ====   ======      ======       ====    ======    ======   ======

Notes:

(A) The  aggregate  cost of real estate owned at September  30, 1999 for Federal income tax purposes is approximately $5,038,000.
(B) See Notes 4 and 7 to Financial Statements.
(C) Reconciliation of real estate owned:

                                                   1999          1998          1997
                                                   ----          ----          ----

Balance at beginning of year                     $ 5,038       $ 5,038       $ 5,038
Improvements                                           -             -             -
                                                 -------       -------       -------

Balance at end of year                           $ 5,038       $ 5,038       $ 5,038
                                                 =======       =======       =======

(D) Reconciliation of accumulated depreciation:

Balance at beginning of year                     $ 1,593       $ 1,491       $ 1,389
Depreciation expense                                 102           102           102
                                                 -------       -------       -------
Balance at end of year                           $ 1,695       $ 1,593       $ 1,491
                                                 =======       =======       =======

</TABLE>
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS


The Partners of
Paine Webber Income Properties Three Limited Partnership:

      We have audited the  accompanying  combined balance sheets of the Combined
Joint Ventures of Paine Webber Income Properties Three Limited Partnership as of
September 30, 1997, and the related combined statements of income and changes in
venturers' capital,  and cash flows for the period October 1, 1997 through March
3, 1998 and the year ended September 30, 1997.  These  financial  statements are
the  responsibility of the Partnership's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

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

      In our  opinion,  the  combined  financial  statements  referred  to above
present fairly, in all material respects, the combined financial position of the
Combined  Joint  Ventures  of  Paine  Webber  Income  Properties  Three  Limited
Partnership at September 30, 1997, and the combined  results of their operations
and their cash flows for the period  October 1, 1997  through  March 3, 1998 and
the  year  ended  September  30,  1997 in  conformity  with  generally  accepted
accounting principles.





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






Boston, Massachusetts
April 22, 1998



<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                             COMBINED BALANCE SHEET
                               September 30, 1997
                                 (In thousands)

                                     Assets
                                                                        1997
                                                                        ----
Current assets:
   Cash and cash equivalents                                         $    378
   Escrowed funds, principally for payment of real estate taxes           307
   Accounts receivable                                                     67
   Note receivable                                                         40
   Prepaid expenses                                                         1
                                                                     --------
      Total current assets                                                793

Operating investment properties:
   Land                                                                   967
   Buildings, improvements and equipment                                5,587
                                                                     --------
                                                                        6,554
   Less accumulated depreciation                                       (4,061)
                                                                     --------
          Net operating investment properties                           2,493

Deferred expenses, net of accumulated amortization
  of $243                                                                 203
                                                                     --------
                                                                     $  3,489
                                                                     ========

                             Liabilities and Venturers' Deficit
Current liabilities:
   Accounts payable                                                  $     23
   Distributions payable to venturers                                     275
   Accrued interest                                                        34
   Accrued real estate taxes                                              106
   Long-term debt - current portion                                        31
                                                                     --------
      Total current liabilities                                           469

Tenant security deposits                                                    9

Long-term debt                                                          4,104

Venturers' deficit                                                     (1,093)
                                                                     --------
                                                                     $  3,489
                                                                     ========










                                  See accompanying notes.


<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

    COMBINED STATEMENTS OF INCOME AND CHANGES IN VENTURERS' CAPITAL (DEFICIT)

          For the period October 1, 1998 through March 3, 1998 and the
                         year ended September 30, 1997
                                 (In thousands)


                                                 1998               1997
                                                 ----               ----
Revenues:
   Rental income                             $    398            $ 2,515
   Reimbursements from tenants                     46                717
   Interest and other income                        8                 25
                                             --------            -------
                                                  452              3,257

Expenses:
   Interest expense                               182              1,179
   Depreciation expense                            29                266
   Real estate taxes                               71                408
   Management fees                                 16                101
   Ground rent                                      -                 96
   Repairs and maintenance                         58                372
   Insurance                                        -                 28
   Utilities                                       15                 59
   General and administrative                      36                 57
   Other                                            6                  -
   Amortization expense                           192                 18
                                             --------            -------
                                                  605              2,584
                                             --------            -------

Operating income (loss)                          (153)               673

Gain on sale of operating investment
   property                                     5,567                  -
                                             --------            -------

Net income                                      5,414                673

Distributions to venturers                     (4,321)              (621)

Reduction in combined capital due to
   sale of joint venture interest (Note 3)          -             (4,859)

Venturers' capital (deficit), beginning
   of year                                     (1,093)              3,714
                                             --------            --------

Venturers' capital (deficit), end of year    $      -            $ (1,093)
                                             ========            ========











                             See accompanying notes.


<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                        COMBINED STATEMENTS OF CASH FLOWS
          For the period October 1, 1997 through March 3, 1998 and the
                         year ended September 30, 1997
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)

                                                          1998           1997
                                                          ----           ----
Cash flows from operating activities:
   Net income                                          $   5,414       $    673
   Adjustments to reconcile net income to
     net cash provided by operating activities:
      Depreciation and amortization                          221            284
      Amortization of deferred financing costs                11             26
      Gain on sale of operating investment property       (5,567)             -
      Changes in assets and liabilities:
         Escrowed funds                                      307            (34)
         Accounts receivable                                  67            (50)
         Note receivable                                      40             40
         Prepaid expenses                                      1             23
         Capital improvement reserve                           -              -
         Deferred expenses                                     -            (29)
         Accounts payable                                    (23)           (35)
         Accrued interest                                    (34)             1
         Accrued real estate taxes                          (106)           (45)
         Other accrued liabilities                             -             (3)
         Prepaid rent                                          -              -
         Tenant security deposits                             (9)             -
                                                       ---------       --------
            Total adjustments                             (5,092)           178
                                                       ---------       --------
            Net cash provided by operating activities        322            851
                                                       ---------       --------

Cash flows from investing activities:
   Additions to operating investment properties                -            (64)
   Proceeds from sale of operating investment property     8,031              -
                                                       ---------       --------
            Net cash provided by (used in)
                investing activities                       8,031            (64)
                                                       ---------       --------

Cash flows from financing activities:
   Principal payments on long-term debt                   (4,135)          (173)
   Distributions to venturers                             (4,596)          (432)
                                                       ---------       --------
            Net cash used in financing activities         (8,731)          (605)
                                                       ---------       --------

Net (decrease) increase in cash and cash equivalents        (378)           182

Less:  cash balance of Pine Trail joint venture                -            (2)
                                                       ---------       --------
                                                            (378)           180

Cash and cash equivalents, beginning of period               378            198
                                                       ---------       --------

Cash and cash equivalents, end of period               $       -       $    378
                                                       =========       ========

Cash paid during the period for interest               $     205       $  1,152
                                                       =========       ========

                             See accompanying notes.


<PAGE>

                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

              Notes to Combined Joint Ventures Financial Statements


1.  Organization and Nature of Operations
    -------------------------------------

      The  accompanying  financial  statements of the Combined Joint Ventures of
Paine  Webber  Income  Properties  Three  Limited  Partnership  (Combined  Joint
Ventures) include the accounts of Boyer Lubbock Associates  (through the date of
the sale described below), a Utah limited partnership and Pine Trail Partnership
(through the date of the sale described  below), a Florida general  partnership.
The  financial  statements  of the  Combined  Joint  Ventures  are  presented in
combined form, rather than  individually,  due to the nature of the relationship
between the  co-venturers  and Paine  Webber  Income  Properties  Three  Limited
Partnership  (PWIP3),  which owned a substantial  financial interest but did not
have voting control in each joint venture.

      The dates of PWIP3's acquisition of interests in the joint ventures are as
follows:

                                             Date of Acquisition
                   Joint Venture                 of Interest
                   -------------                 -----------

            Boyer Lubbock Associates             6/30/81
            Pine Trail Partnership               11/12/81

      During  fiscal  1998,  Boyer  Lubbock  Associates  sold the Central  Plaza
Shopping Center to an unrelated third party.  During fiscal 1997, PWIP3 sold its
interest in the Pine Trail  Partnership to its co-venturer  partner.  See Note 3
for a further discussion of these transactions.

2.  Use of Estimates and Summary of Significant Accounting Policies
    ---------------------------------------------------------------

      The  accompanying  financial  statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting  principles
which require  management  to make  estimates  and  assumptions  that affect the
reported amounts of assets and liabilities and disclosures of contingent  assets
and  liabilities  as of  September  30, 1997 and  revenues  and expenses for the
period  October 1, 1997 through  March 3, 1998 and the year ended  September 30,
1997. Actual results could differ from the estimates and assumptions used.

      Basis of presentation
      ---------------------

      Generally,  the records of the combined joint ventures were  maintained on
the income tax basis of accounting and adjusted to generally accepted accounting
principles for financial reporting purposes, principally for depreciation.

      Operating investment properties
      -------------------------------

      The operating investment properties were recorded at cost less accumulated
depreciation  or an amount  less  than cost if  indicators  of  impairment  were
present in accordance with Statement of Financial  Accounting  Standards  (SFAS)
No. 121,  "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed  Of," which was adopted in fiscal 1997.  SFAS 121 requires
impairment  losses to be recorded on long-lived  assets used in operations  when
indicators of impairment are present and the  undiscounted  cash flows estimated
to be  generated  by those  assets  are less than the  assets  carrying  amount.
Management   generally  assessed   indicators  of  impairment  by  a  review  of
independent  appraisal  reports  on  the  operating  investment  property.  Such
appraisals  make use of a combination of certain  generally  accepted  valuation
techniques,   including  direct   capitalization,   discounted  cash  flows  and
comparable sales analysis. Acquisition fees were capitalized and included in the
cost of the operating investment property.  Depreciation expense was computed on
a  straight-line  basis  over  the  estimated  useful  lives  of the  buildings,
improvements and equipment, generally five to forty years.

      Deferred expenses
      -----------------

      Deferred expenses consisted primarily of loan fees and leasing commissions
which were  being  amortized  over the lives of the  related  loans and  related
leases on the  straight-line  method.  Amortization of deferred loan fees, which
approximated the effective  interest method, was included in interest expense on
the accompanying income statements.

      Income tax matters
      ------------------

      The  Combined  Joint  Ventures  are  comprised  of entities  which are not
taxable and accordingly, the results of their operations are included on the tax
returns  of the  various  partners.  Accordingly  no  income  tax  provision  is
reflected in the accompanying combined financial statements.

      Fair Value of Financial Instruments
      -----------------------------------

      The  carrying  amounts of cash and cash  equivalents,  escrowed  funds and
reserved cash approximated their fair values as of September 30, 1997 due to the
short-term maturities of these instruments. Information regarding the fair value
of long-term  debt is provided in Note 5. The fair value of  long-term  debt was
estimated using discounted cash flow analyses, based on current market rates for
similar types of borrowing arrangements.

      Cash and cash equivalents
      -------------------------

      For  purposes of the  statement of cash flows,  cash and cash  equivalents
included all highly liquid investments with maturities of 90 days or less.

      Capital improvement reserve
      ---------------------------

      In  accordance   with  the  joint  venture   agreement  of  Boyer  Lubbock
Associates, a capital improvement reserve account was established to insure that
adequate  funds are  available  to pay for future  capital  improvements  to the
venture's  operating  investment  property.  At the end of each month, 1% of the
gross minimum base rents and percentage  rents collected from tenants during the
month was to be deposited  into this account.  These deposits were not made on a
monthly basis but were made  periodically  throughout  the year in the aggregate
required amounts.

3.  Joint Ventures
    --------------

      See Note 5 to the financial  statements  of PWIP3  included in this Annual
Report for a more detailed  description of the joint  ventures.  Descriptions of
the ventures' properties are summarized below:

      a.  Boyer Lubbock Associates
          ------------------------

      The joint venture  owned and operated  Central Plaza  Shopping  Center,  a
151,857  square foot shopping  center,  located in Lubbock,  Texas.  On March 3,
1998,  Boyer Lubbock  Associates  sold the Central Plaza  Shopping  Center to an
unrelated third party for a net price of $8,350,000.  PWIP3 received proceeds of
approximately  $2,199,000 after the buyer's  assumption of the outstanding first
mortgage  loan  of  $4,122,000,  closing  costs  and  proration  adjustments  of
$232,000,  and the co-venture partner's share of the proceeds of $1,797,000.  In
addition,  PWIP3  received  $82,000 upon the  liquidation  of the joint venture,
which  represented  its share of the net cash flow from  operations  through the
date of the sale.

      b.  Pine Trail Partnership
          ----------------------

      The joint venture owned and operated Pine Trail Shopping Center, a 266,042
square foot shopping center,  located in West Palm Beach,  Florida. On August 1,
1997,  PWIP 3 sold its interest in the Pine Trail  Shopping  Center to its joint
venture  partner  for  a  net  price  of  $6,150,000.  Funds  to  complete  this
transaction  were provided from a refinancing of the first mortgage debt secured
by the Pine Trail property. PWIP 3 no longer holds an interest in this property.
As a result,  the accounts of Pine Trail  Partnership  are no longer included in
these combined financial statements effective as of August 1, 1997. Pine Trails'
net  capital  of  $4,859,000  as of July 31,  1997 is shown  as a  reduction  of
combined capital on the accompanying  statement of changes in venturers' capital
(deficit).

      The following description of the joint venture agreements provides certain
general information.

      Allocations of net income and loss
      ----------------------------------

      The joint venture  agreements  generally  provided that taxable income and
tax loss from operations were to be allocated between PWIP3 and the co-venturers
in the same  proportion  as net cash flow  distributed  to each partner for such
year,  except  for  certain  items  which  were  specifically  allocated  to the
partners, as defined in the joint venture agreements.  Allocations of income and
loss for financial  reporting  purposes  have been made in  accordance  with the
allocations of taxable income and loss.

      Gains or losses resulting from sales or other dispositions of the projects
were to be allocated as specified in the joint venture agreements.

      Distributions
      -------------

      The joint venture agreements generally provided that distributions were to
be paid first to PWIP3 from net cash flow monthly or  quarterly,  equivalent  to
$171,000 annually in the case of Boyer Lubbock  Associates and $515,000 annually
for  Pine  Trail   Partnership.   After  payment  of  certain   amounts  to  the
co-venturers,  any  remaining  net cash  flow was to be  allocated  between  the
partners in accordance with their respective ownership percentages.

      Distribution of net proceeds resulting from the sale or refinancing of the
properties  was to be made in  accordance  with  formulas  provided in the joint
venture agreements.

4.  Related party transactions
    --------------------------

      The  Combined  Joint   Ventures  had  entered  into  property   management
agreements  with  affiliates  of the  co-venturers,  cancellable  at  the  joint
ventures'  option upon the occurrence of certain  events.  The  management  fees
generally  were equal to 4% of gross  receipts,  as  defined in the  agreements.
Management  fees  totalling  $16,000 and $101,000 were paid to affiliates of the
co-venturers  for the period  October 1, 1997 through March 3, 1998 and the year
ended September 30, 1997, respectively.

      Certain of the joint  ventures paid leasing  commissions  to affiliates of
the co-venturers.  Leasing commissions paid to affiliates amounted to $18,000 in
fiscal 1997. No leasing  commissions  were paid to affiliates  during the period
October 1, 1997 through March 3, 1998.

5.  Long-term debt
    --------------

      Long-term  debt at  September  30, 1997  consisted  of the  following  (in
thousands):

                                                            1997
                                                            ----

      10%  nonrecourse  mortgage  loan  secured by
      Central Plaza  Shopping  Center,  payable in
      monthly   installments  of  $37,   including
      interest,  with a final  payment  of  $3,983
      due  January  2,  2002.  The  fair  value of
      this mortgage note payable  approximated its
      carrying value as of September 30, 1997.           $  4,135
                                                         ========