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, 1998

                                      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
                                1998 FORM 10-K

                              TABLE OF CONTENTS


Part   I                                                                 Page

Item    1   Business                                                      I-1

Item    2   Properties                                                    I-3

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    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 Executive Officers of the Partnership         III-1

Item    11  Executive Compensation                                      III-2

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

Item    13  Certain Relationships and Related Transactions              III-3


Part  IV

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

Signatures                                                               IV-2

Index to Exhibits                                                        IV-3

Financial Statements and Supplementary Data                       F-1 to F-28

<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, 1998 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, 1998, the Partnership owned directly the property set forth in the
following table:

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

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


(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.  See  Note 5 to the  financial  statements  of the
Partnership  accompanying  this Annual  Report for a further  discussion of this
transaction.  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, 1998, the Limited Partners had received  cumulative
cash distributions totalling approximately $36,785,000,  or approximately $1,734
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, and
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.
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 as well as in a note receivable  related to the Briarwood
and Gatewood 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.  At the  present  time,  real estate  values for retail  shopping
centers in certain markets  continue to be adversely  impacted by the effects of
overbuilding  and  consolidations  among  retailers  which have  resulted  in an
oversupply of space. Currently,  occupancy at the Partnership's remaining retail
shopping  center  remains high and operations to date do not appear to have been
affected by this general trend.

      As discussed further in the notes to the financial statements,  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 has  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.  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.  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.  The experts currently
predict that the cleanup will be completed in approximately  one to three years.
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 has appealed the judgment  pertaining to
its damages claims.  Subsequently,  the Partnership has negotiated a contract to
sell the Northeast Plaza property to the  master-lessee at a net price which the
Partnership  believes  reflects only a small deduction for the stigma associated
with the contamination.  However, since this sale remains contingent upon, among
other  things,  the  buyer  obtaining   sufficient  financing  to  complete  the
transaction, there are no assurances that a sale will be consummated. The appeal
of the Mobil litigation has been stayed pending the resolution of this potential
sale transaction. To the extent that this sale transaction is not completed, the
Partnership   reserves  all  rights   against   Mobil  for  damages   under  the
indemnification  contract  with Mobil.  No assurance  can be given as to whether
Mobil will  perform its  obligations  under the contract or as to the outcome of
any litigation against Mobil, should Mobil fail to perform its obligations.

      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.

Item 2.  Properties

      As of September 30, 1998,  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  1998,  along with an
average for the year, are presented below for the property:

                                           Percent Leased At     
                              --------------------------------------------------
                                                                       Fiscal 
                                                                       1998
                              12/31/97   3/31/98    6/30/98   9/30/98  Average
                              --------   -------    -------   -------  -------

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

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 has 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 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.  The experts currently predict that the cleanup
will be completed in approximately  one to three years. 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  has appealed the judgment  pertaining  to its
damages claims. Subsequently,  the Partnership has negotiated a contract to sell
the  Northeast  Plaza  property  to the  master-lessee  at a net price which the
Partnership  believes  reflects only a small deduction for the stigma associated
with the contamination.  However, since this sale remains contingent upon, among
other  things,  the  buyer  obtaining   sufficient  financing  to  complete  the
transaction, there are no assurances that a sale will be consummated. The appeal
of the Mobil litigation has been stayed pending the resolution of this potential
sale transaction. To the extent that this sale transaction is not completed, the
Partnership   reserves  all  rights   against   Mobil  for  damages   under  the
indemnification  contract  with Mobil.  No assurance  can be given as to whether
Mobil will  perform its  obligations  under the contract or as to the outcome of
any litigation against Mobil, should Mobil fail to perform its obligations.

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 alleges 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 have denied any and all liability in the lawsuit.  By Agreement dated
December 30, 1998, the  Partnership and the defendants have 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 have
agreed  to pay the  Partnership  the  aggregate  amount  of $3  million  and the
Partnership  has  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 is to
be paid by no later than 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, 1998,  there were 1,525 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 1998.

Item 6.  Selected Financial Data

                       Paine Webber Income Properties Three Limited Partnership
                               (In thousands, except per Unit data)

                                      Years Ended September 30,     
                      ----------------------------------------------------------
                           1998       1997         1996      1995       1994
                           ----       ----         ----      ----       ----

Revenues               $   714       $   579     $   562   $   492    $   483

Operating loss         $  (116)      $  (130)    $   (80)  $  (246)   $  (197)

Partnership's share
of ventures' income
(loss)                 $  (155)      $   403     $   696   $   510    $   442

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

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

Net income             $ 2,120       $ 3,838     $ 6,542   $   264    $   245

Per Limited
  Partnership Unit:
   Net income          $ 97.41       $176.32     $300.56   $ 12.14    $  11.26

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

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

Total assets           $ 4,367       $ 4,767     $ 7,645   $ 7,151    $ 7,429

Mortgage note
 payable               $ 1,124       $ 1,278     $ 1,420   $ 1,549    $ 1,667

      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, 1998, 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,  the Partnership  also retains 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 to its existing  investments
to pay for its share of certain required capital improvement expenses.

      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
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 and its co-venture  partner had engaged the services of a nationally
affiliated  brokerage  firm to market the Central Plaza property for sale during
fiscal  1997.  The property was marketed  extensively  and sales  packages  were
distributed to national,  regional and local prospective purchasers. As a result
of these efforts,  three offers were received.  After  evaluating the offers and
the relative strength of the prospective  purchasers,  an offer was selected and
the Partnership and the co-venturer negotiated a purchase and sale contract with
the buyer that was executed in January 1998.  The net sale price under the terms
of the purchase and sale agreement was  $8,350,000,  which was net of a $525,000
credit to the buyer in return for its  assumption of the existing first mortgage
loan secured by the property.  This loan,  which contained a prepayment  penalty
amount  that was  greater  than the  $525,000  credit to the  buyer,  carried an
interest rate of 10% per annum. Since this interest rate was higher than current
market rates obtainable by the prospective buyer, the credit was negotiated. The
net proceeds  from the sale were  greater  than if the venture  received a gross
sale price of $8,875,000  and paid the  prepayment  penalty called for under the
loan agreement. The loan was not prepayable without penalty until February 2002.
Both the  Partnership  and the  co-venturer  believed the risks  associated with
holding this  property  until the  prepayment  penalty  expired  outweighed  the
reduction in net proceeds  resulting  from the interest  rate credit  negotiated
with the buyer.

      With the  fiscal  1998 sale of the  Central  Plaza  Shopping  Center,  the
Partnership's  remaining  assets  consist of the  wholly-owned  Northeast  Plaza
Shopping Center and the subordinated  mortgage note receivable  position related
to the  Briarwood  and Gatewood  properties  which were sold in fiscal 1985.  As
discussed  further below,  the Partnership has entered into an agreement to sell
the  Northeast  Plaza  property to the master  lessee  which could be  completed
during  fiscal  1999.  However,  there  can  be no  assurances  that  this  sale
transaction  will be  completed,  and the  Partnership  has  certain  litigation
outstanding  related to Mobil Oil  Corporation's  contamination of the Northeast
Plaza  property and a pending  settlement  of  litigation  related to the second
mortgage  loan  receivable  position that the  Partnership  holds related to the
Briarwood  and  Gatewood  properties.  The  sale  or  other  disposition  of the
Partnership's  remaining assets and the resolution of the outstanding litigation
matters would be followed by a liquidation of the  Partnership.  It is currently
contemplated that  dispositions of the  Partnership's  remaining assets could be
completed by the end of calendar year 1999.  There are no  assurances,  however,
that the  sales of the  remaining  assets,  the  resolution  of the  outstanding
litigation and the liquidation of the Partnership  will be completed within this
time frame.

      The occupancy  level at the Northeast  Plaza Shopping  Center in Sarasota,
Florida,  remained at 100% for the year ended  September 30, 1998.  The focus of
the property's  leasing team continues to be with the renewal of the leases with
five tenants  occupying  37,300  square feet that are scheduled to expire in the
next twelve months.  All five tenants are expected to renew their leases. One of
these  tenants  is one of the  center's  two anchor  tenants  which has a 25,600
square  foot lease that  expires in January of 1999.  This tenant is expected to
exercise  one of its two  five-year  options  and  renew  its  lease  with a 10%
increase in the rental rate. A second tenant, which operates a 6,500 square foot
discount retail store, is expected to exercise an option and renew its lease for
five years at a slightly  increased rental rate. The remaining three expirations
consist of a 1,200 square foot  bookstore,  a 1,600 square foot hair salon and a
2,400 square foot restaurant.  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 has 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.  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.  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.  The experts currently
predict that the cleanup will be completed in approximately  one to three years.
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 has appealed the judgement pertaining to
its damages claims.  Subsequently,  the Partnership has negotiated a contract to
sell the Northeast Plaza property to the  master-lessee at a net price which the
Partnership  believes  reflects only a small deduction for the stigma associated
with the contamination.  However, since this sale remains contingent upon, among
other  things,  the  buyer  obtaining   sufficient  financing  to  complete  the
transaction, there are no assurances that a sale will be consummated. The appeal
of the Mobil litigation has been stayed pending the resolution of this potential
sale transaction. To the extent that this sale transaction is not completed, the
Partnership   reserves  all  rights   against   Mobil  for  damages   under  the
indemnification  contract  with Mobil.  No assurance  can be given as to whether
Mobil will  perform its  obligations  under the contract or as to the outcome of
any litigation against Mobil, should Mobil fail to perform its obligations.

      The  Partnership  also has a note receivable that it received as a portion
of the proceeds from the sale of its interest in the Briarwood  joint venture in
fiscal 1985. The note and related accrued  interest  receivable have been netted
against a deferred gain of a like amount on the accompanying  balance sheet. The
interest  owed on the note  receivable is 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 has been
recorded as interest income on the accompanying statement of operations. On June
22, 1998, the Partnership  initiated a lawsuit in  Massachusetts  state court in
connection  with this note  receivable.  The suit alleges 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 have denied
any and all liability in the lawsuit.  By Agreement dated December 30, 1998, the
Partnership and the defendants have 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  have agreed to pay
the  Partnership  the  aggregate  amount of $3 million and the  Partnership  has
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 is to be paid
by no later than January 29, 1999. The  settlement  payments will be recorded as
income in the period in which they are received.

      At  September  30,  1998,  the  Partnership  had  available  cash and cash
equivalents of $911,000. 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,  settlement  payments  from  the  assignment  of the  note  receivable
discussed  further above and proceeds  received from the sale or  refinancing of
such property or a sale of the  Partnership's  interest in 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  by the end of
calendar year 1999.  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
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 the current fiscal year is 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 the current  fiscal
year. 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 is mainly due to the
inclusion of the operating  results of the Pine Trail joint venture in the prior
year's results. As discussed further above, the Partnership sold its interest in
Pine Trail in August of 1997. As a result,  the current period  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
having 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.

1996 Compared to 1995
---------------------

      The  Partnership's  net income increased by $6,278,000 during fiscal 1996,
when compared to the prior year. The substantial  increase in the  Partnership's
net income for fiscal 1996 was primarily the result of the  Partnership's  share
of the gain from the sale of the  Camelot  Apartments,  which  occurred  in June
1996. The gain recognized by the Camelot joint venture totalled  $12,089,000 and
the  Partnership's  share  of  such  gain  amounted  to  $5,926,000,  net of the
write-off of the unamortized  balance of the  Partnership's  excess basis in the
Camelot joint venture of $1,506,000.  In addition,  the  Partnership's  share of
ventures' operating income increased by $186,000,  when compared to fiscal 1995.
The Partnership's share of ventures' operating income increased primarily due to
an increase in the portion of the income  allocated to the Partnership  from the
Central Plaza joint venture.  The joint venture's  income  allocation  primarily
followed the allocation of cash  distributions.  The  Partnership  was allocated
100% of the cash distributions from Central Plaza during fiscal 1996 as compared
to approximately 60% of cash  distributions  during the prior year. While fiscal
1996 net income  increased by only $65,000 at Central Plaza,  the  Partnership's
share of the venture's income increased by $224,000. Net income at Central Plaza
increased in fiscal 1996 primarily due to an increase in revenues resulting from
higher  average  rental  rates.  The  increase  in the  Partnership's  share  of
venture's  income  from  Central  Plaza was  partially  offset by a decrease  in
operating  income from the Camelot  Apartments  joint venture due to the sale of
the property on June 19, 1996.

      A  decrease  in  the   Partnership's   operating  loss  of  $166,000  also
contributed  to the  increase  in net  income in  fiscal  1996.  Operating  loss
decreased  due to an increase  in  interest  income of $70,000 and a decrease in
general and administrative expenses of $85,000. Interest income increased due to
the higher  average  outstanding  cash  balances  resulting  from the  temporary
investment of the Camelot sale proceeds pending the special  distribution to the
Limited Partners which occurred on August 15, 1996.  General and  administrative
expenses  decreased  primarily as a result of incremental  expenses  incurred in
fiscal 1995 relating to an independent valuation of the Partnership's  operating
properties.

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.

      Notwithstanding  the  environmental   situation  at  the  Northeast  Plaza
property  described  above,  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,  nor is the Partnership aware of any  environmental  condition with
respect  to its  remaining  property  that it  believes  will  involve  any such
material   expenditure.   However,   there   can  be  no   assurance   that  any
non-compliance, liability, claim or expenditure will not arise in the future.

      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 is currently suffering 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  seventeenth  full year of  operations in
fiscal 1998 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.  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 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              39         8/22/96
Terrence E. Fancher     Director                            45        10/10/96
Walter V. Arnold        Senior Vice President
                          and Chief Financial Officer       51        10/29/85
David F. Brooks         First Vice President and
                          Assistant Treasurer               56         6/13/80 *
Timothy J. Medlock      Vice President and Treasurer        37          6/1/88
Thomas W. Boland        Vice President and Controller       36         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.

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

     Thomas W. Boland is a Vice President 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, 1998, 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,
1998. No incentive  management  fees were earned during the year ended September
30, 1998.

      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, 1998 is $71,000, representing reimbursements to this affiliate for
providing such services to the Partnership.

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


   (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:  January 13, 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: January 13, 1999    
   -----------------------                            ----------------
   Bruce J. Rubin
   Director



By:/s/ Terrence E. Fancher                      Date: January 13, 1999    
   -----------------------                            ----------------
   Terrence E. Fancher
   Director


<PAGE>
<TABLE>


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

               PAINE WEBBER PROPERTIES THREE LIMITED PARTNERSHIP


                               INDEX TO EXHIBITS
<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, 1998 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

    Report of independent accountants - Coopers & Lybrand L.L.P.        F-3

    Balance sheets at September 30, 1998 and 1997                       F-4

    Statements of income for the years ended September 30, 1998,
       1997 and 1996                                                    F-5

    Statements of changes in partners' capital (deficit) for the 
       years ended September 30, 1998, 1997 and 1996                    F-6

    Statements of cash flows for the years ended September 30, 1998,
       1997 and 1996                                                    F-7

    Notes to financial statements                                       F-8

    Schedule III - Real Estate and Accumulated Depreciation             F-19

Combined Joint Ventures of PaineWebber Income Properties Three Limited
  Partnership

    Report of independent auditors - Ernst & Young LLP                  F-20

    Report of independent accountants - Coopers & Lybrand L.L.P.        F-21

    Combined balance sheet as of September 30, 1997                     F-22

    Combined  statements of income and changes in venturers'  capital
       (deficit)for the period  October 1, 1997 through March 3, 1998 
       and the years ended September 30, 1997 and 1996                  F-23

    Combined  statements  of cash flows for the period  October 1, 1997
       through March 3, 1998 and the years ended September 30, 1997 and 
       1996                                                             F-24

    Notes to combined financial statements                              F-25


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, 1998 and 1997, and the
related statements of income,  changes in partners' capital (deficit),  and cash
flows for each of the three years in the period ended  September  30, 1998.  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.  The  financial
statements of Camelot  Associates (a partnership in which the  Partnership had a
50%  interest)  have  been  audited  by other  auditors  whose  report  has been
furnished to us; insofar as our opinion on the financial  statements  relates to
data included for Camelot Associates, it is based solely on their report. In the
financial  statements,  the  Partnership's  share of venture's income of Camelot
Associates is stated at $190,000 for the year ended  September 30, 1996, and the
Partnership's  share  of  gain  on the  sale of  Camelot  Associates'  operating
investment  property is stated at  $7,432,000  for the year ended  September 30,
1996.

     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 and the report of other auditors provide a reasonable
basis for our opinion.

     In our opinion,  based on our audits and the report of other auditors,  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, 1998 and 1997,  and the results of its  operations
and its cash flows for each of the three years in the period ended September 30,
1998, 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 18, 1998,
except for the
fifth paragraph of Note 6,
as to which the
date is December 30, 1998



<PAGE>


                        Report of Independent Accountants



To the Venturers of
Camelot Associates:

    We have audited the  accompanying  balance sheets of Camelot  Associates (an
Ohio  Partnership)  as of June 19, 1996 and September 30, 1995,  and the related
statements of income,  venturers'  deficit and cash flows for the period October
1,  1995 to June  19,  1996 and for each of the two  years in the  period  ended
September 30, 1995.  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 financial  statements referred to above present fairly,
in all material respects,  the financial position of Camelot Associates (an Ohio
Partnership)  as of June 19, 1996 and September 30, 1995, and the results of its
operations  and its cash flows for the period  October 1, 1995 to June 19,  1996
and for  each of the two  years in the  period  ended  September  30,  1995,  in
conformity with generally accepted accounting principles.

    As described in Note 1, the  partnership  sold its  operating  properties in
1996.




                                             /s/ Coopers & Lybrand L.L.P.
                                             ----------------------------
                                                 Coopers & Lybrand L.L.P.






Cincinnati, Ohio
January 10, 1997


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                                 BALANCE SHEETS
                           September 30, 1998 and 1997
                     (In thousands, except per Unit amounts)

                                     ASSETS
                                                            1998       1997
                                                            ----       ----

Operating investment property, at cost:
   Land                                                 $     950   $     950
   Building and improvements                                4,088       4,088
                                                        ---------   ---------
                                                            5,038       5,038
   Less accumulated depreciation                           (1,593)     (1,491)
                                                        ---------   ---------
      Net operating investment property                     3,445       3,547

Investments in joint ventures, at equity                        -         215

Cash and cash equivalents                                     911         973
Deferred expenses, net of accumulated amortization
   of $95 ($74 in 1997)                                        11          32
Note and interest receivable, net                               -           -
                                                        ---------   ---------
                                                        $   4,367   $   4,767
                                                        =========   =========

                        LIABILITIES AND PARTNERS' CAPITAL


Accounts payable - affiliates                           $       1   $       4
Accrued expenses                                              171          58
Mortgage note payable                                       1,124       1,278
                                                       ----------  ----------
      Total liabilities                                     1,296       1,340


Partners' capital:
  General Partner:
   Capital contribution                                         1           1
   Cumulative net income                                      205         184
   Cumulative cash distributions                             (154)       (152)

  Limited Partners ($1,000 per Unit; 21,550 Units issued):
   Capital contributions, net of offering costs            19,397      19,397
   Cumulative net income                                   20,407      18,308
   Cumulative cash distributions                          (36,785)    (34,311)
      Total partners' capital                               3,071       3,427
                                                        ---------    --------
                                                        $   4,367    $  4,767
                                                        =========    ========








                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                              STATEMENTS OF INCOME
              For the years ended September 30, 1998, 1997 and 1996
                     (In thousands, except per Unit amounts)


                                                1998        1997        1996
                                                ----        ----        ----
Revenues:
   Rental revenues                           $    478    $    478    $    478
   Interest and other income                      236         101          84
                                             --------    --------    --------
                                                  714         579         562

Expenses:
   Interest expense                               130         143         155
   Management fees                                  4          17          17
   Depreciation expense                           102         102         102
   General and administrative                     594         447         368
                                             --------    --------    --------
                                                  830         709         642
                                             --------    --------    --------

Operating loss                                   (116)       (130)        (80)

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

Gain on sale of joint venture interest
  (net of write-off of unamortized excess
  basis of $50)                                     -       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
  and $1,506 in 1996)                           2,391            -      5,926
                                             --------    --------    --------

Net income                                   $  2,120    $  3,838    $  6,542
                                             ========    ========    ========


Net income per Limited Partnership Unit       $ 97.41     $176.32     $300.56
                                              =======     =======     =======

Cash distributions per Limited
  Partnership Unit                            $114.81     $304.77     $275.40
                                              =======     =======     =======


   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 (DEFICIT
              For the years ended September 30, 1998, 1997 and 1996
                                 (In thousands)

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

Balance at September 30, 1995            $  (61)     $ 5,619        $ 5,558

Cash distributions                           (4)      (5,935)        (5,939)

Net income                                   65        6,477          6,542
                                         ------      -------        -------

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
                                         ======      =======        =======


























                             See accompanying notes.


<PAGE>

<TABLE>

            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS
             For the years ended September 30, 1998, 1997 and 1996
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)
<CAPTION>

                                                            1998        1997        1996
                                                            ----        ----        ----
<S>                                                         <C>         <C>         <C>  

Cash flows from operating activities:
   Net income                                               $  2,120    $  3,838   $   6,542
   Adjustments to reconcile net income
      to net cash provided by operating activities:
      Depreciation                                               102         102         102
      Amortization of deferred financing costs                    21          21          21
      Partnership's share of ventures' income (loss)             155        (403)       (696)
      Gain on sale of joint venture interest                       -      (3,565)          -
      Partnership's share of gain on sale
        of operating investment property                      (2,391)          -      (5,926)
      Changes in assets and liabilities:
         Accounts receivable                                       -          99           -
         Accounts payable - affiliates                            (3)          -           -
         Accrued expenses                                        113          (2)         20
                                                            --------    --------   ---------
           Total adjustments                                  (2,003)     (3,748)     (6,479)
                                                            --------    --------   ---------
           Net cash provided by operating activities             117          90          63
                                                            --------    --------   ---------

Cash flows from investing activities:
   Proceeds from sale of joint venture interest                    -       6,150           -
   Distributions from joint ventures                           2,451         447       6,709
                                                            --------    --------   ---------
           Net cash provided by investing activities           2,451       6,597       6,709
                                                            --------    --------   ---------

Cash flows from financing activities:                         (2,476)     (6,572)     (5,939)
   Principal payments on mortgage note payable                  (154)       (142)       (129)
                                                            --------    --------   ---------
           Net cash used in financing activities              (2,630)     (6,714)     (6,068)
                                                            --------    --------   ---------

Net (decrease) increase in cash and cash equivalents             (62)        (27)        704

Cash and cash equivalents, beginning of year                     973       1,000         296
                                                            --------    --------   ---------

Cash and cash equivalents, end of year                      $    911   $     973   $   1,000
                                                            ========   =========   =========

Cash paid during the year for interest                      $    109   $     122   $     134
                                                            ========   =========   =========

</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,  1998,  the  three
multi-family  apartment properties have been sold, the Partnership's interest in
one of the retail  shopping  centers has been sold, 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 fiscal 1998 sale of the Central  Plaza  Shopping  Center (see Note
5), the  Partnership's  remaining assets consist of the  wholly-owned  Northeast
Plaza Shopping Center (see Note 4) and the subordinated mortgage note receivable
position  related to the  Briarwood and Gatewood  properties  which were sold in
fiscal 1985 (see Note 6). As discussed  further in Note 8, the  Partnership  has
entered  into an agreement to sell the  Northeast  Plaza  property to the master
lessee which could be completed  during  fiscal 1999.  However,  there can be no
assurances that this sale transaction will be completed, and the Partnership has
certain  litigation  matters  outstanding  related  to Mobil  Oil  Corporation's
contamination of the Northeast Plaza property and related to the second mortgage
loan  receivable  position  that  the  Partnership  holds  from  the sale of the
Briarwood  and  Gatewood  properties.  The  sale  or  other  disposition  of the
Partnership's  remaining assets and the resolution of the outstanding litigation
would  be  followed  by a  liquidation  of  the  Partnership.  It  is  currently
contemplated that  dispositions of the  Partnership's  remaining assets could be
completed by the end of calendar year 1999.  There are no  assurances,  however,
that the  sales of the  remaining  assets,  the  resolution  of the  outstanding
litigation and the 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, 1998 and 1997 and revenues and expenses for
each of the three years in the period ended  September 30, 1998.  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 is represented by a note and
accrued interest receivable.  The note and accrued interest receivable have been
netted against the deferred gain on the  accompanying  balance  sheet.  The gain
would be recognized if the note and interest  receivable are collected (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. 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,  1998 and 1997 due to the
short-term maturities of these instruments.  The mortgage note payable is also a
financial  instrument  for  purposes of SFAS 107. The fair value of the mortgage
note payable is  estimated  using  discounted  cash flow  analysis  based on the
current  market rate for a similar  type of borrowing  arrangement.  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 and unconsolidated operating investment
properties  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 the year  ended  September  30,  1998 and
$17,000 for both of the years ended  September  30,  1997and  1996. No incentive
management  fees were earned during the  three-year  period ended  September 30,
1998. Accounts payable - affiliates at both September 30, 1998 and 1997 consists
of management fees payable to the Adviser of $1,000 and $4,000, respectively.

      Included  in  general  and  administrative  expenses  for the years  ended
September 30, 1998, 1997 and 1996 is $71,000, $67,000 and $68,000, 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 $5,000,  $7,000 and $2,000 (included in general and administrative  expenses)
for managing the  Partnership's  cash assets during fiscal 1998,  1997 and 1996,
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. As
discussed  further in Note 8, the  Partnership  has entered into an agreement to
sell  Northeast  Plaza to the master lessee.  There are no assurances,  however,
that this sale transaction, which would result in a gain for financial reporting
purposes, will be completed.

      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, will 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, 1998, the Partnership had no joint venture partnership
investments (one as of September 30, 1997). 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.  In addition,  on June 19, 1996 Camelot Associates,  in
which  the  Partnership  had a joint  interest,  sold its  operating  investment
property to an  unrelated  third party and  distributed  the net proceeds to the
venture partners.

      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 financial statements of these joint ventures follow.
<PAGE>

                        Condensed Combined Balance Sheets
                               September 30, 1997
                                 (in thousands)

                                     Assets

                                                      1997
                                                      ----

   Current assets                                   $    793
   Operating investment property, net                  2,493
   Other assets, net                                     203
                                                    --------
                                                    $  3,489
                                                    ========

                       Liabilities and Capital (Deficit) 

   Current liabilities                              $    469
   Other liabilities                                       9
   Long-term mortgage debt                             4,104
   Partnership's share of combined capital
      (deficit)                                           91
   Co-venturers' share of combined capital 
      (deficit)                                       (1,184)
                                                    --------
                                                    $  3,489
                                                    ========

                   Reconciliation of Partnership's Investment

                                                      1997
                                                      ----

   Partnership's share of capital,
     as shown above                                 $     91
   Partnership's share of current
     liabilities and long-term debt                       91
   Excess basis due to investment in 
     ventures, net (1)                                    33
                                                    --------
   Investments in joint ventures, at equity         $    215
                                                    ========

   (1)At September 30, 1997 the Partnership's  investment  exceeded its share of
      the joint venture  partnerships' capital accounts by $33,000. This amount,
      which  related  to  certain  expenses   incurred  by  the  Partnership  in
      connection  with  acquiring  its  joint  venture  investments,  was  being
      amortized  over  the  estimated  useful  life  of the  related  investment
      property.  The remaining  unamortized excess basis was written off against
      the gain on the sale of the operating investment property in fiscal 1998.

                    Condensed Combined Summary of Operations
            For the period October 1, 1997 through March 3, 1998 and
                   the years ended September 30, 1997 and 1996
                                 (in thousands)

                                                1998        1997        1996
                                                ----        ----        ----
   Revenues:
     Rental revenues and expense recoveries   $   444     $ 3,232     $ 5,632
     Interest income                                8          25          20
                                              -------     -------     -------
                                                  452       3,257       5,652
   Expenses:
     Property operating expenses                  202       1,121       2,473
     Depreciation and amortization                221         284         726
     Interest expense                             182       1,179       1,644
                                              -------     -------     -------
                                                  605       2,584       4,843
                                              -------     -------     -------
   Operating income (loss)                       (153)        673         809

   Gain on sale of operating investment
     property                                   5,567           -      12,089
                                              -------     -------     -------

   Net income                                 $ 5,414     $   673     $12,898
                                              =======     =======     =======

   Net income:
     Partnership's share of combined income   $ 2,259     $   405     $ 8,134
     Co-venturers' share of combined income     3,155         268       4,764
                                              -------     -------     -------
                                              $ 5,414     $   673     $12,898
                                              =======     =======     =======
<PAGE>
                 Reconciliation of Partnership's Share of Income

                                                1998        1997        1996
                                                ----        ----        ----
   Partnership's share of income, 
     as shown above                           $ 2,259     $   405     $ 8,134
   Amortization of excess basis                   (23)         (2)     (1,512)
                                              -------     -------     -------
   Partnership's share of ventures'
     net income                               $ 2,236     $   403     $ 6,622
                                              =======     =======     =======

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

                                                1998        1997        1996
                                                ----        ----        ----

   Partnership share of ventures' 
     income (loss)                            $  (155)    $   403     $   696
   Partnership's share of gain on sale
     of operating investment property           2,391           -       5,926
                                              -------     -------     -------
                                              $ 2,236     $   403     $ 6,622
                                              =======     =======     =======

      Investments in joint  ventures,  at equity,  on the  accompanying  balance
sheet at  September  30,  1997 was  comprised  of the  following  joint  venture
investment:
                                                            1997
                                                            ----

        Boyer Lubbock Associates                          $  215
                                                          ======

      The Partnership received cash distributions from the joint ventures as set
forth below:
                                                 
                                                1998        1997        1996
                                                ----        ----        ----
        Camelot Associates                    $     -     $     -     $ 6,078
        Boyer Lubbock Associates                2,451         172         231
        Pine Trail Partnership                      -         275         400
                                              -------     -------     -------
           Total                              $ 2,451     $   447      $6,709
                                              =======     =======      ======

      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.
<PAGE>

      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 and
for the year ended  September  30,  1996,  the property  manager  earned fees of
$63,000  and  $74,000,  respectively.  In  addition,  the  property  manager was
entitled to leasing commissions at prevailing market rates.  Leasing commissions
earned by the property manager were $18,000 and $23,000 for the ten months ended
July 31, 1997 and for the year ended September 30, 1996, respectively.

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 years ended  September  30,
1997 and 1996, the affiliate of the co-venturer earned fees of $16,000,  $38,000
and $41,000, respectively.

c)  Camelot Associates
    ------------------

      On June  29,  1981,  the  Partnership  acquired  an  interest  in  Camelot
Associates  ("Camelot")  an Ohio  limited  partnership  which owned and operated
Camelot  Apartments,  a 492-unit  apartment  complex  in  Fairfield,  Ohio.  The
aggregate  cash   investment  by  the  Partnership  for  its  50%  interest  was
approximately  $2,790,000  (including an acquisition fee of $300,000 paid to the
Adviser).  The  Partnership  was a general  partner  in the joint  venture.  The
Partnership's   co-venturers   were  Chelsea  Moore   Corporation   and  certain
individuals.
<PAGE>

      On June 19, 1996,  the joint  venture  which owned the Camelot  Apartments
sold  the  operating  investment  property  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 the outstanding  first
mortgage loans, the buyout of an underlying  ground lease and the  co-venturers'
share of the net proceeds.  The Partnership  made a special  distribution to the
Limited Partners from the Camelot sale proceeds of  approximately  $5.5 million,
or $256 per original  $1,000  investment,  on August 15, 1996. The remaining net
proceeds  were added to the  Partnership's  cash  reserves  to  provide  for the
potential capital needs of the  Partnership's  remaining  investments.  The gain
recognized   by  the  Camelot  joint  venture   totaled   $12,089,000   and  the
Partnership's share of such gain amounted to $5,926,000, net of the write-off of
the unamortized  balance of the Partnership's  excess basis in the Camelot joint
venture of $1,506,000.

      Taxable income and tax loss from operations in each year were allocated to
the  Partnership  and  the  co-venturers   generally  in  accordance  with  cash
distributions  except that all  depreciation  attributable to a step-up in basis
pursuant to an election  under  Section 754 of the  Internal  Revenue  Code as a
result of the investment by the  Partnership  was allocated to the  Partnership.
Allocations  of  the  venture's   operations   among  the  Partnership  and  the
co-venturers 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-venturers.  Fees due  under  the  terms of the  management
contract  amounted to 4% of collected  rents.  For the period October 1, 1995 to
June 19, 1996 and the year ended  September  30, 1995,  the  management  company
earned fees of $76,000 and $103,000, 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 has been 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 September 30, 1998 and 1997 would
be approximately $7,858,000 and $6,925,000, respectively.

      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 alleges 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 have denied any and all liability in the lawsuit.  

     By Agreement  dated December 30, 1998, the  Partnership  and the defendants
have 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  have agreed to pay the  Partnership  the  aggregate
amount of $3 million and the  Partnership  has 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 is to be paid by no later than  January 29,  1999.  The
settlement  payments  will be recorded as income in the period in which they are
received.

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

      The mortgage note payable at September 30, 1998 and 1997 is secured by the
Partnership's  wholly-owned  Northeast Plaza Shopping Center. 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,  has a term of five  years and bears
interest  at a fixed  rate  of 9% per  annum.  Monthly  principal  and  interest
payments of $22,000 are due through  maturity on March 29,  1999.  As  discussed
further  in Note 8,  the  Partnership  has  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.  While there are no assurances that
this sale  transaction  will be  completed,  the  Partnership  believes that the
existing  mortgage debt will be refinanced  during fiscal 1999.  The loan may be
prepaid at anytime without penalty. The fair value of this mortgage note payable
approximated its carrying value as of September 30, 1998 and 1997.

      Scheduled  maturity of the mortgage  note payable for the next fiscal year
is as follows (in thousands):

                  1999             $ 1,124

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 has  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
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.  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.  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.  The experts currently
predict that the cleanup will be completed in approximately  one to three years.
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 has appealed the judgment  pertaining to
its damages claims.  Subsequently,  the Partnership has negotiated a contract to
sell the Northeast Plaza property to the  master-lessee at a net price which the
Partnership  believes  reflects only a small deduction for the stigma associated
with the contamination.  However, since this sale remains contingent upon, among
other  things,  the  buyer  obtaining   sufficient  financing  to  complete  the
transaction, there are no assurances that a sale will be consummated. The appeal
of the Mobil litigation has been stayed pending the resolution of this potential
sale transaction. To the extent that this sale transaction is not completed, the
Partnership   reserves  all  rights   against   Mobil  for  damages   under  the
indemnification  contract  with Mobil.  No assurance  can be given as to whether
Mobil will  perform its  obligations  under the contract or as to the outcome of
any litigation against Mobil, should Mobil fail to perform its obligations.

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

      On November 13, 1998, the Partnership  distributed  $28,000 to the Limited
Partners and $1,000 to the General  Partner for the quarter ended  September 30,
1998.

<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, 1998
                                 (In thousands)
<CAPTION>



                                                                                                                      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     $ 1,124      $950    $1,930       $2,158     $950   $4,088    $5,038    $1,593     1964 - 1978    9/25/8    40 years
             =======      ====    ======       ======     ====   ======    ======    ======

Notes:

(A) The  aggregate  cost of real estate owned at September  30, 1998 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:

                                                   1998          1997          1996
                                                   ----          ----          ----

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                     $ 1,491       $ 1,389       $ 1,287
Depreciation expense                                 102           102           102
                                                 -------       -------       -------
Balance at end of year                           $ 1,593       $ 1,491       $ 1,389
                                                 =======       =======       =======

</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 years  ended  September  30,  1997 and  1996.  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 did not audit the financial  statements  of Camelot  Associates,
which  statements  reflect  total  revenues  of  $2,044,000  for the year  ended
September  30, 1996.  Those  statements  were audited by other  auditors,  whose
report has been furnished to us, and our opinion,  insofar as it relates to data
included  for  Camelot  Associates,  is based  solely on the report of the other
auditors.

      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 and the report of other auditors provide a reasonable
basis for our opinion.

      In our opinion,  based on our audits and the report of other auditors, 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 for each of the two  years in the
period ended September 30, 1997 in conformity with generally accepted accounting
principles.





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






Boston, Massachusetts
April 22, 1998


<PAGE>


                        Report of Independent Accountants



To the Venturers of
Camelot Associates:

      We have audited the accompanying  balance sheets of Camelot Associates (an
Ohio  Partnership)  as of June 19, 1996 and September 30, 1995,  and the related
statements of income,  venturers'  deficit and cash flows for the period October
1,  1995 to June  19,  1996 and for each of the two  years in the  period  ended
September 30, 1995.  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 financial statements referred to above present fairly,
in all material respects,  the financial position of Camelot Associates (an Ohio
Partnership)  as of June 19, 1996 and September 30, 1995, and the results of its
operations  and its cash flows for the period  October 1, 1995 to June 19,  1996
and for  each of the two  years in the  period  ended  September  30,  1995,  in
conformity with generally accepted accounting principles.

      As described in Note 1, the partnership  sold its operating  properties in
1996.




                                             /s/ Coopers & Lybrand L.L.P.
                                             ----------------------------
                                                 Coopers & Lybrand L.L.P.






Cincinnati, Ohio
January 10, 1997


<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 rea
      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' Capital (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 years
                        ended September 30, 1997 and 1996
                                 (In thousands)


                                                 1998       1997        1996
                                                 ----       ----        ----
Revenues:
   Rental income                             $    398     $ 2,515     $ 4,892
   Reimbursements from tenants                     46         717         740
   Interest and other income                        8          25          20
                                             --------     -------     -------
                                                  452       3,257       5,652

Expenses:
   Interest expense                               182       1,179       1,644
   Depreciation expense                            29         266         710
   Real estate taxes                               71         408         553
   Management fees                                 16         101         190
   Ground rent                                      -          96         126
   Repairs and maintenance                         58         372         623
   Insurance                                        -          28          73
   Utilities                                       15          59         229
   General and administrative                      36          57         360
   Other                                            6           -         319
   Amortization expense                           192          18          16
                                             --------     -------     -------
                                                  605       2,584       4,843
                                             --------     -------     -------

Operating income (loss)                          (153)        673         809

Gain on sale of operating 
  investment property                           5,567           -      12,089
                                             --------     -------     -------

Net income                                      5,414         673      12,898

Distributions to venturers                     (4,321)       (621)    (10,939)

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       1,755
                                             --------     -------     -------

Venturers' capital (deficit), end of year    $      -     $(1,093)    $ 3,714
                                             ========     =======     =======











                             See accompanying notes.


<PAGE>
<TABLE>


                           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 years ended September 30, 1997 and 1996
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)
<CAPTION>

                                                                    1998       1997       1996
                                                                    ----       ----       ----
<S>                                                              <C>         <C>         <C>

Cash flows from operating activities:
   Net income                                                    $   5,414   $   673   $  12,898
   Adjustments to reconcile net income to
     net cash provided by operating activities:
      Depreciation and amortization                                    221       284         726
      Amortization of deferred financing costs                          11        26          26
      Gain on sale of operating investment property                 (5,567)        -     (12,089)
      Changes in assets and liabilities:
         Escrowed funds                                                307       (34)        (39)
         Accounts receivable                                            67       (50)        (38)
         Note receivable                                                40        40         (80)
         Prepaid expenses                                                1        23          (1)
         Capital improvement reserve                                     -         -          (2)
         Deferred expenses                                               -       (29)        (59)
         Accounts payable                                              (23)      (35)       (114)
         Accrued interest                                              (34)        1         (33)
         Accrued real estate taxes                                    (106)      (45)       (125)
         Other accrued liabilities                                       -        (3)         (2)
         Prepaid rent                                                    -         -         (18)
         Tenant security deposits                                       (9)        -         (88)
                                                                 ---------   -------   ---------
            Total adjustments                                       (5,092)      178     (11,936)
                                                                 ---------   -------   ---------
            Net cash provided by operating activities                  322       851         962
                                                                 ---------   -------   ---------

Cash flows from investing activities:
   Additions to operating investment properties                          -       (64)       (230)
   Proceeds from sale of operating investment property               8,031         -      14,470
                                                                 ---------   -------   ---------
            Net cash provided by (used in)
                investing activities                                 8,031       (64)     14,240
                                                                 ---------   -------   ---------

Cash flows from financing activities:
   Principal payments on long-term debt                             (4,135)     (173)     (4,479)
   Distributions to venturers                                       (4,596)     (432)    (11,325)
                                                                 ---------   -------   ---------
            Net cash used in financing activities                   (8,731)     (605)    (15,804)
                                                                 ---------   -------   ---------

Net (decrease) increase in cash and cash equivalents                  (378)      182        (602)

Less:  cash balance of Pine Trail joint venture                          -        (2)          -
                                                                 ---------   -------   ---------
                                                                      (378)      180        (602)

Cash and cash equivalents, beginning of year                           378       198         800
                                                                 ---------   -------   ---------

Cash and cash equivalents, end of year                           $      -    $   378   $     198
                                                                 ========    =======   =========

Cash paid during the year for interest                           $    205    $ 1,152   $   1,652
                                                                 ========    =======   =========
</TABLE>

                             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 Camelot  Associates  (through the date of the
sale described below),  an Ohio limited  partnership;  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 
            -----------------------     -------------------

            Camelot Associates                6/29/81
            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. During fiscal
1996, Camelot Associates sold its operating  investment property and distributed
the net proceeds to the venture partners. 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 years ended  September 30,
1997 and 1996.  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.  Camelot Associates
          ------------------

      The  joint  venture  owned and  operated  Camelot  East and the  Villas of
Camelot Apartments, a 492-unit apartment complex, located in Fairfield, Ohio. On
June 19, 1996,  the joint venture sold the operating  investment  property to an
unrelated  third party for  $15,150,000.  PWIP3  received net sales  proceeds of
approximately  $5.9 million after deducting  closing costs, the repayment of the
two outstanding  first mortgage loans, the buyout of an underlying  ground lease
and the co-venturers' share of the net proceeds.

      b.  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.

      c.  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).
<PAGE>

      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, $101,000 and $190,000 were paid to affiliates
of the co-venturers for the period October 1, 1997 through March 3, 1998 and the
years ended September 30, 1997 and 1996, respectively.

      Certain of the joint  ventures paid leasing  commissions  to affiliates of
the co-venturers. Leasing commissions paid to affiliates amounted to $18,000 and
$23,000 in fiscal 1997 and 1996, respectively.  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
                                                         ========