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, 1995

                                      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 of organization)                               (I.R.S. Employer
                                                     Identification No.)

265 Franklin Street, Boston, Massachusetts                      02110
(Address of principal executive office)                        (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
Title of each class                             on 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
                                1995 FORM 10-K

                              TABLE OF CONTENTS

Part   I                                                               Page

Item  1           Business                                               I-1

Item  2           Properties                                             I-3

Item  3           Legal Proceedings                                      I-3

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

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-1

Item  8           Financial Statements and Supplementary Data            II-5

Item  9           Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosure                    II-5

Part III

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

Item 11           Executive Compensation                                 III-3

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-29


<PAGE>

                                    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 real 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 capital contributions.

      As of September 30, 1995, the  Partnership  owns directly or through joint
venture  partnerships the properties or interests in the properties  referred to
below:

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

Camelot Associates            492           6/29/81      Fee ownership of
Camelot East and the Villas   Units                      improvements
Camelot Apartments                                       (through joint
venture).
Fairfield, Ohio                                          Land is subject to a
                                                         ground lease.

Boyer Lubbock Associates      143,800       6/30/81      Fee ownership of land
Central Plaza Shopping Center gross                      and improvements
Lubbock, Texas                leasable                  (through joint venture).
                              sq. ft.

Northeast Plaza Shopping      116,000       9/25/81     Fee ownership of land
Center                        gross                     and improvements
Sarasota, Florida             leasable                  subject to a master
                              sq. ft.                   lease.
                              

Pine Trail Partnership        283,000       11/12/81     Fee ownership of
Pine Trail Shopping Center    gross                      improvements and 23
West Palm Beach, Florida      leasable                   acres of land (through
                              sq. ft.                    joint venture).
Approximately 4 acres of
land is subject to ground
leases.

(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  investments and for a description of the
    agreements  through  which the  Partnership  has acquired  these real estate
    investments.

    The  Partnership  originally  had  investment  interests  in  six  operating
investment  properties.  The  Partnership  sold its  investment in the Briarwood
Joint Venture,  which owned the Briarwood  Apartments and Gatewood Apartments in
Bucks County, Pennsylvania, on December 20, 1984 for cash and a note receivable.
See Note 6 to the  financial  statements  accompanying  this Annual Report for a
further discussion of this transaction.



<PAGE>


    The Partnership's investment objectives are 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, 1995,  the Limited  Partners had received  cumulative
cash distributions totalling approximately $21,809,000,  or approximately $1,039
per original $1,000 investment for the Partnership's earliest investors.  Of the
total  distributions,   approximately  $7,623,000,  or  approximately  $354  per
original $1,000 investment,  represents  proceeds from the sale of the Briarwood
and Gatewood  Apartments in fiscal 1985. 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.  The
Partnership is currently paying  quarterly  distributions of excess cash flow at
the rate of 3% per annum on the remaining  invested  capital.  In addition,  the
Partnership  retains  its  ownership  interest  in  four  of  its  six  original
investment  properties.   The  Partnership's  success  in  meeting  its  capital
appreciation  objective  will depend upon the proceeds  received  from the final
liquidation  of its  remaining  investments.  The amount of such  proceeds  will
ultimately depend upon the value of the underlying  investment properties at the
time of their final  disposition,  which cannot presently be determined.  At the
present time, real estate values for retail shopping  centers in certain markets
have begun to be  affected  by the effects of  overbuilding  and  consolidations
among  retailers  which have  resulted  in an  oversupply  of space.  Currently,
occupancy at all three of the Partnership's  retail shopping centers remain high
and operations do not appear to have been affected by this general trend.

    As discussed further in the notes to the accompanying  financial statements,
the amount of proceeds  received  from the future  liquidation  of the Northeast
Plaza  Shopping   Center  may  be  adversely   impacted  by  the  effects  of  a
contamination  of the  groundwater  at the  property.  Per the terms of a formal
indemnification agreement, Mobil Oil Corporation,  the party responsible for the
contamination,  agreed to compensate the  Partnership  for any damages caused by
the contamination.  Since the time that the contamination was discovered,  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  Regulation,  which has  approved  Mobil's  remedial  action plan.
Although  the  Partnership  was  able  to  refinance  the  property's   mortgage
indebtedness,  which had been in default for more than two years,  during fiscal
1994, it has incurred significant out-of-pocket and legal expenses in connection
with its sale and refinancing  efforts as a result of the  contamination  issue.
During the first  quarter of fiscal  1993,  the  Partnership  filed suit against
Mobil for breach of  indemnity  and  property  damage (see Item 3). On April 28,
1995,  Mobil Oil  Corporation  was  successful  in  obtaining a Partial  Summary
Judgment which removed the case from the Federal Court system. Subsequently, the
Partnership  has filed an action in the Florida State Court system.  This action
is for  substantially  all of the  same  claims  and  utilizes  the  substantial
discovery and trial preparation work already completed for the Federal case. The
Partnership is seeking  judgment against Mobil which would award the Partnership
compensatory damages,  costs, attorneys' fees and such other relief as the court
may deem  proper.  The outcome of these legal  proceedings  cannot  presently be
determined.

    All of the properties securing the Partnership's  investments are located in
real estate markets in which they face significant  competition for the revenues
they generate.  The apartment complex competes with numerous projects of similar
type  generally  on the  basis  of  price,  location  and  amenities.  Apartment
properties  in all markets also compete with the local single family home market
for  prospective  tenants.  The continued  availability of low interest rates on
home mortgage  loans has increased the level of this  competition  over the past
few years.  However,  the impact of the competition from the single-family  home
market has been offset by the lack of significant new  construction  activity in
the multi-family apartment market over this period. The shopping centers compete
for long-term retail tenants with numerous projects of similar type generally on
the  basis  on  rental  rates,  location,  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, 1995, the  Partnership  owned one property  directly and
owned   interests  in  three   operating   properties   through   joint  venture
partnerships.  Such  properties  are  referred  to  under  Item 1 above to which
reference is made for the name, location and description of each property.

    Occupancy figures for each fiscal quarter during 1995, along with an average
for the year, are presented below for each property:


                                               Percent Leased At
                                                                    Fiscal 1995
                             12/31/94   3/30/95   6/30/95   9/30/95    Average

Camelot Apartments              95%       97%       97%        94%       96%

Central Plaza                   96%       92%       92%        92%       93%

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

Pine Trail Shopping Center      94%       96%       96%        96%       96%

Item 3.  Legal Proceedings

    As further  discussed 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 groundwater  contamination  affecting the  Partnership's
Northeast  Plaza  Shopping  Center  investment.  Management  believes  that  the
Partnership's  efforts to sell or refinance  the Northeast  Plaza  property have
been 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 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  Regulation,  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.  As a result of the contamination of the
groundwater at Northeast  Plaza,  the Partnership has incurred  certain damages,
primarily  related to the  inability  to sell the  property and to delays in the
process of refinancing the property's mortgage indebtedness. The Partnership has
incurred  significant  out-of-pocket  and legal expenses in connection with such
sale and refinancing  efforts.  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 these 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 Oil  Corporation  was
successful in obtaining a Partial  Summary  Judgment which removed the case from
the Federal Court system.  Subsequently,  the Partnership has filed an action in
the Florida State Court system. This action is for substantially all of the same
claims and utilizes the substantial discovery and trial preparation work already
completed for the Federal case.  The  Partnership  is seeking  judgment  against
Mobil which would award the Partnership  compensatory damages, costs, attorneys'
fees and such other  relief as the Court may deem  proper.  The outcome of these
legal proceedings cannot presently be determined.

     In  November  1994,  a series of  purported  class  actions  (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments,  including those offered
by the Partnership.  The lawsuits were brought against PaineWebber  Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied  partnership  investors.  In March  1995,  after the  actions  were
consolidated under the title In re PaineWebber Limited  Partnership  Litigation,
the  plaintiffs  amended their  complaint to assert claims  against a variety of
other defendants,  including Third Income Properties,  Inc. which is the General
Partner of the Partnership and an affiliate of PaineWebber. On May 30, 1995, the
court certified class action treatment of the claims asserted in the litigation.

     The amended complaint in the New York Limited  Partnership  Actions alleges
that, in connection with the sale of interests in Paine Webber Income Properties
Three Limited  Partnership,  PaineWebber and Third Income  Properties,  Inc. (1)
failed to provide adequate disclosure of the risks involved;  (2) made false and
misleading   representations  about  the  safety  of  the  investments  and  the
Partnership's  anticipated  performance;  and (3)  marketed the  Partnership  to
investors for whom such  investments  were not  suitable.  The  plaintiffs,  who
purport to be suing on behalf of all persons who invested in Paine Webber Income
Properties Three Limited Partnership, also allege that following the sale of the
partnership   interests,   PaineWebber   and  Third  Income   Properties,   Inc.
misrepresented   financial   information   about  the  Partnerships   value  and
performance.  The amended  complaint  alleges that  PaineWebber and Third Income
Properties, Inc. violated the Racketeer Influenced and Corrupt Organizations Act
("RICO")  and the federal  securities  laws.  The  plaintiffs  seek  unspecified
damages,   including  reimbursement  for  all  sums  invested  by  them  in  the
partnerships,  as well as  disgorgement  of all fees and other income derived by
PaineWebber from the limited partnerships. In addition, the plaintiffs also seek
treble  damages under RICO. The  defendants'  time to move against or answer the
complaint has not yet expired.

    Pursuant to provisions of the  Partnership  Agreement and other  contractual
obligations,  under certain  circumstances  the  Partnership  may be required to
indemnify  Third  Income  Properties,  Inc.  and its  affiliates  for  costs and
liabilities in connection with this  litigation.  The General Partner intends to
vigorously  contest the allegations of the action,  and believes that the action
will be resolved without material adverse effect on the Partnership's  financial
statements, taken as a whole.

    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,  1995 there were  1,649  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. 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 1995.

Item 6.  Selected Financial Data

             Paine Webber Income Properties Three Limited Partnership
                           (In thousands, except per Unit data)
                            Years Ended September 30,
                           1995       1994         1993      1992       1991
                           ----       ----         ----      ----       ----

Revenues               $   492       $   483     $   483   $   491   $    517

Operating loss         $  (246)      $  (197)    $  (154)  $  (229)  $   (100)

Partnership's share
of ventures' income   $    510      $    442     $   332   $   351   $    414

Net income            $    264      $    245    $    178   $   122   $    314

Per Limited Partnership Unit:
   Net income           $ 12.14       $ 11.26    $   8.16  $  5.61     $ 14.40

   Cash distributions   $ 19.40      $  19.40     $ 19.40  $ 38.80    $  49.69

Total assets            $ 7,151      $  7,429     $ 8,271   $ 8,537   $  9,213

Mortgage note payable   $ 1,549      $  1,667     $ 2,245   $ 2,276   $  2,304

      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

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.  As of September 30, 1995,  two of the original  properties had been
sold. 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.  The Partnership's four remaining  investment  properties
consist of three retail shopping centers and one multi-family apartment complex.
Towards the latter half of 1995, real estate values for retail shopping  centers
in certain markets have begun to be affected by the effects of overbuilding  and
consolidations  among  retailers  which have resulted in an oversupply of space.
Currently,  occupancy at all three of the Partnership's  retail shopping centers
remain high and  operations  do not appear to have been affected by this general
trend.

      The  operations  of  the  Partnership's  three  joint  venture  investment
properties  are stable and producing  excess cash flow as of September 30, 1995.
At the Pine Trail Shopping Center, the national restaurant chain which renovated
a building on an out-parcel  at the property and opened for business  during the
first quarter of fiscal 1995 is  generating  increased  shopper  traffic and new
business for the Center's other tenants.  Road  construction near the center has
been  completed,  and the traffic  flow to Pine Trail has  improved as a result.
Pine Trail  maintained a 96% occupancy  level as of September 30, 1995. The Pine
Trail Shopping Center has five out-parcels on the site,  covering  approximately
six acres,  which  have been  leased by the Pine  Trail  Partnership  from third
parties  under five  separate  ground  leases  since the  inception of the joint
venture.  During the third quarter of fiscal 1995,  the joint venture  completed
the acquisition of one of these out-parcels,  containing 60,248 square feet, for
the purchase price of $350,000.  This purchase price is significantly lower than
the assessed value of the out-parcel and comparable land sales in the area. This
purchase was 100% financed with a  non-recourse  first  mortgage loan secured by
the lease of the free-standing  restaurant  located on the out-parcel.  The loan
bears interest at the prime rate plus one-percent and requires monthly principal
and interest  payments  over a 5-year term.  Management  may seek to acquire the
other  out-parcels  at the Pine  Trails  property  if  favorable  terms for such
acquisitions  can be  negotiated.  Comprehensive  ownership  of all of the  land
underlying   the  shopping   center,   if   accomplished,   should  enhance  the
marketability of the property under a sale scenario.

     The average occupancy level at the Camelot Apartments  increased to 96% for
the year  ended  September  30,  1995 from 94% for the prior  fiscal  year.  The
capital  improvement program implemented at the property in 1994, which included
the  continuation  of a roof  replacement  process,  has enabled the property to
increase occupancy levels and rental rates over the past year. Given the current
strength  of the  national  real  estate  market  with  respect to  multi-family
apartment properties, management began to actively market this property for sale
during the fourth  quarter of fiscal 1995.  In  addition,  the  Partnership  has
engaged in preliminary  discussions with its co-venture  partners  regarding the
possible sale of the  Partnership's  interest in the Camelot joint  venture.  In
accordance with the terms of the joint venture agreement,  the co-venturers have
the  right  to  match  any  third  party  offer  obtained  to buy the  property.
Accordingly,  a negotiated  sale to the  co-venturers  at the  appropriate  fair
market value may represent the most  expeditious  and  advantageous  way for the
Partnership  to sell this  investment.  The decision as to whether to complete a
transaction to sell the Partnership's interest in the Camelot Apartments will be
based on an  evaluation  of the  current  fair  market  value  of the  operating
investment  property and an assessment of the national and local market  factors
affecting  the  appreciation  potential of the property in the  relatively  near
term.  Accordingly,  there can be no assurances that a sale  transaction will be
consummated  in the near  term.  A  portion  of the  property's  cash  flow will
continue to be reinvested to address certain deferred maintenance items and make
selected  capital  improvements  during  fiscal  1996 in  order to  enhance  the
property's  curb appeal.  The Camelot  joint venture has two  outstanding  first
mortgage  loans  which had a  combined  principal  balance of  $4,298,000  as of
September 30, 1995. One of these first mortgages,  with a balance of $2,298,000,
was originally  scheduled to mature on January 1, 1996.  Subsequent to year-end,
the venture  obtained an extension of the maturity  date from the lender to July
1, 1996 in return for an  extension  fee of $5,600.  The  venture's  other first
mortgage loan had a principal balance of $2,000,000 as of September 30, 1995 and
is  scheduled  to mature on July 1, 1997.  At the present  time,  the venture is
negotiating with several  different  potential  lending sources to refinance the
mortgage  loan  which  matures in fiscal  1996.  The  principal  balance of this
mortgage loan represents  less than 20% of the total  estimated  market value of
the  venture's  operating  investment  property.  In light of the  venture's low
leverage  level,  the  current  favorable  interest  rate  environment  and  the
continued strong supply of capital for real estate lending,  management  expects
to be able to secure a loan to refinance this maturing obligation.

      The  mortgage  debt  secured by Central  Plaza was  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, bears interest at a
rate  of  10%  per  annum.   Monthly  payments  of  principal  and  interest  of
approximately  $37,000  are due until  maturity  in January  2002.  With the new
financing in place,  management is now working on a plan to increase  occupancy,
upgrade the property's  tenant mix and increase rental rates. Such plans involve
a possible  15,000 square foot store  expansion  for one of the center's  anchor
tenants.  The additional space requirements could be met by expanding into 6,000
square  feet of  space  currently  occupied  by a tenant  which is  experiencing
financial  problems and enlarging  the shopping  center by  approximately  9,000
square  feet.  The costs of the  expansion  would be paid by the anchor  tenant.
Subsequent  to  year-end,  a tentative  agreement  was reached  with this anchor
tenant to proceed  with this planned  expansion.  In  addition,  the  property's
leasing and management team is negotiating with an existing tenant that occupies
5,600  square feet of space on an  amendment  of its lease which would result in
higher  effective  rental rates and an  extension of the lease term.  It is also
negotiating  with two other  leasing  prospects  that  would  lease  most of the
remaining available space.

      As previously reported, management believes that the Partnership's efforts
to sell or refinance the Northeast Plaza property have been impeded by potential
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 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 Regulation, 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.  As a
result  of  the  contamination  of  the  groundwater  at  Northeast  Plaza,  the
Partnership has incurred certain damages,  primarily related to the inability to
sell the property  and to delays in the process of  refinancing  the  property's
mortgage  indebtedness.  The Partnership has incurred significant  out-of-pocket
and legal expenses in connection with such sale and refinancing efforts. 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 these 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 Oil Corporation was successful in obtaining a
Partial  Summary  Judgment which removed the case from the Federal Court system.
Subsequently,  the  Partnership  has filed an action in the Florida  State Court
system. This action is for substantially all of the same claims and utilizes the
substantial  discovery  and trial  preparation  work already  completed  for the
Federal case.  The  Partnership  is seeking  judgment  against Mobil which would
award the  Partnership  compensatory  damages,  costs,  attorneys' fees and such
other  relief  as the  Court  may  deem  proper.  The  outcome  of  these  legal
proceedings cannot presently be determined.

      At  September  30,  1995,  the  Partnership  had  available  cash and cash
equivalents of $296,000. 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
properties and proceeds received from the sale or refinancing of such properties
or sales of the  Partnership's  interests  in such  properties.  Such sources of
liquidity are expected to be sufficient to meet the Partnership's  needs on both
a short-term  and  long-term  basis.  In addition,  the  Partnership  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 currently  payable only to the extent that the related  properties
generate  excess net cash flow.  To date,  no payments have been received on the
note,  which  matures  on January 1,  2000,  and none are  expected  in the near
future.  Since the  operating  properties  continue  to  generate  net cash flow
deficits and the  Partnership's  note receivable is subordinated to the existing
first mortgage debt, there is significant  uncertainty as to the  collectibility
of the principal and accrued  interest.  Proceeds,  if any, received on the note
would represent a source of additional liquidity for the Partnership.

Results of Operations
1995 Compared to 1994

      The Partnership's net income increased by $19,000 during fiscal 1995, when
compared to the prior year, mainly due to an increase in the Partnership's share
of ventures'  income of $68,000 which was partially offset by an increase in the
general  and  administrative  expenses of  $51,000.  General and  administrative
expenses  increased  mainly due to increased legal and appraisal costs resulting
from the  continued  litigation  against  Mobil Oil  Corporation,  as  discussed
further above. The Partnership's  share of ventures' income increased  primarily
due to an increase in net income at the Pine Trail joint venture.  Net income at
Pine Trail  increased as a result of an increase in rental  income due to higher
average  occupancy  rates  when  compared  to the prior  year.  The Pine  Trails
Shopping  Center  had an average  occupancy  level of 96% for  fiscal  1995,  as
compared to 93% for the prior year. The Partnership's  share of ventures' income
also increased  because the Partnership was allocated a higher percentage of the
net income  from the  Camelot  joint  venture  when  compared to the prior year.
Although net income decreased  slightly at Camelot as a result of an increase in
maintenance  expenses,  the Partnership was allocated a larger percentage of the
net  income  due to the  method of  allocation  specified  in the joint  venture
agreement. The increase in the Partnership's share of income from the Pine Trail
and  Camelot  joint  ventures  was  partially   offset  by  a  decrease  in  the
Partnership's share of income from Central Plaza. Net income was down at Central
Plaza as a result of a decline in average occupancy  compared to the prior year.
Occupancy at Central  Plaza  declined from 96% for fiscal 1994 to 93% for fiscal
1995 mainly due to a 6,000  square foot tenant that  vacated the property in the
second  quarter of fiscal  1995.  As  discussed  further  above,  management  is
currently  evaluating tentative plans to re-lease this space and possibly expand
the shopping center.

1994 Compared to 1993

    The  Partnership's  net income  increased by $67,000 during fiscal 1994 when
compared  to the prior  year.  The  increase is the result of an increase in the
Partnership's  share of ventures'  income of $111,000 and a decrease in interest
expense of $90,000 as a result of the March 1994  refinancing  of the  Northeast
Plaza note payable. The Partnership's share of ventures' income increased mainly
due to an increase in net income at the Pine Trail Shopping  Center.  Net income
at Pine Trail  increased  as a result of an  increase in rental  revenues  and a
decrease in  operating  expenses.  Rental  revenues  increased  mainly due to an
increase in the average  occupancy  of the center for fiscal 1994 versus  fiscal
1993.  Property  operating  expenses  decreased  as a result  of an  improvement
program  which took place in fiscal  1993 and  resulted  in higher  than  normal
repairs and maintenance  expenses in that year. The net operating results of the
Central Plaza joint venture also improved  slightly  during fiscal 1994 due to a
modest  increase in rental  revenues.  The net  operating  income of the Camelot
joint venture decreased  slightly in fiscal 1994 as revenues remained flat while
certain  property  operating  expenses  increased over the prior year.  Interest
expense  decreased in fiscal 1994 as a result of the accrual of default interest
during the prior year while the  Northeast  Plaza  refinancing  efforts  were in
process.  These  favorable  changes in net income  were  partially  offset by an
increase in the Partnership's  general and administrative  expenses.  The higher
general and  administrative  expenses in fiscal  1994  reflected  an increase in
legal fees in connection with the ongoing Mobil litigation referred to above, as
well as certain  additional  costs  related to an  independent  valuation of the
Partnership's  operating  properties  which was in process in  conjunction  with
management's ongoing refinancing and portfolio management responsibilities.

1993 Compared to 1992

   For the year ended September 30, 1993, the Partnership's net income increased
by $56,000 when compared to the prior year.  The  improvement  in net income was
primarily due to a decrease in general and  administrative  expenses of $67,000,
mainly as a result of a reduction in legal expenses  incurred in connection with
the Northeast  Plaza debt  refinancing  efforts and Mobil  litigation  described
above.  In  addition,  management  fees  declined  by  $13,000  as a result of a
reduction in the distribution rate from 6% to 3% effective for the quarter ended
September 30, 1992.  The reductions in general and  administrative  expenses and
management fees were partially offset by a decline in interest income of $8,000,
resulting  mainly  from a  decline  in the  interest  rates  earned  on  average
outstanding  cash reserve  balances  during  fiscal 1993,  and a decrease in the
Partnership's  share of ventures'  income of $19,000 mainly due to a decrease in
tenant reimbursement income at the Pine Trail joint venture.

Inflation

   The  Partnership  completed its fourteenth  full year of operations in fiscal
1995 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  properties.  Many of the
existing leases with tenants at the Partnership's two joint venture owned retail
shopping centers contain rental escalation and/or expense  reimbursement clauses
based on increases in tenant sales or property operating expenses.  Furthermore,
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.  In  addition,  rental  revenues  at  the  Partnership's  multi-family
residential investment property may be adjusted to keep pace with inflation,  as
market  conditions  allow,  as the leases,  which are short-term in nature,  are
renewed or turned over.  Such increases in rental income would be expected to at
least partially offset the  corresponding  increases in Partnership and property
operating expenses.

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

Lawrence A. Cohen       President, Chief Executive          42        8/30/88
                          Officer and Director
Albert Pratt            Director                            84        6/13/80 *
J. Richard Sipes        Director                            48        6/9/94
Walter V. Arnold        Senior Vice President
                          and Chief Financial Officer       47        10/29/85
James A. Snyder         Senior Vice President               50        7/6/92
John B. Watts III       Senior Vice President               42        6/6/88
David F. Brooks         First Vice President and
                          Assistant Treasurer               53        6/13/80 *
Timothy J. Medlock      Vice President and Treasurer        34        6/1/88
Thomas W. Boland        Vice President                      33        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:

    Lawrence A. Cohen is President  and Chief  Executive  Officer of the General
Partner and President and Chief Executive Officer of the Adviser which he joined
in  January  1989.  He is  also a  member  of the  Board  of  Directors  and the
Investment Committee of the Adviser. From 1984 to 1988, Mr. Cohen was First Vice
President of VMS Realty  Partners where he was  responsible  for origination and
structuring  of  real  estate  investment  programs  and for  managing  national
broker-dealer  relationships.  He is a  member  of the  New  York  Bar  and is a
Certified Public Accountant.

    Albert Pratt is a Director of the General Partner, a Consultant of PWI and a
general  partner of the  Associate  General  Partner.  Mr.  Pratt  joined PWI as
Counsel  in 1946 and since  that time has held a number of  positions  including
Director of both the Investment Banking Division and the International Division,
Senior  Vice  President  and Vice  Chairman of PWI and  Chairman of  PaineWebber
International, Inc.


<PAGE>


    J.  Richard  Sipes is a Director  of the  Managing  General  Partner  and a
Director  of  the  Adviser.  Mr.  Sipes  is  an  Executive  Vice  President  at
PaineWebber.  He joined the firm in 1978 and has  served in various  capacities
within the Retail Sales and  Marketing  Division.  Before  assuming his current
position  as  Director of Retail  Underwriting  and  Trading in 1990,  he was a
Branch Manager,  Regional  Manager,  Branch System and Marketing  Manager for a
PaineWebber  subsidiary,  Manager  of Branch  Administration  and  Director  of
Retail  Products  and  Trading.  Mr.  Sipes  holds a B.S.  in  Psychology  from
Memphis State University.

    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.

      James A. Snyder is a Senior Vice President of the Managing General Partner
and a Senior  Vice  President  and  Member of the  Investment  Committee  of the
Adviser.  Mr. Snyder re-joined the Adviser in July 1992 having served previously
as an officer of PWPI from July 1980 to August  1987.  From January 1991 to July
1992, Mr. Snyder was with the Resolution  Trust  Corporation  where he served as
the Vice President of Asset Sales prior to re-joining  PWPI.  From February 1989
to October  1990,  he was  President  of Kan Am  Investors,  Inc., a real estate
investment  company.  During the period August 1987 to February 1989, Mr. Snyder
was Executive Vice President and Chief Financial  Officer of Southeast  Regional
Management Inc., a real estate development company.

      John B.  Watts III is a Senior  Vice  President  of the  Managing  General
Partner and a Senior Vice President of the Adviser which he joined in June 1988.
Mr. Watts has had over 16 years of experience in acquisitions,  dispositions and
finance of real  estate.  He  received  degrees  of  Bachelor  of  Architecture,
Bachelor of Arts and Master of Business  Administration  from the  University of
Arkansas.

    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  of the  General  Partner and a Vice
President  and Manager of Financial  Reporting 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, 1995, all filing
requirements  applicable to the officers and  directors of the Managing  General
Partner and ten-percent beneficial holders were complied with.


<PAGE>


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 8.25%  per  annum on  remaining
invested capital over the past five years.  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.

      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 $17,000 for the year ended September 30,
1995. No incentive  management  fees were earned during the year ended September
30, 1995.

      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.

      The General  Partner and its  affiliates  are  reimbursed for their direct
expenses  relating  to  the  offering  of  Units,  the   administration  of  the
Partnership  and  the  acquisition  and  operations  of the  Partnership's  real
property investments.

      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, 1995 is $72,000 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 $1,400  (included in general and  administrative  expenses)  for managing the
Partnership's  cash assets during fiscal 1995. 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 1995.

   (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
                                            LIMITED PARTNERSHIP



                                      By:  Third Income Properties, Inc.
                                               General Partner



                                  By:/s/ Lawrence A. Cohen
                                     Lawrence A. Cohen
                                     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

Dated:  January 4, 1996

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/ Albert Pratt                             Date:January 4, 1996
   Albert Pratt
   Director



By: /s/ J. Richard Sipes                        Date: January 4, 1996
   J. Richard Sipes
   Director


                        


<PAGE>


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

               PAINE WEBBER PROPERTIES THREE LIMITED PARTNERSHIP


                               INDEX TO EXHIBITS


                                                         Page  Number  in  the
Exhibit No.        Description of Document               Report    or    Other
                                                         Reference
----------------   -----------------------------------   ----------------------
(3) and (4)        Prospectus   of   the   Registrant     Filed    with    the
                   dated   December   3,  1980,  as       Commission  pursuant
                   supplemented,    with   particular     to Rule  424(c)  and
                   reference    to    the    Restated     incorporated  herein
                   Certificate   and   Agreement   of     by reference.
                   Limited Partnership.

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

(13)               Annual Report to Limited Partners      No   Annual   Report
                                                          for the  year  ended
                                                          September  30,  1995
                                                          has  been   sent  to
                                                          the          Limited
                                                          Partners.         An
                                                          Annual  Report  will
                                                          be   sent   to   the
                                                          Limited     Partners
                                                          subsequent  to  this
                                                          filing.

(22)               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 the last
                                                          page of EDGAR
                                                          submission
                                                          following the
                                                          Financial
                                                          Statements and
                                                          Financial Statement
                                                          Schedule required
                                                          by Item 14.






<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, 1995 and 1994                       F-4

    Statements of income for the years ended September 30, 
         1995, 1994 and 1993                                            F-5

    Statements of changes in partners' capital (deficit) for the 
        years ended  September 30, 1995, 1994 and 1993                  F-6

    Statements of cash flows for the years ended  September 
          30, 1995, 1994 and 1993                                       F-7

    Notes to financial statements                                       F-8

    Schedule III - Real Estate and Accumulated Depreciation             F-18

Combined  Joint  Ventures  of  PaineWebber  Income  Properties  Three  Limited
Partnership

    Report of independent auditors - Ernst & Young LLP                  F-19

    Report of independent accountants - Coopers & Lybrand L.L.P.        F-20

    Combined balance sheets as of September 30, 1995 and 1994           F-21

    Combined statements of income and changes in venturers' 
       capital for the years ended September 30, 1995, 1994 and 1993    F-22

    Combined  statements of cash flows for the years ended 
     September 30, 1995, 1994 and 1993                                  F-23

    Notes to combined financial statements                              F-24

    Schedule III - Real Estate and Accumulated Depreciation             F-29

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, 1995 and 1994, 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, 1995.  Our
audits also included the  financial  statement  schedule  listed in the Index at
Item 14(a).  These financial  statements and schedule are the  responsibility of
the  Partnership's  management.  Our  responsibility is to express an opinion on
these  financial  statements and schedule based on our audits.  We did not audit
the financial statements of Camelot Associates,  which statements reflect 2% and
3% of the  Partnership's  total  assets  as of  September  30,  1995  and  1994,
respectively,  and 38%,  40% and 62% of the  Partnership's  share  of  ventures'
income for the years ended  September  30,  1995,  1994 and 1993,  respectively.
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
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, 1995 and 1994 and the results of its operations and
its cash flows for each of the three  years in the period  ended  September  30,
1995 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 28, 1995



<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 September 30, 1995 and 1994, and the related  statements
of income,  venturers' deficit and cash flows for each of the three 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 September 30, 1995 and 1994 and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1995 in conformity with generally accepted accounting principles.





/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
November 16, 1995




<PAGE>


           PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                                BALANCE SHEETS
                         September 30, 1995 and 1994
                     (In thousands, except per Unit data)

                                    ASSETS
                                                             1995       1994

Operating investment property, at cost:
   Land                                                  $    950   $     950
   Building and improvements                                4,088       4,088
                                                         --------   ---------
                                                            5,038       5,038
   Less accumulated depreciation                           (1,287)     (1,185)
                                                          -------   ---------
      Net operating investment property                     3,751       3,853

Investments in joint ventures, at equity                    3,030       3,265

Cash and cash equivalents                                     296         216
Deferred expenses, net of accumulated amortization
   of $32 ($11 in 1994)                                        74          95
Note and interest receivable, net                               -           -
                                                     ------------------------
                                                          $ 7,151     $ 7,429
                                                          =======     =======

                      LIABILITIES AND PARTNERS' CAPITAL


Accounts payable - affiliates                          $        4 $         4
Accrued expenses                                               40          42
Mortgage note payable                                       1,549       1,667
                                                         --------   ---------
          Total liabilities                                 1,593       1,713


Partners' capital:
  General Partner:
   Capital contribution                                         1           1
   Cumulative net income                                       81          79
   Cumulative cash distributions                             (143)       (139)

  Limited Partners ($1,000 per unit; 21,550 Units issued):
   Capital contributions, net of offering costs            19,397      19,397
   Cumulative net income                                    8,031       7,769
   Cumulative cash distributions                          (21,809)    (21,391)
          Total partners' capital                           5,558       5,716
                                                         --------    --------
                                                          $ 7,151     $ 7,429
                                                          =======     =======








                           See accompanying notes.


<PAGE>


           PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                             STATEMENTS OF INCOME
            For the years ended September 30, 1995, 1994 and 1993
                     (In thousands, except per Unit data)


                                                1995         1994         1993
                                                ----         ----         ----
Revenues:
   Rental revenues                          $     478    $    478       $ 478
   Interest income                                 14           5           5
                                          ----------- -----------    --------
                                                  492         483         483

Expenses:
   Interest expense                               166         159         249
   Management fees                                 17          17          17
   Depreciation                                   102         102         102
   General and administrative                     453         402         269
                                             --------   ---------      ------
                                                  738         680         637
                                             --------   ---------      ------

Operating loss                                   (246)       (197)       (154)

Partnership's share of ventures' income           510         442         332
                                             --------   ---------      ------

Net income                                    $   264    $    245       $ 178
                                              =======    ========       =====


Net income per Limited Partnership Unit         $12.14     $ 11.26     $  8.16
                                                ======     =======     =======

Cash distributions per Limited Partnership Unit $19.40     $ 19.40      $19.40
                                                ======     =======      ======


   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, 1995, 1994 and 1993
                                (In thousands)

                                          General     Limited
                                          Partner     Partners        Total


Balance at September 30, 1992              $ (55)       $ 6,192       $ 6,137

Cash distributions                            (4)          (418)         (422)

Net income                                     2            176           178
                                          ------        -------      --------

Balance at September 30, 1993                (57)         5,950         5,893

Cash distributions                            (4)          (418)         (422)

Net income                                     2            243           245
                                         -------       --------      --------

Balance at September 30, 1994                (59)         5,775         5,716

Cash distributions                            (4)          (418)         (422)

Net income                                     2            262           264
                                          ------       --------      --------

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
























                           See accompanying notes.


<PAGE>


           PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                           STATEMENTS   OF  CASH  FLOWS 
              For the years ended September 30, 1995, 1994 and 1993
               Increase (Decrease) in Cash and Cash Equivalents
                                (In thousands)


                                                1995        1994        1993
                                                ----        ----        ----
Cash flows from operating activities:
   Net income                              $      264    $    245    $    178
   Adjustments to reconcile net income
      to net cash used for operating activities:
      Depreciation                                102         102         102
      Amortization of deferred financing costs     21          11           -
      Partnership's share of ventures' income    (510)       (442)       (332)
      Changes in assets and liabilities:
         Interest and other receivables             -           -        (236)
         Accounts payable - affiliates              -         (25)         (5)
         Accrued expenses                          (2)         15         (24)
         Default interest payable                   -         (77)         38
                                         ------------  ----------   ---------
           Total adjustments                     (389)       (416)       (457)
           Net cash used for operating
                activities                       (125)       (171)       (279)

Cash flows from investing activities:
   Distributions from joint ventures              745         775         746

Cash flows from financing activities:
   Distributions to partners                     (422)       (422)       (422)
   Proceeds from issuance of mortgage
      note payable                                  -       1,722           -
   Principal payments on mortgage 
      note payable                               (118)     (1,741)        (31)
   Payment of loan fees and expenses                -        (106)          -
                                          -----------   --------- -----------
           Net cash used for 
             financing activities                (540)      (547)       (453)
                                             --------    ---------  ---------

Net increase in cash and cash equivalents          80          57          14

Cash and cash equivalents, 
     beginning of year                             216       159          145
                                             ---------    -------      --------

Cash and cash equivalents, end of year      $     296    $    216     $   159
                                            =========    ========     =======

Cash paid during the year for interest      $     145    $    226     $   210
                                            =========    ========     =======












                            See accompanying notes.


<PAGE>


           PAINEWEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
                         Note to Financial Statements


1.   Organization

        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.

2.   Summary of Significant Accounting Policies

        The accompanying financial statements include three investments in joint
     venture  partnerships  which  own  operating  properties.  The  Partnership
     accounts for its investments in joint venture partnerships using the equity
     method because the Partnership  does 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 paid (see Note 6).

        The Partnership  carries its operating  investment property at the lower
     of cost, reduced by accumulated depreciation,  or net realizable value. The
     net realizable value of a property held for long-term  investment  purposes
     is measured by the  recoverability of the Partnership's  investment through
     expected future cash flows on an undiscounted  basis,  which may exceed the
     property's  market value.  The net realizable  value of a property held for
     sale  approximates  its current market value. The  Partnership's  operating
     investment  property  is  considered  to be held for  long-term  investment
     purposes as of September 30, 1995 and 1994.  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  has reviewed FAS No. 121 "Accounting for the Impairment
    of Long-Lived  Assets and for Long-Lived Assets To Be Disposed Of," which is
    effective for financial  statements for years  beginning  after December 15,
    1995, and believes this new pronouncement will not have a material effect on
    the Partnership's financial statements.

       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.  Rental income under the master
    lease is recorded on the accrual basis as earned.

        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.

        No provision  for income taxes has been made as the  liability  for such
     taxes is that of the partners rather than the Partnership.

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.

        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 $17,000 for each of the three years ended  September 30, 1995, 1994
     and 1993. No incentive  management  fees were earned during the  three-year
     period ended  September  30, 1995.  Accounts  payable - affiliates  at both
     September  30, 1995 and 1994  consists of  management  fees  payable to the
     Adviser of $4,000.

        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.

        The General  Partner and its  affiliates are reimbursed for their direct
     expenses  relating to the  offering  of Units,  the  administration  of the
     Partnership and the acquisition  and operations of the  Partnership's  real
     property investments.

        Included  in general  and  administrative  expenses  for the years ended
     September  30,  1995,  1994  and  1993 is  $72,000,  $81,000  and  $90,000,
     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 $1,400,  $300 and $300  (included  in general and
     administrative  expenses) for managing the Partnership's cash assets during
     fiscal 1995, 1994 and 1993, respectively.


<PAGE>


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.  The shopping
    center was expanded to its current size of 116,000  square feet by September
    30, 1986. The aggregate cash invested by the Partnership  was  approximately
    $2,888,000  (including an acquisition  fee of $268,000 paid to the Adviser).
    The property was acquired subject to a nonrecourse wrap-around mortgage loan
    of approximately  $2,480,000.  On March 29, 1994, the Partnership refinanced
    the  existing  wraparound  mortgage  note  secured  by the  Northeast  Plaza
    Shopping  Center,  which had been in default for over two years,  with a new
    non-recourse  loan issued by the prior underlying first mortgage lender (see
    Note 7). The refinancing was negotiated in conjunction  with a restructuring
    of the master  lease that covers the  Partnership's  interest  in  Northeast
    Plaza. The master lessee was also the holder of the wraparound mortgage.  As
    part of the  refinancing,  the wrap  note  holder  applied  withheld  rental
    payments,  which totalled $661,000,  against the outstanding  balance of the
    wraparound  mortgage.  Rental  payments to the  Partnership  were reinstated
    beginning in April 1994.

        At the  time  of the  original  purchase  of the  shopping  center,  the
     Partnership  entered into a lease agreement with the seller of the property
     for the operation and management of the property.  The lease has an initial
     term  of 30  years  and two  5-year  renewal  options.  This  master  lease
     agreement has been classified as an operating lease and, therefore,  rental
     income is  reported  when  earned.  Under the terms of the  agreement,  the
     Partnership  receives annual basic rent of $435,000.  The Partnership  also
     receives contingent rent equal to the greater of (a) approximately 47.5% of
     annual increases to gross rental income over a specified base amount or (b)
     $43,000 annually.  The agreement provides specifically that the manager pay
     all costs of operating the shopping center and all annual taxes,  insurance
     and administrative expenses. The manager is further required to pay for all
     costs of repair and  replacement  required in connection  with the shopping
     center.  Minimum  lease  payments  under  the  initial  term  of the  lease
     agreement,  including the minimum amount of contingent rent, 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 and repayment of the Partnership's  original investment,
     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, 1995 and 1994, the  Partnership  had  investments in
     three joint  ventures.  These joint  ventures are  accounted  for using the
     equity method in the Partnership's financial statements. Condensed combined
     financial statements of these joint ventures follow.


<PAGE>


                      Condensed Combined Balance Sheets
                         September 30, 1995 and 1994
                                (in thousands)

                                    Assets
                                                       1995              1994
                                                       ----              ----

   Current assets                                   $  1,377        $   1,055
   Operating investment property, net                 17,510           17,772
   Other assets, net                                     263              110
                                                  ----------       ----------
                                                     $19,150          $18,937
                                                     =======          =======

                           Liabilities and Capital
   Current liabilities                              $  3,828        $   5,315
   Other liabilities                                     111              114
   Long-term mortgage debt                            13,456           11,537
   Partnership's share of combined capital accounts    1,251            1,526
   Co-venturers' share of combined capital accounts      504              445
                                                  ----------        ----------
                                                     $19,150          $18,937
                                                     =======          =======

                  Reconciliation of Partnership's Investment
                                                        1995            1994

   Partnership's share of capital, as shown above       $ 1,251       $ 1,526
   Partnership's share of current
     liabilities and long-term debt                      173               33
   Excess basis due to investment in ventures, net (1)  1,606           1,706
                                                      -------        --------
   Investments in joint ventures, at equity          $ 3,030          $ 3,265
                                                     =======          =======

   (1)At September 30, 1995 and 1994, the Partnership's  investment  exceeds its
      share of the joint venture  partnerships'  capital  accounts by $1,606,000
      and  $1,706,000,  respectively.  This  amount,  which  relates  to certain
      expenses  incurred by the  Partnership  in connection  with  acquiring its
      joint venture  investments,  is being amortized over the estimated  useful
      life of the investment properties.

                   Condensed  Combined Summary of Operations
              For the years ended September 30, 1995, 1994 and 1993
                                (in thousands)
                                                1995        1994        1993
                                                ----        ----        ----

   Rental revenues and expense recoveries     $ 6,186     $ 6,030     $ 5,885
   Interest income                                 63          27          28
                                           ----------  ----------  ----------
                                                6,249       6,057       5,913

   Property operating expenses                  2,729       2,524       2,514
   Depreciation and amortization                  822         908         895
   Interest expense                             1,737       1,705       1,740
                                             --------     -------    --------
                                               5,288       5,137        5,149
   Net income                                $    961   $     920    $    764
                                             ========   =========    ========

   Net income:
     Partnership's share of combined income   $    610  $     542    $    432
     Co-venturers' share of combined income       351         378         332
                                            ---------  ----------   ---------
                                             $    961   $     920    $    764
                                             ========   =========    ========

               Reconciliation of Partnership's Share of Income

                                                 1995       1994         1993
                                                 ----       ----         ----

   Partnership's share of income, 
     as shown above                            $  610    $    542     $   432
   Amortization of excess basis                  (100)       (100)       (100)
                                               ------    --------    ---------
   Partnership's share of ventures' income     $  510     $   442     $   332
                                               ======     =======     =======

        Investments  in joint  ventures,  at equity,  is the  Partnership's  net
   investment  in the joint  venture  partnerships.  These  joint  ventures  are
   subject  to  partnership  agreements  which  determine  the  distribution  of
   available  funds,  the disposition of the ventures'  assets and the rights of
   the partners,  regardless of the Partnership's  percentage ownership interest
   in the venture.  Substantially all of the Partnership's  investments in these
   joint ventures are restricted as to distributions.

       Investments  in  joint  ventures,  at  equity,  on the  balance  sheet is
    comprised of the following joint venture investments:
                                                       1995           1994

        Camelot Associates                          $     103    $    182
        Boyer Lubbock Associates                           33         (16)
        Pine Trail Partnership                          2,894       3,099
         Investments in joint ventures, at equity      $3,030     $ 3,265

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

                                               1995        1994        1993
                                               ----        ----        ----

        Camelot Associates                  $   274    $   284     $   262
        Boyer Lubbock Associates                111         181        174
        Pine Trail Partnership                  360         310        310
                                            -------    --------       ----
                    Total                  $  745     $   775      $   746
                                             ======    =======        ====
A  description  of the  joint  ventures'  properties  and the terms of the joint
venture agreements are summarized below.

a) Camelot Associates

     On June 29, 1981 the Partnership acquired an interest in Camelot Associates
   ("Camelot")  an Ohio  limited  partnership  which owns and  operates  Camelot
   Apartments, a 492-unit apartment complex in Fairfield,  Ohio. The Partnership
   is a general partner in the joint venture. The Partnership's co-venturers are
   Chelsea Moore Corporation and certain individuals.

     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's  interest  was  acquired  subject  to  two
   institutional  nonrecourse  first  mortgages  with  balances,  at the time of
   closing,  totalling  approximately  $6,128,000.  One of these first mortgages
   with a balance of $2,298,000 was originally scheduled to mature on January 1,
   1996.  Subsequent  to  year-end,  the venture  obtained an  extension  of the
   maturity  date from the lender to July 1, 1996 in return for an extension fee
   of $5,600. The venture's other first mortgage loan had a principal balance of
   $2,000,000  as of  September  30, 1995 and is  scheduled to mature on July 1,
   1997. At the present time, the venture is negotiating with several  different
   potential  lending  sources to refinance  the mortgage  loan which matures in
   fiscal 1996. The principal balance of this mortgage loan represents less than
   20% of the total estimated market value of the venture's operating investment
   property. In light of the venture's low leverage level, the current favorable
   interest rate environment and the continued strong supply of capital for real
   estate lending,  management  expects to be able to secure a loan to refinance
   this  maturing   obligation.   In  addition  to   investigating   refinancing
   alternatives,  the venture partners have engaged in preliminary  negotiations
   regarding a possible sale of the Partnership's  interest in the joint venture
   to the  co-venturers.  There are no assurances that any such sale transaction
   will be completed.  The proceeds of any such transaction would  substantially
   exceed the present equity method carrying value of the Partnership's interest
   in Camelot Associates. As a result, the Partnership would expect to recognize
   a gain on the sale of its venture interest.

     The joint venture  agreement  provides that from  available  cash flow, the
   Partnership  will receive an annual  preferred base return payable monthly of
   $252,000.  The  co-venturers  will  then be  entitled  to  receive  an annual
   non-cumulative,  subordinated base return,  payable annually of $148,000. The
   next $100,000 in excess of such base returns in any year will be  distributed
   60% to the  Partnership and 40% to the  co-venturers,  and any remaining cash
   flow  will  be  distributed  to  the  Partnership  and  the  co-venturers  in
   accordance with their ownership interests in the venture. During fiscal 1995,
   1994 and 1993, the  Partnership  was due to receive all of its preferred base
   return.  During fiscal 1994 and 1993, the Partnership was also due to receive
   an additional $22,000 and $33,000,  respectively,  in excess of its preferred
   base return. The co-venturers  received  $112,000,  $163,000 and $170,000 for
   fiscal 1995, 1994 and 1993, respectively.

     Upon sale or refinancing,  the Partnership  will receive an amount equal to
   the  Partnership's  gross  investment as a first priority in distributions of
   net sale or refinancing  proceeds after repayment of long-term debt. The next
   $2,700,000 of such  proceeds will be  distributed  to the  co-venturers.  Any
   remaining   proceeds  will  be  distributed  to  the   Partnership   and  the
   co-venturers in accordance with their ownership interests in the venture.

     Taxable income and tax loss from  operations in each year will be 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  will  be  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  entered  into a property  management  contract  with an
   affiliate of the  co-venturers.  The initial term of the contract  expires on
   July 1, 1997. The contract may be cancelled,  at the Partnership's option, at
   any  time,  upon the  occurrence  of  certain  events.  For the  years  ended
   September 30, 1995,  1994 and 1993,  the  management  company  earned fees of
   $103,000, $98,000 and $100,000, 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 143,800 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. Revenue from a major tenant
   of Central Plaza accounted for 28% of the venture's total revenues for fiscal
   1995.

     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,  bears interest at a rate of 10% per annum.
   Monthly payments of principal and interest of  approximately  $37,000 are due
   until maturity in January 2002.

     The joint venture  agreement  between the  Partnership  and the co-venturer
   provides that from available cash flow the Partnership will receive an annual
   preference,  payable monthly,  of $171,000,  and the co-venturer will receive
   the remaining distributable cash up to a maximum of $120,000. Additional cash
   flow will be  distributed  equally to the  Partnership  and the  co-venturer.
   During fiscal 1995, 1994 and 1993 the Partnership was due to receive its full
   preferred base return.  The co-venturer  received its base return of $120,000
   in 1995,  1994 and 1993. In addition,  for fiscal 1995,  1994 and 1993 excess
   cash flow of $120,000, $12,000 and $22,000, respectively, was available to be
   distributed equally between the Partnership and the co-venturer.

     Taxable income and tax loss before  depreciation are generally 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 is
   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.  In the  event  of no  available  cash  flow,  100% of
   remaining profit or loss is allocated to the Partnership.  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.

     Upon sale or refinancing,  the Partnership  will receive  $2,000,000,  plus
   certain  closing  costs,  as a first  priority  in  distributions  of sale or
   refinancing  proceeds  after the  repayment of the  remaining  balance on the
   first mortgage.  The next $1,625,000 will be distributed to the  co-venturer.
   Any remaining proceeds will be distributed equally to the Partnership and the
   co-venturer.

     The joint venture entered into a management  agreement with an affiliate of
   the co-venturer.  The contract may be cancelled at the Partnership's  option,
   at any time upon the  occurrence  of  certain  events.  For the  years  ended
   September 30, 1995,  1994 and 1993,  the  management  company  earned fees of
   $37,000,  $38,000 and $37,000,  respectively.  In addition,  during the years
   ended September 30, 1995 and 1993, lease commissions  aggregating  $7,000 and
   $13,000, respectively, were also paid to the affiliate of the co-venturer. No
   lease commissions were paid for the year ended September 30, 1994.

c) 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 283,000  square  foot  shopping  center in West Palm Beach,
   Florida.  The  Partnership  is a general  partner in the joint  venture.  The
   Partnership's co-venturer is 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 is subject to an institutional nonrecourse first mortgage which had a
   balance of approximately  $8,140,000 at the time of the closing. The mortgage
   loan has a  scheduled  maturity  date of  January  1,  2001.  The Pine  Trail
   Shopping Center has five out-parcels on the site, covering  approximately six
   acres,  which  have been  leased by the Pine  Trail  Partnership  from  third
   parties  under five  separate  ground leases since the inception of the joint
   venture. During the third quarter of fiscal 1995, the joint venture completed
   the acquisition of one of these  out-parcels,  containing 60,248 square feet,
   for the purchase  price of $350,000.  This  purchase was 100% financed with a
   non-recourse  first  mortgage loan secured by the lease of the  free-standing
   restaurant  located on the  out-parcel.  The loan bears interest at the prime
   rate plus  one-percent and requires monthly  principal and interest  payments
   over a 5-year term.

     The joint venture  agreement  provides that the Partnership  will receive a
   noncumulative  annual cash  distribution,  payable  quarterly,  from net cash
   flow.  The  first  $515,000  of net cash  flow  shall be  distributed  to the
   Partnership,  and the next $235,788 of net cash flow shall be  distributed to
   the co-venturer.  Any excess cash flow shall be allocated equally between the
   Partners.  During  fiscal  1995,  1994 and 1993 the property did not generate
   sufficient  cash flow for the  Partnership  to receive its minimum  preferred
   distribution of $515,000.  Based on the  distributable  cash generated by the
   venture's  operations,  the  Partnership  was  entitled to receive  $402,000,
   $343,000  and  $314,000 for fiscal  1995,  1994 and 1993,  respectively.  The
   co-venturer  was  not  entitled  to  receive  any  distributions  during  the
   three-year period ended September 30, 1995.

     Upon sale or refinancing of the encumbered  property,  the Partnership will
   receive  $6,150,000  as a first  priority  in  distributions  of net  sale or
   refinancing   proceeds.   The  next  $4,156,000  of  such  proceeds  will  be
   distributed to the co-venturer.  Thereafter,  any remaining  proceeds will be
   distributed  50%  to  the  Partnership  and  50%  to  the  co-venturer.   The
   co-venturer's  distributable share of sale or refinancing proceeds is subject
   to reduction if certain specified  percentage  rental revenue  objectives are
   not achieved. Upon refinancing of the unencumbered property, the distribution
   will be shared equally.

     Taxable income and tax loss from operations in each year shall be 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  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.  For the years ended  September 30,
   1995, 1994 and 1993, the property manager earned fees of $76,000, $71,000 and
   $70,000,  respectively.  In  addition,  the  property  manager is entitled to
   leasing commissions at prevailing market rates. Leasing commissions earned by
   the  property  manager were  $41,000,  $4,000 and $20,000 for the years ended
   September 30, 1995, 1994 and 1993, 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 bears interest at
   9%  annually,  matures  on  January  1, 2000 and is  subordinated  to a first
   mortgage. Interest and principal payments on the note are payable only to the
   extent of net cash flow from the  properties  sold,  as  defined  in the sale
   documents.  Any interest not received will 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.  To date,  the  Partnership  has not  received  any  interest
   payments. Per the terms of the note agreement, accrued interest receivable as
   of  September  30,  1995  and  1994  would be  approximately  $5,283,000  and
   $4,562,000, respectively. Since the properties continue to generate operating
   deficits and the Partnership's note receivable is subordinated to other first
   mortgage debt, there is significant  uncertainty as to the  collectibility of
   both the  principal  and accrued  interest as of  September  30,  1995.  As a
   result,  the  portion  of the  remaining  gain  to be  recognized,  which  is
   represented  by the note  and  accrued  interest,  has  been  deferred  until
   realized in cash.

7.   Mortgage Note Payable

      The mortgage note payable at September 30, 1995 and 1994 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 beginning in May 1994. The loan may
    be prepaid at anytime without  penalty.  Closing costs of $106,000 were paid
    out of the proceeds of the  refinancing.  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.

      Previously,  the mortgage  secured by Northeast  Plaza had  consisted of a
    9.3%  nonrecourse  wraparound  mortgage  note.  The mortgage  note was to be
    payable  in monthly  installments  of  principal  and  interest  aggregating
    $241,000 per year.  This note wrapped  around an underlying  first  mortgage
    loan.  The entire  principal  balance,  together  with  outstanding  accrued
    interest,  was  originally due and payable on September 30, 1991. Due to the
    default on the wrap  mortgage,  beginning  October 1, 1991 interest began to
    accrue on the  outstanding  balance of the wraparound  mortgage at a default
    rate of 11% under the terms of the  original  loan  agreement.  Such default
    interest  amounted  to  $19,000  and  $38,000  for  fiscal  1994  and  1993,
    respectively.  Due to differences  between the Partnership and the mortgagee
    in the  methods  used to apply the  withheld  rental  payments  against  the
    outstanding mortgage obligation,  the final pay-off amount on the wraparound
    mortgage  loan was less than the  carrying  balance of the loan plus accrued
    interest,  net of the rent  receivable,  on the  Partnership's  books.  As a
    result,  the difference of $51,000 was recognized as a reduction of interest
    expense in fiscal 1994.

      Scheduled  maturities  of long-term  debt for each of the next four fiscal
    years are as follows (in thousands):

                  1996            $    129
                  1997                 141
                  1998                 155
                  1999               1,124
                                  --------
                                   $ 1,549

8.   Subsequent Event


     On November 15, 1995, the Partnership  distributed  $105,000 to the Limited
   Partners and $1,000 to the General  Partner for the quarter  ended  September
   30, 1995.

9.  Contingencies

      Management  believes that the  Partnership's  efforts to sell or refinance
    the Northeast Plaza property have been 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 Regulation,  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.

      As a result of the  contamination  of the groundwater at Northeast  Plaza,
    the  Partnership  has incurred  certain  damages,  primarily  related to the
    inability to sell the  property and to delays in the process of  refinancing
    the  property's   mortgage   indebtedness.   The  Partnership  has  incurred
    significant  out-of-pocket  and legal expenses in connection  with such sale
    and refinancing  efforts.  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 these 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 Oil
    Corporation  was  successful in obtaining a Partial  Summary  Judgment which
    removed  the  case  from  the  Federal  Court  system.   Subsequently,   the
    Partnership  has filed an action in the  Florida  State Court  system.  This
    action  is for  substantially  all of  the  same  claims  and  utilizes  the
    substantial  discovery and trial  preparation work already completed for the
    Federal case. The Partnership is seeking  judgment against Mobil which would
    award the Partnership compensatory damages,  out-of-pocket costs, attorneys'
    fees and such  other  relief  as the  court may deem  proper.  The  eventual
    outcome  of these  legal  proceedings  cannot  be  predicted  at this  time.
    Accordingly,  the  out-of-pocket  costs,  legal  fees and  related  expenses
    related  to  this   situation   have  been   expensed  as  incurred  on  the
    Partnership's  income  statements  and no estimate of any  recoveries  which
    could result from this litigation have been recorded.

      The Partnership is involved in certain legal actions.  The General Partner
    believes these actions will be resolved  without  material adverse effect on
    the Partnership's financial statements, taken as a whole.



<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, 1995
                                 (in thousands)

<CAPTION>

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

Shopping Center
Sarasota, Florida  $ 1,549   $950   $1,930   $2,158     $950    $4,088   $5,038     $1,287     1964 - 19789/25/81 40
                   =======   ====   ======   ======     ====    ======   ======     ======
years

Notes:

(A) The  aggregate  cost of real estate owned at September  30, 1995 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:

                                                   1995            1994          1993
                                                   ----            ----          ----

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                     $ 1,185       $ 1,083      $    981
Depreciation expense                                 102           102           102
                                                --------     ---------     ---------
Balance at end of year                           $ 1,287       $ 1,185       $ 1,083
                                                 =======       =======       =======
</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, 1995 and 1994, and the related  combined  statements of income and
changes in venturers'  capital and cash flows for each of the three years in the
period  ended  September  30,  1995.  Our audits  also  included  the  financial
statement schedule listed in the Index at Item 14(a). These financial statements
and  schedule  are  the  responsibility  of the  Partnership's  management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule  based on our audits.  We did not audit the  financial  statements  and
schedule  of Camelot  Associates,  which  statements  reflect 15% and 16% of the
combined assets of the Combined Joint Ventures of Paine Webber Income Properties
Three Limited Partnership as of September 30, 1995 and 1994,  respectively,  and
44%, 43% and 43% of the  combined  revenues of the  Combined  Joint  Ventures of
Paine Webber Income  Properties  Three Limited  Partnership  for the years ended
September 30, 1995, 1994 and 1993,  respectively.  Those statements and schedule
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 the
Partnership's  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, 1995
and 1994 and the combined  results of their  operations and their cash flows for
each of the three years in the period  ended  September  30, 1995 in  conformity
with generally accepted accounting  principles.  Also, in our opinion,  based on
our audits and the report of other  auditors,  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
November 16, 1995


<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 September 30, 1995 and 1994, and the related  statements
of income,  venturers' deficit and cash flows for each of the three 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 September 30, 1995 and 1994 and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1995 in conformity with generally accepted accounting principles.





/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
November 16, 1995





<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                             COMBINED BALANCE SHEETS
                           September 30, 1995 and 1994
                                 (In thousands)

                                     Assets
                                    1995 1994
Current assets:
   Cash and cash equivalents                        $    800         $    449
   Escrowed funds, principally for 
     payment of real estate taxes                        451              332
   Accounts receivable                                    91              140
   Accounts receivable due from partners                   -               90
   Prepaid expenses                                       35               34
   Capital improvement reserve                             -               10
                                                 -----------        ---------
          Total current assets                         1,377            1,055

Operating investment properties:
   Land                                                4,392            4,025
   Buildings, improvements and equipment              27,400           27,223
                                                    --------         --------
                                                      31,792           31,248
   Less accumulated depreciation                     (14,282)         (13,476)
          Net operating investment properties         17,510           17,772

Deferred expenses, net of accumulated amortization
  of $185 ($140 in 1994)                                 263              110
                                                  ----------       ----------
                                                     $19,150          $18,937
                                                     =======          =======

                       Liabilities and Venturers' Capital
Current liabilities:
   Accounts payable                                  $   178       $       83
   Distributions payable to venturers                    436              360
   Accrued interest                                      158              155
   Accrued real estate taxes                             458              424
   Other accrued liabilities                              28               32
   Prepaid rent                                           18               19
   Long-term debt - current portion                    2,552            4,242
                                                    --------         --------
         Total current liabilities                     3,828            5,315

Notes payable                                             14               14

Tenant security deposits                                  97              100

Long-term debt                                        13,456           11,537

Commitments (Note 5)

Venturers' capital                                     1,755            1,971
                                                   ---------        ---------
                                                     $19,150          $18,937
                                                     =======          =======



                             See accompanying notes.


<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

         COMBINED STATEMENTS OF INCOME AND CHANGES IN VENTURERS' CAPITAL

              For the years ended September 30, 1995, 1994 and 1993
                                 (In thousands)


                                                1995       1994        1993
                                                ----       ----        ----
Revenues:
   Rental income                              $ 5,479     $ 5,306      $5,205
   Reimbursement from tenants                     707         724         680
   Interest income and other                       63          27          28
                                            ---------  ---------- -----------
                                                6,249       6,057       5,913

Expenses:
   Interest expense                             1,737       1,705       1,740
   Depreciation and amortization                  822         908         895
   Real estate taxes                              632         586         555
   Management fees                                215         206         207
   Ground rent                                    147         154         154
   Repairs and maintenance                        674         569         628
   Insurance                                       89          72          71
   Utilities                                      257         266         240
   General and administrative                     266         291         215
   Other                                          449         380         409
   Bad debt expense                                 -           -          35
                                         ------------------------  ----------
                                                5,288       5,137       5,149
                                            ---------    --------    --------

Net income                                        961         920         764

Distributions to venturers                     (1,177)     (1,083)     (1,080)

Contributions from venturers                        -          75          30

Venturers' capital, beginning of year           1,971       2,059       2,345
                                             --------    --------   ---------

Venturers' capital, end of year                $1,755     $ 1,971     $ 2,059
                                               ======     =======     =======















                             See accompanying notes.


<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                        COMBINED STATEMENTS OF CASH FLOWS
              For the years ended September 30, 1995, 1994 and 1993
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)

                                                1995        1994        1993
                                                ----        ----        ----
Cash flows from operating activities:
   Net income                                $    961   $     920     $   764
   Adjustments to reconcile net income to
     net cash provided by operating activities:
      Depreciation and amortization               822         908         895
      Amortization of deferred financing costs     29           -           -
      Bad debt expense                              -           -          44
      Changes in assets and liabilities:
         Escrowed funds                          (119)        (45)         38
         Accounts receivable                       49         (40)         17
         Prepaid expenses                          (1)         (1)          1
         Capital improvement reserve               10         (10)          -
         Deferred expenses                       (198)        (22)        (72)
         Other assets                               -           3           -
         Accounts payable                          95         (34)          7
         Accrued interest                           3          (4)          2
         Accrued real estate taxes                 34          11          (1)
         Other accrued liabilities                 (4)         14           4
         Prepaid rent                              (1)          9         (15)
         Tenant security deposits                  (3)         (6)         (6)
                                         ------------   ---------  -----------
            Total adjustments                     716         783         914
                                            ---------     -------    --------
            Net cash provided by
               operating activities             1,677       1,703       1,678

Cash flows from investing activities:
   Additions to operating investment properties  (544)       (342)       (314)

Cash flows from financing activities:
   Capital contributions                            -          15           -
   Principal payments on long-term debt        (4,321)       (488)       (442)
   Distributions to partners                   (1,011)       (946)       (965)
   Proceeds from refinancing of debt            4,200           -           -
   Proceeds of long-term debt                     350           -           -
                                              ------- -----------------------
            Net cash used for
               financing activities              (782)     (1,419)     (1,407)
                                             --------     -------     --------

Net increase (decrease) in cash
 and cash equivalents                             351       (58)        (43)

Cash and cash equivalents, beginning of year      449         507         550
                                             --------   ---------   ---------

Cash and cash equivalents, end of year       $    800    $    449    $    507
                                             ========    ========    ========

Cash paid during the year for interest        $ 1,734     $ 1,709     $ 1,739
                                              =======     =======     =======

                             See accompanying notes.


<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
                     NOTES TO COMBINED FINANCIAL STATEMENTS

1. Summary of significant accounting policies

   Organization

     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,   an  Ohio  limited
partnership; Boyer Lubbock Associates, a Utah limited partnership and Pine Trail
Partnership,  a Florida  general  partnership.  The financial  statements of the
Combined   Joint   Ventures  are  presented  in  combined   form,   rather  than
individually,  because the nature of the  relationship  between the co-venturers
and  Paine  Webber  Income  Properties  Three  Limited  Partnership  (PWIP3)  is
substantially the same for 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

  Basis of presentation

     Generally, the records of the combined joint ventures are 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 are recorded at cost less accumulated
depreciation.  Acquisition  fees have been  capitalized  and are included in the
cost of the operating investment property. Depreciation expense is computed on a
straight-line   basis  over  the  estimated   useful  lives  of  the  buildings,
improvements and equipment, generally five to forty years.

     The Combined Joint Ventures have reviewed FAS No. 121  "Accounting  for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets To Be Disposed Of,"
which is effective for financial  statements for years  beginning after December
15, 1995, and believes this new pronouncement will not have a material effect on
the financial statements of the Combined Joint Ventures.

  Deferred expenses

     Deferred  expenses consist  primarily of loan fees and leasing  commissions
which are being amortized over the lives of the related loans and related leases
on the straight-line method.

  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.


<PAGE>


  Cash and cash equivalents

     For  purposes of the  statement  of cash flows,  cash and cash  equivalents
include 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 is to be
deposited  into this  account.  These  deposits  have not been made on a monthly
basis but have  been  made  periodically  throughout  the year in the  aggregate
required amounts.

2.   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 owns and operates  Camelot East and the Villas of Camelot
Apartments, a 492-unit apartment complex, located in Fairfield, Ohio. As further
described  in Note 4, the  venture had a first  mortgage  loan with a balance of
$2,298,000  which was  scheduled  to mature on January 1,  1996.  Subsequent  to
year-end, the venture obtained an extension of the maturity date from the lender
to July 1, 1996. At the present time,  the venture is  negotiating  with several
different potential lenders to refinance this mortgage loan.

  b. Boyer Lubbock Associates

     The joint  venture owns and  operates  Central  Plaza  Shopping  Center,  a
143,800 square foot shopping center, located in Lubbock, Texas.

  c. Pine Trail Partnership

     The joint venture owns and operates Pine Trail Shopping  Center,  a 283,000
square foot shopping center, located in West Palm Beach, Florida.

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

  Allocations of net income and loss

     The joint venture agreements  generally provide that taxable income and tax
loss from  operations are 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 are  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
shall be allocated as specified in the joint venture agreements.

  Distributions

     The joint venture  agreements  generally provide that distributions will be
paid  first to PWIP3  from net cash flow  monthly or  quarterly,  equivalent  to
between  $171,000  and  $515,000  annually  as  specified  in the joint  venture
agreements. After payment of certain amounts to the co-venturers,  any remaining
net cash flow is 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  shall be made in  accordance  with  formulas  provided  in the joint
venture agreements.

3.   Related party transactions

     The  Combined  Joint   Ventures  have  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  are equal to 4% of gross  receipts,  as  defined  in the  agreements.
Management  fees  totalling  $215,000,   $206,000  and  $207,000  were  paid  to
affiliates of the  co-venturers for the years ended September 30, 1995, 1994 and
1993, respectively.

     Certain of the joint ventures pay leasing  commissions to affiliates of the
co-venturers. Leasing commissions paid to affiliates amounted to $48,000, $4,000
and $33,000 in fiscal 1995, 1994 and 1993, respectively.

4.   Long-term debt

     Long-term debt at September 30, 1995 and 1994 consists of the following (in
thousands):

                                                          1995          1994
                                                          ----          ----

      9.375% nonrecourse mortgage loan secured
      by Central Plaza Shopping Center, payable
      in monthly installments of $40 including 
      interest,  with a final payment
      of the remaining principal due January 1, 1995.  $      -       $ 3,888

      10% nonrecourse  mortgage loan secured by 
      Central Plaza Shopping Center,
      payable in  monthly  installments  of $37,  
      including  interest,  with a
      final payment of $4,010 due January 2, 2002.          4,187           -

      12%  unsecured  note  payable  to  the   
      co-venturer  of  Boyer  Lubbock
      Associates,  payable in monthly  
      installments  of $5 including  interest
      with a final payment of $1 due on 
      October 1, 1995.                                       -            63

      9.25%  mortgage  note,  due  July  1,  1997  
      with  monthly  payments  of
      principal  and  interest  of  $21  secured  
      by  the  Camelot  Apartments
      property.                                             2,000       2,064


<PAGE>



      9.0% mortgage note, due January 1, 1996 
      with monthly payments of principal
      and interest of $30 secured by the Camelot
      Apartments property.  See discussion below.           2,298       2,453

      12.25% mortgage note,  payable $85 per month  
      including  interest with a
      payment  of $5,874  due  January  1,  2001,  
      secured  by the Pine  Trail
      Shopping Center                                       7,175       7,311


      10% mortgage  note,  payable $3 per month,  
      including  interest,  with a
      payment  of $330  due in  2000,  secured  
      by 1.4  acres  of land and the
      operating  investment  thereon  owned by 
      the Pine Trail  joint  venture.
      See discussion below.                                   348            -
                                                           16,008      15,779
      Less amounts due within one year                     (2,552)     (4,242)
                                                        ---------   ----------
                                                          $13,456     $11,537


    Scheduled  maturities of long-term  debt for each of the next five years and
thereafter are as follows (in thousands):

                             1996                  $  2,552
                             1997                     2,132
                             1998                       231
                             1999                       254
                             2000                       630
                             Thereafter              10,209
                                                   --------
                                                    $16,008

    One of the first  mortgage loans secured by the Camelot  Apartments,  with a
balance of  $2,298,000  as of  September  30, 1995,  was  scheduled to mature on
January 1, 1996.  Subsequent to year-end,  the venture  obtained an extension of
the maturity date from the lender to July 1, 1996 in return for an extension fee
of $5,600.  At the  present  time,  the  venture  is  negotiating  with  several
different  potential  lending  sources to  refinance  this  mortgage  loan.  The
principal  balance of this mortgage loan  represents  less than 20% of the total
estimated market value of the venture's operating investment property.  In light
of the  venture's  low  leverage  level,  the current  favorable  interest  rate
environment and the continued  strong supply of capital for real estate lending,
management  expects  to be able to  secure  a loan to  refinance  this  maturing
obligation. In addition to investigating  refinancing alternatives,  the venture
partners have engaged in preliminary  negotiations  regarding a possible sale of
PWIP3's  interest  in the  joint  venture  to  the  co-venturers.  There  are no
assurances that any such sale transaction will be completed.

    The Pine Trail Shopping  Center has five  out-parcels on the site,  covering
approximately  six acres,  which have been leased by the Pine Trail  Partnership
from third parties under five separate  ground leases since the inception of the
joint  venture.  During the third  quarter  of fiscal  1995,  the joint  venture
completed the acquisition of one of these out-parcels,  containing 60,248 square
feet, for the purchase price of $350,000. This purchase was 100% financed with a
non-recourse  first  mortgage  loan  secured  by the lease of the  free-standing
restaurant located on the out-parcel.  The loan bears interest at the prime rate
plus  one-percent and requires  monthly  principal and interest  payments over a
5-year term.

    In  accordance   with  the  mortgage  note   agreement  of  the  Pine  Trail
Partnership,  the joint venture is required to escrow certain insurance premiums
and real estate taxes totalling  $216,000 and $228,000 at September 30, 1995 and
1994, respectively.

5.  Leases

     The  Combined  Joint  Ventures  derive a  portion  of their  revenues  from
noncancellable  shopping  center  operating  leases.  The initial  terms of such
leases  range from five to  twenty-five  years with the  majority  of the leases
containing renewal options. Revenue from a major tenant of the property owned by
Boyer Lubbock  Associates  accounted for 28% of the venture's total revenues for
the year ended September 30, 1995.

     Minimum  future  rentals  due to be  received  on  existing  noncancellable
operating leases by the Pine Trail Partnership and Boyer Lubbock  Associates for
the years ending September 30 and thereafter are as follows (in thousands):

                             1996         $   2,645
                             1997             2,412
                             1998             2,345
                             1999             2,175
                             2000             1,986
                             Thereafter       7,836
                                         ----------
                               Total       $ 19,399

     The above amounts do not include contingent rentals based on cost of living
increases and rentals which may be received under certain leases on the basis of
a percentage of sales in excess of stipulated minimums.

     The operating  investment property of the Pine Trail Partnership is subject
to ground  leases on the acreage not  encumbered  by long-term  debt (Note 4) or
owned in fee. The leases contain various  provisions with  stipulations for cost
of living increases and contingent payments based on sales and purchase options.
The lease terms range from 35 to 99 years with certain renewal options.

     Minimum future rentals payable on existing noncancellable ground leases are
as follows (in thousands):

                             1996              $112
                             1997               112
                             1998               112
                             1999               112
                             2000               112
                             Thereafter       5,756
                               Total         $6,316


<PAGE>


------------------------------------------------------------------

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<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
                                                  COMBINED JOINT VENTURES OF
                                   PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
                                     Schedule of Real Estate and Accumulated Depreciation

                               September 30, 1995
                                 (In thousands)

<CAPTION>

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

COMBINED JOINT VENTURES:

Apartment 
Complex
Fairfield, OH   $ 4,298  $  498  $ 6,685     $ 566     $  498   $ 7,251    $ 7,749  $ 5,154         various   6/29/81   various

Shopping Center   4,187     966    4,573       871        966     5,444      6,410    3,894         1978-80   6/30/81  15-31.5 yrs.
Lubbock, TX

Shopping Center
West Palm 
Beach, FL        7,523    2,561  13,306      1,766      2,928    14,705    7,633    5,234         1980-82   11/12/81  3-31.5 yrs.  

                $16,008    $4,025  $24,564  $3,203   $4,392   $27,400    $31,792  $14,282
                =======    ======  =======  ======   ======   =======    =======  =======

Notes:
(A) The  aggregate  cost of real estate owned at September  30, 1995 for Federal income tax  purposes is 
     approximately  $28,725,000.  
(B) See Note 4 to Combined Financial  Statements for a description of the terms of the debt encumbering the properties.
(C) Reconciliation of real estate owned:
                                                   1995             1994          1993
                                                   ----             ----          ----

Balance at beginning of year                     $31,248           $30,906       $30,739
Increase due to additions                            544               342           167
                                              ----------        ----------    ----------
Balance at end of year                           $31,792           $31,248       $30,906
                                                 =======           =======       =======

(D) Reconciliation of accumulated depreciation:

Balance at beginning of year                     $13,476           $12,585       $11,710
Depreciation expense                                 806               891           875
                                              ----------        ----------     ---------
Balance at end of year                           $14,282           $13,476       $12,585
                                                 =======           =======       =======
</TABLE>