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, 2000

                                       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

Current Report on Form 8-K of                                  Part IV
registrant dated October 12, 2000



<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                                 2000 FORM 10-K

                                TABLE OF CONTENTS

Part   I                                                                 Page
--------                                                                 ----

Item  1           Business                                               I-1

Item  2           Properties                                             I-4

Item  3           Legal Proceedings                                      I-4

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

Part  II
--------

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

Item  6           Selected Financial Data                                II-1

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

Item  7A          Market Risk Disclosures                                II-5


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-2

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

Item 13           Certain Relationships and Related Transactions         III-3

Part  IV
--------

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

Signatures                                                               IV-2

Index to Exhibits                                                        IV-3

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


<PAGE>




                                     PART I
                                     ------

Item 1.  Business
-----------------

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

      The  Partnership  originally  invested  the  net  proceeds  of the  public
offering,  either  directly  or  through  joint  venture  partnerships,  in  six
operating properties. As discussed below, through September 30, 2000 four of the
operating  properties  had been sold, and the  Partnership  sold its interest in
another  joint  venture to its  co-venture  partner  during  fiscal 1997.  As of
September 30, 2000, the Partnership owned directly the property set forth in the
following table:

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

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


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

     Subsequent  to year end,  on October 12,  2000,  the  Partnership  sold the
wholly-owned  Northeast  Plaza Shopping Center to an unrelated third party for a
gross sale price of $3,712,500.  After deducting  closing costs of $32,000,  net
property  proration  adjustments  totalling  $126,000 and the  prepayment of the
first   mortgage  debt  and  accrued   interest   secured  by  the  property  of
approximately   $758,000,   the  Partnership   received  net  sale  proceeds  of
approximately $2,796,000. The Partnership was entitled to 100% of these net sale
proceeds  because the master  lease  agreement  which had covered the  Northeast
Plaza  property  was  terminated  prior to the sale.  As of August 1, 2000,  the
master lease agreement was terminated in return for the Partnership's release of
the master lessee from any liability regarding the known environmental issues at
the property.  As discussed  further below, as part of the October 12, 2000 sale
transaction the Partnership was indemnified by the buyer against claims arising
from the known  environmental  problems  at the  Northeast  Plaza  property.  As
previously  reported,  the  Partnership  had  been  focusing  on a  sale  of the
Northeast Plaza Shopping  Center,  its remaining real estate  investment,  and a
liquidation of the  Partnership.  With the sale of the Northeast  Plaza property
completed,  the Partnership is currently proceeding with an orderly liquidation.
On November  15,  2000,  a  Liquidating  Distribution,  which  included  the net
proceeds  of  the  Northeast  Plaza   transaction,   along  with  the  remaining
Partnership reserves after the payment of all liquidation-related  expenses, was
paid to  unitholders  of record as of the October 12, 2000 sale date. The formal
liquidation of the  Partnership  will be completed  prior to the end of calendar
year 2000.

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

      The Partnership's original investment objectives were to:

(1)  provide the Limited Partners with cash distributions  which, to some
     extent, would 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, 2000, the Limited Partners had received  cumulative
cash distributions totalling approximately $39,455,000,  or approximately $1,858
per original $1,000  investment for the  Partnership's  earliest  investors.  In
addition,  as noted  above,  on November 15, 2000 the  Partnership  made a Final
Distribution  of  approximately  $2,451,000,  or  $113.74  per  original  $1,000
investment,  as a result of the sale of the Northeast Plaza Shopping Center.  Of
the  total   distributions  paid  through  September  30,  2000,   approximately
$7,516,000, or $348.75 per original $1,000 investment,  represents proceeds from
the sale of the Briarwood and Gatewood Apartments in fiscal 1985;  approximately
$108,000,  or $5 per original $1,000  investment,  represents  proceeds from the
fiscal 1986  repayment of an  additional  investment  that was made in Northeast
Plaza;  approximately  $5,517,000,  or  $256  per  original  $1,000  investment,
represents  proceeds  from the sale of the Camelot  Apartments  in fiscal  1996;
approximately $6,147,000, or $285.25 per original $1,000 investment,  represents
proceeds from the sale of the Partnership's  interest in the Pine Trail Shopping
Center during  fiscal 1997;  approximately  $2,284,000,  or $106.00 per original
$1,000  investment,  represents  proceeds  from  the sale of the  Central  Plaza
Shopping Center during fiscal 1998; and  approximately  $2,500,000,  or $116 per
original $1,000  investment,  represents the proceeds from the assignment of the
subordinated  mortgage  note  received  as part  of the  December  1984  sale of
Briarwood  and Gatewood  apartment  properties in February  1999.  The remaining
distributions   have  been  made  from  the  net  operating  cash  flow  of  the
Partnership.  A substantial  portion of such  distributions  was sheltered  from
current taxable income.  In addition to returning 100% of the Limited  Partners'
original  invested  capital from the capital  transactions  described above, the
Partnership  paid out the  equivalent  of a 7%  cumulative  annual return to the
Limited Partners over the life of the Partnership.

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

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

      During the quarter ended December 31, 1998, the  Partnership  negotiated a
contract to sell the  Northeast  Plaza  property  to the master  lessee at a net
price which the  Partnership  believed  reflected only a small deduction for the
stigma  associated  with the Mobil  contamination.  The  agreement was signed on
November 29, 1998 and was contingent on the master-lessee's  ability to obtain a
commitment for sufficient  financing by January 29, 1999 to pay the  Partnership
for its ownership  interest.  This financing  commitment  date was  subsequently
extended to April 19, 1999.  As noted  below,  the  master-lessee  was unable to
secure a commitment for financing because of an unrelated  environmental  issue,
which resulted in the termination of the purchase  agreement.  The appeal of the
Mobil  litigation was stayed until  mid-December  1999 pending the resolution of
this potential sale transaction. During the quarter ended December 31, 1999, the
Partnership proposed a settlement agreement which resulted in a dismissal of the
appeal of its damages claims  against Mobil with both parties  bearing their own
costs and attorneys'  fees. Under the terms of the settlement  agreement,  which
was finalized in September 2000, Mobil remained subject to the injunctive order,
and the cleanup was to proceed as set forth in the court  order.  In  accordance
with the Northeast Plaza purchase and sale agreement, all liabilities associated
with the pre-existing  environmental conditions at the property were transferred
to the buyer at the time of the October 12, 2000 sale,  and the buyer  agreed to
indemnify  the  Partnership  against  claims  arising  from known  environmental
problems.  In addition,  for the purpose of addressing risks relating to cleanup
cost  overruns and any unknown  environmental  conditions,  the buyer  purchased
environmental insurance under which the Partnership is included as an additional
insured.  As a result,  the  Partnership  is free to  proceed  with its  planned
liquidation.

      The Partnership had no real estate investments  located outside the United
States.  The  Partnership  was  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, 2000,  the  Partnership  owned one property  directly.
Such  property is referred to under Item 1 above to which  reference is made for
the name, location and description of the property. As discussed in Item 1, this
property was sold subsequent to the fiscal year end, on October 12, 2000.

      Occupancy  figures  for each fiscal  quarter  during  2000,  along with an
average for the year, are presented below for the property:

                                              Percent Leased At
                                 -----------------------------------------------
                                                                     Fiscal 2000
                                 12/31/99  3/31/00  6/30/00  9/30/00   Average
                                 --------  -------  -------  -------   -------

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


Item 3.  Legal Proceedings
--------------------------

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

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

     A jury trial against Mobil Oil  Corporation  took place during the two-week
period  ended  April  17,  1998,  in  state  court  in  Sarasota,  Florida.  The
Partnership  sought  an  injunctive  order  to  force  Mobil  to  clean  up  the
contamination  and sought to recover  damages  suffered by the  Partnership as a
result of the  contamination.  During trial, Mobil stipulated to the entry of an
injunctive  order  compelling  Mobil to continue  the cleanup  until state water
quality  standards are achieved.  As previously  reported,  the  Partnership had
obtained a summary  judgment  as to  liability  on its claims for  trespass  and
nuisance.   The  issues  of  damages  on  these  two  counts,  as  well  as  the
Partnership's breach of contract claim, were submitted to the jury. On April 17,
1998,  the  jury  returned  a  verdict  in favor of the  defendant,  Mobil.  The
Partnership's  subsequent  motion  for a new  trial  was  not  granted.  A final
judgment  in  favor of Mobil as to the  Partnership's  damages  claims  has been
entered  with the Court.  In  addition,  a final  judgment  compelling  Mobil to
cleanup the  contamination  at the Northeast  Plaza Shopping  Center was entered
with the Court. The Partnership  subsequently began the process of appealing the
judgment  pertaining  to its  damages  claims  and  Mobil  filed a  cross-appeal
challenging the scope of the injunctive order. During the quarter ended December
31, 1998,  the  Partnership  negotiated a contract to sell the  Northeast  Plaza
property  to the master  lessee at a net price  which the  Partnership  believed
reflected  only a small  deduction  for the  stigma  associated  with the  Mobil
contamination.  The agreement was signed on November 29, 1998 and was contingent
on the master-lessee's  ability to obtain a commitment for sufficient  financing
by January 29, 1999 to pay the  Partnership  for its  ownership  interest.  This
financing  commitment  date was  subsequently  extended  to April 19,  1999.  As
discussed further in Item 7, the master-lessee was unable to secure a commitment
for financing because of an unrelated environmental issue, which resulted in the
termination of the purchase  agreement.  The appeal of the Mobil  litigation was
stayed until  mid-December  1999 pending the  resolution of this  potential sale
transaction.  During the  quarter  ended  December  31,  1999,  the  Partnership
proposed a settlement  agreement  which resulted in a dismissal of the appeal of
its damages claims  against Mobil with both parties  bearing their own costs and
attorneys'  fees.  Under  the  terms  of the  settlement  agreement,  which  was
finalized in September 2000, Mobil remained subject to the injunctive order, and
the cleanup was due to proceed as set forth in the court order.

     As discussed  further in Items 1 and 7, the  Northeast  Plaza  property was
sold  subsequent to the fiscal  year-end,  on October 12, 2000.  The  settlement
agreement  described  above  was not  affected  by the sale,  and Mobil  remains
subject to the injunctive order. Furthermore, the Partnership was indemnified by
the buyer of Northeast Plaza against claims arising from the known environmental
problems at the property and was named as an additional  insured on an insurance
policy purchased by the buyer which covers  potential  cleanup cost overruns and
any unknown environmental conditions. Accordingly, subsequent to the sale of the
Northeast  Plaza  property,  the Partnership was free to proceed with an orderly
liquidation (see Item 7).

     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, 2000,  there were 1,495 record  holders of Units in the
Partnership.  There is no public market for the Units, and it is not anticipated
that a public market for Units will develop.  Upon request,  the General Partner
will  endeavor to assist a  Unitholder  desiring  to transfer  his Units and may
utilize the services of PWI in this  regard.  The price to be paid for the Units
will be subject to negotiation by the  Unitholder.  The General Partner will not
redeem or repurchase Units.

      Reference is made to Item 6 below for a discussion  of cash  distributions
made to the Limited Partners during fiscal 2000.


Item 6.  Selected Financial Data
--------------------------------

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

                                       Years Ended September 30,
                          ----------------------------------------------------
                             2000      1999      1998      1997      1996
                             ----      ----      ----      ----      ----

Revenues                   $  618     $  534    $  714    $  579    $  562

Operating loss             $ (506)    $ (913)   $ (116)   $ (130)   $  (80)

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

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

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

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

Net income (loss)          $ (506)    $1,748    $2,120    $3,838    $6,542

Per Limited Partnership
 Unit:
   Net income (loss)      $(23.24)   $ 80.30   $ 97.41   $176.32   $300.56

   Cash distributions
    from operations        $ 2.62    $  5.24   $  8.81   $ 19.52   $ 19.40

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

Total assets               $3,779    $ 4,152   $ 4,367   $ 4,767   $ 7,645

Mortgage note payable      $  755    $   967   $ 1,124   $ 1,278   $ 1,420

      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.

<PAGE>

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, comprised of three multi-family apartment complexes and three retail
shopping centers.  Through September 30, 2000, the three multi-family  apartment
properties had been sold, the Partnership sold its interest in one of the retail
shopping  centers to its  co-venture  partner  during  fiscal 1997,  and another
retail  shopping center was sold to an unrelated third party during fiscal 1998.
The one remaining  retail  property was the Northeast Plaza Shopping  Center,  a
121,000  square foot retail center located in Sarasota,  Florida.  Subsequent to
year end, on October 12, 2000, the Partnership sold the  wholly-owned  Northeast
Plaza  Shopping  Center to an  unrelated  third  party for a gross sale price of
$3,712,500.  After deducting  closing costs of $32,000,  net property  proration
adjustments totalling $126,000 and the prepayment of the first mortgage debt and
accrued  interest  secured  by  the  property  of  approximately  $758,000,  the
Partnership  received  net  sale  proceeds  of  approximately  $2,796,000.   The
Partnership  was entitled to 100% of these net sale proceeds  because the master
lease  agreement  which  had  covered  the  Northeast  Plaza  property  had been
terminated  prior to the sale. As of August 1, 2000, the master lease  agreement
was terminated in return for the Partnership's release of the master lessee from
any liability  regarding  the known  environmental  issues at the  property.  As
discussed  further below,  as part of the October 12, 2000 sale  transaction the
Partnership  was  indemnified by the buyer against claims arising from the known
environmental  problems at the Northeast Plaza property. As previously reported,
the  Partnership  had been  focusing on a sale of the Northeast  Plaza  Shopping
Center,  its  remaining  real  estate  investment,  and  a  liquidation  of  the
Partnership.  With the  sale of the  Northeast  Plaza  property  completed,  the
Partnership is currently proceeding with an orderly liquidation. On November 15,
2000,  a  Liquidating  Distribution,  which  included  the net  proceeds  of the
Northeast Plaza transaction, along with the remaining Partnership reserves after
the payment of all  liquidation-related  expenses,  was paid to  unitholders  of
record as of the October 12, 2000 sale date.  The Final  Distribution  amount of
approximately  $2,451,000,  or  $113.74  per  original  $1,000  investment,  was
comprised of $94.74 from the sale of the Northeast  Plaza property and $19.00 of
remaining Partnership reserves.

      In accordance with the Partnership Agreement, sale or refinancing proceeds
are to be  distributed  first,  100% to the Limited  Partners  until the Limited
Partners have received their  original  capital  contributions  and a cumulative
annual  return  of  7%  based  upon  a  Limited   Partner's   Adjusted   Capital
Contributions,  as  defined in the  Partnership  Agreement.  Then a real  estate
brokerage commission is payable to the Partnership's Adviser. In connection with
the sale of each  property,  the  Adviser is  entitled  to receive a real estate
brokerage commission in an amount equal to 0.75% of the selling prices of all of
the  properties  in the  portfolio.  Pursuant  to this  provision,  a  total  of
approximately  $380,000  was  paid to the  Adviser  as a real  estate  brokerage
commission. Any remaining sale or refinancing proceeds are to be distributed 85%
to the Limited  Partners  and 15% to the General  Partner.  Including  the Final
Liquidating  Distribution discussed further above, Limited Partners who acquired
their Units during the original  offering period received a full return of their
original  capital  contributions,  their  cumulative  preferred return of 7%, as
defined  in  the  Partnership  Agreement,   and  their  proportionate  share  of
approximately  $2.1 million which  represents an 85% share in the remaining sale
or  refinancing  proceeds  after the payment of the brokerage  commission to the
Adviser.   The  General  Partner  of  the   Partnership   received  a  total  of
approximately  $375,000 as their 15% residual  share noted  above.  Prior to the
Final Distribution,  all sale and refinancing  proceeds were distributed 100% to
the Limited  Partners.  Pursuant to the  settlement  of the  consolidated  class
action involving certain PaineWebber affiliated Limited Partnerships,  including
the Partnership,  all net commissions and distributions  paid to the Adviser and
to the  General  Partner  of the  Partnership  have been  assigned  to an escrow
account for the benefit of the class members.

     As  previously  reported,  during  the  quarter  ended  June  30,  1999 the
Partnership was notified by the Northeast Plaza Shopping Center master-lessee of
the presence of groundwater  contamination at the Shopping Center which appeared
to have been caused by the operation of dry cleaning equipment at the Center. On
December 13, 1999, the  Partnership  submitted a Site  Assessment  Report to the
state  regulatory  authority that  confirmed the presence of the  contamination,
described the location of elevated contaminant  concentrations,  and outlined an
initial analysis of remedial  alternatives based on preliminary reports obtained
from the master-lessee and work performed by the Partnership's own environmental
consultants.  On April 6, 2000, the  Partnership  submitted a Supplemental  Site
Assessment  Report further defining the nature and extent of the  contamination.
In early  May  2000,  the  Partnership's  environmental  consultant  prepared  a
Remedial  Action Plan and submitted the Plan to the state  regulatory  authority
for review and approval.  During the fourth quarter of fiscal 2000, the Plan was
effectively  approved by the state regulatory authority subject to the execution
of a voluntary cleanup agreement with the state. The Partnership's environmental
consultant  had proposed to implement the Plan at a cost of  approximately  $1.2
million.

      However, while awaiting the approval of the Plan, the Partnership had also
initiated  efforts to market and sell the Northeast Plaza property on terms that
would allocate to the purchaser  responsibility  for pre-existing  environmental
conditions.  In July 2000, the  Partnership  distributed  four sales packages to
prospective  purchasers  who were targeted as potential  buyers of property with
pre-existing  environmental conditions. As a result of that effort, three offers
were received.  After  evaluating the offers and the strength of the prospective
purchasers, the Partnership selected an offer. A purchase and sale agreement was
subsequently  negotiated  and  signed on August 31,  2000 with this  prospective
third-party  buyer.  After  completing its due diligence work in September 2000,
the prospective buyer made two non-refundable  deposits totalling $200,000.  The
transaction  closed as described  above on October 12, 2000. In accordance  with
the Northeast Plaza purchase and sale agreement, all liabilities associated with
the  pre-existing  environmental  conditions at the property were transferred to
the  buyer at the time of the  sale,  and the  buyer  agreed  to  indemnify  the
Partnership  against  claims  arising  from  known  environmental  problems.  In
addition,  for the purpose of addressing risks relating to cleanup cost overruns
and any unknown  environmental  conditions,  the buyer  purchased  environmental
insurance under which the Partnership is included as an additional insured. As a
result,  the Partnership is free to proceed with its planned  liquidation  which
will be completed prior to the end of calendar year 2000.

     The Partnership had accrued a liability of $1 million during fiscal 1999 to
cover expected legal and  environmental  testing and remediation costs regarding
the Northeast Plaza dry cleaner  contamination  based on the preliminary reports
obtained  from  the   master-lessee  and  the  initial  work  performed  by  the
Partnership's own environmental  consultants.  Based on the preliminary feedback
from  the  state  regulatory  authority  on  the  Site  Assessment  Report,  the
Partnership  believed  that the scope fo the  remediation  work would be broader
than  originally  expected.  As a result,  during the quarter ended December 31,
1999, the Partnership accrued an additional liability of $300,000.  Based on the
final cost estimates of the environmental  consultant,  the Partnership  accrued
another $350,000 of environmental  remediation expenses during the quarter ended
June 30,  2000,  bringing  the total  accrued  expenses to  $1,650,000.  Through
September 30, 2000, the Partnership had incurred actual legal and  environmental
testing  expenses of  $465,000  in  connection  with this  situation  (including
$386,000  incurred  in  fiscal  2000).  The  remaining  balance  of the  accrued
liability of  $1,185,000  is included in the balance of accrued  expenses on the
accompanying  balance  sheet as of  September  30,  2000.  As noted  above,  the
Partnership  was  indemnified  by the buyer of Northeast  Plaza  against  claims
arising from the known  environmental  problems at the property and was named as
an additional insured on an insurance policy purchased by the buyer which covers
potential cleanup cost overruns and any unknown environmental conditions.  Since
the Partnership has no further  liability for any  environmental  expenses under
the terms of the Northeast  Plaza sale agreement,  the remaining  balance of the
accrued  liability of $1,185,000 will be recovered on the  Partnership's  income
statement for period ending December 31, 2000.

      At  September  30,  2000,  the  Partnership  had  available  cash and cash
equivalents  of  $514,000.  Such cash and cash  equivalents,  along with the net
proceeds  received  subsequent  to  year-end  in  connection  with  the  sale of
Northeast  Plaza,  were  used  for  the  working  capital  requirements  of  the
Partnership and to pay for final liquidation-related expenses. The remainder was
paid out to the  General  Partner,  the  Limited  Partners  and the  Adviser  in
accordance with the Partnership Agreement, as described in more detail above.

Results of Operations
2000 Compared to 1999
---------------------

     The  Partnership  reported  a net  loss  of  $506,000  for the  year  ended
September 30, 2000, as compared to net income of $1,748,000  for the prior year.
This  $2,254,000  unfavorable  change in net  operating  results  was  primarily
attributable  to the gain of  $2,661,000  realized  in the  prior  year from the
Briarwood note  settlement,  as discussed  further in Note 6 to the accompanying
financial statements. The impact of the Briarwood gain was partially offset by a
decrease of $350,000 in Northeast Plaza environmental  remediation  expenses for
the  current  year.  The  decline  in  environmental  remediation  expenses,  as
discussed  further  above,  represents  the  difference  between  the initial $1
million  estimate  of  expenses  made  during the prior year and the  additional
accruals  totalling  $650,000  that  were made  during  fiscal  2000 as  further
information  on the extent of the  contamination  and the scope of the  required
cleanup work became available.  In addition,  an increase of $36,000 in interest
expense and a decline of $19,000 in interest and other  income also  contributed
to the unfavorable  change in the  Partnership's  net operating  results for the
current year.  Interest expense increased due to the higher interest rate on the
outstanding  mortgage note payable called for under the terms of the forbearance
agreement discussed further in Note 7 to the accompanying  financial statements.
Interest income declined due to a reduction in the average  outstanding  balance
of the  Partnership's  cash  reserves  during fiscal 2000. An increase in rental
revenues, net of additional  property-related expenses, in fiscal 2000 resulting
from the  termination of the Northeast Plaza master lease agreement on August 1,
2000,  partially offset these  unfavorable  changes in net income.  As discussed
further above, the master lease was terminated  during fiscal 2000 in return for
the Partnership's  release of the master lessee from any liability regarding the
known  environmental  issues at the  property.  Subsequent  to the master  lease
termination,  the income from the individual tenant leases at the property,  net
of property operating  expenses,  was higher than the master lease payments that
the Partnership had been receiving.

1999 Compared to 1998
---------------------

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

      A  $270,000  increase  in  gains  realized  from the  sales  of  operating
investment  properties  and a $155,000  decrease in the  Partnership's  share of
venture's losses  partially offset the unfavorable  change in operating loss for
fiscal 1999. The increase in gains on sales of operating  investment  properties
represents  the  difference  between the  $2,661,000  gain  realized  due to the
Briarwood note settlement in fiscal 1999 and the $2,391,000 gain realized on the
sale of the Central Plaza  Shopping  Center in fiscal 1998.  The decrease in the
Partnership's  share of venture's  losses  resulted from the sale of the Central
Plaza  property  on  March  3,  1998,  as  discussed  further  in  Note 5 to the
accompanying financial statements. As a result, there was no income or loss from
joint venture operations for the year ended September 30, 1999.

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

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

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

Inflation
---------

      The  Partnership  completed its  nineteenth  full year of operations as of
September  30,  2000 and the  effects  of  inflation  and  changes  in prices on
revenues and expenses  through that date and for the period  through the date of
the Partnership's liquidation have not been significant.


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

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


Item 8.  Financial Statements and Supplementary Data
----------------------------------------------------

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


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

      None.


<PAGE>


                                    PART III
                                    --------


Item 10.  Directors and Principal Executive Officers of the Partnership
-----------------------------------------------------------------------

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

      (a) and (b) The names and ages of the directors  and  principal  executive
officers of the General Partner of the Partnership are as follows:

                                                                   Date elected
      Name                      Office                    Age       to Office
      ----                      ------                    ---       ---------

Bruce J. Rubin          President and Director             41        8/22/96
Terrence E. Fancher     Director                           47       10/10/96
Walter V. Arnold        Senior Vice President
                          and Chief Financial Officer      53       10/29/85
Thomas W. Boland        Vice President and Controller      38        12/1/91

*  The date of incorporation of the General Partner

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

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

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

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

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

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

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

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

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

      Based solely on its review of the copies of such forms received by it, the
Partnership  believes that, during the year ended September 30, 2000, all filing
requirements  applicable to the officers and  directors of the Managing  General
Partner and ten-percent beneficial holders were complied with.


Item 11.  Executive Compensation
--------------------------------

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

      The Partnership paid cash  distributions to the Unitholders on a quarterly
basis at rates  ranging  from 3% to 5% per annum on remaining  invested  capital
over the past five years.  Quarterly  distributions  of net operating  cash flow
were suspended after the payment made on February 15, 2000 for the quarter ended
December 31,  1999.  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 was distributed
quarterly  in the ratio of 99% to the  Limited  Partners  and 1% to the  General
Partner.  In accordance  with the  Partnership  Agreement,  sale or  refinancing
proceeds are to be  distributed  first,  100% to the Limited  Partners until the
Limited  Partners have  received  their  original  capital  contributions  and a
cumulative annual return of 7% based upon a Limited  Partner's  Adjusted Capital
Contributions,  as  defined in the  Partnership  Agreement.  Then a real  estate
brokerage commission is payable to the Partnership's Adviser. In connection with
the sale of each  property,  the  Adviser is  entitled  to receive a real estate
brokerage commission in an amount equal to 0.75% of the selling prices of all of
the  properties  in the  portfolio.  Pursuant  to this  provision,  a  total  of
approximately  $380,000  was  paid to the  Adviser  as a real  estate  brokerage
commission. Any remaining sale or refinancing proceeds are to be distributed 85%
to the Limited  Partners  and 15% to the General  Partner.  Including  the Final
Liquidating  Distribution discussed further above, Limited Partners who acquired
their Units during the original  offering period received a full return of their
original  capital  contributions,  their  cumulative  preferred return of 7%, as
defined  in  the  Partnership  Agreement,   and  their  proportionate  share  of
approximately  $2.1 million which  represents an 85% share in the remaining sale
or  refinancing  proceeds  after the payment of the brokerage  commission to the
Adviser.   The  General  Partner  of  the   Partnership   received  a  total  of
approximately  $375,000 as their 15% residual  share noted  above.  Prior to the
Final Distribution,  all sale and refinancing  proceeds were distributed 100% to
the Limited  Partners.  Pursuant to the  settlement  of the  consolidated  class
action involving certain PaineWebber affiliated Limited Partnerships,  including
the Partnership,  all net commissions and distributions  paid to the Adviser and
to the  General  Partner  of the  Partnership  have been  assigned  to an escrow
account for the benefit of the class members.

     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 is entitled to receive
a disposition fee,  payable upon  liquidation of the  Partnership,  in an amount
equal to 0.75% of the selling price of the property, subordinated to the payment
of certain amounts to the Limited Partners. As noted above, the Adviser received
a  disposition  fee  of  approximately  $380,000  upon  the  liquidation  of the
Partnership.

      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.
Management  fees earned by the Adviser  totalled $1,000 and $4,000 for the years
ended September 30, 2000 and 1999, respectively. Regular quarterly distributions
to the  Limited  Partners,  upon  which  the  management  fees are  based,  were
suspended  effective for the quarter ended March 31, 2000.  Since  distributions
were no longer being paid,  no  management  fees have been earned by the Adviser
subsequent to the quarter ended December 31, 1999. Accounts payable - affiliates
at  September  30, 1999  consisted of $1,000 of  management  fees payable to the
Adviser.  No  incentive  management  fees  were  earned  during  the year  ended
September 30, 2000.

      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, 2000 is $76,000, representing reimbursements to this affiliate for
providing such services to the Partnership.

      The  Partnership  uses the  services  of Mitchell  Hutchins  Institutional
Investors,  Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a  subsidiary  of  Mitchell  Hutchins  Asset  Management,  Inc.,  an
independently operated subsidiary of PaineWebber.  Mitchell Hutchins earned fees
of $2,000  (included in general and  administrative  expenses)  for managing the
Partnership's  cash assets during fiscal 2000. 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)  A Current Report on Form 8-K dated October 12, 2000 was filed subsequent
        to the  year  ended  September  30,  2000  to  report  the  sale  of the
        Partnership's   final  asset  and  is  hereby   incorporated  herein  by
        reference.

   (c)  Exhibits

             See (a) (3) above.

   (d)  Financial Statement Schedules

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




<PAGE>


                                   SIGNATURES
                                   ----------

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


                            PAINE WEBBER INCOME PROPERTIES
                            THREE LIMITED PARTNERSHIP

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

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

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

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

Dated:  December 29, 2000

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


By:/s/ Bruce J. Rubin                           Date: December 29, 2000
   --------------------                               -----------------
   Bruce J. Rubin
   Director

By:/s/ Terrence E. Fancher                      Date: December 29, 2000
   ------------------------                           -----------------
   Terrence E. Fancher
   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 Report
Exhibit No.  Description of Document                   or Other Reference
-----------  --------------------------------------   ------------------------

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


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


(13)         Annual Reports to Limited Partners        No Annual Report for the
                                                       year ended September 30,
                                                       2000 has been sent to the
                                                       Limited Partners. An
                                                       Annual Report will be
                                                       made available to the
                                                       Limited Partners
                                                       subsequent to this
                                                       filing.

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


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










<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                                      F-2

    Balance sheets at September 30, 2000 and 1999                       F-3

    Statements of operations for the years ended September 30, 2000,
         1999 and 1998                                                  F-4

    Statements of changes in partners' capital for the years ended
         September 30, 2000, 1999 and 1998                              F-5

    Statements of cash flows for the years ended September 30, 2000,
         1999 and 1998                                                  F-6

    Notes to financial statements                                       F-7

    Schedule III - Real Estate and Accumulated Depreciation             F-17


Combined Joint Ventures of PaineWebber Income Properties Three
   Limited Partnership
--------------------------------------------------------------

    Report of independent auditors                                      F-18

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

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

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

    Notes to combined financial statements                              F-22


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


<PAGE>



                         REPORT OF INDEPENDENT AUDITORS


The Partners of
Paine Webber Income Properties Three Limited Partnership:

     We have audited the  accompanying  balance  sheets of Paine  Webber  Income
Properties Three Limited  Partnership as of September 30, 2000 and 1999, and the
related statements of operations,  changes in partners' capital,  and cash flows
for each of the three years in the period ended  September 30, 2000.  Our audits
also  included  the  financial  statement  schedule  listed in the Index at Item
14(a).  These financial  statements and schedule are the  responsibility  of the
Partnership's  management.  Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in all  material  respects,  the  financial  position  of  Paine  Webber  Income
Properties  Three Limited  Partnership  at September 30, 2000 and 1999,  and the
results of its  operations and its cash flows for each of the three years in the
period ended  September  30, 2000,  in  conformity  with  accounting  principles
generally  accepted in the United  States.  Also,  in our  opinion,  the related
financial statement schedule, when considered in relation to the basic financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.




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





Boston, Massachusetts
December 15, 2000


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                                 BALANCE SHEETS
                           September 30, 2000 and 1999
                     (In thousands, except per Unit amounts)


                                     ASSETS
                                     ------

                                                     2000           1999
                                                     ----           ----

Operating investment property, at cost:

   Land                                            $     950      $     950
   Building and improvements                           4,088          4,088
                                                   ---------      ---------
                                                       5,038          5,038
   Less accumulated depreciation                      (1,797)        (1,695)
                                                   ---------      ---------
      Net operating investment property                3,241          3,343

Cash and cash equivalents                                514            809
Prepaid expenses                                          24              -
                                                   ---------      ---------
                                                   $   3,779      $   4,152
                                                   =========      =========


                        LIABILITIES AND PARTNERS' CAPITAL
                        ---------------------------------

Accounts payable - affiliates                      $       -      $       1
Accounts payable and accrued expenses                  1,318            979
Security deposits                                         14              -
Other liabilities                                         50              -
Mortgage note payable in default                         755            967
                                                   ---------      ---------
      Total liabilities                                2,137          1,947


Partners' capital:
  General Partner:
     Capital contribution                                  1              1
     Cumulative net income                               217            222
     Cumulative cash distributions                      (155)          (155)

  Limited Partners ($1,000 per Unit; 21,550
   Units issued):
     Capital contributions, net of offering costs     19,397         19,397
     Cumulative net income                            21,637         22,138
     Cumulative cash distributions                   (39,455)       (39,398)
                                                   ---------      ---------
      Total partners' capital                          1,642          2,205
                                                   ---------      ---------
                                                   $   3,779      $   4,152
                                                   =========      =========












                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                              STATEMENTS OF OPERATIONS
              For the years ended September 30, 2000, 1999 and 1998
                     (In thousands, except per Unit amounts)


                                            2000        1999        1998
                                            ----        ----        ----
Revenues:

   Rental revenues                      $    581    $    478    $    478
   Interest and other income                  37          56         236
                                        --------    --------    --------
                                             618         534         714

Expenses:

   Interest expense                          159         123         130
   Management fees                             1           4           4
   Depreciation expense                      102         102         102
   Property operating expenses                22           -           -
   Real estate taxes                          18           -           -
   General and administrative                172         218         594
   Environmental remediation expenses        650       1,000           -
                                        --------    --------    --------
                                           1,124       1,447         830
                                        --------    --------    --------

Operating loss                              (506)       (913)       (116)

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

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

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

Net income (loss)                       $   (506)   $  1,748    $  2,120
                                        ========    ========    ========


Net income (loss) per Limited
  Partnership Unit                      $ (23.24)   $  80.30    $  97.41
                                        ========    ========    ========

Cash distributions per Limited
  Partnership Unit                      $   2.62    $ 121.24    $ 114.81
                                        ========    ========    ========


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

                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
              For the years ended September 30, 2000, 1999 and 1998
                                 (In thousands)


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

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

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

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

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

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

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

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

Cash distributions                              -          (57)          (57)

Net loss                                       (5)        (501)         (506)
                                          -------     --------       -------

Balance at September 30, 2000             $    63     $  1,579       $ 1,642
                                          =======     ========       =======

























                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS
              For the years ended September 30, 2000, 1999 and 1998
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)


                                                2000        1999        1998
                                                ----        ----        ----

Cash flows from operating activities:
   Net income (loss)                          $  (506)   $  1,748    $  2,120
   Adjustments to reconcile net income
    (loss) to net cash (used in) provided
    by operating activities:
      Depreciation                                102         102         102
      Amortization of deferred financing costs      -          11          21
      Partnership's share of ventures' income
       (loss)                                       -           -         155
      Partnership's share of gain on sale
        of operating investment property            -           -      (2,391)
      Gain on sale of operating investment
        property                                    -      (2,661)          -
      Changes in assets and liabilities:
         Prepaid expenses                         (24)          -           -
         Accounts payable - affiliates             (1)          -          (3)
         Accounts payable and accrued expenses    339         808         113
         Security deposits                         14           -           -
         Other liabilities                         50           -           -
                                              -------    --------    --------
           Total adjustments                      480      (1,740)     (2,003)
                                              -------    --------    --------
           Net cash (used in) provided by
             operating activities                 (26)          8         117
                                              -------    --------    --------

Cash flows from investing activities:
   Distributions from joint ventures                -           -       2,451
   Net proceeds from collection of mortgage
     note receivable                                -       2,661           -
                                              -------    --------    --------
           Net cash provided by investing
             activities                             -       2,661       2,451
                                              -------    --------    --------

Cash flows from financing activities:
   Distributions to partners                      (57)     (2,614)     (2,476)
   Principal payments on mortgage
     note payable                                (212)       (157)       (154)
                                              -------    --------    --------
           Net cash used in financing
             activities                          (269)     (2,771)     (2,630)
                                              -------    --------    --------

Net decrease in cash and cash equivalents        (295)       (102)        (62)

Cash and cash equivalents, beginning of year      809         911         973
                                              -------    --------    --------

Cash and cash equivalents, end of year        $   514    $    809    $    911
                                              =======    ========    ========

Cash paid during the year for interest        $   159    $    112    $    109
                                              =======    ========    ========









                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                          Notes to Financial Statements


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

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

      The  Partnership  originally  invested  the  net  proceeds  of the  public
offering,  either  directly  or  through  joint  venture  partnerships,  in  six
operating  properties,  comprised of three multi-family  apartment complexes and
three  retail  shopping   centers.   Through   September  30,  2000,  the  three
multi-family  apartment properties had been sold, the Partnership's  interest in
one of the retail  shopping  centers was sold in fiscal 1997, and another retail
shopping  center was sold  during  fiscal  1998 (see Note 5). The one  remaining
retail property was the Northeast Plaza Shopping  Center,  a 121,000 square foot
retail center located in Sarasota, Florida.

     As  discussed  further in Note 4,  subsequent  to year end,  on October 12,
2000, the Partnership sold the  wholly-owned  Northeast Plaza Shopping Center to
an unrelated  third party for a gross sale price of $3,712,500.  After deducting
closing costs of $32,000, net property proration  adjustments totalling $126,000
and the  prepayment of the first mortgage debt and accrued  interest  secured by
the  property of  approximately  $758,000,  the  Partnership  received  net sale
proceeds of approximately  $2,796,000.  As previously reported,  the Partnership
had  been  focusing  on a sale  of the  Northeast  Plaza  Shopping  Center,  its
remaining real estate investment, and a liquidation of the Partnership. With the
sale of the Northeast  Plaza property  completed,  the  Partnership is currently
proceeding  with an orderly  liquidation.  On November 15,  2000, a  Liquidating
Distribution,   which   included  the  net  proceeds  of  the  Northeast   Plaza
transaction,  along with the remaining Partnership reserves after the payment of
all  liquidation-related  expenses,  was paid to unitholders of record as of the
October  12,  2000  sale  date  (see  Note 9).  The  formal  liquidation  of the
Partnership will be completed prior to the end of calendar year 2000.


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

      The  accompanying  financial  statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting  principles
which require  management  to make  estimates  and  assumptions  that affect the
reported amounts of assets and liabilities and disclosures of contingent  assets
and  liabilities as of September 30, 2000 and 1999 and revenues and expenses for
each of the three years in the period ended  September 30, 2000.  Actual results
could differ from the estimates and assumptions used.

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

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

      The Partnership carries its operating investment property at cost, reduced
by  accumulated  depreciation,  or an amount  less than  cost if  indicators  of
impairment  are present in  accordance  with  Statement of Financial  Accounting
Standards  (SFAS) No. 121,  "Accounting for the Impairment of Long-Lived  Assets
and for Long-Lived  Assets to Be Disposed Of," which was adopted in fiscal 1997.
SFAS 121 requires  impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the  undiscounted  cash
flows  estimated  to be  generated  by those  assets  are less  than the  assets
carrying amount. The Partnership  generally assesses indicators of impairment by
a review of independent  appraisal reports on the operating investment property.
Such  appraisals  make  use  of a  combination  of  certain  generally  accepted
valuation techniques, including direct capitalization, discounted cash flows and
comparable sales analysis. 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.

     Through July 31, 2000, the Partnership's  wholly-owned operating investment
property  was leased under a master lease  agreement  which  covered 100% of the
rentable space of the shopping center.  The master lease was accounted for as an
operating lease in the Partnership's  financial statements.  Basic rental income
under the master lease was recorded on the straight-line basis. Effective August
1, 2000, the master lease was terminated and the Partnership leased retail space
to  individual  tenants  under  separate  operating  leases.  Rental  income was
recognized on a straight-line basis as earned.  Subsequent to the termination of
the master lease, the Partnership entered into a property  management  agreement
with the  former  lessee.  The  management  fees were 5% of gross  receipts,  as
defined.

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

      The cash and cash equivalents appearing on the accompanying balance sheets
represent   financial   instruments  for  purposes  of  Statement  of  Financial
Accounting  Standards  No.  107,  "Disclosures  about  Fair  Value of  Financial
Instruments."   The  carrying   amount  of  these  cash  and  cash   equivalents
approximates  their  fair  value as of  September  30,  2000 and 1999 due to the
short-term maturities of these instruments.  The mortgage note payable is also a
financial  instrument for purposes of SFAS 107.  Information  regarding the fair
value of the Partnership's mortgage note payable is provided in Note 7.

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


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

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

     All  distributable  cash, as defined,  for each fiscal year was distributed
quarterly  in the ratio of 99% to the  Limited  Partners  and 1% to the  General
Partner.  In accordance  with the  Partnership  Agreement,  sale or  refinancing
proceeds are to be  distributed  first,  100% to the Limited  Partners until the
Limited  Partners have  received  their  original  capital  contributions  and a
cumulative annual return of 7% based upon a Limited  Partner's  Adjusted Capital
Contributions,  as  defined in the  Partnership  Agreement.  Then a real  estate
brokerage commission is payable to the Partnership's Adviser. In connection with
the sale of each  property,  the  Adviser is  entitled  to receive a real estate
brokerage commission in an amount equal to 0.75% of the selling prices of all of
the  properties in the  portfolio.  Pursuant to this provision and subsequent to
the fiscal year ended September 30, 2000, a total of approximately  $380,000 was
paid to the Adviser as a real estate brokerage commission. Any remaining sale or
refinancing  proceeds are to be distributed 85% to the Limited  Partners and 15%
to the General Partner.  Including the Final Liquidating  Distribution discussed
further  above,  Limited  Partners who acquired  their Units during the original
offering period received a full return of their original capital  contributions,
their  cumulative  preferred  return  of  7%,  as  defined  in  the  Partnership
Agreement,  and their  proportionate  share of approximately  $2.1 million which
represents an 85% share in the remaining sale or refinancing  proceeds after the
payment of the brokerage  commission to the Adviser.  The General Partner of the
Partnership  received a total of  approximately  $375,000 as their 15%  residual
share noted above.  Prior to the Final  Distribution,  all sale and  refinancing
proceeds  were  distributed  100%  to  the  Limited  Partners.  Pursuant  to the
settlement  of the  consolidated  class  action  involving  certain  PaineWebber
affiliated Limited Partnerships,  including the Partnership, all net commissions
and  distributions  paid  to  the  Adviser  and to the  General  Partner  of the
Partnership have been assigned to an escrow account for the benefit of the class
members.

     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 is entitled to receive
a disposition fee,  payable upon  liquidation of the  Partnership,  in an amount
equal to 0.75% of the selling price of the property, subordinated to the payment
of certain amounts to the Limited Partners. As noted above, the Adviser received
a  disposition  fee  of  approximately  $380,000  upon  the  liquidation  of the
Partnership.

      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.
Management fees earned by the Adviser totalled $1,000, $4,000 and $4,000 for the
years ended September 30, 2000, 1999 and 1998,  respectively.  Regular quarterly
distributions to the Limited Partners, upon which the management fees are based,
were  suspended   effective  for  the  quarter  ended  March  31,  2000.   Since
distributions  were no longer being paid, no management fees have been earned by
the Adviser subsequent to the quarter ended December 31, 1999.  Accounts payable
-  affiliates  at September  30, 1999  consisted  of $1,000 of  management  fees
payable to the Adviser.  No  incentive  management  fees were earned  during the
three-year  period ended  September 30, 2000.  Accounts  payable - affiliates at
September  30,  1999  consisted  of  management  fees  payable to the Adviser of
$1,000.

      Included  in  general  and  administrative  expenses  for the years  ended
September 30, 2000, 1999 and 1998 is $76,000, $74,000 and $71,000, respectively,
representing reimbursements to an affiliate of the General Partner for providing
certain  financial,  accounting  and  investor  communication  services  to  the
Partnership.

      The  Partnership  uses the  services  of Mitchell  Hutchins  Institutional
Investors,  Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a  subsidiary  of  Mitchell  Hutchins  Asset  Management,  Inc.,  an
independently operated subsidiary of PaineWebber.  Mitchell Hutchins earned fees
of $2,000,  $2,000 and $5,000 (included in general and administrative  expenses)
for managing the  Partnership's  cash assets during fiscal 2000,  1999 and 1998,
respectively.


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

      As of September 30, 2000, the Partnership had one  wholly-owned  operating
investment property.  On September 25, 1981, the Partnership purchased Northeast
Plaza,  a 67,000  square foot  existing  shopping  center in Sarasota,  Florida.
Subsequent to the  acquisition,  the shopping center was expanded to its current
size of 121,005 square feet. The aggregate cash invested by the  Partnership was
approximately  $2,888,000  (including an acquisition fee of $268,000 paid to the
Adviser).  The  property  was  acquired  subject  to a  nonrecourse  wrap-around
mortgage loan of  approximately  $2,480,000.  On March 29, 1994, the Partnership
refinanced the existing  wraparound mortgage note secured by the Northeast Plaza
Shopping  Center,  which  had been in  default  for over two  years,  with a new
non-recourse loan issued by the prior underlying first mortgage lender (see Note
7). The  refinancing was negotiated in conjunction  with a restructuring  of the
master lease that covered 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 had an initial term of
30 years and two  5-year  renewal  options.  This  master  lease  agreement  was
classified as an operating lease and, therefore, rental income was reported when
earned. Under the terms of the agreement,  the Partnership received annual basic
rent of $435,000.  The  Partnership  also received  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  provided
specifically that the manager pay all costs of operating the shopping center and
all annual taxes, insurance and administrative expenses. The manager was further
required to pay for all costs of repair and  replacement  required in connection
with the shopping center.

     As discussed in Note 1,  subsequent  to year end, on October 12, 2000,  the
Partnership  sold  the  wholly-owned  Northeast  Plaza  Shopping  Center  to  an
unrelated  third  party for a gross sale price of  $3,712,500.  After  deducting
closing costs of $32,000, net property proration  adjustments totalling $126,000
and the  prepayment of the first mortgage debt and accrued  interest  secured by
the  property of  approximately  $758,000,  the  Partnership  received  net sale
proceeds of  approximately  $2,796,000.  The Partnership was entitled to 100% of
these net sale proceeds because the master lease agreement which had covered the
Northeast Plaza property had been terminated  prior to the sale. As of August 1,
2000, the master lease agreement was terminated in return for the  Partnership's
release  of  the  master   lessee  from  any   liability   regarding  the  known
environmental  issues  at the  property  (see  Note  8).  The  Partnership  will
recognize a gain of approximately  $445,000 for financial  reporting purposes on
the sale of the Northeast  Plaza property in fiscal 2001 through the date of the
Partnership's  liquidation.  As previously  reported,  the  Partnership had been
focusing on a sale of the Northeast  Plaza Shopping  Center,  its remaining real
estate  investment,  and a liquidation of the Partnership.  With the sale of the
Northeast Plaza property completed, the Partnership is currently proceeding with
an orderly liquidation which will be completed prior to the end of calendar year
2000 (see Note 9).


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

      As of September 30, 2000 and 1999,  the  Partnership  had no joint venture
partnership  investments.  As discussed  further below, on March 3, 1998,  Boyer
Lubbock  Associates,  a joint venture in which the  Partnership had an interest,
sold the Central  Plaza  Shopping  Center to an unrelated  third party for a net
price of $8,350,000.

      The Central  Plaza joint  venture  was  accounted  for by using the equity
method because the  Partnership  did not have a voting  control  interest in the
venture. Under the equity method, the assets, liabilities, revenues and expenses
of the joint venture did not appear in the Partnership's  financial  statements.
Condensed  combined  summary of  operations of the joint venture for fiscal 1998
(through the date of the sale) follow.

                    Condensed Combined Summary of Operations
              For the period October 1, 1997 through March 3, 1998
                                 (in thousands)

                                                            1998
                                                            ----
   Revenues:
     Rental revenues and expense recoveries            $      444
     Interest income                                            8
                                                       ----------
                                                              452

   Expenses:
     Property operating expenses                              202
     Depreciation and amortization                            221
     Interest expense                                         182
                                                       ----------
                                                              605
                                                       ----------
   Operating income (loss)                                   (153)

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

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

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

                 Reconciliation of Partnership's Share of Income

                                                            1998
                                                            ----

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

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

                                                            1998
                                                            ----

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

      A description of the joint  venture's  property and the terms of the joint
venture agreement are summarized below.

Boyer Lubbock Associates
------------------------

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

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

      The joint venture  agreement  between the  Partnership and the co-venturer
provided that from available cash flow the  Partnership  would receive an annual
preference,  payable monthly, of $171,000, and the co-venturer would receive the
remaining  distributable cash up to a maximum of $120,000.  Additional cash flow
was to be  distributed  equally  to the  Partnership  and the  co-venturer.  The
Partnership  received total cash  distributions  (including  sales  proceeds) of
$2,451,000 during the year ended September 30, 1998.

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

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


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

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

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

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

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


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

      The mortgage  note  payable at September  30, 2000 and 1999 was 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,  had a term of five  years  and bore
interest  at a fixed  rate  of 9% per  annum.  Monthly  principal  and  interest
payments of  approximately  $22,000  were due until  maturity on March 29, 1999.
While the maturity date of the existing  first mortgage loan was March 29, 1999,
this date was extended by the lender in February  1999 to June 29, 1999 to allow
for the master-lessee to complete its planned refinancing and acquisition of the
Partnership's interest in the property. During the first quarter of fiscal 1999,
the  Partnership  had entered into an agreement to sell  Northeast  Plaza to the
master  lessee in  conjunction  with a  refinancing  of the first  mortgage debt
secured by the  property.  The agreement was signed on November 29, 1998 and was
contingent on the master-lessee's  ability to obtain a commitment for sufficient
financing by January 29, 1999 to pay the Partnership for its ownership interest.
This financing  commitment date was subsequently  extended to April 19, 1999. As
discussed further in Note 8, the master-lessee was unable to secure a commitment
for  financing  because  of  an  environmental  issue,  which  resulted  in  the
termination  of the purchase  agreement.  On July 16, 1999,  the lender issued a
default  notice as of June 29, 1999 and assessed  default  interest at a rate of
25% per annum on the outstanding  balance of approximately  $998,000.  On August
31, 1999, the Partnership and the lender executed a forbearance agreement. Under
the  forbearance  agreement,  the lender agreed not to foreclose or exercise any
remedy  available to it under the loan  agreement  until  December 15, 1999. The
Partnership  agreed to pay a $35,000 extension fee; $10,000 of which was paid on
August 31, 1999 and $25,000 of which was payable by December 15, 1999. Under the
forbearance agreement, interest accrued at a rate of 18% on the unpaid principal
balance.  Monthly  principal  and interest  payments  were  increased to $30,000
beginning  August 31, 1999. On January 20, 2000, the lender agreed to extend the
forbearance  agreement  to June 30,  2000.  Interest  continued to accrue on the
unpaid  principal  balance at a rate of 18%, and monthly  principal and interest
payments  remained at $30,000  during this extension  period.  In return for the
extension,  the  Partnership  agreed to pay the $25,000 fee which was payable on
December 15, 1999 plus an  additional  extension fee of $10,000 to be payable in
the event that the loan was not repaid in full by June 30, 2000. As of September
30,  2000,  the  loan had not  been  repaid  because  the  environmental  issues
affecting  the  property  (as  discussed  further  in  Note 8) had  delayed  the
Partnership's  plans to market and sell the shopping  center.  As a result,  the
loan was  technically in default as of September 30, 2000. As discussed  further
in Note 4, the Northeast  Plaza  property was sold  subsequent  to year-end,  on
October 12, 2000,  and the first  mortgage loan was repaid in full in connection
with this transaction. The lender agreed to accept interest at a rate of 18% per
annum through the date of the repayment. It is impracticable for the Partnership
to estimate the fair value of this debt  obligation as of September 30, 2000 and
1999 as a result of its default status.


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

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

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

      During the quarter ended December 31, 1998, the  Partnership  negotiated a
contract to sell the  Northeast  Plaza  property  to the master  lessee at a net
price which the  Partnership  believed  reflected only a small deduction for the
stigma  associated  with the Mobil  contamination.  The  agreement was signed on
November 29, 1998 and was contingent on the master-lessee's  ability to obtain a
commitment for sufficient  financing by January 29, 1999 to pay the  Partnership
for its ownership  interest.  This financing  commitment  date was  subsequently
extended to April 19, 1999.  As noted  below,  the  master-lessee  was unable to
secure a commitment for financing because of an unrelated  environmental  issue,
which resulted in the termination of the purchase  agreement.  The appeal of the
Mobil  litigation was stayed until  mid-December  1999 pending the resolution of
this potential sale transaction. During the quarter ended December 31, 1999, the
Partnership proposed a settlement agreement which resulted in a dismissal of the
appeal of its damages claims  against Mobil with both parties  bearing their own
costs and attorneys'  fees. Under the terms of the settlement  agreement,  which
was finalized in September 2000, Mobil remained subject to the injunctive order,
and the cleanup was to proceed as set forth in the court order.

     As  previously  reported,  during  the  quarter  ended  June  30,  1999 the
Partnership was notified by the Northeast Plaza Shopping Center master-lessee of
the presence of groundwater  contamination at the Shopping Center which appeared
to have been caused by the operation of dry cleaning equipment at the Center. On
December 13, 1999, the  Partnership  submitted a Site  Assessment  Report to the
state  regulatory  authority that  confirmed the presence of the  contamination,
described the location of elevated contaminant  concentrations,  and outlined an
initial analysis of remedial  alternatives based on preliminary reports obtained
from the master-lessee and work performed by the Partnership's own environmental
consultants.  On April 6, 2000, the  Partnership  submitted a Supplemental  Site
Assessment  Report further defining the nature and extent of the  contamination.
In early  May  2000,  the  Partnership's  environmental  consultant  prepared  a
Remedial  Action Plan and submitted the Plan to the state  regulatory  authority
for review and approval.  During the fourth quarter of fiscal 2000, the Plan was
effectively  approved by the state regulatory authority subject to the execution
of a voluntary cleanup agreement with the state. The Partnership's environmental
consultant  had proposed to implement the Plan at a cost of  approximately  $1.2
million.

     However,  while awaiting the approval of the Plan, the Partnership had also
initiated  efforts to market and sell the Northeast Plaza property on terms that
would allocate to the purchaser  responsibility  for pre-existing  environmental
conditions.  In July 2000, the  Partnership  distributed  four sales packages to
prospective  purchasers  who were targeted as potential  buyers of property with
pre-existing  environmental conditions. As a result of that effort, three offers
were received.  After  evaluating the offers and the strength of the prospective
purchasers, the Partnership selected an offer. A purchase and sale agreement was
subsequently  negotiated  and  signed on August 31,  2000 with this  prospective
third-party  buyer.  After  completing its due diligence work in September 2000,
the prospective buyer made two  non-refundable  deposits  totalling $200,000 (of
which  $150,000  remained in escrow as of  September  30,  2000).  As  described
further  in Note 4,  on  October  12,  2000  the  sale  transaction  closed.  In
accordance with the Northeast Plaza purchase and sale agreement, all liabilities
associated with the pre-existing  environmental  conditions at the property were
transferred  to the  buyer at the time of the  sale,  and the  buyer  agreed  to
indemnify  the  Partnership  against  claims  arising  from known  environmental
problems.  In addition,  for the purpose of addressing risks relating to cleanup
cost  overruns and any unknown  environmental  conditions,  the buyer  purchased
environmental insurance under which the Partnership is included as an additional
insured.  As a result,  the  Partnership  is free to  proceed  with its  planned
liquidation which will be completed prior to the end of calendar year 2000.

     The Partnership had accrued a liability of $1 million during fiscal 1999 to
cover expected legal and  environmental  testing and remediation costs regarding
the Northeast Plaza dry cleaner  contamination  based on the preliminary reports
obtained  from  the   master-lessee  and  the  initial  work  performed  by  the
Partnership's own environmental  consultants.  Based on the preliminary feedback
from  the  state  regulatory  authority  on  the  Site  Assessment  Report,  the
Partnership  believed  that the scope fo the  remediation  work would be broader
than  originally  expected.  As a result,  during the quarter ended December 31,
1999, the Partnership accrued an additional liability of $300,000.  Based on the
final cost estimates of the environmental  consultant,  the Partnership  accrued
another $350,000 of environmental  remediation expenses during the quarter ended
June 30,  2000,  bringing  the total  accrued  expenses to  $1,650,000.  Through
September 30, 2000, the Partnership had incurred actual legal and  environmental
testing  expenses of  $465,000  in  connection  with this  situation  (including
$386,000  incurred  in  fiscal  2000).  The  remaining  balance  of the  accrued
liability of  $1,185,000  is included in the balance of accrued  expenses on the
accompanying  balance  sheet as of  September  30,  2000.  As noted  above,  the
Partnership  was  indemnified  by the buyer of Northeast  Plaza  against  claims
arising from the known  environmental  problems at the property and was named as
an additional insured on an insurance policy purchased by the buyer which covers
potential cleanup cost overruns and any unknown environmental conditions.  Since
the Partnership has no further  liability for any  environmental  expenses under
the terms of the Northeast  Plaza sale agreement,  the remaining  balance of the
accrued  liability of $1,185,000 will be recovered on the  Partnership's  income
statement for period ending December 31, 2000.


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

     On November 15, 2000, the Partnership made a Final Liquidating Distribution
of $2,451,000 to the Limited  Partners and $375,000 to the General  Partner as a
result of the sale of the  Northeast  Plaza  Shopping  Center  (see Note 4). The
Final Distribution amount of approximately  $2,451,000,  or $113.74 per original
$1,000 investment,  was comprised of $94.74 from the sale of the Northeast Plaza
property and $19.00 of remaining  Partnership  reserves.  The difference between
the sum of the net  proceeds  received  from the  sale of  Northeast  Plaza,  of
$2,922,000 (prior to property proration adjustments),  and the net assets of the
Partnership as of September 30, 2000 (excluding the historical cost basis of the
operating investment property, the accrued environmental  liability described in
Note 8 and the mortgage note payable repaid as part of the sale transaction), of
$341,000, and the amount of the Liquidating Distribution,  of $2,826,000, totals
$437,000.  This  difference is comprised of the disposition fee of $380,000 paid
to the  Partnership's  Adviser in connection with the liquidation  (see Note 3),
additional  Partnership  operating and liquidating expenses of $41,000 and a net
operating loss from the Northeast  Plaza property for the period from October 1,
2000 through the date of the sale, of $25,000, net of additional interest income
of $9,000.  Such Partnership  expenses include $1,000 paid to Mitchell  Hutchins
for managing the  Partnership's  cash assets through its liquidation and $30,000
paid to an affiliate of the General  Partner for  providing  certain  financial,
accounting  and  investor   communication  services  through  the  Partnership's
liquidation date (see Note 3).


<PAGE>


Schedule III - Real Estate and Accumulated Depreciation

                   PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                     Schedule of Real Estate and Accumulated Depreciation
                                     September 30, 2000
                                       (In thousands)

<TABLE>
<CAPTION>

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

Shopping Center
Sarasota,
Florida            $755   $950   $1,930       $2,158         $950  $4,088      $5,038   $1,797    1964 - 1978  9/25/81  40 years
                   ====   ====   ======       ======         ====  ======      ======   ======

Notes:
------

(A) The  aggregate  cost of real estate owned at September  30, 2000 for Federal income tax purposes is approximately  $5,038.
(B) See Notes 4 and 7 to Financial Statements.
(C) Reconciliation of real estate owned:

                                                   2000          1999          1998
                                                   ----          ----          ----

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                     $ 1,695       $ 1,593       $ 1,491
Depreciation expense                                 102           102           102
                                                 -------       -------       -------
Balance at end of year                           $ 1,797       $ 1,695       $ 1,593
                                                 =======       =======       =======



</TABLE>


<PAGE>





                         REPORT OF INDEPENDENT AUDITORS


The Partners of
Paine Webber Income Properties Three Limited Partnership:

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

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

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



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






Boston, Massachusetts
April 22, 1998


<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                             COMBINED BALANCE SHEET
                               September 30, 1997
                                 (In thousands)


                                     Assets
                                     ------

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

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

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

                       Liabilities and Venturers' Deficit
                       ----------------------------------

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

Tenant security deposits                                                    9

Long-term debt                                                          4,104

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


                             See accompanying notes.


<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

    COMBINED STATEMENTS OF INCOME AND CHANGES IN VENTURERS' CAPITAL (DEFICIT)
              For the period October 1, 1998 through March 3, 1998
                      and the year ended September 30, 1997
                                 (In thousands)

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

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

Operating income (loss)                          (153)               673

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

Net income                                      5,414                673

Distributions to venturers                     (4,321)              (621)

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

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

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











                             See accompanying notes.


<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

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

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

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

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

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

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

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

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

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


                             See accompanying notes.


<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

              Notes to Combined Joint Ventures Financial Statements


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

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

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

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

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

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


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

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

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

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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


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

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

                                                            1997
                                                            ----

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