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, 1996

                                      OR

        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
              SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                     For the transition period from to .

                       Commission File Number: 0-10979

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

        Delaware                                                 13-3038189
(State of organization)                                       (I.R.S. Employer
                                                            Identification No.)

265 Franklin Street, Boston, Massachusetts                        02110
(Address of principal executive office)                           (Zip Code)

Registrant's telephone number, including area code:  (617) 439-8118

Securities registered pursuant to Section 12(b) of the Act:
                                                          Name of each exchange
Title of each class                                       on which registered
     None                                                        None 

          Securities registered pursuant to Section 12(g) of the Act:
                      UNITS OF LIMITED PARTNERSHIP INTEREST
                                (Title of class)

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

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

State the aggregate market value of the voting stock held by  non-affiliates  of
the registrant. Not applicable.
                     DOCUMENTS INCORPORATED BY REFERENCE
Documents                                                   Form 10-K Reference
Prospectus of registrant dated                                 Part IV
December 3, 1980, as supplemented



<PAGE>


          PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
                                1996 FORM 10-K

                              TABLE OF CONTENTS

PART   I                                                                 Page

Item  1           Business                                               I-1

Item  2           Properties                                             I-3

Item  3           Legal Proceedings                                      I-3

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

PART  II

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

Item  6           Selected Financial Data                                II-1

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

Item  8           Financial Statements and Supplementary Data            II-5

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

PART III

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

Item 11           Executive Compensation                                 III-3

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

Item 13           Certain Relationships and Related Transactions         III-3

PART  IV

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

SIGNATURES                                                               IV-2

INDEX TO EXHIBITS                                                        IV-3

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                       F-1 to F-32


<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, 1996 three of
the operating  properties had been sold, including one during fiscal 1996. As of
September 30, 1996,  the  Partnership  owned,  directly or through joint venture
partnerships,  the  properties or interests in the  properties  set forth in the
following table:
<TABLE>
Name of Joint Venture                                    Date of
Name and Type of Property                                Acquisition of    Type of
Location                                    Size         Interest          Ownership (1)
-------------------------------------       ----         ----------        -------------
<S>                                          <C>          <C>              <C>

Boyer Lubbock Associates                    151,857       6/30/81          Fee ownership of land
Central Plaza Shopping Center               gross                          and improvements
Lubbock, Texas                              leasable                       (through joint venture).
                                            sq. ft.

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

Pine Trail Partnership                      266,042      11/12/81          Fee ownership of
Pine Trail Shopping Center                  gross                          improvements and 23
West Palm Beach, Florida                    leasable                       acres of land (through
                                            sq. ft.                        joint venture).Approximately 
                                                                           4 acres of land is subject
                                                                           to ground leases.
</TABLE>

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

    The Partnership  previously had investment  interests in the Briarwood Joint
Venture,  which owned the Briarwood  Apartments and Gatewood Apartments in Bucks
County, Pennsylvania, and Camelot Associates, which owned the Camelot Apartments
in Fairfield, Ohio. 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.  On June 19, 1996, Camelot
Associates sold Camelot  Apartments to an unrelated third party for $15,150,000.
The Partnership  received net sales proceeds of approximately $5.9 million after
deducting  closing costs, the repayment of two outstanding first mortgage loans,
the buyout of an underlying ground lease and the co-venturers'  share of the net
proceeds. See Note 5 to the financial statements of the Partnership accompanying
this Annual Report for a further discussion of this transaction.



<PAGE>


    The Partnership's investment objectives are to:

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

    Through  September 30, 1996,  the Limited  Partners had received  cumulative
cash distributions totalling approximately $27,744,000,  or approximately $1,314
per original $1,000 investment for the Partnership's earliest investors.  Of the
total  distributions,   approximately  $7,623,000,  or  approximately  $354  per
original $1,000 investment,  represents  proceeds from the sale of the Briarwood
and Gatewood Apartments in fiscal 1985 and approximately $5,517,000, or $256 per
original  $1,000  investment,  represents  proceeds from the sale of the Camelot
Apartments in fiscal 1996. The remaining  distributions  have been made from the
net  operating  cash flow of the  Partnership.  A  substantial  portion  of such
distributions has been sheltered from current taxable income. The Partnership is
currently paying  quarterly  distributions of excess cash flow at the rate of 3%
per annum on a remaining  capital account balance of $390.25 per original $1,000
investment. In addition, the Partnership retains its ownership interest in three
of its six original investment properties.  The Partnership's success in meeting
its capital  appreciation  objective will depend upon the proceeds received from
the final liquidation of its remaining investments.  The amount of such proceeds
will ultimately depend upon the value of the underlying investment properties at
the time of their final  disposition,  which cannot presently be determined.  At
the present  time,  real estate  values for retail  shopping  centers in certain
markets  are  being  adversely  impacted  by the  effects  of  overbuilding  and
consolidations  among  retailers  which have resulted in an oversupply of space.
Currently,  occupancy at all three of the Partnership's  retail shopping centers
remain high and  operations  to date do not appear to have been affected by this
general trend.

      As discussed further in the notes to the financial statements,  management
believes that the Partnership's efforts to sell or refinance the Northeast Plaza
property  have been impeded by  potential  lender  concerns of an  environmental
nature with respect to the property. During 1990, it was discovered that certain
underground  storage tanks of a Mobil service  station  located  adjacent to the
shopping center had leaked and  contaminated the 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 remedy the soil and
ground water  contamination  under the supervision of the Florida  Department of
Environmental  Regulation,  which has  approved  Mobil's  remedial  action plan.
During  fiscal  1990,  the  Partnership  had  obtained a formal  indemnification
agreement  from Mobil Oil  Corporation in which Mobil agreed to bear the cost of
all damages and required clean-up expenses.  Furthermore,  Mobil indemnified the
Partnership  against its inability to sell,  transfer or obtain financing on the
property because of the  contamination.  As a result of the contamination of the
ground water at Northeast  Plaza,  the Partnership has incurred certain damages,
primarily  related to the  inability  to sell the  property and to delays in the
process of refinancing the property's mortgage indebtedness. The Partnership has
incurred  significant  out-of-pocket  and legal expenses in connection with such
sale and refinancing  efforts.  Despite repeated requests by the Partnership for
compensation under the terms of the indemnification agreement, to date Mobil has
refused to compensate the Partnership for any of these damages. During the first
quarter of fiscal 1993, the  Partnership  filed suit against Mobil for breach of
indemnity  and property  damage.  On April 28,  1995,  Mobil 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 is for  substantially  all of the same  claims  and
utilizes the substantial  discovery and trial preparation work already completed
for the  Federal  case.  On  November  14,  1996,  the state  court  granted the
Partnership's Motion for Partial Summary Judgment as to liability with regard to
the Partnership's claims for damages. During fiscal 1996, the Partnership agreed
to a mediation session with Mobil,  which took place on November 25, 1996, in an
attempt to agree on the amount of the damages.  A settlement  was not reached at
the mediation, but discussions are continuing. If a settlement is not reached, a
jury trial is expected to commence sometime in early April 1997.

    The  Partnership's  three  remaining  operating  properties  are all  retail
shopping  centers  which are located in real  estate  markets in which they face
significant  competition  for the revenues they generate.  The shopping  centers
compete for  long-term  retail  tenants with  numerous  projects of similar type
generally  on the  basis  on  location,  rental  rates,  tenant  mix and  tenant
improvement allowances.

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

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

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

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

Item 2.  Properties

    As of September 30, 1996, the  Partnership  owned one property  directly and
owned interests in two operating properties through joint venture  partnerships.
Such  properties  are referred to under Item 1 above to which  reference is made
for the name, location and description of each property.

    Occupancy figures for each fiscal quarter during 1996, along with an average
for the year, are presented below for each property:


                                           Percent Leased At
                             -------------------------------------------------
                                                                       Fiscal
                                                                       1996
                              12/31/95   3/31/96    6/30/96   9/30/96  Average
                              --------   -------    -------   -------  -------

Camelot Apartments (1)          91%       89%        N/A       N/A      N/A

Central Plaza                   96%       89%       92%        92%       93%

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

Pine Trail Shopping Center      95%       96%       97%        97%       96%


(1)  Property was sold on June 19, 1996.

Item 3.  Legal Proceedings

    As further  discussed in Item 7, during  fiscal 1993 the  Partnership  filed
suit against Mobil Oil Corporation  because of Mobil's failure to compensate the
Partnership under the terms of an indemnification  agreement between the parties
related to the soil and ground water  contamination  affecting the Partnership's
Northeast  Plaza  Shopping  Center  investment.  Management  believes  that  the
Partnership's  efforts to sell or refinance  the Northeast  Plaza  property have
been impeded by potential buyer and lender concerns of an  environmental  nature
with  respect to the  property.  During  1990,  it was  discovered  that certain
underground  storage tanks of a Mobil service  station  located  adjacent to the
shopping center had leaked and  contaminated the 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 remedy the soil and
ground water  contamination  under the supervision of the Florida  Department of
Environmental  Regulation,  which has  approved  Mobil's  remedial  action plan.
During  fiscal  1990,  the  Partnership  had  obtained a formal  indemnification
agreement  from Mobil Oil  Corporation in which Mobil agreed to bear the cost of
all damages and required clean-up expenses.  Furthermore,  Mobil indemnified the
Partnership  against its inability to sell,  transfer or obtain financing on the
property because of the  contamination.  As a result of the contamination of the
ground water at Northeast  Plaza,  the Partnership has incurred certain damages,
primarily  related to the  inability  to sell the  property and to delays in the
process of refinancing the property's mortgage indebtedness. The Partnership has
incurred  significant  out-of-pocket  and legal expenses in connection with such
sale and refinancing  efforts.  Despite repeated requests by the Partnership for
compensation under the terms of the indemnification agreement, to date Mobil has
refused to compensate the Partnership for any of these damages. During the first
quarter of fiscal 1993, the  Partnership  filed suit against Mobil for breach of
indemnity  and property  damage.  On April 28,  1995,  Mobil was  successful  in
obtaining a Partial  Summary  Judgment  which  removed the case from the Federal
Court system.  Subsequently,  the Partnership has filed an action in the Florida
State Court system.  This action is for substantially all of the same claims and
utilizes the substantial  discovery and trial preparation work already completed
for the Federal case. The  Partnership is seeking  judgment  against Mobil which
would award the Partnership  compensatory  damages,  costs,  attorneys' fees and
such other relief as the Court may deem proper.  On November 14, 1996, the state
court  granted  the  Partnership's  Motion for  Partial  Summary  Judgment as to
liability  with regard to the  Partnership's  claims for damages.  During fiscal
1996, the Partnership agreed to a mediation session with Mobil, which took place
on November  25, 1996,  in an attempt to agree on the amount of the  damages.  A
settlement was not reached at the mediation, but discussions are continuing.  If
a settlement  is not reached,  a jury trial is expected to commence  sometime in
early April 1997.  The outcome of these legal  proceedings  cannot  presently be
determined.

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

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

     In January 1996,  PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding,  PaineWebber  irrevocably  deposited  $125 million into an escrow
fund under the  supervision of the United States District Court for the Southern
District of New York to be used to resolve the  litigation in accordance  with a
definitive  settlement  agreement  and plan of  allocation.  On July  17,  1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which has been preliminarily approved by the court and provides for the complete
resolution of the class action  litigation,  including  releases in favor of the
Partnership  and the General  Partners,  and the  allocation of the $125 million
settlement  fund among  investors  in the various  partnerships  at issue in the
case.  As part of the  settlement,  PaineWebber  also  agreed to  provide  class
members with certain financial  guarantees relating to some of the partnerships.
The details of the settlement are described in a notice mailed directly to class
members at the  direction of the court.  A final  hearing on the fairness of the
proposed  settlement  was held in December  1996, and a ruling by the court as a
result of this final hearing is currently pending.

     In  June  1996,  approximately  50  plaintiffs  filed  an  action  entitled
Bandrowski v. PaineWebber Inc. in Sacramento,  California Superior Court against
PaineWebber   Incorporated  and  various  affiliated   entities  concerning  the
plaintiff's purchases of various limited partnership interests,  including those
offered by the  Partnership.  The complaint  alleged,  among other things,  that
PaineWebber and its related entities committed fraud and  misrepresentation  and
breached  fiduciary  duties  allegedly  owed to the  plaintiffs  by  selling  or
promoting  limited   partnership   investments  that  were  unsuitable  for  the
plaintiffs and by overstating the benefits,  understating  the risks and failing
to state  material  facts  concerning  the  investments.  The  complaint  sought
compensatory damages of $15 million plus punitive damages against PaineWebber.

     Mediation with respect to the Bandrowski action described above was held in
December 1996. As a result of such  mediation,  a tentative  settlement  between
PaineWebber  and the  plaintiffs  was reached which would provide for a complete
resolution of the action.  PaineWebber  anticipates that releases and dismissals
with regard to this action will be received by February 1997.

    Under certain limited  circumstances,  pursuant to the Partnership Agreement
and other contractual  obligations,  PaineWebber affiliates could be entitled to
indemnification  for expenses and  liabilities in connection with the litigation
described above. However, PaineWebber has agreed not to seek indemnification for
any amounts it is required to pay in connection  with the  settlement of the New
York Limited  Partnership  Actions.  At the present  time,  the General  Partner
cannot estimate the impact, if any, of the potential  indemnification  claims on
the  Partnership's  financial  statements,  taken  as a whole.  Accordingly,  no
provision  for any  liability  which could result from the  eventual  outcome of
these  matters has been made in the  accompanying  financial  statements  of the
Partnership.

    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, 1996,  there were 1,584  record  holders of Units in the
Partnership.  There is no public market for the Units, and it is not anticipated
that a public market for Units will develop. The General Partner will not redeem
or repurchase Units.

     Reference  is made to Item 6 below for a discussion  of cash  distributions
made to the Limited Partners during fiscal 1996.

Item 6.  Selected Financial Data

            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
                      (IN THOUSANDS, EXCEPT PER UNIT DATA)


                                   Years Ended September 30,
                       -------------------------------------------------------
                           1996       1995         1994      1993       1992
                           ----       ----         ----      ----       ----

Revenues               $   562       $   492     $   483   $   483    $   491

Operating loss         $   (80)      $  (246)    $  (197)  $  (154)   $  (229)

Partnership's share
of ventures' income    $   696       $   510     $   442   $   332    $   351

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

Net income             $ 6,542       $   264     $   245   $   178    $   122

Per Limited
  Partnership Unit:
   Net income          $300.56       $ 12.14     $ 11.26   $  8.16     $  5.61

   Cash distributions
     from operations   $ 19.40       $ 19.40     $ 19.40   $ 19.40     $ 38.80

   Cash distributions 
     from sale 
     transactions      $256.00            -          -         -           -

Total assets           $ 7,645       $ 7,151     $ 7,429   $ 8,271    $ 8,537

Mortgage note payable  $ 1,420       $ 1,549     $ 1,667   $ 2,245    $ 2,276

      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, 1996, the three multi-family  apartment
properties  have been sold,  including  one  during  fiscal  1996.  Of the three
remaining retail  properties,  two are owned through joint venture  partnerships
and one is owned directly.  At the present time, the  Partnership  does not have
any  commitments for additional  capital  expenditures or investments but may be
called upon to advance funds to its existing investments to pay for its share of
certain required capital improvement expenses.

      As  previously  reported,  given the current  state of the  national  real
estate  market with respect to  multi-family  apartment  properties,  management
began to actively  market the Camelot  Apartments for sale to prospective  third
party  buyers  during  the second  quarter  of fiscal  1996.  In  addition,  the
Partnership had engaged in preliminary  discussions with its Camelot  co-venture
partners  regarding  the  possible  sale of the  Partnership's  interest  in the
Camelot  joint  venture.  In  accordance  with the  terms of the  joint  venture
agreement,  the  co-venturers  had the  right to match  any  third  party  offer
obtained to buy the property.  After widely  marketing the property for sale, on
June 19, 1996 the joint  venture  which owned the  Camelot  Apartments  sold the
operating  investment property to an unrelated third party for $15,150,000.  The
Partnership  received net sales  proceeds of  approximately  $5.9 million  after
deducting  closing costs,  the repayment of the two  outstanding  first mortgage
loans, the buyout of an underlying ground lease and the  co-venturers'  share of
the net proceeds.  The  Partnership  made a special  distribution to the Limited
Partners from the Camelot sale proceeds of approximately  $5.5 million,  or $256
per original $1,000  investment,  on August 15, 1996. The remaining net proceeds
were added to the  Partnership's  cash  reserves  to provide  for the  potential
capital needs of the Partnership's three remaining  investments.  As a result of
the sale of the Camelot  property  at a  substantial  gain on the  Partnership's
original investment,  the return of the capital proceeds to the Limited Partners
and the  replenishing of the  Partnership's  cash reserve  balances,  management
increased  the   Partnership's   distribution   rate  for  operating  cash  flow
distributions  in  future  quarters.  Effective  for  the  distribution  made on
November 15, 1996 for the quarter  ended  September 30, 1996,  the  distribution
rate  increased  from 3% to 5% per annum on the $390.25  remaining  portion of a
Limited Partner's original $1,000 investment.

      The  operations  of  the  Partnership's   two  joint  venture   investment
properties  are stable and producing  excess cash flow as of September 30, 1996.
The occupancy level at Pine Trail Shopping  Center in West Palm Beach,  Florida,
improved to 97% at fiscal  year-end 1996, up from 96% at the end of 1995. In the
first  quarter  of fiscal  year  1996,  two  tenants  left the  Center  creating
approximately  11,200 square feet of newly available space. Six new tenants took
occupancy during the fiscal year for a total of 12,600 square feet. In addition,
the  property's  leasing agents were able to extend or renew the leases of three
existing  tenants,  including  the national  retailer  Marshalls.  These tenants
occupy a total of  approximately  37,000  square  feet,  or 13% of the  Center's
leasable  area,  and each  committed to a five-year  extension/renewal  of their
lease. Property  improvements  completed during the year included resurfacing of
the parking areas in front of the Center's  anchor  tenants and installing a new
roof on a 12,000  square foot  portion of the Center.  Additionally,  during the
year two tenants, at their own expense, completed extensive renovations to their
spaces,  showing  continuing  commitment  to  long-term  tenancy at the  Center.
Subsequent to the end of the fourth quarter,  the property's leasing team signed
a lease with a new tenant for 1,100  square  feet,  leaving only one vacant shop
space at the  Center.  This  7,400  square  foot  vacancy  continues  to attract
interest from potential tenants. However, the leasing plan is to rent the entire
space to a single tenant which would be expected to attract additional  shoppers
to the area.  The leasing team is continuing  its efforts to interest  potential
tenants  fitting this  profile.  Five of the  Center's  smaller  tenant  leases,
representing  a total of 8,645  square feet,  are  scheduled to expire in fiscal
1997.

      At Central Plaza Shopping  Center in Lubbock,  Texas,  the occupancy level
was 92% as of  September  30,  1996,  unchanged  from its level of one year ago.
During the year,  two tenants that  occupied a total of 12,125  square feet left
the Center.  However,  the property's  leasing agents were successful in signing
three new leases with tenants that now occupy a total of 11,250  square feet. In
addition, the property's leasing team extended the 5,600 square foot lease of an
existing tenant by negotiating an amendment that resulted in a higher  effective
rental rate. In the fourth fiscal quarter, the Partnership and its joint venture
partner  contracted for the services of a new leasing and management  company to
represent  the  property.  It is  anticipated  that the new firm's  contacts and
experience will stimulate new leasing  activity for the remaining  vacant spaces
at the Center.  None of the Center's existing leases expire before January 1999.
Subsequent to the end of the fiscal year, one of the Center's restaurant tenants
completed  extensive  renovations  at its own expense and changed its theme to a
seafood menu from American-style  cuisine.  The changes are expected to increase
traffic at the Center.  Property  improvements  completed during the fiscal year
included  roof  replacement  above the spaces  occupied by the  Center's  anchor
tenants and the restriping of the parking lot.

      As previously reported, management believes that the Partnership's efforts
to sell or refinance the Northeast Plaza property have been impeded by potential
lender concerns of an environmental nature with respect to the property.  During
1990,  it was  discovered  that  certain  underground  storage  tanks of a Mobil
service  station  located  adjacent  to  the  shopping  center  had  leaked  and
contaminated  the 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 remedy the soil and ground water contamination under
the supervision of the Florida Department of Environmental Regulation, which has
approved Mobil's  remedial action plan.  During fiscal 1990, the Partnership had
obtained a formal indemnification  agreement from Mobil Oil Corporation in which
Mobil  agreed to bear the cost of all damages and  required  clean-up  expenses.
Furthermore,  Mobil  indemnified the Partnership  against its inability to sell,
transfer or obtain financing on the property because of the contamination.  As a
result  of the  contamination  of the  ground  water  at  Northeast  Plaza,  the
Partnership has incurred certain damages,  primarily related to the inability to
sell the property  and to delays in the process of  refinancing  the  property's
mortgage  indebtedness.  The Partnership has incurred significant  out-of-pocket
and legal expenses in connection with such sale and refinancing efforts. Despite
repeated  requests by the  Partnership for  compensation  under the terms of the
indemnification   agreement,  to  date  Mobil  has  refused  to  compensate  the
Partnership  for any of these damages.  During the first quarter of fiscal 1993,
the  Partnership  filed suit against  Mobil for breach of indemnity and property
damage.  On April 28, 1995,  Mobil 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 is
for substantially all of the same claims and utilizes the substantial  discovery
and trial  preparation work already  completed for the Federal case. On November
14, 1996, the state court granted the  Partnership's  Motion for Partial Summary
Judgment as to liability  with regard to the  Partnership's  claims for damages.
During fiscal 1996, the  Partnership  agreed to a mediation  session with Mobil,
which took place on November 25,  1996,  in an attempt to agree on the amount of
the damages. A settlement was not reached at the mediation,  but discussions are
continuing. If a settlement is not reached, a jury trial is expected to commence
sometime  in early April 1997.  The  outcome of these legal  proceedings  cannot
presently be determined.  The Northeast  Plaza  property,  which the Partnership
master leases to a local manager/operator, was 100% occupied as of September 30,
1996.  Leases  with  three  tenants  occupying  3,300  square  feet of space are
scheduled to expire in fiscal 1997.

      Each of the Partnership's  three remaining  properties are retail shopping
centers.  At the present time, real estate values for retail shopping centers in
certain markets are being adversely  impacted by the effects of overbuilding and
consolidations  among  retailers  which have resulted in an oversupply of space.
Currently,  occupancy at all three of the Partnership's  retail shopping centers
remain high and  operations  to date do not appear to have been affected by this
general trend. It remains unclear at this time what impact, if any, this general
trend  will  have  on  the  future   operations  and/or  market  values  of  the
Partnership's  retail  properties.  It  is  possible  that  the  current  market
conditions  for  retail  properties  in  general  will  affect the timing of the
dispositions of the remaining investments.  If favorable sales opportunities are
not  available  in the near  term,  the  Partnership  may  continue  to hold the
investments and, where  necessary,  obtain  assumable  mortgage  financing which
would allow the  Partnership  the greatest  flexibility  to pursue  future sales
opportunities when such market conditions improve.  The mortgage debt secured by
the Pine Trail Shopping Center, which bears interest at 12% per annum, contained
a prohibition on prepayment  until  November 1, 1996.  This mortgage note is not
scheduled  to  mature  until  January  2001.  Nonetheless,  management  has been
investigating whether a refinancing  transaction can be accomplished which would
provide a more favorable interest rate along with the desired  assumability.  At
the present time,  management  continues to work to identify  potential  sources
capable of providing the required financing.

      At  September  30,  1996,  the  Partnership  had  available  cash and cash
equivalents  of  $1,000,000.  Such  cash and cash  equivalents  will be used for
working capital  requirements and  distributions to the partners.  The source of
future  liquidity  and  distributions  to the partners is expected to be through
cash  generated  from  the  operations  of  the  Partnership's  income-producing
investment properties and proceeds received from the sale or refinancing of such
properties  or sales of the  Partnership's  interests in such  properties.  Such
sources of liquidity  are expected to be  sufficient  to meet the  Partnership's
needs on both a short-term and long-term basis. In addition, the Partnership has
a note receivable that it received as a portion of the proceeds from the sale of
its interest in the Briarwood joint venture in fiscal 1985. The note and related
accrued  interest  receivable have been netted against a deferred gain of a like
amount  on the  accompanying  balance  sheet.  The  interest  owed  on the  note
receivable is currently  payable only to the extent that the related  properties
generate  excess net cash flow.  To date,  no payments have been received on the
note,  which  matures  on January 1,  2000,  and none are  expected  in the near
future.  Since the  operating  properties  continue  to  generate  net cash flow
deficits and the  Partnership's  note receivable is subordinated to the existing
first mortgage debt, there is significant  uncertainty as to the  collectibility
of the principal and accrued  interest.  Proceeds,  if any, received on the note
would represent a source of additional liquidity for the Partnership.

RESULTS OF OPERATIONS
1996 Compared to 1995
---------------------

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

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

1995 Compared to 1994
---------------------

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

1994 Compared to 1993
---------------------

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

Inflation
---------

   The  Partnership  completed its  fifteenth  full year of operations in fiscal
1996 and the effects of inflation and changes in prices on revenues and expenses
to date have not been significant.

   Inflation  in future  periods may  increase  revenues,  as well as  operating
expenses, at the Partnership's operating investment properties. The master lease
on the Partnership's  wholly-owned retail shopping center requires the lessee to
pay all of the expenses  associated  with  operating the property.  Furthermore,
many of the existing leases with tenants at the  Partnership's two joint venture
owned  retail  shopping  centers  contain  rental   escalation   and/or  expense
reimbursement  clauses based on increases in tenant sales or property  operating
expenses.  Such  increases  in  rental  income  would  be  expected  to at least
partially  offset  the  corresponding  increases  in  Partnership  and  property
operating expenses caused by future inflation.

Item 8.  Financial Statements and Supplementary Data

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

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

   None.


<PAGE>

                                   PART III

Item 10.  Directors and Principal Executive Officers of the Partnership

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

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

Bruce J. Rubin          President and Director              37        8/22/96
Terrence E. Fancher     Director                            43        10/10/96
Walter V. Arnold        Senior Vice President
                          and Chief Financial Officer       49        10/29/85
James A. Snyder         Senior Vice President               51        7/6/92
David F. Brooks         First Vice President and
                          Assistant Treasurer               54        6/13/80 *
Timothy J. Medlock      Vice President and Treasurer        35        6/1/88
Thomas W. Boland        Vice President                      34        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.


<PAGE>


    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.

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

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

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

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

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

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

    Based  solely on its review of the copies of such forms  received by it, the
Partnership  believes that, during the year ended September 30, 1996, all filing
requirements  applicable to the officers and  directors of the Managing  General
Partner and ten-percent beneficial holders were complied with.


<PAGE>


Item 11.  Executive Compensation

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

    The  Partnership  has  paid  cash  distributions  to  the  Unitholders  on a
quarterly  basis at rates ranging from 3% to 6% per annum on remaining  invested
capital over the past five years.  However,  the Partnership's  Units of Limited
Partnership  Interest are not actively traded on any organized exchange,  and no
efficient secondary market exists. Accordingly, no accurate price information is
available for these Units.  Therefore,  a presentation of historical  Unitholder
total returns would not be meaningful.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

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

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

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

Item 13.  Certain Relationships and Related Transactions

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

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

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

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

      Under  the  advisory  contract,   the  Adviser  has  specific   management
responsibilities:  to administer the day-to-day  operations of the  Partnership,
and to report  periodically  the  performance of the  Partnership to the General
Partners.  The Adviser is paid a basic management fee (4% of Adjusted Cash Flow,
as  defined)  and  an  incentive  management  fee  (5%  of  Adjusted  Cash  Flow
subordinated to a noncumulative  annual return to the Limited  Partners equal to
6% based upon their adjusted capital  contribution) for services  rendered.  The
Adviser earned basic management fees of $17,000 for the year ended September 30,
1996. No incentive  management  fees were earned during the year ended September
30, 1996.

      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, 1996 is $68,000, 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 1996. Fees charged by Mitchell Hutchins
are based on a percentage of invested  cash  reserves  which varies based on the
total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI.





<PAGE>







                                    PART IV



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

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

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

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

        (3)  Exhibits:

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

   (b) No  Current  Reports on Form 8-K were  filed  during the last  quarter of
       fiscal 1996.


   (c)  Exhibits

             See (a) (3) above.

   (d)  Financial Statement Schedules

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




<PAGE>


                                  SIGNATURES


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

                                      PAINE WEBBER INCOME PROPERTIES
                                            LIMITED PARTNERSHIP



                                      By:  Third Income Properties, Inc.
                                               General Partner



                                     By:  /s/ 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

Dated:  January 13, 1997

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




By:/s/ Bruce J. Rubin                           Date: January 13, 1997
   ----------------------                             ----------------
   Bruce J. Rubin
   Director



By:/s/ Terrence E. Fancher                      Date: January 13, 1997
   ----------------------                             ----------------
   Terrence E. Fancher
   Director



<PAGE>


                          ANNUAL REPORT ON FORM 10-K
                                 ITEM 14(A)(3)

               PAINE WEBBER PROPERTIES THREE LIMITED PARTNERSHIP


                               INDEX TO EXHIBITS
<TABLE>
<CAPTION>
                                                      PAGE   NUMBER   IN   THE REPORT
EXHIBIT NO. DESCRIPTION OF DOCUMENT                   OR OTHER REFERENCE
----------- ------------------------                  -------------------------------
<S>         <C>                                       <C>
(3) and (4) Prospectus of the Registrant              Filed with  the Commission
            dated December 3, 1980, supplemented,     pursuant to Rule 424(c)
            with particular reference to the          and incorporated  herein by
            Restated Certificate and Agreement        reference.
            Limited Partnership.


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


(13)        Annual Reports to Limited Partners        No Annual Report for the year
                                                      ended September 30, 1996 has                                             
                                                      been sent to the Limited Partners.
                                                      An  Annual  Report  will be sent to                   
                                                      the Limited Partners subsequent to
                                                      this filing.


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

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

</TABLE>


<PAGE>
                          ANNUAL REPORT ON FORM 10-K

                       ITEM 14(A) (1) AND (2) AND 14(D)

           PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

       INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

                                                                     REFERENCE
                                                                     ---------

PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP:

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

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

    Balance sheets at September 30, 1996 and 1995                       F-4

    Statements of income for the years ended September 30, 1996,
      1995 and 1994                                                     F-5

    Statements of changes in partners' capital (deficit) for the
       years ended September 30, 1996, 1995 and 1994                    F-6

    Statements of cash flows for the years ended  September 30,
      1996, 1995 and 1994                                               F-7

    Notes to financial statements                                       F-8

    Schedule III - Real Estate and Accumulated Depreciation             F-20

COMBINED  JOINT  VENTURES  OF  PAINEWEBBER  INCOME  PROPERTIES  THREE  LIMITED
PARTNERSHIP

    Report of independent auditors - Ernst & Young LLP                  F-21

    Report of independent accountants - Coopers & Lybrand L.L.P.        F-22

    Combined balance sheets as of September 30, 1996 and 1995           F-23

    Combined statements of income and changes in venturers'
       capital for the years ended September 30, 1996, 1995 and 1994    F-24

    Combined  statements of cash flows for the years ended
      September 30, 1996, 1995 and 1994                                 F-25

    Notes to combined financial statements                              F-26

    Schedule III - Real Estate and Accumulated Depreciation             F-32

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, 1996 and 1995, and the
related statements of income,  changes in partners' capital (deficit),  and cash
flows for each of the three years in the period ended  September  30, 1996.  Our
audits also included the  financial  statement  schedule  listed in the Index at
Item 14(a).  These financial  statements and schedule are the  responsibility of
the  Partnership's  management.  Our  responsibility is to express an opinion on
these  financial  statements  and schedule  based on our audits.  The  financial
statements of Camelot  Associates (a partnership in which the  Partnership had a
50%  interest),  have been  audited  by other  auditors  whose  report  has been
furnished to us; insofar as our opinion on the financial  statements  relates to
data included for Camelot Associates, it is based solely on their report. In the
financial  statements,  the  Partnership's  investment in Camelot  Associates is
stated at  $103,000  at  September  30,  1995,  the  Partnership's  share of the
venture's  income of Camelot  Associates  is stated at  $190,000,  $292,000  and
$273,000 for the years ended  September 30, 1996,  1995 and 1994,  respectively,
and the Partnership's share of gain on sale of operating  investment property is
stated at $7,432,000 for the year ended September 30, 1996.

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

    In our opinion,  based on our audits and the report of other  auditors,  the
financial statements referred to above present fairly, in all material respects,
the  financial   position  of  Paine  Webber  Income  Properties  Three  Limited
Partnership  at September 30, 1996 and 1995,  and the results of its  operations
and its cash flows for each of the three years in the period ended September 30,
1996, in conformity with generally accepted accounting principles.  Also, in our
opinion,  the related financial statement schedule,  when considered in relation
to the  basic  financial  statements  taken as a whole,  presents  fairly in all
material respects the information set forth therein.





                                              /S/ ERNST & YOUNG LLP
                                              ERNST & YOUNG LLP







Boston, Massachusetts
January 10, 1997



<PAGE>


                      Report of Independent Accountants



To the Venturers of
Camelot Associates:

    We have audited the  accompanying  balance sheets of Camelot  Associates (an
Ohio  Partnership)  as of June 19, 1996 and September 30, 1995,  and the related
statements of income,  venturers'  deficit and cash flows for the period October
1,  1995 to June  19,  1996 and for each of the two  years in the  period  ended
September 30, 1995.  These financial  statements are the  responsibility  of the
Partnership's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

    In our opinion,  the financial  statements referred to above present fairly,
in all material respects,  the financial position of Camelot Associates (an Ohio
Partnership)  as of June 19, 1996 and September 30, 1995, and the results of its
operations  and its cash flows for the period  October 1, 1995 to June 19,  1996
and for  each of the two  years in the  period  ended  September  30,  1995,  in
conformity with generally accepted accounting principles.

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




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






Cincinnati, Ohio
January 10, 1997


<PAGE>


           PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                                BALANCE SHEETS
                         September 30, 1996 and 1995
                   (In thousands, except per Unit amounts)

                                    ASSETS
                                                             1996       1995
                                                             ----       ----

Operating investment property, at cost:
   Land                                                  $    950   $     950
   Building and improvements                                4,088       4,088
                                                         --------   ---------
                                                            5,038       5,038
   Less accumulated depreciation                           (1,389)     (1,287)
                                                          -------   ---------
      Net operating investment property                     3,649       3,751

Investments in joint ventures, at equity                    2,844       3,030

Cash and cash equivalents                                   1,000         296
Accounts receivable                                            99           -
Deferred expenses, net of accumulated amortization
   of $53 ($32 in 1995)                                        53          74
Note and interest receivable, net                               -           -
                                                         --------   ---------
                                                         $  7,645   $   7,151
                                                         ========   =========

                      LIABILITIES AND PARTNERS' CAPITAL


Accounts payable - affiliates                            $      4   $       4
Accrued expenses                                               60          40
Mortgage note payable                                       1,420       1,549
                                                        ---------   ---------
          Total liabilities                                 1,484       1,593


Partners' capital:
  General Partner:
   Capital contribution                                         1           1
   Cumulative net income                                      146          81
   Cumulative cash distributions                             (147)       (143)

  Limited Partners ($1,000 per Unit; 21,550 Units issued):
   Capital contributions, net of offering costs            19,397      19,397
   Cumulative net income                                   14,508       8,031
   Cumulative cash distributions                          (27,744)    (21,809)
                                                         --------    --------
          Total partners' capital                           6,161       5,558
                                                         --------     -------
                                                         $  7,645     $ 7,151
                                                         ========     =======








                           See accompanying notes.


<PAGE>


           PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                             STATEMENTS OF INCOME
            For the years ended September 30, 1996, 1995 and 1994
                   (In thousands, except per Unit amounts)


                                                1996         1995       1994
                                                ----         ----       ----
REVENUES:
   Rental revenues                            $   478   $     478    $    478
   Interest income                                 84          14           5
                                              -------   ---------    --------
                                                  562         492         483

EXPENSES:
   Interest expense                               155         166         159
   Management fees                                 17          17          17
   Depreciation expense                           102         102         102
   General and administrative                     368         453         402
                                             --------  ----------   ---------
                                                  642         738         680
                                             --------  ----------   ---------

Operating loss                                    (80)       (246)       (197)

Partnership's share of ventures' income           696         510         442

Partnership's share of gain on sale
  of operating investment property 
  (net of write-off of unamoritized excess
  basis of $1,506)                              5,926           -           -
                                             --------  ----------  ----------

NET INCOME                                   $  6,542  $     264   $      245
                                             ========  =========   ==========


Net income per Limited Partnership Unit       $300.56     $12.14      $ 11.26
                                              =======     ======      =======

Cash distributions per Limited 
  Partnership Unit                            $275.40     $19.40      $ 19.40
                                              =======     ======      =======


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














                           See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

              STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
              For the years ended September 30, 1996, 1995 and 1994
                                 (In thousands)

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


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

Cash distributions                           (4)       (418)          (422)

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

BALANCE AT SEPTEMBER 30, 1994               (59)      5,775          5,716

Cash distributions                           (4)       (418)          (422)

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

BALANCE AT SEPTEMBER 30, 1995               (61)      5,619          5,558

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

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

BALANCE AT SEPTEMBER 30, 1996            $    -      $6,161         $6,161
                                         ======      ======         ======























                           See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS
              For the years ended September 30, 1996, 1995 and 1994
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)


                                                1996        1995        1994
                                                ----        ----        ----
Cash flows from operating activities:
   Net income                                 $ 6,542     $   264    $    245
   Adjustments to reconcile net income
      to net cash provided by (used in)
      operating activities:
      Depreciation                                102         102         102
      Amortization of deferred financing
       costs                                       21          21          11
      Partnership's share of ventures' income    (696)       (510)       (442)
      Partnership's share of gain on sale
        of operating investment property       (5,926)          -           -
      Changes in assets and liabilities:
         Accounts payable - affiliates              -           -         (25)
         Accrued expenses                          20          (2)         15
         Default interest payable                   -           -         (77)
                                             --------     -------     -------
           Total adjustments                   (6,479)       (389)       (416)
                                             --------     -------     -------
           Net cash provided by (used in)
            operating activities                   63        (125)       (171)

Cash flows from investing activities:
   Distributions from joint ventures            6,709         745         775

Cash flows from financing activities:
   Distributions to partners                   (5,939)       (422)       (422)
   Proceeds from issuance of mortgage
      note payable                                  -           -       1,722
   Principal payments on mortgage note
      payable                                    (129)       (118)     (1,741)
   Payment of loan fees and expenses                -           -        (106)
                                             --------     -------     -------
           Net cash used in financing
              activities                       (6,068)       (540)       (547)
                                             --------     -------     -------

Net increase in cash and cash equivalents         704          80          57

Cash and cash equivalents, beginning
  of year                                         296         216         159
                                             --------     -------      ------

Cash and cash equivalents, end of year       $  1,000   $     296    $    216
                                             ========   =========    ========

Cash paid during the year for interest       $    134   $     145    $    226
                                             ========   =========    ========












                            See accompanying notes.


<PAGE>


           PAINEWEBBER 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, 1996, the three
     multi-family  apartment  properties  have been sold,  including  one during
     fiscal 1996 (see Note 5). Of the three remaining retail properties, two are
     owned through joint venture  partnerships  and one is owned  directly.  See
     Notes 4 and 5 for a further discussion of the Partnership's  remaining real
     estate investments.

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, 1996 and 1995 and
     revenues  and  expenses  for each of the three  years in the  period  ended
     September  30, 1996.  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 own  operating
     properties.  The Partnership  accounts for its investments in joint venture
     partnerships  using the equity method because the Partnership does not have
     a voting  control  interest in the  ventures.  Under the equity  method the
     investment  in a  joint  venture  is  carried  at  cost  adjusted  for  the
     Partnership's  share of the venture's earnings or losses and distributions.
     See Note 5 for a description of the joint venture partnerships.

         The  Partnership  deferred  a  portion  of the  gain on the sale of the
     Briarwood  Joint  Venture  property in fiscal 1985 using the cost  recovery
     method.  The portion of the remaining  gain to be recognized is represented
     by a note and accrued  interest  receivable.  The note and accrued interest
     receivable  have been netted against the deferred gain on the  accompanying
     balance  sheet.  The gain  would  be  recognized  if the note and  interest
     receivable are paid (see Note 6).

         The Partnership carries its operating  investment property at the lower
     of cost, reduced by accumulated depreciation,  or net realizable value. The
     net realizable value of a property held for long-term  investment  purposes
     is measured by the  recoverability of the Partnership's  investment through
     expected future cash flows on an undiscounted  basis,  which may exceed the
     property's  market value.  The net realizable  value of a property held for
     sale  approximates  its current market value. The  Partnership's  operating
     investment  property  is  considered  to be held for  long-term  investment
     purposes as of September 30, 1996 and 1995.  Depreciation  on the operating
     investment  property has been  provided on the  straight-line  method based
     upon  an   estimated   useful  life  of  40  years  for  the  building  and
     improvements.

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

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

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

         The cash and cash equivalents,  accounts  receivable,  accounts payable
    and accrued expenses 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 assets and liabilities  approximates their fair
    value as of September  30, 1996 due to the  short-term  maturities  of these
    instruments.  The mortgage note payable is also a financial  instrument  for
    purposes  of FAS  107.  The fair  value  of the  mortgage  note  payable  is
    estimated  using  discounted  cash flow analysis based on the current market
    rate for a similar type of borrowing arrangement.  Information regarding the
    fair value of the Partnership's mortgage note payable is provided in Note 7.

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

3.   The Partnership Agreement and Related Party Transactions

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

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

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

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

         Under the  advisory  contract,  the  Adviser  has  specific  management
     responsibilities:   to  administer   the   day-to-day   operations  of  the
     Partnership,  and to report periodically the performance of the Partnership
     to the General  Partners.  The Adviser earns a basic  management fee (4% of
     Adjusted  Cash Flow,  as defined)  and an incentive  management  fee (5% of
     Adjusted Cash Flow  subordinated  to a  noncumulative  annual return to the
     Limited   Partners   equal  to  6%  based  upon  their   adjusted   capital
     contribution)  for services  rendered.  The Adviser earned basic management
     fees of $17,000 for each of the three years ended  September 30, 1996, 1995
     and 1994. No incentive  management  fees were earned during the  three-year
     period ended  September  30, 1996.  Accounts  payable - affiliates  at both
     September  30, 1996 and 1995  consists of  management  fees  payable to the
     Adviser of $4,000.

         Included in general  and  administrative  expenses  for the years ended
     September  30,  1996,  1995  and  1994 is  $68,000,  $72,000  and  $81,000,
     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 $1,000 (included in general and
     administrative  expenses) for managing the Partnership's cash assets during
     fiscal 1996, 1995 and 1994, respectively.

4.   Operating Investment Property

         The Partnership has one wholly-owned  operating investment property. On
     September 25, 1981, the  Partnership  purchased  Northeast  Plaza, a 67,000
     square foot existing  shopping  center in Sarasota,  Florida.  The shopping
     center was expanded to its current size of 121,005 square feet by September
     30, 1986. The aggregate cash invested by the Partnership was  approximately
     $2,888,000  (including an acquisition fee of $268,000 paid to the Adviser).
     The property was acquired  subject to a  nonrecourse  wrap-around  mortgage
     loan of  approximately  $2,480,000.  On March  29,  1994,  the  Partnership
     refinanced the existing  wraparound  mortgage note secured by the Northeast
     Plaza Shopping Center, which had been in default for over two years, with a
     new non-recourse  loan issued by the prior underlying first mortgage lender
     (see  Note  7).  The  refinancing  was  negotiated  in  conjunction  with a
     restructuring of the master lease that covers the Partnership's interest in
     Northeast  Plaza.  The master lessee was also the holder of the  wraparound
     mortgage. As part of the refinancing, the wrap note holder applied withheld
     rental payments,  which totalled $661,000,  against the outstanding balance
     of  the  wraparound  mortgage.  Rental  payments  to the  Partnership  were
     reinstated beginning in April 1994.

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

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



<PAGE>



5.    Joint Venture Partnerships

         As of September 30, 1996, the  Partnership had investments in two joint
     ventures (three as of September 30, 1995).  As discussed  further below, on
     June 19, 1996  Camelot  Associates,  in which the  Partnership  had a joint
     venture interest,  sold its operating  investment  property to an unrelated
     third party and distributed the net proceeds to the venture  partners.  The
     joint   ventures  are   accounted  for  using  the  equity  method  in  the
     Partnership's financial statements. Condensed combined financial statements
     of these joint ventures follow.

                      CONDENSED COMBINED BALANCE SHEETS
                         September 30, 1996 and 1995
                                (in thousands)

                                    Assets

                                                        1996             1995
                                                        ----             ----

   Current assets                                    $   935          $ 1,377
   Operating investment property, net                 14,682           17,510
   Other assets, net                                     247              263
                                                     -------          -------
                                                     $15,864          $19,150
                                                     =======          =======

                           Liabilities and Capital
   Current liabilities                               $   803          $ 3,828
   Other liabilities                                      23              111
   Long-term mortgage debt                            11,324           13,456
   Partnership's share of combined capital
     accounts                                          2,686            1,251
   Co-venturers' share of combined capital
     accounts                                          1,028              504
                                                     -------          -------
                                                     $15,864          $19,150
                                                     =======          =======

                  Reconciliation of Partnership's Investment

                                                        1996            1995
                                                        ----            ----

   Partnership's share of capital, as shown above       $ 2,686       $ 1,251
   Partnership's share of current
     liabilities and long-term debt                          64           173
   Excess basis due to investment in ventures, net (1)       94         1,606
                                                        -------       -------
   Investments in joint ventures, at equity             $ 2,844       $ 3,030
                                                        =======       =======

   (1)At September 30, 1996 and 1995, the Partnership's  investment  exceeds its
      share of the joint venture  partnerships'  capital accounts by $94,000 and
      $1,606,000,  respectively.  This amount, which relates to certain expenses
      incurred by the Partnership in connection with acquiring its joint venture
      investments,  is being  amortized  over the  estimated  useful life of the
      investment properties.


<PAGE>


                    CONDENSED COMBINED SUMMARY OF OPERATIONS
             For the years ended September 30, 1996, 1995 and 1994
                                 (in thousands)
                                                1996        1995        1994
                                                ----        ----        ----
   Revenues:
     Rental revenues and expense recoveries   $ 5,632     $ 6,186     $ 6,030
     Interest income                               20          63          27
                                              -------     -------     -------
                                                5,652       6,249       6,057
   Expenses:
     Property operating expenses                2,473       2,729       2,524
     Depreciation and amortization                726         822         908
     Interest expense                           1,644       1,737       1,705
                                             --------     -------     -------
                                                4,843       5,288       5,137
                                             --------     -------     -------
   Operating income                               809         961         920

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

   Net income                                $ 12,898    $    961     $   920
                                             ========    ========     =======

   Net income:
     Partnership's share of combined income  $  8,134    $    610    $    542
     Co-venturers' share of combined income     4,764         351         378
                                             --------    --------    --------
                                             $ 12,898    $    961    $    920
                                             ========    ========    ========

               Reconciliation of Partnership's Share of Income

                                               1996       1995         1994
                                               ----       ----         ----

   Partnership's share of income, 
     as shown above                          $  8,134   $     610    $    542
   Amortization of excess basis                (1,512)       (100)       (100)
                                             --------   ---------    --------
   Partnership's share of ventures' income   $  6,622   $     510    $    442
                                             ========   =========    ========


        The Partnership's  share of ventures' net income is presented as follows
   in the statements of operations (in thousands):
                                                 1996       1995         1994
                                                 ----       ----         ----

        Partnership share of ventures' income  $  696      $  510      $  442
        Partnership's share of gain on sale
          of operating investment property      5,926           -           -
                                               ------      ------      ------
                                               $6,622       $ 510      $  442
                                               ======       =====      ======

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


<PAGE>


       Investments in joint ventures,  at equity,  on the  accompanying  balance
    sheets at September  30, 1996 and 1995 is comprised of the  following  joint
    venture investments:
                                                              1996     1995
                                                              ----     ----

        Camelot Associates                                  $     -   $   103
        Boyer Lubbock Associates                                186        33
        Pine Trail Partnership                                2,658     2,894
                                                            -------   -------
             Investments in joint ventures, at equity       $2,844    $ 3,030
                                                            ======    =======


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

                                                 1996       1995        1994
                                                 ----       ----        ----

        Camelot Associates                     $6,078      $   274     $   284
        Boyer Lubbock Associates                  231          111         181
        Pine Trail Partnership                    400          360         310
                                               ------      -------     -------
                      Total                    $6,709      $   745     $   775
                                               ======      =======     =======


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

a) Camelot Associates
   -----------------

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

     Management  began to  actively  market the Camelot  Apartments  for sale to
   prospective  third party buyers during the second  quarter of fiscal 1996. In
   addition,  the  Partnership had engaged in preliminary  discussions  with its
   co-venture partners regarding the possible sale of the Partnership's interest
   in the  Camelot  joint  venture.  In  accordance  with the terms of the joint
   venture  agreement,  the  co-venturers had the right to match any third party
   offer obtained to buy the property. On June 19, 1996, the joint venture which
   owned the Camelot  Apartments  sold the operating  investment  property to an
   unrelated third party for  $15,150,000.  The  Partnership  received net sales
   proceeds of  approximately  $5.9 million after deducting  closing costs,  the
   repayment  of  the  outstanding  first  mortgage  loans,  the  buyout  of  an
   underlying ground lease and the co-venturers' share of the net proceeds.  The
   Partnership  made a special  distribution  to the Limited  Partners  from the
   Camelot sale proceeds of  approximately  $5.5  million,  or $256 per original
   $1,000 investment,  on August 15, 1996. The remaining net proceeds were added
   to the Partnership's cash reserves to provide for the potential capital needs
   of the Partnership's three remaining investments.  The gain recognized by the
   Camelot joint venture totaled $12,089,000 and the Partnership's share of such
   gain amounted to $5,926,000,  net of the write-off of the unamortized balance
   of the Partnership's excess basis in the Camelot joint venture of $1,506,000.

     Taxable income and tax loss from  operations in each year were allocated to
   the  Partnership  and the  co-venturers  generally  in  accordance  with cash
   distributions except that all depreciation attributable to a step-up in basis
   pursuant to an election  under Section 754 of the Internal  Revenue Code as a
   result of the investment by the Partnership was allocated to the Partnership.
   Allocations  of the  venture's  operations  among  the  Partnership  and  the
   co-venturers for financial  accounting  purposes have been made in conformity
   with the allocations of taxable income or tax loss.


<PAGE>



     The joint venture had entered into a property  management  contract with an
   affiliate  of the  co-venturers.  Fees due under the terms of the  management
   contract amounted to 4% of collected rents. For the period October 1, 1995 to
   June 19, 1996 and the years ended September 30, 1995 and 1994, the management
   company earned fees of $76,000, $103,000 and $98,000, respectively.

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

     On June 30, 1981,  the  Partnership  acquired an interest in Boyer  Lubbock
   Associates,  a Texas  general  partnership  organized to purchase and operate
   Central Plaza, a 151,857 square foot shopping center in Lubbock,  Texas.  The
   Partnership  is a general  partner in the joint  venture.  The  Partnership's
   co-venturer is an affiliate of The Boyer Company. Revenue from a major tenant
   of Central Plaza accounted for 26% of the venture's total revenues for fiscal
   1996.

     The aggregate cash  investment by the  Partnership for its 50% interest was
   approximately  $2,076,000  (including an acquisition  fee of $225,000 paid to
   the  Adviser).   The  Partnership's  interest  was  acquired  subject  to  an
   institutional  nonrecourse  first  mortgage  with a balance of  approximately
   $4,790,000  at the  time  of  closing.  The  venture's  debt  was  originally
   scheduled to mature on December 1, 1994.  During the first  quarter of fiscal
   1995, the venture  obtained an extension of the maturity date from the lender
   to January 1, 1995.  During the second  quarter of fiscal  1995,  the venture
   obtained  a mortgage  loan from a new lender  which  enabled  the  venture to
   repay,  in full,  this  maturing  obligation.  The new loan,  in the  initial
   principal  amount of  $4,200,000,  bears interest at a rate of 10% per annum.
   Monthly payments of principal and interest of  approximately  $37,000 are due
   until  maturity  in January  2002.  The loan has a balance of  $4,162,000  at
   September 30, 1996.

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

     Taxable income and tax loss before  depreciation are generally allocated in
   accordance with cash distributions,  after equal allocation of profits in the
   amount required to be transferred to the capital cash reserve accounts and to
   amortize  the  indebtedness  of the joint  venture.  Depreciation  expense is
   allocated in accordance  with the tax basis of the capital  contributions  of
   the Partnership  and the  co-venturer,  after  adjustment for liabilities and
   capital  improvements.  In the  event  of no  available  cash  flow,  100% of
   remaining profit or loss is allocated to the Partnership.  Allocations of the
   venture's   operations  between  the  Partnership  and  the  co-venturer  for
   financial   accounting  purposes  have  been  made  in  conformity  with  the
   allocations of taxable income or tax loss.

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

     The Central Plaza property is co-managed by an affiliate of the co-venturer
   and an unrelated  third party.  For the years ended  September 30, 1996, 1995
   and 1994, the affiliate of the  co-venturer  earned fees of $41,000,  $37,000
   and $38,000,  respectively.  In addition, during the year ended September 30,
   1995 lease commissions  aggregating $7,000 were also paid to the affiliate of
   the co-venturer.  No lease  commissions were paid to affiliates for the years
   ended September 30, 1996 and 1994.



<PAGE>


c) Pine Trail Partnership
   ----------------------

     On November 12, 1981,  the  Partnership  acquired an interest in Pine Trail
   Partnership,  a Florida general partnership organized to own and operate Pine
   Trail  Center,  a 266,042  square  foot  shopping  center in West Palm Beach,
   Florida.  The  Partnership  is a general  partner in the joint  venture.  The
   Partnership's co-venturer is a partnership comprised of certain individuals.

     The Partnership invested approximately $6,236,000 (including an acquisition
   fee of $645,600  paid to the Adviser) for its 50% interest.  The  co-venturer
   contributed  its  interest in the  property to the joint  venture.  The joint
   venture is subject to an institutional nonrecourse first mortgage which had a
   balance of approximately  $8,140,000 at the time of the closing. The mortgage
   loan has a  scheduled  maturity  date of  January  1,  2001.  The Pine  Trail
   Shopping Center has five out-parcels on the site, covering  approximately six
   acres,  which  have been  leased by the Pine  Trail  Partnership  from  third
   parties  under five  separate  ground leases since the inception of the joint
   venture.  During fiscal 1995, the joint venture  completed the acquisition of
   one of these  out-parcels,  containing  60,248 square feet,  for the purchase
   price of $350,000.  This purchase was 100% financed with a non-recourse first
   mortgage loan secured by the lease of the free-standing restaurant located on
   the  out-parcel.  The loan bears interest at the prime rate plus  one-percent
   and requires monthly principal and interest payments over a 5-year term.

     The joint venture  agreement  provides that the Partnership  will receive a
   noncumulative  annual cash  distribution,  payable  quarterly,  from net cash
   flow.  The  first  $515,000  of net cash  flow  shall be  distributed  to the
   Partnership,  and the next $235,788 of net cash flow shall be  distributed to
   the co-venturer.  Any excess cash flow shall be allocated equally between the
   Partners.  During  fiscal  1996,  1995 and 1994 the property did not generate
   sufficient  cash flow for the  Partnership  to receive its minimum  preferred
   distribution of $515,000.

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

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

     The joint  venture  entered  into a property  management  contract  with an
   affiliate of the  co-venturer  cancellable  at the option of the  Partnership
   upon the occurrence of certain events. The contract provides for a management
   fee equal to 4% of gross rents  collected.  For the years ended September 30,
   1996, 1995 and 1994, the property manager earned fees of $74,000, $76,000 and
   $71,000,  respectively.  In  addition,  the  property  manager is entitled to
   leasing commissions at prevailing market rates. Leasing commissions earned by
   the property  manager were  $23,000,  $41,000 and $40,000 for the years ended
   September 30, 1996, 1995 and 1994, respectively.


<PAGE>



6.   Note and Interest Receivable, Net

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

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

     The principal amount of the note receivable of $3,445,000 bears interest at
   9%  annually,  matures  on  January  1, 2000 and is  subordinated  to a first
   mortgage. Interest and principal payments on the note are payable only to the
   extent of net cash flow from the  properties  sold,  as  defined  in the sale
   documents.  Any interest not received will accrue  additional  interest of 9%
   per annum.  The  Partnership's  policy has been to defer  recognition  of all
   interest  income on the note until  collected,  due to the uncertainty of its
   collectibility.  To date,  the  Partnership  has not  received  any  interest
   payments. Per the terms of the note agreement, accrued interest receivable as
   of  September  30,  1996  and  1995  would be  approximately  $6,068,000  and
   $5,283,000, respectively. Since the properties continue to generate operating
   deficits and the Partnership's note receivable is subordinated to other first
   mortgage debt, there is significant  uncertainty as to the  collectibility of
   both the  principal  and accrued  interest as of  September  30,  1996.  As a
   result,  the  portion  of the  remaining  gain  to be  recognized,  which  is
   represented  by the note  and  accrued  interest,  has  been  deferred  until
   realized in cash.

7.   Mortgage Note Payable

      The mortgage note payable at September 30, 1996 and 1995 is secured by the
    Partnership's  wholly-owned  Northeast Plaza Shopping  Center.  On March 29,
    1994,  the  Partnership  refinanced  the existing  wraparound  mortgage note
    secured by  Northeast  Plaza,  which had been in default for over two years,
    with a new loan issued by the prior underlying  first mortgage  lender.  The
    new loan, in the initial principal amount of $1,722,000,  has a term of five
    years and bears interest at a fixed rate of 9% per annum.  Monthly principal
    and interest  payments of $22,000 are due through maturity on April 1, 1999.
    The loan may be prepaid at anytime without  penalty.  The fair value of this
    mortgage note payable  approximated  its carrying  value as of September 30,
    1996.

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

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

                  1997             $   142
                  1998                 154
                  1999               1,124
                                   -------
                                   $ 1,420
                                   =======
<PAGE>
8.  Legal Proceedings and Related Contingencies

      Management  believes that the  Partnership's  efforts to sell or refinance
    the Northeast Plaza property have been impeded by potential buyer and lender
    concerns of an  environmental  nature with respect to the  property.  During
    1990, it was discovered  that certain  underground  storage tanks of a Mobil
    service  station  located  adjacent  to the  shopping  center had leaked and
    contaminated the ground water in the vicinity of the station. Since the time
    that the  contamination  was discovered,  Mobil Oil Corporation  (Mobil) has
    investigated  the problem and is progressing with efforts to remedy the soil
    and  ground  water  contamination  under  the  supervision  of  the  Florida
    Department of Environmental Regulation,  which has approved Mobil's remedial
    action  plan.   During  fiscal  1990,  the   Partnership   had  obtained  an
    indemnification  agreement from Mobil in which Mobil agreed to bear the cost
    of  all  damages  and  required  clean-up   expenses.   Furthermore,   Mobil
    indemnified  the  Partnership  against its inability to sell,  transfer,  or
    obtain financing on the property because of the  contamination.  As a result
    of the contamination of the ground water at Northeast Plaza, the Partnership
    has incurred certain damages, primarily related to the inability to sell the
    property and to delays in the process of refinancing the property's mortgage
    indebtedness.  The Partnership has incurred  significant  out-of-pocket  and
    legal expenses in connection with such sale and refinancing efforts. Despite
    repeated requests by the Partnership for compensation under the terms of the
    indemnification  agreement,  to date  Mobil has  refused to  compensate  the
    Partnership  for any of these  damages.  During the first  quarter of fiscal
    1993, the  Partnership  filed suit against Mobil for breach of indemnity and
    property  damage.  On April 28, 1995,  Mobil 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 is for  substantially  all of the same claims and
    utilizes  the  substantial  discovery  and trial  preparation  work  already
    completed for the Federal case. The Partnership is seeking  judgment against
    Mobil which would award the Partnership compensatory damages,  out-of-pocket
    costs,  attorneys'  fees and such other relief as the court may deem proper.
    On November 14, 1996, the state court granted the  Partnership's  Motion for
    Partial  Summary  Judgment as to liability with regard to the  Partnership's
    claims  for  damages.  During  fiscal  1996,  the  Partnership  agreed  to a
    mediation  session with Mobil,  which took place on November 25, 1996, in an
    attempt to agree on the amount of the damages.  A settlement was not reached
    at the mediation,  but discussions  are  continuing.  If a settlement is not
    reached,  a jury trial is expected to commence sometime in early April 1997.
    The outcome of these  legal  proceedings  cannot  presently  be  determined.
    Accordingly,  the  out-of-pocket  costs,  legal  fees and  related  expenses
    related  to  this   situation   have  been   expensed  as  incurred  on  the
    Partnership's  income  statements  and no estimate of any  recoveries  which
    could result from this litigation have been recorded.

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

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

      In January 1996, PaineWebber signed a memorandum of understanding with the
    plaintiffs in the New York Limited  Partnership  Actions outlining the terms
    under  which the parties  have  agreed to settle the case.  Pursuant to that
    memorandum of understanding,  PaineWebber irrevocably deposited $125 million
    into an escrow  fund under the  supervision  of the United  States  District
    Court  for the  Southern  District  of New  York to be used to  resolve  the
    litigation in accordance with a definitive  settlement agreement and plan of
    allocation. On July 17, 1996, PaineWebber and the class plaintiffs submitted
    a definitive  settlement agreement which has been preliminarily  approved by
    the court and  provides  for the  complete  resolution  of the class  action
    litigation,  including  releases in favor of the Partnership and the General
    Partners,  and the  allocation  of the $125  million  settlement  fund among
    investors in the various  partnerships  at issue in the case. As part of the
    settlement,  PaineWebber  also agreed to provide  class members with certain
    financial  guarantees  relating to some of the partnerships.  The details of
    the settlement are described in a notice mailed directly to class members at
    the direction of the court.  A final hearing on the fairness of the proposed
    settlement  was held in December 1996, and a ruling by the court as a result
    of this final hearing is currently pending.

      In June  1996,  approximately  50  plaintiffs  filed  an  action  entitled
    Bandrowski v.  PaineWebber  Inc. in  Sacramento,  California  Superior Court
    against PaineWebber  Incorporated and various affiliated entities concerning
    the  plaintiff's   purchases  of  various  limited  partnership   interests,
    including those offered by the  Partnership.  The complaint  alleged,  among
    other things,  that PaineWebber and its related entities committed fraud and
    misrepresentation  and  breached  fiduciary  duties  allegedly  owed  to the
    plaintiffs by selling or promoting limited partnership investments that were
    unsuitable for the plaintiffs and by overstating the benefits,  understating
    the risks and failing to state  material facts  concerning the  investments.
    The  complaint  sought  compensatory  damages of $15 million  plus  punitive
    damages against PaineWebber.

      Mediation with respect to the Bandrowski  action  described above was held
    in December  1996.  As a result of such  mediation,  a tentative  settlement
    between PaineWebber and the plaintiffs was reached which would provide for a
    complete resolution of the action. PaineWebber anticipates that releases and
    dismissals with regard to this action will be received by February 1997.

      Under certain limited circumstances, pursuant to the Partnership Agreement
    and other contractual obligations,  PaineWebber affiliates could be entitled
    to  indemnification  for expenses and  liabilities  in  connection  with the
    litigation  described above. At the present time, the General Partner cannot
    estimate the impact, if any, of the potential  indemnification claims on the
    Partnership's  financial  statements,  taken  as a  whole.  Accordingly,  no
    provision for any liability which could result from the eventual  outcome of
    these matters has been made in the accompanying financial statements.


9.   Subsequent Event

      On November 15, 1996, the Partnership  distributed $105,000 to the Limited
    Partners and $1,000 to the General  Partner for the quarter ended  September
    30, 1996.



<PAGE>

<TABLE>



Schedule III - Real Estate and Accumulated Depreciation

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

                               September 30, 1996
                                 (In thousands)
<CAPTION>

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

Shopping Center
Sarasota, 
Florida     $ 1,420     $950   $1,930       $2,158       $950    $4,088     $5,038     $1,389   1964 - 1978  9/25/81   40 years
            =======     ====   ======       ======       ====    ======     ======     ======

Notes:

(A) The  aggregate  cost of real estate owned at September  30, 1996 for Federal income tax purposes is approximately $5,038,000.
(B) See Notes 4 and 7 to Financial Statements. 
(C) Reconciliation of real estate owned:

                                                   1996          1995          1994
                                                   ----          ----          ----

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                     $ 1,287       $ 1,185       $ 1,083
Depreciation expense                                 102           102           102
                                                 -------       -------       -------
Balance at end of year                           $ 1,389       $ 1,287       $ 1,185
                                                 =======       =======       =======

</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, 1996 and 1995, and the related  combined  statements of income and
changes in venturers' capital, and cash flows for each of the three years in the
period  ended  September  30,  1996.  Our audits  also  included  the  financial
statement schedule listed in the Index at Item 14(a). These financial statements
and  schedule  are  the  responsibility  of the  Partnership's  management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule  based on our audits.  We did not audit the  financial  statements  and
schedule of Camelot  Associates,  which  statements  reflect 15% of the combined
assets of the Combined  Joint Ventures of Paine Webber Income  Properties  Three
Limited  Partnership as of September 30, 1995,  36%, 44% and 43% of the combined
revenues of the Combined Joint Ventures of Paine Webber Income  Properties Three
Limited  Partnership  for the years ended  September  30,  1996,  1995 and 1994,
respectively,  and 100% of the gain on sale of operating investment property for
the year ended September 30, 1996. Those statements and schedule were audited by
other auditors,  whose report has been furnished to us, and our opinion, insofar
as it relates to data  included for Camelot  Associates,  is based solely on the
report of the other auditors.

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

     In our opinion,  based on our audits and the report of other auditors,  the
combined financial  statements referred to above present fairly, in all material
respects,  the combined  financial  position of the Combined  Joint  Ventures of
Paine Webber Income  Properties Three Limited  Partnership at September 30, 1996
and 1995, and the combined  results of their operations and their cash flows for
each of the three years in the period  ended  September  30, 1996 in  conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.





                                /S/ ERNST & YOUNG LLP
                                ERNST & YOUNG LLP






Boston, Massachusetts
January 10, 1997


<PAGE>


                        Report of Independent Accountants



To the Venturers of
Camelot Associates:

    We have audited the  accompanying  balance sheets of Camelot  Associates (an
Ohio  Partnership)  as of June 19, 1996 and September 30, 1995,  and the related
statements of income,  venturers'  deficit and cash flows for the period October
1,  1995 to June  19,  1996 and for each of the two  years in the  period  ended
September 30, 1995.  These financial  statements are the  responsibility  of the
Partnership's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

    In our opinion,  the financial  statements referred to above present fairly,
in all material respects,  the financial position of Camelot Associates (an Ohio
Partnership)  as of June 19, 1996 and September 30, 1995, and the results of its
operations  and its cash flows for the period  October 1, 1995 to June 19,  1996
and for  each of the two  years in the  period  ended  September  30,  1995,  in
conformity with generally accepted accounting principles.

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




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






Cincinnati, Ohio
January 10, 1997


<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                             COMBINED BALANCE SHEETS
                           September 30, 1996 and 1995
                                 (In thousands)

                                     Assets
                                                      1996            1995
                                                      ----            ----
Current assets:
   Cash and cash equivalents                       $     198         $    800
   Escrowed funds, principally for 
     payment of real estate taxes                        490              451
   Accounts receivable                                   129               91
   Note receivable                                        80                -
   Prepaid expenses                                       36               35
   Capital improvement reserve                             2                -
                                                   ---------         --------
          Total current assets                           935            1,377

Operating investment properties:
   Land                                                3,893            4,392
   Buildings, improvements and equipment              20,411           27,400
                                                   ---------         --------
                                                      24,304           31,792
                                                   
   Less accumulated depreciation                      (9,622)         (14,282)
                                                   ---------         --------
          Net operating investment properties         14,682           17,510

Deferred expenses, net of accumulated amortization
  of $201 ($185 in 1995)                                 247              263
                                                   ---------         --------
                                                   $  15,864         $ 19,150
                                                   =========         ========

                       Liabilities and Venturers' Capital
Current liabilities:
   Accounts payable                                $      64         $    178
   Distributions payable to venturers                     50              436
   Accrued interest                                      125              158
   Accrued real estate taxes                             333              458
   Other accrued liabilities                              26               28
   Prepaid rent                                            -               18
   Long-term debt - current portion                      205            2,552
                                                   ---------         --------
         Total current liabilities                       803            3,828

Notes payable                                             14               14

Tenant security deposits                                   9               97

Long-term debt                                        11,324           13,456

Commitments (Note 6)

Venturers' capital                                     3,714            1,755
                                                   ---------         --------
                                                   $  15,864         $ 19,150
                                                   =========         ========



                             See accompanying notes.


<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

         COMBINED STATEMENTS OF INCOME AND CHANGES IN VENTURERS' CAPITAL
              For the years ended Setember 30, 1996, 1995 and 1994
                                 (In thousands)


                                                1996       1995        1994
                                                ----       ----        ----
REVENUES:
   Rental income                              $ 4,892     $ 5,479     $ 5,306
   Reimbursement from tenants                     740         707         724
   Interest income and other                       20          63          27
                                              -------     -------     -------
                                                5,652       6,249       6,057

EXPENSES:
   Interest expense                             1,644       1,737       1,705
   Depreciation expense                           710         806         891
   Real estate taxes                              553         632         586
   Management fees                                190         215         206
   Ground rent                                    126         147         154
   Repairs and maintenance                        623         674         569
   Insurance                                       73          89          72
   Utilities                                      229         257         266
   General and administrative                     360         266         291
   Other                                          319         449         380
   Amortization expense                            16          16          17
                                              -------     -------     -------
                                                4,843       5,288       5,137
                                              -------     -------     -------

Operating income                                  809         961         920

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

NET INCOME                                     12,898         961         920

Distributions to venturers                    (10,939)     (1,177)     (1,083)

Contributions from venturers                        -           -          75

Venturers' capital, beginning of year           1,755       1,971       2,059
                                              -------     -------     -------

Venturers' capital, end of year               $ 3,714     $ 1,755     $ 1,971
                                              =======     =======     =======











                             See accompanying notes.


<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                        COMBINED STATEMENTS OF CASH FLOWS
              For the years ended September 30, 1996, 1995 and 1994
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)

                                                1996        1995        1994
                                                ----        ----        ----
Cash flows from operating activities:
   Net income                               $  12,898    $    961    $    920
   Adjustments to reconcile net income to
     net cash provided by operating activities:
      Depreciation and amortization               726         822         908
      Amortization of deferred financing costs     26          29           -
      Gain on sale of operating investment 
        property                              (12,089)          -           -
      Changes in assets and liabilities:
         Escrowed funds                           (39)       (119)        (45)
         Accounts receivable                      (38)         49         (40)
         Note receivable                          (80)          -           -
         Prepaid expenses                          (1)         (1)         (1)
         Capital improvement reserve               (2)         10         (10)
         Deferred expenses                        (59)       (198)        (22)
         Other assets                               -           -           3
         Accounts payable                        (114)         95         (34)
         Accrued interest                         (33)          3          (4)
         Accrued real estate taxes               (125)         34          11
         Other accrued liabilities                 (2)         (4)         14
         Prepaid rent                             (18)         (1)          9
         Tenant security deposits                 (88)         (3)         (6)
                                            ---------    --------    --------
            Total adjustments                 (11,936)        716         783
                                            ---------    --------    --------
            Net cash provided by 
              operating activities                962       1,677       1,703

Cash flows from investing activities:
   Additions to operating investment 
     properties                                  (230)       (544)       (342)
   Proceeds from sale of operating
     investment property                        14,470          -           -
                                             ---------   ---------    -------
            Net cash provided by (used in)
                investing activities           14,240        (544)       (342)

Cash flows from financing activities:
   Capital contributions                            -           -          15
   Principal payments on long-term debt        (4,479)     (4,321)       (488)
   Distributions to partners                  (11,325)     (1,011)       (946)
   Proceeds from refinancing of debt                -       4,200           -
   Proceeds of long-term debt                       -         350           -
                                            ---------    --------    --------
            Net cash used in financing
               activities                     (15,804)      (782)      (1,419)
                                            ---------    --------    --------

Net (decrease) increase in cash and
   cash equivalents                              (602)       351         (58)

Cash and cash equivalents,
   beginning of year                              800        449         507
                                            ---------   --------     -------

Cash and cash equivalents, end of year      $     198    $   800     $   449
                                            =========    =======     =======

Cash paid during the year for interest      $   1,652    $ 1,734     $ 1,709
                                            =========    =======     =======

                             See accompanying notes.


<PAGE>


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

1.    Organization and Nature of Operations

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

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

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

            Camelot Associates                   6/29/81
            Boyer Lubbock Associates             6/30/81
            Pine Trail Partnership               11/12/81

      During  fiscal 1996,  Camelot  Associates  sold its  operating  investment
property and  distributed the net proceeds to the venture  partners.  See Note 3
for a further discussion of this transaction.

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, 1996 and 1995 and revenues and expenses for
each of the three years in the period ended  September 30, 1996.  Actual results
could differ from the estimates and assumptions used.

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

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

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

     Management of PWIP3 has reviewed FAS No. 121 "Accounting for the Impairment
of  Long-Lived  Assets and for  Long-Lived  Assets To Be Disposed  Of," which is
effective for financial  statements for years beginning after December 15, 1995,
and  believes  this new  pronouncement  will not have a  material  effect on the
financial statements of the Combined Joint Ventures.

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



<PAGE>


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

     Deferred  expenses consist  primarily of loan fees and leasing  commissions
which are being amortized over the lives of the related loans and related leases
on the straight-line  method.  Amortization of deferred loan fees is included in
interest expense on the accompanying income statements.

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

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

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

    The  carrying  amounts  of  cash  and  cash  equivalents,   escrowed  funds,
receivables, reserved cash, accounts payable and accrued liabilities approximate
their fair values as of September 30, 1996 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 is  estimated  using
discounted  cash flow  analyses,  based on the  current  market rate for similar
types of borrowing arrangements.

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

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

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

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

3.   Joint Ventures

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

  a.  Camelot Associates
      ------------------

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



<PAGE>


  b. Boyer Lubbock Associates
    -------------------------

     The joint  venture owns and  operates  Central  Plaza  Shopping  Center,  a
151,857 square foot shopping center, located in Lubbock, Texas.

  c. Pine Trail Partnership
     ----------------------

     The joint venture owns and operates Pine Trail Shopping  Center,  a 266,042
square foot shopping center, located in West Palm Beach, Florida.

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

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

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

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

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

     The joint venture  agreements  generally provide that distributions will be
paid  first to PWIP3  from net cash flow  monthly or  quarterly,  equivalent  to
$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 is to be  allocated  between  the
partners in accordance with their respective ownership percentages.

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

4.   Related party transactions

     The  Combined  Joint   Ventures  have  entered  into  property   management
agreements  with  affiliates  of the  co-venturers,  cancellable  at  the  joint
ventures'  option upon the occurrence of certain  events.  The  management  fees
generally  are equal to 4% of gross  receipts,  as  defined  in the  agreements.
Management  fees  totalling  $190,000,   $215,000  and  $206,000  were  paid  to
affiliates of the  co-venturers for the years ended September 30, 1996, 1995 and
1994, respectively.

     Certain of the joint ventures pay leasing  commissions to affiliates of the
co-venturers.  Leasing  commissions  paid to  affiliates  amounted  to  $23,000,
$48,000 and $4,000 in fiscal 1996, 1995 and 1994, respectively.



<PAGE>


5.   Long-term debt

     Long-term debt at September 30, 1996 and 1995 consists of the following (in
thousands):

                                                            1996        1995
                                                            ----        ----

     10%   nonrecourse   mortgage   loan
     secured by Central  Plaza  Shopping
     Center,    payable    in    monthly
     installments   of  $37,   including
     interest,  with a final  payment of
     $4,010 due  January  2,  2002.  The
     fair  value of this  mortgage  note
     payable  approximated  its carrying
     value as of  September  30, 1996.                 $  4,162       $ 4,187

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

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

     12.25%  mortgage note,  payable $85
     per month including interest with a
     payment  of $5,874  due  January 1,
     2001,  secured  by the  Pine  Trail
     Shopping Center.  The fair value of
     this    mortgage    note    payable
     approximated $7,476 as of September
     30, 1996.                                            7,023         7,175

     Mortgage  note bearing  interest at
     prime  plus 1% (9.25% at  September
     30,  1996),  payable  $3 per month,
     including interest,  with a payment
     of $329 due in 2000, secured by 1.4
     acres  of land  and  the  operating
     investment  thereon  owned  by  the
     Pine Trail joint venture.  The fair
     value of this mortgage note payable
     approximated  its carrying value as
     of   September   30,   1996.    See
     discussion below.                                      344           348
                                                        -------       -------
                                                         11,529        16,008
      Less amounts due within one year                     (205)       (2,552)
                                                        -------       -------
                                                        $11,324       $13,456
                                                        =======       =======



<PAGE>



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

                             1997                  $    205
                             1998                       231
                             1999                       254
                             2000                       627
                             2001                       323
                             Thereafter               9,889
                                                   -------
                                                   $ 11,529
                                                   ========

    One of the first  mortgage loans secured by the Camelot  Apartments,  with a
balance of  $2,298,000  as of  September  30, 1995,  was  scheduled to mature on
January 1, 1996.  During the current year, the venture  obtained an extension of
the maturity date from the lender to July 1, 1996 in return for an extension fee
of  $5,600.  On June 19,  1996,  the  joint  venture  which  owned  the  Camelot
Apartments  sold the operating  investment  property to an unrelated third party
for $15,150,000. PWIP3 received net sales proceeds of approximately $5.9 million
after  deducting  closing  costs,  the  repayment of the two  outstanding  first
mortgage loans, the buyout of an underlying  ground lease and the  co-venturers'
share of the net proceeds.

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

    In  accordance   with  the  mortgage  note   agreement  of  the  Pine  Trail
Partnership,  the joint venture is required to escrow certain insurance premiums
and real estate taxes totalling  $228,000 and $216,000 at September 30, 1996 and
1995, respectively.

6.  Leases

     The  Combined  Joint  Ventures  derive a  portion  of their  revenues  from
noncancellable  shopping  center  operating  leases.  The initial  terms of such
leases  range from five to  twenty-five  years with the  majority  of the leases
containing renewal options. Revenue from a major tenant of the property owned by
Boyer Lubbock  Associates  accounted for 26% of the venture's total revenues for
the year ended September 30, 1996.

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

                             1997          $  2,662
                             1998             2,536
                             1999             2,403
                             2000             2,280
                             2001             1,804
                             Thereafter       9,656
                                           --------
                               Total       $ 21,341
                                           ========

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

     The operating  investment property of the Pine Trail Partnership is subject
to ground  leases on the acreage not  encumbered  by long-term  debt (Note 5) or
owned in fee. The leases contain various  provisions with  stipulations for cost
of living increases and contingent payments based on sales and purchase options.
The lease terms range from 35 to 99 years with certain renewal options.

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

                             1997          $    113
                             1998               113
                             1999               113
                             2000               113
                             2001               113
                             Thereafter       5,746
                                           --------
                               Total       $  6,311
                                           ========


<PAGE>






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

                               September 30, 1996
                                 (In thousands)
<CAPTION>
                                                                                                                       Life on Which
                              Initial Cost to                    Gross Amount at Which Carried at                       Depreciation
                                 Partnership     Costs                 End of Year                                       in Latest
                                 Buildings    Capitalized       Buildings                                                Income
                                 and          Subsequent to     and                 Accumulated   Date of       Date     Statement
Description Encumbrances(B) Land Improvements Acquisition  Land Improvements  Total Depreciation  Construction  Acquired is Computed
----------- --------------- ---- ------------ -----------  ---- -------------  ----- -----------  ------------  -------- ----------
<S>             <C>         <C>     <C>        <C>         <C>      <C>         <C>       <C>       <C>         <C>       <C> 

COMBINED JOINT VENTURES:

Shopping Center $ 4,162     $ 966  $ 4,573     $1,014      $  966   $ 5,587    $ 6,553   $3,992    1978-80     6/30/81  15-31.5 yrs.
Lubbock, TX

Shopping Center
West Palm 
 Beach, FL       7,367      2,561  13,306       1,885       2,927    14,824     17,751    5,630    1980-82     11/12/81  3-31.5 yrs
               -------     ------ -------      ------      ------   -------    -------   ------
               $11,529     $3,527 $17,879      $2,899      $3,893   $20,411    $24,304   $9,622
               =======     ====== =======      ======      ======   =======    =======   ======

Notes:
(A) The  aggregate  cost of real estate owned at September  30, 1996 for Federal income  tax  purposes  is  approximately  $20,884.
(B) See  Note 5 to  Combined Financial  Statements for a description of the terms of the debt encumbering the properties.
(C) Reconciliation of real estate owned:
                                                   1996           1995          1994
                                                   ----           ----          ----

Balance at beginning of year                     $31,792       $31,248       $30,906
Increase due to additions                            230           544           342
Write-off due to dispositions                     (7,718)            -             -
                                                 -------       -------       -------
Balance at end of year                           $24,304       $31,792       $31,248
                                                 =======       =======       =======

(D) Reconciliation of accumulated depreciation:

Balance at beginning of year                     $14,282       $13,476       $12,585
Depreciation expense                                 710           806           891
Decreases due to dispositions                     (5,370)            -             -
                                                 -------       -------       -------
Balance at end of year                           $ 9,622       $14,282       $13,476
                                                 =======       =======       =======


</TABLE>