UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549
                    ----------------------------------
                                    FORM 10-Q

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

               FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998

                                    OR

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

               For the transition period from ________ to _______.

                         Commission File Number: 0-10979

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

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

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

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

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 |_|.

<PAGE>


         PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                              BALANCE SHEETS
             June 30, 1998 and September 30, 1997 (Unaudited)
                              (In thousands)

                                  ASSETS

                                                   June 30    September 30
                                                   -------    ------------

Operating investment property, at cost:
   Land                                            $    950    $     950
   Building and improvements                          4,088        4,088
                                                   --------    ---------
                                                      5,038        5,038
   Less accumulated depreciation                     (1,568)      (1,491)
                                                   --------    ---------
      Net operating investment property               3,470        3,547

Investment in joint venture, at equity                    -          215

Cash and cash equivalents                               965          973
Deferred expenses, net                                   16           32
                                                   --------    ---------
                                                   $  4,451    $   4,767
                                                   ========    =========

                        LIABILITIES AND PARTNERS' CAPITAL

Accounts payable - affiliates                      $      1    $       4
Accrued expenses                                         35           58
Mortgage note payable                                 1,164        1,278
Partners' capital                                     3,251        3,427
                                                   --------    ---------
                                                   $  4,451    $   4,767
                                                   ========    =========








                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                            STATEMENTS OF OPERATIONS
     For the three and nine months ended June 30, 1998 and 1997 (Unaudited)
                    (In thousands, except per Unit amounts)

                                    Three Months Ended      Nine Months Ended
                                        June 30,                 June 30
                                   -----------------     -----------------------
                                     1998     1997         1998        1997
                                     ----     ----         ----        ----

Revenues:
   Rental revenues                 $   119   $  119      $   358     $  358
   Interest income                     168       13          222         40
                                   -------   ------      -------     ------
                                       287      132          580        398

Expenses:
   Interest expense                     32       36           99        109
   Management fees                       1        5            3         13
   Depreciation expense                 26       26           77         77
   General and administrative          238      171          366        314
                                   -------   ------      -------     ------
                                       297      238          545        513
                                   -------   ------      -------     ------

Operating income (loss)                (10)    (106)          35       (115)

Partnership's share of
   ventures' income (losses)             -       97         (155)       286

Partnership's share of gain on
   sale of investment property           -        -        2,392          -
                                   -------   ------      -------     ------

Net income (loss)                  $   (10)  $   (9)     $ 2,272     $  171
                                   =======   ======      =======     ======

Net income (loss) per
  Limited Partnership Unit         $ (0.46)  $(0.41)     $104.37     $ 7.86
                                   =======   ======      =======     ======


Cash distributions per 
  Limited Partnership Unit         $107.31   $ 4.88      $113.50     $14.64
                                   =======   ======      =======     ======

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



                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

              STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
          For the nine months ended June 30, 1998 and 1997 (Unaudited)
                                 (In thousands)

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

Balance at September 30, 1996                  $     -           $ 6,161
Cash distributions                                  (3)             (316)
Net income                                           2               169
                                               -------           -------
Balance at June 30, 1997                       $    (1)          $ 6,014
                                               =======           =======

Balance at September 30, 1997                  $    33           $ 3,394
Cash distributions                                  (2)           (2,446)
Net income                                          23             2,249
                                               -------           -------
Balance at June 30, 1998                       $    54           $ 3,197
                                               =======           =======























                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS
          For the nine months ended June 30, 1998 and 1997 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)

                                                        1998        1997
                                                        ----        ----
Cash flows from operating activities:
   Net income                                      $   2,272   $     171
   Adjustments to reconcile net income to
    net cash provided by (used in) operating
       activities:
     Partnership's share of gain on sale of 
       investment property                            (2,392)          -
     Depreciation expense                                 77          77
     Amortization of deferred financing costs             16          16
     Partnership's share of ventures' income
        (losses)                                         155        (286)
     Changes in assets and liabilities:
      Accounts payable - affiliates                      (23)          -
      Accounts payable and accrued expenses               (3)          5
                                                   ---------   ---------
         Total adjustments                            (2,170)       (188)
                                                   ---------   ---------
         Net cash provided by (used in)
           operating activities                          102         (17)

Cash flows from investing activities:
   Distributions from joint ventures                   2,452         289

Cash flows from financing activities:
   Distributions to partners                          (2,448)       (319)
   Principal payments on mortgage note payable          (114)       (105)
                                                   ---------   ---------
         Net cash used in financing activities        (2,562)       (424)
                                                   ---------   ---------

Net decrease in cash and cash equivalents                 (8)       (152)

Cash and cash equivalents, beginning of period           973       1,000
                                                   ---------   ---------

Cash and cash equivalents, end of period           $     965   $     848
                                                   =========   =========

Cash paid during the period for interest           $      83   $      93
                                                   =========   =========




                             See accompanying notes.


<PAGE>

                      PAINE WEBBER INCOME PROPERTIES THREE
                               LIMITED PARTNERSHIP
                          Notes to Financial Statements
                                   (Unaudited)


1.  General
    -------

      The accompanying financial statements,  footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in the
Partnership's  Annual  Report  for the year ended  September  30,  1997.  In the
opinion of management,  the accompanying  financial  statements,  which have not
been audited,  reflect all  adjustments  necessary to present fairly the results
for the interim  period.  All of the adjustments  reflected in the  accompanying
interim financial statements are of a normal recurring nature.

      The  accompanying  financial  statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting  principles
which  requires  management to make  estimates and  assumptions  that affect the
reported amounts of assets and liabilities and disclosures of contingent  assets
and  liabilities  as of June 30, 1998 and  September  30, 1997 and  revenues and
expenses  for the three- and  nine-month  periods  ended June 30, 1998 and 1997.
Actual results could differ from the estimates and assumptions used.

2.  Related Party Transactions
    --------------------------

      Management  fees earned by the Adviser for the  nine-month  periods  ended
June 30,  1998 and 1997  totalled  $3,000 and  $13,000,  respectively.  Accounts
payable - affiliates  at June 30, 1998 and September 30, 1997 consists of $1,000
and $4,000, respectively, of management fees payable to the Adviser.

      Included in general and  administrative  expenses for the nine months June
30,  1998  and  1997  is  $53,000  and   $50,000,   respectively,   representing
reimbursements  to an affiliate  of the General  Partner for  providing  certain
financial, accounting and investor communication services to the Partnership.

      Also included in general and  administrative  expenses for the nine months
ended June 30,  1998 and 1997 is $3,000 and $6,000,  respectively,  representing
fees paid to an affiliate,  Mitchell Hutchins Institutional Investors, Inc., for
managing the Partnership's cash assets.

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

      Note and  interest  receivable  at June 30,  1998 and  September  30, 1997
consists of a $3,445,336 note received in connection with the Partnership's sale
of its joint venture  interest in the Briarwood  joint venture  (which owned the
Briarwood and Gatewood  apartment  properties) in December of 1984. The note has
been  netted  against  deferred  gain  on  the  sale  of a  like  amount  on the
Partnership's  balance  sheet.  The note bears  interest at 9%  annually  and is
subordinated  to a first mortgage loan.  Interest and principal  payments on the
note are  payable  only to the  extent  of net  cash  flow  from the  properties
securing the note, as defined in the note  agreement.  Any interest not received
accrues additional  interest of 9% per annum. The Partnership's  policy has been
to defer recognition of all interest income on the note until collected,  due to
the  uncertainty of its  collectibility.  Until the quarter ended June 30, 1998,
the  Partnership  had not received any interest  payments since the inception of
the note.  During the quarter  ended June 30,  1998,  the  Partnership  received
$149,000  from the borrower  which has been  recorded as interest  income on the
accompanying  statement  of  operations.  Per the  terms of the note  agreement,
accrued  interest  receivable  as  of  June  30,  1998  would  be  approximately
$7,624,000. Since the Partnership's note receivable continues to be subordinated
to other  first  mortgage  debt,  there  is  significant  uncertainty  as to the
collectibility  of both the principal and the remaining  accrued  interest as of
June 30, 1998. As a result,  the portion of the remaining gain to be recognized,
which is represented by the note and the remaining  accrued  interest,  has been
deferred until realized in cash.

      On June 22, 1998,  the  Partnership  initiated a lawsuit in  Massachusetts
state court in connection with this note  receivable.  The suit alleges that the
defendants in this  lawsuit,  acting as agents for the  Partnership,  improperly
released  six of the  ten  properties  (including  the  Briarwood  and  Gatewood
apartment  properties) from the mortgage that secured the note  receivable,  and
that they  improperly  extended the maturity date of the note by ten years.  The
Partnership  is seeking  equitable  relief and  monetary  damages  for breach of
fiduciary duty, misrepresentation and related causes of action. No answer to the
complaint  has been filed  with the Court yet by the  defendants.  The  eventual
outcome of this litigation cannot be determined at the present time.

4.  Real Estate Investments
    -----------------------

      As  of  June  30,  1998,  the  Partnership  directly  owns  one  operating
investment property,  the Northeast Plaza Shopping Center, a 121,000 square foot
retail center located in Sarasota,  Florida (see Notes 5 and 6). The Partnership
had no joint venture  partnership  investments at June 30, 1998 (two at June 30,
1997). On March 3, 1998, Boyer Lubbock Associates,  a joint venture in which the
Partnership  had an  interest,  sold the  Central  Plaza  Shopping  Center to an
unrelated third party for a net price of $8,350,000.  The  Partnership  received
proceeds of  approximately  $2,199,000  after the assumption of the  outstanding
first  mortgage loan of $4,122,000,  closing costs and proration  adjustments of
$232,000,  and the co-venture partner's share of the proceeds of $1,797,000.  In
addition,  the  Partnership  received  $82,000 upon the liquidation of the joint
venture,  which  represented  its  share of the net cash  flow  from  operations
through the date of the sale. As a result of this  transaction,  the Partnership
made a Special Distribution to the Limited Partners of approximately $2,284,000,
or $106 per original  $1,000  investment,  on April 3, 1998.  The  Partnership's
share of the gain on the sale of the Central Plaza property totalled  $2,392,000
(net of the write-off of unamortized excess basis of $17,000).

      On August 1, 1997,  the  Partnership  sold its  interest in the Pine Trail
Shopping  Center to its joint  venture  partner  for a net price of  $6,150,000.
Funds to complete this transaction were provided from a refinancing of the first
mortgage  debt  secured  by  the  Pine  Trail  property.  As a  result  of  this
transaction,  the Partnership made a special capital distribution to the Limited
Partners of approximately $6,147,000, or $285.25 per original $1,000 investment,
on September 15, 1997. The  Partnership  recognized a gain of $3,565,000 (net of
the write-off of  unamortized  excess basis of $50,000) in the fourth quarter of
fiscal 1997 in connection with this sale transaction.

      The joint  ventures were  accounted for by using the equity method because
the  Partnership did not have a voting control  interest in the ventures.  Under
the equity method, the assets,  liabilities,  revenues and expenses of the joint
ventures did not appear in the Partnership's financial statements.  Instead, the
investments  were carried at cost  adjusted for the  Partnership's  share of the
ventures' earnings,  losses and distributions.  Summarized  operating results of
the Central  Plaza joint venture for the period from October 1, 1997 through the
date of sale, March 3, 1998, and the Central Plaza and Pine Trail joint ventures
for the three and nine months ended June 30, 1997 are as follows:

                    Condensed Combined Summary of Operations
           For the three and nine months ended June 30, 1998 and 1997
                                 (in thousands)

                                      Three Months Ended   Nine Months Ended
                                           June 30,            June 30
                                    --------------------  ------------------
                                       1998     1997        1998     1997
                                       ----     ----        ----     ----

     Rental revenues and expense
        recoveries                  $    -    $    885    $    443  $ 2,700
     Interest and other income           -           9           8       16
                                    ------    --------    --------  -------
                                         -         894         451    2,716

     Property operating expenses         -         268         215      880
     Interest expense                    -         328         171      993
     Depreciation and 
       amortization                      -         142         224      383
                                    ------    --------    --------  -------
                                         -         738         610    2,256
                                    ------    --------    --------  -------
     Operating income (loss)             -         156        (159)     460

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

     Net income                     $    -    $    156    $  5,408  $   460
                                    ======    ========    ========  =======


<PAGE>
                                     Three Months Ended   Nine Months Ended
                                           June 30,            June 30
                                    --------------------  ------------------
                                       1998     1997        1998     1997
                                       ----     ----        ----     ----

     Net income:
      Partnership's share of
        net income                  $    -    $     98    $  2,254  $   289
      Co-venturers' share of
        net income                       -          58       3,154      171
                                    ------    --------    --------  -------
    
                                    $    -    $    156    $  5,408  $   460
                                    ======    ========    ========  =======

               Reconciliation of Partnership's Share of Operations
    For the three and nine months ended June 30, 1998 and 1997 (in thousands)

                                      
                                     Three Months Ended   Nine Months Ended
                                           June 30,            June 30
                                    --------------------  ------------------
                                       1998     1997        1998       1997
                                       ----     ----        ----       ----

      Partnership's share of net
         income, as shown above     $     -    $   98     $  2,254   $  289
      Amortization of excess basis        -        (1)         (17)      (3)
                                    -------    ------     --------   ------
      Partnership's share of
         ventures' net income       $     -    $   97     $  2,237   $  286
                                    =======    ======     ========   ======

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

                                      T
                                     Three Months Ended   Nine Months Ended
                                           June 30,            June 30
                                    -------------------   ------------------
                                     1998     1997           1998       1997
                                     ----     ----           ----       ----

      Partnership's share of
        ventures' income (loss)     $     -  $    97       $  (155)   $   286
      Partnership's share of gain 
        on sale of investment
        property                          -        -          2,392         -
                                    -------  -------       --------   -------
                                    $     -  $    97       $  2,237   $   286
                                    =======  =======       ========   =======


5.  Mortgage Note Payable
    ---------------------

      The  mortgage  note  payable at June 30,  1998 and  September  30, 1997 is
secured by the  Partnership's  wholly-owned  Northeast Plaza Shopping Center. On
March 29, 1994, the Partnership refinanced the existing wraparound mortgage note
secured by Northeast Plaza, which had been in default for over two years, with a
new loan issued by the prior underlying first mortgage lender.  The new loan, in
the initial  principal amount of $1,722,000,  has a term of five years and bears
interest  at a fixed  rate  of 9% per  annum.  Monthly  principal  and  interest
payments of  approximately  $21,900 are due until maturity in May 1999. The loan
may be prepaid at anytime without penalty.  The fair value of this mortgage note
payable  approximated  its carrying  value as of June 30, 1998 and September 30,
1997.

6.  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
groundwater   in  the  vicinity  of  the  station.   Since  the  time  that  the
contamination was discovered,  Mobil Oil Corporation  ("Mobil") has investigated
the problem and is progressing  with efforts to remedy the soil and  groundwater
contamination  under the supervision of the Florida  Department of Environmental
Protection, which has approved Mobil's remedial action plan. During fiscal 1990,
the  Partnership  had  obtained  an  indemnification  agreement  from  Mobil Oil
Corporation  in which Mobil  agreed to bear the cost of all damages and required
clean-up expenses.  Furthermore,  Mobil indemnified the Partnership  against its
inability to sell, transfer,  or obtain financing on the property because of the
contamination. Subsequent to the discovery of the contamination, the Partnership
experienced difficulty in refinancing the mortgages on the property that matured
in  1991.  The  existence  of  contamination   on  the  property   impacted  the
Partnership's  ability to obtain  standard  market  financing.  Ultimately,  the
Partnership was able to refinance its first mortgage at a substantially  reduced
loan-to-value  ratio.  In  addition,  the  Partnership  was  unable  to sell the
property at an  uncontaminated  market  price.  The  Partnership  also  retained
outside  counsel and  environmental  consultants to review  Mobil's  remediation
efforts and has incurred significant  out-of-pocket  expenses in connection with
this situation.  Despite  repeated  requests by the Partnership for compensation
under the terms of the indemnification agreement, to date Mobil has disagreed as
to the  extent  of  the  indemnification  and  has  refused  to  compensate  the
Partnership for any of its damages.

      During  the first  quarter  of fiscal  1993,  the  Partnership  filed suit
against  Mobil for breach of indemnity and property  damage.  On April 28, 1995,
Mobil was successful in obtaining a Partial  Summary  Judgment which removed the
case from the Federal  Court  system.  Subsequently,  the  Partnership  filed an
action in the Florida State Court system.  During November 1996, the Partnership
and Mobil attempted to settle the action through mediation. A settlement was not
achieved.  Mobil's  proposal  to settle  the case,  which  included  a  proposed
purchase of the  contaminated  portion of the Northeast  Plaza property from the
Partnership,  failed due to Mobil's  inability to obtain a zoning variance which
was  necessary to make such a transaction  possible.  A jury trial against Mobil
Oil  Corporation  took place during the two-week period ended April 17, 1998, in
state court in Sarasota,  Florida. The Partnership sought an injunctive order to
force Mobil to clean up the contamination and sought to recover damages suffered
by the  Partnership as a result of the  contamination.  During the trial,  Mobil
stipulated to the entry of an injunctive  order compelling Mobil to continue the
cleanup until state water quality standards are achieved.  The experts currently
predict that the cleanup will be completed in approximately  one to three years.
As previously  reported,  the Partnership had obtained a summary  judgment as to
liability  on its claims for  trespass  and  nuisance.  The issues of damages on
these two counts,  as well as the  Partnership's  breach of contract claim, were
submitted to the jury.  On April 17, 1998,  the jury returned a verdict in favor
of the defendant, Mobil. The Partnership's subsequent motion for a new trial was
not granted. A final judgment in favor of Mobil as to the Partnership's  damages
claims has been entered with the Court. In addition, a final judgment compelling
Mobil to cleanup the  contamination  at the Northeast  Plaza Shopping Center was
entered with the Court. The Partnership is considering an appeal of the judgment
pertaining to its damages claims. While the Partnership is currently considering
offering  the  property  for  sale,  the   Partnership  is  concerned  that  the
contamination may negatively affect the sales price. To the extent that the sale
price is negatively impacted by the contamination,  the Partnership reserves all
rights against Mobil for damages under the indemnification  contract with Mobil.
No assurance can be given as to whether Mobil will perform its obligations under
the contract or as to the outcome of any litigation against Mobil,  should Mobil
fail to perform its obligations.  The Partnership is currently  negotiating with
Mobil on a potential  comprehensive  settlement  whereby  Mobil would agree to a
specific  procedure for  reimbursing the Partnership in the event of a low sales
price and the Partnership would waive its appellate rights. The eventual outcome
of this situation cannot be determined at the present time.



<PAGE>



            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


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

      The following  discussion of financial condition includes  forward-looking
statements  which  reflect  management's  current  views with  respect to future
events and  financial  performance  of the  Partnership.  These  forward-looking
statements  are  subject to certain  risks and  uncertainties,  including  those
identified  in Item 7 of the  Partnership's  Annual  Report on Form 10-K for the
year ended  September  30, 1997 under the  heading  "Certain  Factors  Affecting
Future Operating Results", which could cause actual results to differ materially
from historical  results or those  anticipated.  The words "believe",  "expect",
"anticipate,"  and  similar  expressions  identify  forward-looking  statements.
Readers  are  cautioned  not to place undue  reliance  on these  forward-looking
statements,  which were made based on facts and conditions as they existed as of
the date of this report.  The  Partnership  undertakes no obligation to publicly
update or revise  any  forward-looking  statements,  whether  as a result of new
information, future events or otherwise.

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

      On March 3, 1998, Boyer Lubbock  Associates,  a joint venture in which the
Partnership  had an  interest,  sold the  Central  Plaza  Shopping  Center to an
unrelated third party for a net price of $8,350,000.  The  Partnership  received
proceeds of  approximately  $2,199,000  after the assumption of the  outstanding
first  mortgage loan of $4,122,000,  closing costs and proration  adjustments of
$232,000,  and the co-venture partner's share of the proceeds of $1,797,000.  In
addition,  the  Partnership  received  $82,000 upon the liquidation of the joint
venture,  which  represented  its  share of the net cash  flow  from  operations
through the date of the sale. As a result of this  transaction,  the Partnership
made a Special Distribution to the Limited Partners of approximately $2,284,000,
or $106 per original  $1,000  investment,  on April 3, 1998. The Partnership and
its  co-venture  partner  had engaged the  services of a  nationally  affiliated
brokerage firm to market the Central Plaza property for sale during fiscal 1997.
The property was marketed  extensively  and sales  packages were  distributed to
national,  regional  and  local  prospective  purchasers.  As a result  of these
efforts,  three  offers  were  received.  After  evaluating  the  offers and the
relative strength of the prospective  purchasers,  an offer was selected and the
Partnership and the co-venturer negotiated a purchase and sale contract with the
prospective  buyer that was executed in January  1998.  The net sale price under
the terms of the purchase and sale agreement was $8,350,000,  which was net of a
$525,000  credit to the buyer in return for its assumption of the existing first
mortgage loan secured by the property.  This loan,  which contained a prepayment
penalty amount that was greater than the $525,000  credit to the buyer,  carried
an  interest  rate of 10% per annum.  Since this  interest  rate was higher than
current  market  rates  obtainable  by the  prospective  buyer,  the  credit was
negotiated.  The net  proceeds  from the sale were  greater  than if the venture
received a gross sale price of $8,875,000 and paid the prepayment penalty called
for under the loan agreement.  The loan was not prepayable without penalty until
February  2002.  Both the  Partnership  and the  co-venturer  believed the risks
associated  with holding this  property  until the  prepayment  penalty  expired
outweighed the reduction in net proceeds resulting from the interest rate credit
negotiated with the buyer.

      With the fiscal 1998 sale of the Central Plaza Shopping  Center and fiscal
1997 sale of the Partnership's  interest in the Pine Trail Shopping Center,  the
Partnership's  remaining  assets  consist of the  wholly-owned  Northeast  Plaza
Shopping Center and the subordinated  mortgage note receivable  position related
to  the  Briarwood  and  Gatewood  properties  which  were  sold  in  1984.  The
Partnership  expects to re-market the Northeast Plaza property for sale once the
lawsuit  against Mobil Oil  Corporation,  which is discussed  further below,  is
fully resolved. The sale of the Partnership's remaining assets would be followed
by  a  liquidation  of  the  Partnership.  It  is  currently  contemplated  that
dispositions of the Partnership's remaining assets could be completed within the
next 2 years. There are no assurances,  however, that the sales of the remaining
assets and the liquidation of the Partnership will be completed within this time
frame.

      The occupancy  level at the Northeast  Plaza Shopping  Center in Sarasota,
Florida,  remained at 100% for the quarter  ended June 30,  1998.  Over the next
twelve months, leases with six tenants occupying 38,500 square feet will expire.
All six tenants are expected to renew their  leases.  During the third  quarter,
one of these  tenants,  whose lease was  scheduled to expire in September  1998,
signed a new five-year lease at an increased  rental rate. This tenant leases an
out-parcel where they operate a cleaning  business.  A second expiration is with
one of the center's two anchor tenants which has a 25,600 square foot lease that
expires in January of 1999.  This tenant is expected to exercise  one of its two
five-year  options and renew its lease with a 10% increase in the rental rate. A
third  tenant,  which  operates a 6,500 square foot discount  retail  store,  is
expected  to exercise an option and renew its lease for five years at a slightly
increased rental rate. The remaining three expirations consist of a 1,200 square
foot  bookstore,  a  1,600  square  foot  hair  salon  and a 2,400  square  foot
restaurant.  As previously reported,  management 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
at a Mobil service  station  located  adjacent to the shopping center had leaked
and contaminated the ground water in the vicinity of the station. Since the time
that the  contamination  was discovered,  Mobil has investigated the leak and is
progressing with efforts to remedy the soil and ground water contamination under
the supervision of the Florida Department of Environmental Protection, which has
approved Mobil's  remedial action plan.  During fiscal 1990, the Partnership had
obtained a formal indemnification  agreement from Mobil Oil Corporation in which
Mobil  agreed to bear the cost of all damages and  required  clean-up  expenses.
Furthermore,  Mobil  indemnified the Partnership  against its inability to sell,
transfer  or obtain  financing  on the  property  because of the  contamination.
Subsequent to the discovery of the  contamination,  the Partnership  experienced
difficulty  in  refinancing  the mortgages on the property that matured in 1991.
The  existence  of  contamination  on the property  impacted  the  Partnership's
ability to obtain standard  market  financing.  Ultimately,  the Partnership was
able to refinance its first mortgage at a  substantially  reduced  loan-to-value
ratio.  In  addition,  the  Partnership  was unable to sell the  property  at an
uncontaminated  market price.  The Partnership also retained outside counsel and
environmental consultants to review Mobil's remediation efforts and has incurred
significant  out-of-pocket  expenses in connection with this situation.  Despite
repeated  requests by the  Partnership for  compensation  under the terms of the
indemnification  agreement,  to date Mobil has disagreed as to the extent of the
indemnification  and has refused to compensate  the  Partnership  for any of its
damages.

      During the first  quarter of fiscal 1993,  the  Partnership  filed suit in
Federal  Court against  Mobil for breach of indemnity  and property  damage.  On
April 28, 1995,  Mobil was  successful in dismissing the action from the Federal
Court system on jurisdictional grounds.  Subsequently,  the Partnership filed an
action in the Florida State Court system.  During November 1996, the Partnership
and Mobil attempted to settle the action through mediation. A settlement was not
achieved.  Mobil's  proposal  to settle  the case,  which  included  a  proposed
purchase of the  contaminated  portion of the Northeast  Plaza property from the
Partnership,  failed due to Mobil's  inability to obtain a zoning variance which
was  necessary to make such a transaction  possible.  A jury trial against Mobil
Oil  Corporation  took place during the two-week period ended April 17, 1998, in
state court in Sarasota,  Florida. The Partnership sought an injunctive order to
force Mobil to clean up the contamination and sought to recover damages suffered
by the  Partnership  as a  result  of the  contamination.  During  trial,  Mobil
stipulated to the entry of an injunctive  order compelling Mobil to continue the
cleanup until state water quality standards are achieved.  The experts currently
predict that the cleanup will be completed in approximately  one to three years.
As previously  reported,  the Partnership had obtained a summary  judgment as to
liability  on its claims for  trespass  and  nuisance.  The issues of damages on
these two counts,  as well as the  Partnership's  breach of contract claim, were
submitted to the jury.  On April 17, 1998,  the jury returned a verdict in favor
of the defendant, Mobil. The Partnership's subsequent motion for a new trial was
not granted. A final judgment in favor of Mobil as to the Partnership's  damages
claims has been entered with the Court. In addition, a final judgment compelling
Mobil to cleanup the  contamination  at the Northeast  Plaza Shopping Center was
entered with the Court. The Partnership is considering an appeal of the judgment
pertaining to its damages claims. While the Partnership is currently considering
offering  the  property  for  sale,  the   Partnership  is  concerned  that  the
contamination may negatively affect the sales price. To the extent that the sale
price is negatively impacted by the contamination,  the Partnership reserves all
rights against Mobil for damages under the indemnification  contract with Mobil.
No assurance can be given as to whether Mobil will perform its obligations under
the contract or as to the outcome of any litigation against Mobil,  should Mobil
fail to perform its obligations.  The Partnership is currently  negotiating with
Mobil on a  comprehensive  settlement  whereby  Mobil  would agree to a specific
procedure for  reimbursing the Partnership in the event of a low sales price and
the Partnership would waive its appellate  rights.  The eventual outcome of this
situation cannot be determined at the present time.

      At June 30, 1998, the Partnership had available cash and cash  equivalents
of $965,000. Such cash and cash equivalents will be used for the working capital
requirements  of the  Partnership  and for  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  remaining
income-producing  investment  property  and proceeds  received  from the sale or
refinancing  of such  property.  Such  sources of  liquidity  are expected to be
sufficient to meet the  Partnership's  needs on both a short-term  and long-term
basis. 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 (which owed the Briarwood and Gatewood  apartments  properties) in 1984.
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 of net cash
flow from the  properties  securing the note, as defined in the note  agreement.
Until the quarter  ended June 30,  1998,  the  Partnership  had not received any
interest payments since the inception of the note. During the quarter ended June
30, 1998,  the  Partnership  received  $149,000 from the borrower which has been
recorded as interest income on the accompanying  statement of operations.  Since
the  Partnership's  note receivable  continues to be subordinated to other first
mortgage debt, there is significant uncertainty as to the collectibility of both
the  principal  and the  remaining  accrued  interest.  On June  22,  1998,  the
Partnership  initiated a lawsuit in Massachusetts state court in connection with
this note  receivable.  The suit alleges that the  defendants  in this  lawsuit,
acting  as  agents  for  the  Partnership,  improperly  released  six of the ten
properties  (including the Briarwood and Gatewood apartment properties) from the
mortgage that secured the note receivable, and that they improperly extended the
maturity date of the note by ten years.  The  Partnership  is seeking  equitable
relief and monetary damages for breach of fiduciary duty,  misrepresentation and
related  causes of action.  No answer to the  complaint  has been filed with the
Court yet by the defendants.  The eventual outcome of this litigation  cannot be
determined at the present time.

Results of Operations
Three Months Ended June 30, 1998
--------------------------------

      The Partnership  reported a net loss of $10,000 for the three months ended
June 30,  1998,  as  compared to a net loss of $9,000 for the same period in the
prior year. A decrease of $97,000 in the Partnership's share of ventures' income
was offset by a decrease of $96,000 in the  Partnership's  operating  loss.  The
Partnership  reported  income of $97,000 from its share of the operations of the
Pine Trail and Central Plaza joint ventures for the quarter ended June 30, 1997.
As discussed  further above,  the Partnership sold its interest in Pine Trail in
August of 1997 and completed the sale of the Central Plaza  property on March 3,
1998.  Therefore,  there was no income or loss from joint venture operations for
the quarter ended June 30, 1998. The  Partnership  reported an operating loss of
$10,000 during the current  three-month  period as compared to an operating loss
of $106,000  during the same period in the prior year.  The favorable  change in
operating  loss was  primarily the result of an increase of $155,000 in interest
income.  Interest income  increased mainly due to the receipt of $149,000 in the
current period in connection  with the Briarwood note  receivable,  as discussed
further  above.  The  increase in  interest  income was  partially  offset by an
increase  in general  and  administrative  expenses  of $67,000  for the current
three-month period. General and administrative  expenses increased mainly due to
an increase in certain required professional services during the current period.

Nine Months Ended June 30, 1998
-------------------------------

      The  Partnership  reported  net income of  $2,272,000  for the nine months
ended June 30,  1998,  as compared to net income of $171,000 for the same period
in the  prior  year.  This  $2,101,000  increase  in  net  income  is  primarily
attributable  to the  $2,392,000  gain  realized  on the March  1998 sale of the
Central Plaza Shopping Center. In addition,  the Partnership  reported operating
income of  $35,000  during  the  current  nine-month  period as  compared  to an
operating  loss of  $115,000  during  the same  period  in the prior  year.  The
favorable  change in  operating  income  (loss) was the result of an increase of
$182,000 in interest income which was partially offset by an increase of $32,000
in operating  expenses.  Interest income  increased partly due to an increase in
the  Partnership's   average   outstanding  cash  balances  during  the  current
nine-month  period as a result of the receipt and  temporary  investment  of the
Central Plaza sale proceeds prior to the distribution to the Limited Partners in
April 1998. In addition, the Partnership received $149,000 of interest income in
the  current  period  in  connection  with the  Briarwood  note  receivable,  as
discussed further above.  Operating expenses increased mainly due to an increase
in general and  administrative  expenses  of $52,000 for the current  nine-month
period. General and administrative  expenses increased mainly due to an increase
in certain required professional services during the current period.

      The gain realized on the sale of the Central Plaza Shopping Center and the
favorable  change in the  Partnership's  operating  income (loss) were partially
offset by an unfavorable  change in the Partnership's  share of ventures' income
(losses) for the current nine-month period. The Partnership reported a loss from
its share of  ventures'  operations  of $155,000  during the current  nine-month
period as  compared  to income of  $286,000  during the same period in the prior
year.  This  unfavorable  change is mainly due to the inclusion of the operating
results  of the Pine  Trail  joint  venture  in the  prior  year's  results.  As
discussed  further  above,  the  Partnership  sold its interest in Pine Trail in
August of 1997 and completed  the sale of the Central  Plaza  property on May 3,
1998. As a result,  the current  period  results  reflect only the net operating
losses of the Central  Plaza joint  venture prior to the sale of the property on
March 3, 1998.


<PAGE>


                                     PART II
                                Other Information

Item 1. Legal Proceedings

     As discussed  further in the  Partnership's  Annual Report on Form 10-K for
the year ended  September 30, 1997, the Partnership had filed suit against Mobil
Oil  Corporation  during fiscal 1993 for breach of indemnity and property damage
related to the  contamination  of the soil and groundwater at the  Partnership's
Northeast Plaza Shopping Center. A jury trial against Mobil Oil Corporation took
place  during the  two-week  period  ended  April 17,  1998,  in state  court in
Sarasota,  Florida. The Partnership sought an injunctive order to force Mobil to
clean up the  contamination  and  sought  to  recover  damages  suffered  by the
Partnership as a result of the contamination.  During trial, Mobil stipulated to
the entry of an injunctive  order compelling Mobil to continue the cleanup until
state water quality  standards are achieved.  The experts currently predict that
the cleanup will be completed in approximately one to three years. As previously
reported, the Partnership had obtained a summary judgment as to liability on its
claims for trespass and nuisance.  The issues of damages on these two counts, as
well as the Partnership's  breach of contract claim, were submitted to the jury.
On April 17, 1998, the jury returned a verdict in favor of the defendant, Mobil.
The  Partnership's  subsequent  motion for a new trial was not granted.  A final
judgment  in  favor of Mobil as to the  Partnership's  damages  claims  has been
entered  with the Court.  In  addition,  a final  judgment  compelling  Mobil to
cleanup the  contamination  at the Northeast  Plaza Shopping  Center was entered
with the  Court.  The  Partnership  is  considering  an appeal  of the  judgment
pertaining to its damages claims. While the Partnership is currently considering
offering  the  property  for  sale,  the   Partnership  is  concerned  that  the
contamination may negatively affect the sales price. To the extent that the sale
price is negatively impacted by the contamination,  the Partnership reserves all
rights against Mobil for damages under the indemnification  contract with Mobil.
No assurance can be given as to whether Mobil will perform its obligations under
the contract or as to the outcome of any litigation against Mobil,  should Mobil
fail to perform its obligations.  The Partnership is currently  negotiating with
Mobil on a potential  comprehensive  settlement  whereby  Mobil would agree to a
specific  procedure for  reimbursing the Partnership in the event of a low sales
price and the Partnership would waive its appellate rights. The eventual outcome
of this situation cannot be determined at the present time.

      On June 22, 1998,  the  Partnership  initiated a lawsuit in  Massachusetts
state court in connection with the note  receivable  obtained by the Partnership
in connection  with the 1984 sale of its interest in the Briarwood joint venture
(which owned the Briarwood and Gatewood  properties).  The suit alleges that the
defendants in this  lawsuit,  acting as agents for the  Partnership,  improperly
released  six of the  ten  properties  (including  the  Briarwood  and  Gatewood
apartment  properties) from the mortgage that secured the note  receivable,  and
that they  improperly  extended the maturity date of the note by ten years.  The
Partnership  is seeking  equitable  relief and  monetary  damages  for breach of
fiduciary duty, misrepresentation and related causes of action. No answer to the
complaint  has been filed  with the Court yet by the  defendants.  The  eventual
outcome of this litigation cannot be determined at the present time.


Item 2. through 5.      NONE

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits:          NONE

(b) Reports on Form 8-K:

     No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.




<PAGE>





         PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP


                                SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                   PAINE WEBBER INCOME PROPERTIES THREE
                                         LIMITED PARTNERSHIP


                                   By:  THIRD INCOME PROPERTIES, INC.
                                        -----------------------------
                                            General Partner




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


Date:  August 6, 1998