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 DECEMBER 31, 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 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
                   December 31, 1996 and September 30, 1996
                                 (Unaudited)
                                (In thousands)

                                    ASSETS

                                                      December 31  September 30
                                                      -----------  ------------
Operating investment property, at cost:
   Land                                               $       950    $    950
   Building and improvements                                4,088       4,088
                                                      -----------    --------
                                                            5,038       5,038
   Less accumulated depreciation                           (1,415)     (1,389)
                                                      -----------    --------
                                                            3,623       3,649

Investments in joint ventures, at equity                    2,842       2,844
Cash and cash equivalents                                     987       1,000
Accounts receivable                                            99          99
Deferred expenses, net                                         47          53
Note and interest receivable, net                               -           -
                                                      -----------   ---------
                                                      $     7,598   $   7,645
                                                      ===========   =========

                      LIABILITIES AND PARTNERS' CAPITAL

Accounts payable - affiliates                         $         4   $       4
Accrued expenses                                               37          60
Mortgage note payable                                       1,385       1,420
Partners' capital                                           6,172       6,161
                                                      -----------   ---------
                                                      $     7,598   $   7,645
                                                      ===========   =========

              STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
              For the three months ended December 31, 1995 and 1996
                                   (Unaudited)
                                 (In thousands)

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

Balance at September 30, 1995                 $    (61)           $5,619
Cash distributions                                  (1)             (105)
Net income                                           1                82
                                              --------            ------
Balance at December 31, 1995                  $    (61)           $5,596
                                              ========            ======

Balance at September 30, 1996                 $      -            $6,161
Cash distributions                                  (1)             (105)
Net income                                           1               116
                                              --------           -------
Balance at December 31, 1996                  $      -           $ 6,172
                                              ========           =======

                           See accompanying notes.


<PAGE>


           PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                              STATEMENTS OF INCOME
              For the three months ended December 31, 1996 and 1995
                                   (Unaudited)
                     (In thousands, except per Unit amounts)

                                                      1996            1995
                                                      ----            ----
Revenues:
   Rental revenues                                   $  119           $ 119
   Interest income                                       14               4
                                                     ------           -----
                                                        133             123

Expenses:
   Interest expense                                      37              40
   Management fees                                        4               4
   Depreciation expense                                  26              25
   General and administrative                            40              88
                                                     ------           -----
                                                        107             157
                                                     ------           -----
Operating income (loss)                                  26             (34)

Partnership's share of ventures' income                  91             117
                                                     ------           -----

Net income                                           $  117           $  83
                                                     ======           =====

Net income per Limited Partnership Unit               $5.37           $3.80
                                                      =====           =====

Cash distributions per Limited
  Partnership Unit                                    $4.88           $4.88
                                                      =====           =====


   The above net income 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 CASH FLOWS
             For the three months ended December 31, 1996 and 1995
                Increase (Decrease) in Cash and Cash Equivalents
                                   (Unaudited)
                                 (In thousands)

                                                         1996           1995
                                                         ----           ----
Cash flows from operating activities:
   Net income                                           $  117        $    83
   Adjustments to reconcile net income to
    net cash provided by (used in) operating activities:
     Depreciation expense                                   26             25
     Amortization of deferred financing costs                6              5
     Partnership's share of ventures' income               (91)          (117)
     Changes in assets and liabilities:
      Interest and other receivables                         -              -
      Accounts payable and accrued expenses                (23)           (18)
                                                        ------        -------
        Total adjustments                                  (82)          (105)
                                                        ------        -------
        Net cash provided by (used in) 
          operating activities                              35            (22)

Cash flows from investing activities:
   Distributions from joint ventures                        93            280

Cash flows from financing activities:
   Distributions to partners                              (106)          (106)
   Principal payments on mortgage note payable             (35)           (31)
                                                      --------        --------
         Net cash used in financing activities            (141)          (137)
                                                      --------        -------

Net (decrease) increase in cash and cash equivalents       (13)           121

Cash and cash equivalents, beginning of period           1,000            296
                                                      --------        -------

Cash and cash equivalents, end of period              $    987        $   417
                                                      ========        =======

Cash paid during the period for interest              $     31        $    35
                                                      ========        =======





                           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, 1996.
     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 December 31, 1996 and September
      30, 1996 and  revenues  and expenses  for the  three-month  periods  ended
      December 31, 1996 and 1995. Actual results could differ from the estimates
      and assumptions used.

2.   Real Estate Investments

     The Partnership  directly owns one operating investment property (Northeast
     Plaza) and has  investments  in two joint  venture  partnerships  (three at
     December 31, 1995) which own operating  properties as more fully  described
     in the  Partnership's  Annual  Report.  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 joint
     ventures  are  accounted  for  by  using  the  equity  method  because  the
     Partnership does not have a voting control interest in the ventures.  Under
     the equity method,  the assets,  liabilities,  revenues and expenses of the
     joint  ventures do not appear in the  Partnership's  financial  statements.
     Instead, the investments are carried at cost adjusted for the Partnership's
     share of the ventures' earnings, losses and distributions.

     Summarized operating results of the two joint ventures for the three months
     ended  December 31, 1996 and the three joint  ventures for the three months
     ended December 31, 1995 are as follows:


<PAGE>


                    Condensed Combined Summary of Operations
              For the three months ended December 31, 1996 and 1995
                                 (in thousands)

                                                  1996              1995
                                                  ----              ----

     Rental revenues and expense
        recoveries                             $   949            $1,518
     Interest and other income                       4                46
                                               --------           ------
                                                   953             1,564

     Property operating expenses                   389               695
     Interest expense                              333               430
     Depreciation and amortization                 126               208
                                               -------            ------
                                                   848             1,333
                                               -------            ------
     Net income                                $   105            $  231
                                               =======            ======

     Net income:
      Partnership's share of combined
        income                                 $    92            $  142
      Co-venturers' share of combined
        income                                      13                89
                                               -------            ------
                                               $   105            $  231
                                               =======            ======

               Reconciliation of Partnership's Share of Operations
      For the three months ended December 31, 1996 and 1995 (in thousands)

                                                 1996             1995
                                                 ----             ----

      Partnership's share of income,
         as shown above                        $    92          $    142
      Amortization of excess basis                  (1)              (25)
                                               -------          --------
      Partnership's share of
         ventures' income                      $    91          $    117
                                               =======          ========

3.  Note and Interest Receivable, Net

    Note and interest  receivable  at December 31, 1996 and  September  30, 1996
    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  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,  matures on January 1, 2000 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  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  December  31,  1996  would be  approximately  $6,282,000.  Since  the
    properties securing the note 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 December 31, 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.


<PAGE>


4.  Related Party Transactions

    Management  fees  earned  by the  Adviser  totalled  $4,000  for each of the
    three-month  periods  ended  December  31, 1996 and 1995.  Accounts  payable
    affiliates at December 31, 1996 and September 30, 1996 consists of $4,000 of
    management fees payable to the Adviser at both dates.

    Included in general and  administrative  expenses for the three months ended
    December   31,  1996  and  1995  is  $16,000  and   $18,000,   respectively,
    representing  reimbursements  to an  affiliate  of the  General  Partner for
    providing certain financial,  accounting and investor communication services
    to the Partnership.

5.  Mortgage Note Payable and Contingencies

    The mortgage  note payable at December  31, 1996 and  September  30, 1996 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 December 31, 1996.

    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.   Mobil
    investigated the leak and is progressing with efforts to remedy the soil and
    groundwater contamination under the supervision of the Florida Department of
    Environmental  Regulation,  which has approved Mobil's remedial action plan.
    During  fiscal  1990,  the  Partnership  had  obtained  an   indemnification
    agreement from Mobil Oil  Corporation in which Mobil agreed to bear the cost
    of  all  damages  and  required  clean-up   expenses.   Furthermore,   Mobil
    indemnified  the  Partnership  against its inability to sell,  transfer,  or
    obtain financing on the property because of the contamination.

    As a result of the  contamination of the groundwater at Northeast Plaza, the
    Partnership has incurred certain damages, primarily related to the inability
    to sell the  property  and to  delays  in the  process  of  refinancing  the
    property's mortgage  indebtedness.  The Partnership has incurred significant
    out-of-pocket   and  legal  expenses  in  connection   with  such  sale  and
    refinancing  efforts.  Despite  repeated  requests  by the  Partnership  for
    compensation under the terms of the indemnification agreement, to date Mobil
    has  disagreed  as to the extent of the  indemnification  and has refused to
    compensate  the  Partnership  for any of these  damages.  During  the  first
    quarter of fiscal 1993, the Partnership  filed suit in Federal Court against
    Mobil for breach of  indemnity  and  property  damage.  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 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.  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 settle the case. 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 by 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.

    As  discussed  in more  detail  in the  Annual  Report  for the  year  ended
    September  30,  1996,  the  Partnership  is involved in certain  other legal
    actions.  At the present  time,  the General  Partner is unable to determine
    what  impact,  if any,  the  resolution  of  these  matters  may have on the
    Partnership's financial statements, taken as a whole.



<PAGE>



                PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

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

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

      The  operations  of  the  Partnership's   two  joint  venture   investment
properties  are stable and  producing  excess cash flow as of December 31, 1996.
The occupancy level at Pine Trail Shopping  Center in West Palm Beach,  Florida,
was 97% at the end of the quarter, unchanged from the previous quarter. Although
one 1,100  square foot tenant  moved into the Center  during the  quarter,  this
space  represents  less than one-half of one percent of the leasable area of the
Center.  The  property's  leasing team had sought to lease the  remaining  7,400
square  foot  vacant  space at the  Center to a single  retailer,  but could not
identify an  appropriate  tenant.  As a result,  the leasing team signed two new
leases  during the  quarter  with  smaller  tenants  that are  expected  to take
occupancy  in part of this  space  in  March  1997.  One of  these  tenants,  an
apartment  rental  service,  signed a three-year  lease for 926 square feet. The
other new lease is for 1,890 square feet with a financial  services  tenant that
has signed a ten-year  lease.  The property  management  team has  initiated the
design  and  construction  work  necessary  to  prepare  the space for these new
tenants.  Additionally, the property's leasing staff is negotiating with another
prospective tenant that would add a restaurant to the Center.

      At Central Plaza Shopping  Center in Lubbock,  Texas,  the occupancy level
remained at 92% for the quarter.  The property's  leasing team is continuing its
efforts to lease the remaining vacant space in the Center.  The city's occupancy
levels  have  improved  during  the  last  four  years,  and  continued  gradual
improvement in market conditions is expected to allow the leasing team to secure
tenants for the available space at Central Plaza. As previously reported, one of
the Center's  restaurant  tenants changed its theme from a traditional steak and
chicken  American-style cuisine to a seafood menu and renovated its space at its
own  expense.  Since this  change,  the  property's  management  team  reports a
significant increase in the number of restaurant customers.

      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. Mobil 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
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 disagreed as to the
extent of the  indemnification and has refused to compensate the Partnership for
any of these 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.  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
Partnership's damages. During fiscal 1996, the Partnership agreed to a mediation
session  with Mobil,  which took place on November  25,  1996,  in an attempt to
settle the case. 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  by 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% leased as of December 31, 1996. In November, a
10,000 square foot tenant moved,  although its lease obligation  continues until
April  1998.  The  property's  leasing  team has  negotiated  a new lease with a
replacement  tenant  which will occupy this 10,000  square foot space.  This new
five-year lease is nearly  finalized and the tenant is expected to move into the
space  as soon as an  acceptable  termination  agreement  is  reached  with  the
previous tenant.


<PAGE>


      Each of the Partnership's  three remaining  properties are retail shopping
centers.  The  Partnership  is likely to explore the  potential  for selling its
remaining  investment  properties  during fiscal 1997. 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 remains 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 of the
Partnership  continues to work with the co-venture partner to identify potential
sources capable of providing the required financing.

      At  December  31,  1996,  the  Partnership  had  available  cash  and cash
equivalents of $987,000. 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
Three Months Ended December 31,1996
-----------------------------------

      The Partnership reported net income of $117,000 for the three months ended
December 31,  1996,  as compared to net income of $83,000 for the same period in
the prior year. This $34,000 increase in net income is primarily attributable to
a  $50,000  decrease  in the  Partnership's  operating  expenses  and a  $10,000
increase  in  interest  income.  Operating  expenses  declined  mainly  due to a
decrease  in  general  and  administrative  expenses  of  $48,000.  General  and
administrative  expenses  decreased  mainly as a result of a decline  in certain
required professional  services during the current three-month period.  Interest
income  increased due to an increase in the  Partnership's  average  outstanding
cash balances during the current three-month period resulting from the retention
of a portion of the Camelot sale proceeds.

      The  Partnership's  share of ventures' income decreased by $26,000 for the
three months  ended  December 31,  1996,  partially  offsetting  the decrease in
general and  administrative  expenses and the increase in interest  income.  The
Partnership's share of ventures' income decreased mainly due to the inclusion of
the operating results of the Camelot Apartments, which was sold in June 1996, in
the prior year 's income.  The  Partnership's  share of income  from the Camelot
joint venture in the prior year was $88,000.  Partially offsetting the inclusion
of the Camelot joint venture's  operating results in the prior year's income was
an increase in the portion of the income  allocated to the Partnership  from the
Central  Plaza  joint  venture.  While net income  increased  by only  $1,000 at
Central  Plaza  when  compared  to the  same  period  in  the  prior  year,  the
Partnership's share increased by $28,000 as a result of the method of allocation
set forth in the joint venture agreement.



<PAGE>


                                     PART II
                                Other Information

Item 1. Legal Proceedings

     The  status  of the  litigation  involving  the  Partnership  and Mobil Oil
Corporation,  as well as the  litigation  involving  the  Partnership's  General
Partner and its  affiliates,  remains  unchanged  from what was  reported in the
Annual Report on Form 10-K for the year ended September 30, 1996.


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:  February 12, 1997