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 QUARTER ENDED MARCH 31, 1999

                                    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
                March 31, 1999 and September 30, 1998 (Unaudited)
                                 (In thousands)

                                     ASSETS

                                                   March 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                     (1,644)      (1,593)
                                                  ---------    ---------
      Net operating investment property               3,394        3,445

Cash and cash equivalents                               929          911
Deferred expenses, net of accumulated 
  amortization                                            -           11
                                                  ---------    ---------
                                                  $   4,323    $   4,367
                                                  =========    =========

                        LIABILITIES AND PARTNERS' CAPITAL


Accounts payable - affiliates                     $       1    $       1
Accrued expenses                                         37          171
Mortgage note payable                                 1,041        1,124
Partners' capital                                     3,244        3,071
                                                  ---------    ---------
                                                  $   4,323    $   4,367
                                                  =========    =========












                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                              STATEMENTS OF INCOME
     For the three and six months ended March 31, 1999 and 1998 (Unaudited)
                    (In thousands, except per Unit amounts)

                                  Three Months Ended      Six Months Ended
                                       March 31,              March 31,  
                                  ------------------     ------------------
                                      1999     1998          1999      1998
                                      ----     ----          ----      ----

Revenues:
   Rental revenues                 $   119   $   119     $    239   $   239
   Interest income                      22        26           32        54
                                   -------   -------     --------   -------
                                       141       145          271       293

Expenses:
   Interest expense                     30        33           60        67
   Management fees                       1         1            2         2
   Depreciation expense                 25        25           51        51
   General and administrative           46        78           89       128
                                   -------   ------      --------   -------
                                       102       137          202       248
                                   -------   -------     --------   -------

Operating income                        39        8            69        45

Partnership's share of venture's
  losses                                 -      (184)           -      (155)

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

Gain on sale of operating 
  investment property                2,298         -        2,661         -
                                   -------   -------     --------   -------

Net income                         $ 2,337   $ 2,216      $ 2,730   $ 2,282
                                   =======   =======      =======   =======

Net income per Limited 
 Partnership Unit                  $107.38   $101.80      $125.42   $104.83
                                   =======   =======      =======   =======

Cash distributions per 
  Limited Partnership Unit         $117.31   $  1.31      $118.62   $  9.76
                                   =======   =======      =======   =======

      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 CHANGES IN PARTNERS' CAPITAL
          For the six months ended March 31, 1999 and 1998 (Unaudited)
                                 (In thousands)

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

Balance at September 30, 1997                  $    33           $ 3,394
Cash distributions                                  (1)             (133)
Net income                                          23             2,259
                                               -------           -------  
Balance at March 31, 1998                      $    55           $ 5,520
                                               =======           =======

Balance at September 30, 1998                  $    52           $ 3,019
Cash distributions                                  (1)           (2,556)
Net income                                          27             2,703
                                               -------           -------
Balance at March 31, 1999                      $    78           $ 3,166
                                               =======           =======























                             See accompanying notes.


<PAGE>
<TABLE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS
          For the six months ended March 31, 1999 and 1998 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)
<CAPTION>

                                                                                1999             1998
                                                                                ----             ----
<S>                                                                             <C>              <C>  

Cash flows from operating activities:
   Net income                                                                  $   2,730         $   2,282
   Adjustments to reconcile net income to
    net cash (used in) provided by operating activities:
     Partnership's share of gain on sale of investment property                        -            (2,392)
     Gain on sale of operating investment property                                (2,661)                -
     Depreciation expense                                                             51                51
     Amortization of deferred financing costs                                         11                11
     Partnership's share of venture's losses                                           -               155
     Changes in assets and liabilities:
      Accounts payable - affiliates                                                    -               (29)
      Accounts payable and accrued expenses                                         (134)               (3)
         Total adjustments                                                        (2,733)           (2,207)
                                                                               ---------         ---------
         Net cash (used in) provided by operating activities                          (3)               75
                                                                               ---------         ---------

Cash flows from investing activities:
   Distributions from joint ventures                                                   -             2,452
   Net proceeds from collection of mortgage note receivable                        2,661                 -
                                                                               ---------         ---------
         Net cash provided by investing activities                                 2,661             2,452
                                                                               ---------         ---------


Cash flows from financing activities:
   Distributions to partners                                                      (2,557)             (134)
   Principal payments on mortgage note payable                                       (83)              (75)
                                                                               ---------         ---------
         Net cash used in financing activities                                    (2,640)             (209)
                                                                               ---------         ---------

Net increase in cash and cash equivalents                                             18             2,318

Cash and cash equivalents, beginning of period                                       911               973
                                                                               ---------         ---------

Cash and cash equivalents, end of period                                       $     929         $   3,291
                                                                               =========         =========

Cash paid during the period for interest                                       $      49         $      56
                                                                               =========         =========
                          

                             See accompanying notes.
</TABLE>


<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,  1998.  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 March 31, 1999 and  September  30, 1998 and revenues and
expenses  for the three and  six-month  periods  ended  March 31, 1999 and 1998.
Actual results could differ from the estimates and assumptions used.

      As of March 31, 1999, the Partnership has one remaining real estate asset,
the  wholly-owned  Northeast  Plaza  Shopping  Center (see Note 4). As discussed
further in Note 3, the  subordinated  mortgage  note  receivable  related to the
Briarwood and Gatewood properties which were sold in fiscal 1985 was released in
return for a cash settlement  completed in January 1999. As discussed further in
Note 6, the Partnership  continues to negotiate with the master lessee regarding
a potential  sale of the Northeast  Plaza  property.  The  Partnership  also has
certain litigation outstanding related to Mobil Oil Corporation's  contamination
of  the  Northeast  Plaza  property.  The  sale  or  other  disposition  of  the
Partnership's  remaining asset and the resolution of the outstanding  litigation
would  be  followed  by a  liquidation  of  the  Partnership.  It  is  currently
contemplated that the disposition of the Partnership's  remaining asset could be
completed by the end of calendar year 1999.  There are no  assurances,  however,
that  the  sale  of the  remaining  asset,  the  resolution  of the  outstanding
litigation and the liquidation of the Partnership  will be completed within this
time frame.

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

      Management  fees earned by the Adviser for each of the  six-month  periods
ended March 31, 1999 and 1998 totalled $2,000.  Accounts payable - affiliates at
both March 31, 1999 and September 30, 1998 consist of $1,000 of management  fees
payable to the Adviser.

      Included in general and  administrative  expenses for the six months ended
March 31,  1999 and 1998 is  $37,000  and  $35,000,  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 each of the six
months  ended  March 31, 1999 and 1998 is $1,000,  representing  fees paid to an
affiliate,  Mitchell Hutchins  Institutional  Investors,  Inc., for managing the
Partnership's cash assets.

3.  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 resulted
from accounting  differences  related to the carrying value of the Partnership's
investment.
<PAGE>

      The principal  amount of the note  receivable  of  $3,445,336  was to bear
interest at 9% annually and was subordinated to a first mortgage loan.  Interest
and  principal  payments on the note were payable only to the extent of net cash
flow from the properties sold, as defined in the sales  documents.  Any interest
not  received  was  to  accrue   additional   interest  of  9%  per  annum.  The
Partnership's policy was to defer recognition of all interest income on the note
until collected, due to the uncertainty of its collectibility. Until the quarter
ended June 30, 1998,  the  Partnership  had not  received any interest  payments
since the  inception of the note.  During the quarter  ended June 30, 1998,  the
Partnership  received  $149,000 from the borrower which was recorded as interest
income during fiscal 1998. Per the terms of the note agreement, accrued interest
receivable as of September 30, 1998 would have been approximately $8,112,000.

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

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

      As of  March  31,  1999,  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 March 31, 1999 and 1998.  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 joint venture was accounted for by using the equity method because the
Partnership  did not have a voting  control  interest in the venture.  Under the
equity  method,  the assets,  liabilities,  revenues  and  expenses of the joint
venture  did not appear in the  Partnership's  financial  statements.  Condensed
combined  financial  statements  of this joint  venture for the period in fiscal
1998 prior to the sale of the property follow:
<PAGE>

                    Condensed Combined Summary of Operations
                For the three and six months ended March 31, 1998
                                 (in thousands)

                                        Three Months Ended   Six Months Ended
                                             March 31,           March 31,  
                                        ------------------   ----------------
                                              1998                 1998
                                              ----                 ----

     Rental revenues and expense
        recoveries                         $   155               $   443
     Interest and other income                   3                     8
                                           -------               -------
                                               158                   451

     Property operating expenses               130                   215
     Interest expense                           61                   171
     Depreciation and amortization             202                   224
                                           -------               -------
                                               393                   610
                                           -------               -------
     Operating loss                           (235)                 (159)

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

     Net income                            $ 5,332               $ 5,408
                                           =======               =======

     Net income:
      Partnership's share of net income    $ 2,225               $ 2,254
      Co-venturer's share of net income      3,107                 3,154
                                           -------               -------
                                           $ 5,332               $ 5,408
                                           =======               =======

               Reconciliation of Partnership's Share of Operations
        For the three and six months ended March 31, 1998 (in thousands)

                                      Three Months Ended   Six Months Ended
                                            March 31,          March 31,  
                                      ------------------   ----------------
                                              1998                1998
                                              ----                ----

      Partnership's share of net income,
         as shown above                    $ 2,225               $ 2,254
      Amortization of excess basis             (17)                  (17)
                                           -------               -------
      Partnership's share of
         venture's net income              $ 2,208               $ 2,237
                                           =======               =======

      The Partnership's share of venture's net income is presented as follows in
the accompanying fiscal 1998 statements of operations (in thousands):

                                       Three Months Ended   Six Months Ended
                                             March 31,           March 31,  
                                        ------------------   ----------------
                                              1998                 1998
                                              ----                 ----

      Partnership's share of 
        venture's losses                   $  (184)              $  (155)
      Partnership's share of gain on
        sale of investment
        property                             2,392                 2,392
                                           -------               -------
                                           $ 2,208               $ 2,237
                                           =======               =======
                                        

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

      The  mortgage  note  payable at March 31, 1999 and  September  30, 1998 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  $22,000 were due until maturity on March 29, 1999. In
February,  1999, the Partnership negotiated an extension of the maturity date of
this note with the  lender to June 29,  1999.  Monthly  principal  and  interest
payments of  approximately  $22,000 will continue to be due through the extended
maturity  date. In connection  with the  potential  sale of the Northeast  Plaza
property  discussed  below,  further  extension  of  the  maturity  date  may be
necessary  to  accommodate  the  timing of a sale  transaction.  There can be no
assurances that the lender will consent to any such extensions.

      During the first quarter of fiscal 1999, the  Partnership had entered into
an agreement to sell Northeast Plaza to the master lessee in conjunction  with a
refinancing  of the first  mortgage  debt  secured by the  property.  During the
current  quarter,  the sales  contract  expired  pursuant to its terms,  but the
parties  continue to negotiate for a potential  sale  transaction.  There are no
assurances,  however, that a sale transaction will be completed. The loan may be
prepaid at anytime without penalty. The fair value of this mortgage note payable
approximated its carrying value as of March 31, 1999 and September 30, 1998.

6.  Legal Proceedings and Related Contingencies
    -------------------------------------------

      Management  believed that the  Partnership's  efforts to sell or refinance
the Northeast  Plaza  property from fiscal 1991 through fiscal 1998 were impeded
by potential buyer and lender concerns of an  environmental  nature with respect
to the property. During 1990, it was discovered that certain underground storage
tanks 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 remediate the
soil and  ground  water  contamination  under  the  supervision  of the  Florida
Department of  Environmental  Protection,  which has approved  Mobil's  remedial
action plan. During fiscal 1990, the Partnership had obtained 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.  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
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  damage
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 has appealed the judgment  pertaining to
its damage claims.  During the quarter ended December 31, 1998, the  Partnership
negotiated a contract to sell the Northeast Plaza property to the  master-lessee
at a net price which the  Partnership  believes  reflects only a small deduction
for the stigma  associated with the  contamination.  During the current quarter,
the sales contract  expired  pursuant to its terms,  but the parties continue to
negotiate for a potential sale  transaction.  The appeal of the Mobil litigation
has been  stayed  for a period of ten  months  pending  the  resolution  of this
potential  sale  transaction.  To the extent that this sale  transaction  is not
completed,  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.


<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, 1998 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
-------------------------------

      As of March 31, 1999, the  Partnership's  only remaining real estate asset
consists of the  wholly-owned  Northeast  Plaza  Shopping  Center.  As discussed
further  below,  the  subordinated  mortgage  note  receivable  related  to  the
Briarwood and Gatewood  properties was released in return for a cash  settlement
which was completed during the current quarter, and the Partnership continues to
negotiate  with the master  lessee  regarding a potential  sale of the Northeast
Plaza property.  The Partnership also has certain litigation outstanding related
to Mobil Oil  Corporation's  contamination of the Northeast Plaza property.  The
sale  or  other  disposition  of  the  Partnership's  remaining  asset  and  the
resolution of the outstanding  litigation  would be followed by a liquidation of
the  Partnership.  It is  currently  contemplated  that the  disposition  of the
Partnership's  remaining  asset could be completed  by the end of calendar  year
1999.  There are no assurances,  however,  that the sale of the remaining asset,
the  resolution  of  the  outstanding  litigation  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  March 31,  1999.  During the
quarter,  the property's leasing team focused on the renewal of leases with four
tenants  occupying a total of 6,930  square  feet.  Two of these  tenants  which
occupy a total of 3,840 square feet  exercised  their  options and renewed their
leases for five years. Two other tenants  occupying a total of 3,090 square feet
extended their leases for a year. The property's  leasing team continues to work
with three tenants  occupying a total of 16,400 square feet on renewals of their
leases.  Based on current  negotiations,  all three are  expected to renew their
leases.  As previously  reported,  management  believed  that the  Partnership's
efforts to sell or  refinance  the  Northeast  Plaza  property  from fiscal 1991
through   fiscal  1998  were  impeded  by  potential   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  damage
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 has appealed the judgement pertaining to
its damage claims.  During the quarter ended December 31, 1998, the  Partnership
negotiated a contract to sell the Northeast  Plaza property to the master lessee
at a net price which the  Partnership  believes  reflects only a small deduction
for the stigma  associated with the  contamination.  During the current quarter,
the sales contract  expired  pursuant to its terms,  but the parties continue to
negotiate for a potential sale  transaction.  The appeal of the Mobil litigation
has been  stayed  for a period of ten  months  pending  the  resolution  of this
potential  sale  transaction.  To the extent that this sale  transaction  is not
completed,  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 also had 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 interest owed on the note  receivable  was 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 was recorded as interest  income during fiscal 1998. On June 22, 1998, the
Partnership  initiated a lawsuit in Massachusetts state court in connection with
this note  receivable.  The suit alleged that the  defendants  in this  lawsuit,
acting  as  agents  for  the  Partnership,  improperly  released  six of the ten
properties  (including the Briarwood and Gatewood apartment properties) from the
mortgage that secured the note receivable, and that they improperly extended the
maturity date of the note by ten years.  The defendants  have denied any and all
liability in the lawsuit.  By Agreement dated December 30, 1998, the Partnership
and the  defendants  have settled the  lawsuit,  with the  defendants  and their
affiliates  admitting no  liability,  and the parties have  exchanged  releases.
Under the terms of the Agreement,  the defendants  agreed to pay the Partnership
the aggregate amount of $3 million and the Partnership  assigned its interest in
the  note  to  certain  of the  parties  to  the  Agreement.  Of the $3  million
settlement  amount,  the sum of $500,000 was paid to the Partnership on December
30, 1998,  and the balance of $2.5 million was received on January 29, 1999. The
settlement  payments have been  recognized as deferred  gains on the sale of the
Briarwood  and  Gatewood  properties,  in keeping with the  originally  expected
accounting for the principal  balance of the note, net of the expenses  incurred
in fiscal 1999 in connection with the litigation. As a result of the settlement,
the  Partnership  no  longer  has  an  interest  in  the  note  receivable.  The
Partnership  incurred  approximately  $500,000 of legal costs in fiscal 1998 and
1999  associated  with the  litigation  and collection of the settlement of this
note receivable.  Consequently,  approximately $2,500,000 of settlement proceeds
was  available to  distribute to the Limited  Partners.  Accordingly,  a Special
Capital  Distribution  in the amount of $2,499,800,  or $116 per original $1,000
investment,  was paid on February 12, 1999,  to holders of record on January 29,
1999, along with the regular quarterly  distribution for the quarter ended March
31, 1999.

      At March 31, 1999, the Partnership had available cash and cash equivalents
of $929,000. 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
from  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.

      As noted above,  it is expected  that the  Partnership  will be liquidated
prior to the end of calendar year 1999.  Notwithstanding  this, the  Partnership
believes that it has made all necessary modifications to its existing systems to
make  them  year  2000  compliant  and does not  expect  that  additional  costs
associated  with  year  2000  compliance,  if  any,  will  be  material  to  the
Partnership's results of operations or financial position.
<PAGE>

Results of Operations
Three Months Ended March 31, 1999
---------------------------------

     The  Partnership  reported  net income of  $2,337,000  for the three months
ended  March 31,  1999,  as compared  to net income of  $2,216,000  for the same
period in the prior  year.  This  increase  in net income is  attributable  to a
decrease in the  Partnership's  share of venture's losses and an increase in the
Partnership's  operating  income.  The  decrease in the  Partnership's  share of
venture's  losses  resulted from the sale of the Central Plaza property on March
3, 1998,  as discussed  further in the Annual  Report.  Therefore,  there was no
income or loss from joint  venture  operations  for the quarter  ended March 31,
1999,  as  compared  to a loss of  $184,000  during the same period in the prior
year.  The  favorable  change in operating  income was primarily the result of a
decrease  in general  and  administrative  expenses  of $32,000  for the current
three-month period. General and administrative  expenses decreased mainly due to
a reduction in certain required professional services during the current period.
The decrease in the Partnership's  share of venture's losses and the increase in
the  Partnership's  operating  income were partially offset by a decrease in the
gains recognized on the sale of operating investment  properties between the two
three-month   periods.  The  decrease  represents  the  difference  between  the
$2,298,000  gain  realized due to the Briarwood  note  settlement in the current
three-month  period and the $2,392,000  gain realized on the sale of the Central
Plaza Shopping Center during the three months ended March 31, 1998.

Six Months Ended March 31, 1999
-------------------------------

      The Partnership reported net income of $2,730,000 for the six months ended
March 31, 1999, as compared to net income of  $2,282,000  for the same period in
the prior year.  This increase in net income is  attributable  to an increase of
$264,000 in the gains recognized on the sale of operating investment  properties
between the two six-month  periods,  a decrease of $155,000 in the Partnership's
share of  venture's  losses and an  increase  of  $24,000  in the  Partnership's
operating income. The increase in gain on sale of operating  investment property
represents  the  difference  between the  $2,661,000  gain  realized  due to the
Briarwood note settlement in the current period and the $2,392,000 gain realized
on the sale of the Central Plaza Shopping Center in the prior year, as discussed
further above. As discussed  above in the three months results,  the decrease in
the  Partnership's  share  of  venture's  losses  resulted  from the sale of the
Central  Plaza  property on March 3, 1998.  The  favorable  change in  operating
income was  primarily  the result of a decrease  in general  and  administrative
expenses  of  $39,000  and a  reduction  in  interest  expense of $7,000 for the
current six-month period.  General and administrative  expenses decreased mainly
due to a reduction in certain required  professional services during the current
period.  Interest  expense  declined  due to  the  regular  scheduled  principal
payments made on the  Northeast  Plaza  mortgage note payable.  The decreases in
general and  administrative  expenses and interest expense were partially offset
by a decrease in interest  income of $22,000 for the current  six-month  period.
Interest  income  decreased  mainly due to the interest  earned during the prior
six-month period on the Central Plaza Shopping Center sale proceeds prior to the
distribution to the Limited Partners, which occurred in April 1998.



<PAGE>


                                     PART II
                                Other Information

Item 1. Legal Proceedings
-------------------------

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

     The  status of the  Partnership's  litigation  with  Mobil Oil  Corporation
remains unchanged from what was reported in the  Partnership's  Annual Report on
Form 10-K for the year ended September 30, 1998.

Briarwood/Gatewood Litigation
-----------------------------

     On June 22,  1998,  the  Partnership  initiated a lawsuit in  Massachusetts
state court in connection with the note  receivable  obtained by the Partnership
in connection  with the 1984 sale of its interest in the Briarwood joint venture
(which owned the Briarwood and Gatewood  properties).  The suit alleged that the
defendants in this  lawsuit,  acting as agents for the  Partnership,  improperly
released  six of the  ten  properties  (including  the  Briarwood  and  Gatewood
apartment  properties) from the mortgage that secured the note  receivable,  and
that they  improperly  extended the maturity date of the note by ten years.  The
defendants have denied any and all liability in the lawsuit.  By Agreement dated
December 30, 1998, the  Partnership and the defendants have settled the lawsuit,
with the defendants and their affiliates admitting no liability, and the parties
have exchanged releases. Under the terms of the Agreement, the defendants agreed
to pay the  Partnership  the aggregate  amount of $3 million and the Partnership
assigned its interest in the note to certain of the parties to the Agreement. Of
the  $3  million  settlement  amount,  the  sum  of  $500,000  was  paid  to the
Partnership  on December 30, 1998,  and the balance of $2.5 million was received
on January 29, 1999. As a result of the  settlement,  the  Partnership no longer
has an interest in the note receivable.

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:  May 10, 1999