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 DECEMBER 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
              December 31, 1999 and September 30, 1999 (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                     (1,721)      (1,695)
                                                 ----------    ---------
      Net operating investment property               3,317        3,343

Cash and cash equivalents                               700          809
                                                 ----------    ---------
                                                 $    4,017    $   4,152
                                                 ==========    =========

                        LIABILITIES AND PARTNERS' CAPITAL

Accounts payable - affiliates                    $        1    $       1
Accrued expenses                                      1,201          979
Mortgage note payable                                   920          967
Partners' capital                                     1,895        2,205
                                                 ----------    ---------
                                                 $    4,017    $   4,152
                                                 ==========    =========
















                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

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

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

   Rental revenues                             $     119        $    119
   Interest income                                    11              11
                                               ---------        --------
                                                     130             130

Expenses:

   Environmental remediation expense                 300               -
   Interest expense                                   43              30
   Management fees                                     1               1
   Depreciation expense                               26              26
   General and administrative                         42             180
                                               ---------        --------
                                                     412             237
                                               ---------        --------
Operating loss                                      (282)           (107)

Gain on sale of operating investment
  property                                             -             500
                                               ---------        --------

Net income (loss)                              $    (282)       $    393
                                               =========        ========

Net income (loss) per Limited
  Partnership Unit                             $  (12.95)       $  18.04
                                               =========        ========

Cash distributions per Limited
  Partnership Unit                             $    1.31        $   1.31
                                               =========        ========

      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
        For the three months ended December 31, 1999 and 1998 (Unaudited)
                                 (In thousands)

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

Balance at September 30, 1998                  $    52           $ 3,019
Cash distributions                                  (1)              (28)
Net income                                           4               389
                                               -------           -------
Balance at December 31, 1998                   $    55           $ 3,380
                                               =======           =======

Balance at September 30, 1999                  $    68           $ 2,137
Cash distributions                                   -               (28)
Net loss                                            (3)             (279)
                                               -------           -------
Balance at December 31, 1999                   $    65           $ 1,830
                                               =======           =======

























                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS
        For the three months ended December 31, 1999 and 1998 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)

                                                               1999        1998
                                                               ----        ----

Cash flows from operating activities:

   Net income (loss)                                         $  (282)   $   393
   Adjustments to reconcile net income (loss) to
    net cash (used in) provided by operating activities:
     Depreciation expense                                         26         26
     Amortization of deferred financing costs                      -          6
     Changes in assets and liabilities:
      Accrued expenses                                           222       (128)
                                                             -------    -------
         Total adjustments                                       248        (96)
                                                             -------    -------
         Net cash (used in) provided by operating
           activities                                            (34)       297
                                                             -------    -------

Cash flows from financing activities:

   Distributions to partners                                     (28)       (29)
   Principal payments on mortgage note payable                   (47)       (41)
                                                             -------    -------
         Net cash used in financing activities                   (75)       (70)
                                                             -------    -------

Net (decrease) increase in cash and cash equivalents            (109)       227

Cash and cash equivalents, beginning of period                   809        911
                                                             -------    -------

Cash and cash equivalents, end of period                     $   700    $ 1,138
                                                             =======    =======

Cash paid during the period for interest                     $    43    $    24
                                                             =======    =======













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

      As of December 31, 1999,  the  Partnership  has one remaining  real estate
asset,  the  wholly-owned  Northeast  Plaza  Shopping  Center  (see Note 4). The
Partnership's goal during fiscal 1999 had been to pursue a disposition  strategy
for its investment in Northeast  Plaza which would have enabled the  Partnership
to  complete a  liquidation  prior to the end of  calendar  year  1999.  For the
reasons  set forth in detail in Notes 5 and 6, this goal was not  achieved.  The
Partnership  still hopes to complete a  liquidation  during  calendar year 2000.
However,  there  can be no  assurances  that the  disposition  of the  remaining
investment and a 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 three-month  periods
ended December 31, 1999 and 1998 totalled $1,000.  Accounts payable - affiliates
at both December 31, 1999 and September 30, 1999 consist of $1,000 of management
fees payable to the Adviser.

      Included  in general  and  administrative  expenses  for each of the three
months ended December 31, 1999 and 1998 is $19,000,  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 three months
ended  December 31, 1999 and 1998 is $527 and $125,  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
      ---------------------------------

      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.

      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.

      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  denied any and all  liability  in the lawsuit.  By  Agreement  dated
December 30, 1998, the Partnership and the defendants settled the lawsuit,  with
the defendants and their affiliates admitting no liability, and the parties have
exchanged releases.  Under the terms of the Agreement,  the defendants agreed to
pay the  Partnership  the  aggregate  amount of $3 million  and the  Partnership
assigned its interest in the note to certain of the parties to the Agreement. Of
the  $3  million  settlement  amount,  the  sum  of  $500,000  was  paid  to the
Partnership  on December 30, 1998,  and the balance of $2.5 million was received
on January 29, 1999. The settlement  payments were  recognized as deferred gains
on the sale of the  Briarwood  and  Gatewood  properties,  in  keeping  with the
originally expected accounting for the principal balance of the note, net of the
expenses incurred in fiscal 1999 in connection with the litigation.  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.    Operating Investment Property
      -----------------------------

      The Partnership has one wholly-owned  operating  investment  property.  On
September 25, 1981, the Partnership  purchased  Northeast Plaza, a 67,000 square
foot  existing  shopping  center  in  Sarasota,   Florida.   Subsequent  to  the
acquisition,  the  shopping  center was  expanded to its current size of 121,005
square feet. The aggregate cash invested by the  Partnership  was  approximately
$2,888,000  (including an acquisition fee of $268,000 paid to the Adviser).  The
property was acquired  subject to a  nonrecourse  wrap-around  mortgage  loan of
approximately  $2,480,000.  On March 29, 1994,  the  Partnership  refinanced the
existing  wraparound  mortgage  note  secured by the  Northeast  Plaza  Shopping
Center,  which had been in default for over two years,  with a new  non-recourse
loan  issued by the prior  underlying  first  mortgage  lender (see Note 5). The
refinancing  was negotiated in conjunction  with a  restructuring  of the master
lease that covers the  Partnership's  interest in  Northeast  Plaza.  The master
lessee  was  also  the  holder  of  the  wraparound  mortgage.  As  part  of the
refinancing,  the wrap note  holder  applied  withheld  rental  payments,  which
totalled $661,000,  against the outstanding balance of the wraparound  mortgage.
Rental payments to the Partnership were reinstated beginning in April 1994.

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

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

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

      The mortgage  note payable at December 31, 1999 and  September 30, 1999 is
secured by the  Partnership's  wholly-owned  Northeast  Plaza  Shopping  Center.
During the first  quarter of fiscal 1999,  the  Partnership  had entered into an
agreement to sell  Northeast  Plaza to the master lessee in  conjunction  with a
refinancing  of the first  mortgage debt secured by the property.  The agreement
was  signed on  November  29,  1998 and was  contingent  on the  master-lessee's
ability to obtain a commitment for  sufficient  financing by January 29, 1999 to
pay the Partnership for its ownership interest.  This financing  commitment date
was subsequently extended to April 19, 1999. As discussed further in Note 6, the
master-lessee has been unable to secure a commitment for financing because of an
environmental   issue,  which  resulted  in  the  termination  of  the  purchase
agreement.

      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.  While the maturity date of the existing first mortgage loan was March 29,
1999,  this date was extended by the lender in February 1999 to June 29, 1999 to
allow for the master-lessee to complete its planned  refinancing and acquisition
of the  Partnership's  interest in the property.  As noted above,  however,  the
completion of a sale transaction has been affected by an environmental issue and
did not occur by June 29, 1999.  On July 16, 1999,  the lender  issued a default
notice as of June 29, 1999 and  assessed  default  interest at a rate of 25% per
annum on the outstanding balance of approximately  $998,000. On August 31, 1999,
the  Partnership  and the lender  executed a  forbearance  agreement.  Under the
forbearance agreement, the lender agreed not to foreclose or exercise any remedy
available  to  it  under  the  loan  agreement  until  December  15,  1999.  The
Partnership  agreed to pay a $35,000 extension fee; $10,000 of which was paid on
August 31, 1999 and $25,000 of which was payable by December 15, 1999. Under the
forbearance agreement, interest accrued at a rate of 18% on the unpaid principal
balance.  Monthly  principal  and interest  payments  were  increased to $30,000
beginning August 31, 1999.

      Subsequent  to the end of the  quarter,  on January 20,  2000,  the lender
agreed to extend the  forbearance  agreement  to June 30,  2000.  Interest  will
continue to accrue on the unpaid principal balance at a rate of 18%, and monthly
principal and interest payments remain at $30,000. The Partnership agreed to pay
the  $25,000  fee which was  payable on  December  15,  1999 plus an  additional
extension fee of $10,000.  If the  Partnership  makes all payments due under the
forbearance  agreement  during  its term and repays the loan in full by June 30,
2000, the lender will waive the payment of the additional $10,000 extension fee.

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

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

      During the quarter ended June 30, 1999,  the  Partnership  was notified by
the Northeast Plaza Shopping Center master-lessee of the presence of groundwater
contamination  at the Shopping  Center which  appears to have been caused by the
operation of dry cleaning  equipment  at the Center.  On December 13, 1999,  the
Partnership submitted a Site Assessment Report to the state regulatory authority
that  confirms  the  presence of the  contamination,  describes  the location of
elevated  contaminant  concentrations,  and  outlines  an  initial  analysis  of
remedial   alternatives   based  on  preliminary   reports   obtained  from  the
master-lessee  and work performed to date by the Partnership's own environmental
consultants. The Partnership is in the process of planning further investigation
to assist in assessing the extent of the contamination, the anticipated cost and
time to take appropriate  action,  and the feasibility of recovering  associated
costs from responsible  third parties.  While the Partnership  believes that the
cleanup costs should be the  responsibility of the lessee under the terms of the
master  lease,  the  Partnership  is  proceeding on its own to begin the cleanup
process  in order to  protect  its  investment.  The  prospects  for any  future
recoveries  of these costs are uncertain at the present  time.  The  Partnership
accrued a liability of $1 million during fiscal 1999 to cover expected legal and
environmental  testing and remediation costs regarding this contamination  based
on the preliminary  reports obtained from the master-lessee and the initial work
performed by the Partnership's own  environmental  consultants.  The Partnership
has received  preliminary  comments from the state  regulatory  authority on the
Site  Assessment  Report and is  currently in the process of drafting a Remedial
Action Plan.  Until a Remedial  Action Plan is approved by the state  regulatory
authority,  it is unlikely that a sale transaction could be completed.  Based on
the  preliminary  feedback  from  the  state  regulatory  authority  on the Site
Assessment  Report,  the Partnership  believes that the scope of the remediation
work may be broader than originally  expected.  As a result,  during the quarter
ended  December 31, 1999,  the  Partnership  accrued an additional  liability of
$300,000.  Through  December 31, 1999, the Partnership had incurred actual legal
and  environmental   testing  expenses  of  $142,000  in  connection  with  this
situation.  The  remaining  balance of the accrued  liability of  $1,158,000  is
included in the balance of accrued expenses on the  accompanying  balance sheet.
This amount  represents an estimate of the potential  liability  associated with
this situation. It is possible that this estimate could change materially in the
near term as further testing,  consulting with appropriate  state  environmental
agencies and actual  remediation work progresses.  The Partnership will continue
to assess and revise this estimate as further information becomes available.  At
the same  time,  the  Partnership  continues  to work with the  Northeast  Plaza
master-lessee,  the current first mortgage lender and a prospective lender in an
attempt to complete a refinancing of the property in combination  with a sale of
the Partnership's interest in the Center.

      As a result of the current  uncertainty  regarding the  potential  capital
needed to fund the  environmental  remediation  costs at  Northeast  Plaza,  the
Managing General Partner has recommended that the Partnership discontinue making
quarterly  cash  distributions  until  further  notice.  Accordingly,  after the
payment to be made on February 15, 2000 for the quarter ended December 31, 1999,
no further quarterly distributions are planned.


<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, 1999 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 December 31, 1999,  the  Partnership's  only  remaining  real estate
asset  consists  of  the  wholly-owned  Northeast  Plaza  Shopping  Center.  The
Partnership's goal during fiscal 1999 had been to pursue a disposition  strategy
for its investment in Northeast  Plaza which would have enabled the  Partnership
to  complete a  liquidation  prior to the end of  calendar  year  1999.  For the
reasons  set forth in detail  further  below,  this goal was not  achieved.  The
Partnership  still hopes to complete a  liquidation  during  calendar year 2000.
However,  there  can be no  assurances  that the  disposition  of the  remaining
investment and a 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 December 31, 1999. The focus of
the  property's  leasing  team during  fiscal 1999 was the renewal of the leases
with five tenants  occupying  37,300  square feet that were  scheduled to expire
during fiscal 1999. All five tenants renewed their leases.  One of these tenants
was one of the center's two anchor  tenants which has a 25,600 square foot lease
that expired in January of 1999. This tenant  exercised one of its two five-year
options and renewed its lease with a 10%  increase in the rental  rate. A second
tenant,  which operates a 6,500 square foot discount retail store,  exercised an
option and renewed its lease for five years at a slightly increased rental rate.
Additionally,  a 1,200 square foot  bookstore and a 1,600 square foot hair salon
signed  one-year  lease  extensions.  During the first quarter of fiscal 2000, a
lease with one tenant  occupying  1,200 square feet was renewed.  The property's
leasing team is working with five tenants occupying a total of 6,800 square feet
on renewals of their leases which expire within the next twelve months. Based on
current  negotiations,  four of the five tenants  representing 5,600 square feet
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
denied. 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  subsequently began the process of appealing the
judgement  pertaining  to its damages  claims,  and Mobil  filed a  cross-appeal
challenging the scope of the injunctive order.

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

      During the quarter ended June 30, 1999,  the  Partnership  was notified by
the Northeast Plaza Shopping Center master-lessee of the presence of groundwater
contamination  at the Shopping  Center which  appears to have been caused by the
operation of dry cleaning  equipment  at the Center.  On December 13, 1999,  the
Partnership submitted a Site Assessment Report to the state regulatory authority
that  confirms  the  presence of the  contamination,  describes  the location of
elevated  contaminant  concentrations,  and  outlines  an  initial  analysis  of
remedial   alternatives   based  on  preliminary   reports   obtained  from  the
master-lessee  and work performed to date by the Partnership's own environmental
consultants. The Partnership is in the process of planning further investigation
to assist in assessing the extent of the contamination, the anticipated cost and
time to take appropriate  action,  and the feasibility of recovering  associated
costs from responsible  third parties.  While the Partnership  believes that the
cleanup costs should be the  responsibility of the lessee under the terms of the
master  lease,  the  Partnership  is  proceeding on its own to begin the cleanup
process  in order to  protect  its  investment.  The  prospects  for any  future
recoveries  of these costs are uncertain at the present  time.  The  Partnership
accrued a liability of $1 million during fiscal 1999 to cover expected legal and
environmental  testing and remediation costs regarding this contamination  based
on the preliminary  reports obtained from the master-lessee and the initial work
performed by the Partnership's own  environmental  consultants.  The Partnership
has received  preliminary  comments from the state  regulatory  authority on the
Site  Assessment  Report and is  currently in the process of drafting a Remedial
Action Plan.  Until a Remedial  Action Plan is approved by the state  regulatory
authority,  it is unlikely that a sale transaction could be completed.  Based on
the  preliminary  feedback  from  the  state  regulatory  authority  on the Site
Assessment  Report,  the Partnership  believes that the scope of the remediation
work may be broader than originally  expected.  As a result,  during the quarter
ended  December 31, 1999,  the  Partnership  accrued an additional  liability of
$300,000.  Through  December 31, 1999, the Partnership had incurred actual legal
and  environmental   testing  expenses  of  $142,000  in  connection  with  this
situation.  The  remaining  balance of the accrued  liability of  $1,158,000  is
included in the balance of accrued expenses on the  accompanying  balance sheet.
This amount  represents an estimate of the potential  liability  associated with
this situation. It is possible that this estimate could change materially in the
near term as further testing,  consulting with appropriate  state  environmental
agencies and actual  remediation work progresses.  The Partnership will continue
to assess and revise this estimate as further information becomes available.  At
the same  time,  the  Partnership  continues  to work with the  Northeast  Plaza
master-lessee,  the current first mortgage lender and a prospective lender in an
attempt to complete a refinancing of the property in combination  with a sale of
the Partnership's interest in the Center.

      As a result of the current  uncertainty  regarding the  potential  capital
needed to fund the  environmental  remediation  costs at  Northeast  Plaza,  the
Managing General Partner has recommended that the Partnership discontinue making
quarterly  cash  distributions  until  further  notice.  Accordingly,  after the
payment to be made on February 15, 2000 for the quarter ended December 31, 1999,
no further quarterly distributions are planned.

      The  maturity  date of the  existing  first  mortgage  loan secured by the
property  was March 29, 1999.  The  maturity  date was extended by the lender in
February  1999 to June 29, 1999 to allow for the  master-lessee  to complete its
planned  refinancing  and  acquisition  of  the  Partnership's  interest  in the
property. As noted above, however, the completion of a sale transaction has been
affected by an  environmental  issue and did not occur by June 29, 1999. On July
16, 1999,  the lender  issued a default  notice as of June 29, 1999 and assessed
default  interest  at a rate of 25% per  annum  on the  outstanding  balance  of
approximately  $998,000.  On August 31,  1999,  the  Partnership  and the lender
executed a forbearance agreement.  Under the forbearance  agreement,  the lender
agreed not to foreclose  or exercise  any remedy  available to it under the loan
agreement  until  December 15,  1999.  The  Partnership  agreed to pay a $35,000
extension fee; $10,000 of which was paid on August 31, 1999 and $25,000 of which
was payable by December  15, 1999.  Under the  forbearance  agreement,  interest
accrued at a rate of 18% on the unpaid principal balance.  Monthly principal and
interest   payments  were  increased  to  $30,000  beginning  August  31,  1999.
Subsequent to the end of the current  quarter,  on January 20, 2000,  the lender
agreed to extend the  forbearance  agreement  to June 30,  2000.  Interest  will
continue to accrue on the unpaid principal balance at a rate of 18%, and monthly
principal and interest payments remain at $30,000. The Partnership agreed to pay
the  $25,000  fee which was  payable on  December  15,  1999 plus an  additional
extension fee of $10,000.  If the  Partnership  makes all payments due under the
forbearance  agreement  during  its term and repays the loan in full by June 30,
2000, the lender will waive the payment of the additional $10,000 extension fee.

      At  December  31,  1999,  the  Partnership  had  available  cash  and cash
equivalents  of $700,000.  Such cash and cash  equivalents  will be used for the
working capital  requirements of the  Partnership and for  distributions  to the
partners for the quarter ended December 31, 1999. 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.

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

      The Partnership reported a net loss of $282,000 for the three months ended
December 31, 1999,  as compared to net income of $393,000 for the same period in
the prior year. This  unfavorable  change in net operating  results is primarily
attributable  to the gain of  $500,000  realized  in the prior  period  from the
Briarwood note  settlement,  as discussed  further in Note 3 to the accompanying
financial  statements,  and the  additional  accrual of $300,000 made during the
current quarter for the estimated  environmental  remediation costs at Northeast
Plaza, as discussed  further above. The unfavorable  change in net income (loss)
was partially offset by a decline of $138,000 in the  Partnership's  general and
administrative  expenses.  This reduction in general and administrative expenses
was  mainly  due to  additional  legal  fees  incurred  in the  prior  period in
connection with the Mobil Oil litigation  discussed  further above. The decrease
in general and  administrative  expenses was partially  offset by an increase in
interest  expense  of  $13,000.  Interest  expense  increased  due to the higher
interest  rate on the  outstanding  mortgage  note payable  called for under the
terms of the forbearance agreement discussed further above.


<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, 1999.

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 11, 2000