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, 1998

                                       OR

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

            For the transition period from ______ to _______ .


                         Commission File Number: 0-10979


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


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


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


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

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


<PAGE>

            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                                 BALANCE SHEETS
              December 31, 1998 and September 30, 1998 (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                     (1,619)      (1,593)
                                                  ---------     --------
      Net operating investment property               3,419        3,445

Cash and cash equivalents                             1,138          911
Deferred expenses, net of accumulated
  amortization                                            5           11
                                                  ---------    ---------
                                                  $   4,562    $   4,367
                                                  =========    =========

             LIABILITIES AND PARTNERS' CAPITAL


Accounts payable - affiliates                     $       1    $       1
Accrued expenses                                         43          171
Mortgage note payable                                 1,083        1,124
Partners' capital                                     3,435        3,071
                                                  ---------    ---------
                                                  $   4,562    $   4,367
                                                  =========    =========












                  See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                              STATEMENTS OF INCOME
              For the three months ended December 31, 1998 and 1997
                                   (Unaudited)
                     (In thousands, except per Unit amounts)

                                                  1998         1997
                                                  ----         ----

Revenues:
   Rental revenues                              $  119        $  119
   Interest income                                  11            29
                                                ------        ------
                                                   130           148

Expenses:
   Interest expense                                 30            34
   Management fees                                   1             1
   Depreciation expense                             26            26
   General and administrative                      180            50
                                                ------        ------
                                                   237           111
                                                ------        ------

Operating income (loss)                           (107)           37

Partnership's share of venture's income              -            29

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

Net income                                      $  393        $   66
                                                ======        ======

Net income per Limited Partnership Unit         $18.04        $ 3.03
                                                ======        ======

Cash distributions per Limited
  Partnership Unit                              $ 1.31        $ 4.88
                                                ======        ======

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





                  See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
              For the three months ended December 31, 1998 and 1997
                                   (Unaudited)
                                 (In thousands)

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

Balance at September 30, 1997               $     33           $ 3,394
Cash distributions                                (1)             (105)
Net income                                         1                65
                                            --------           -------
Balance at December 31, 1997                $     33           $ 3,354
                                            ========           =======

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























                  See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS
       For the three months ended December 31, 1998 and 1997 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)


                                                       1998        1997
                                                       ----        ----
Cash flows from operating activities:
   Net income                                        $   393    $     66
   Adjustments to reconcile net income to
    net cash provided by operating activities:
     Depreciation expense                                 26          26
     Amortization of deferred financing costs              6           6
     Partnership's share of venture's income               -         (29)
     Changes in assets and liabilities:
      Accounts payable - affiliates                        -          (3)
      Accounts payable and accrued expenses             (128)        (23)
                                                     -------    --------
         Total adjustments                               (96)        (23)
                                                     -------    --------
         Net cash provided by operating activities       297          43

Cash flows from investing activities:
   Distributions from joint ventures                       -         105

Cash flows from financing activities:
   Distributions to partners                             (29)       (106)
   Principal payments on mortgage note payable           (41)        (37)
                                                     -------    --------
         Net cash used in financing activities           (70)       (143)
                                                     -------    --------

Net increase in cash and cash equivalents                227           5

Cash and cash equivalents, beginning of period           911         973
                                                     -------    --------
Cash and cash equivalents, end of period             $ 1,138    $    978
                                                     =======    ========

Cash paid during the period for interest             $    24    $     28
                                                     =======    ========





                             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,  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 December 31, 1998 and September 30, 1998 and revenues and
expenses for the  three-month  periods ended December 31, 1998 and 1997.  Actual
results could differ from the estimates and assumptions used.

     With the fiscal 1998 sale of the Central  Plaza  Shopping  Center (see Note
4), as of December 31, 1998, the Partnership's remaining assets consisted of the
wholly-owned  Northeast Plaza Shopping Center (see Note 4) and the  subordinated
mortgage  note  receivable  position  related  to  the  Briarwood  and  Gatewood
properties which were sold in fiscal 1985 (see Note 3). As discussed  further in
Note 3, the  subordinated  mortgage note receivable was released in return for a
cash  settlement  which was 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 three-month  periods
ended December 31, 1998 and 1997 totalled $1,000.  Accounts payable - affiliates
at both December 31, 1998 and September 30, 1998 consist of $1,000 of management
fees payable to the Adviser.

      Included in general and administrative expenses for the three months ended
December  31, 1998 and 1997 is $19,000 and $18,000,  respectively,  representing
reimbursements  to an affiliate  of the General  Partner for  providing  certain
financial, accounting and investor communication services to the Partnership.

      Also included in general and administrative expenses for each of the three
months  ended  December 31, 1998 and 1997 is $125  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 results
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. 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 have
agreed  to pay the  Partnership  the  aggregate  amount  of $3  million  and the
Partnership  has  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  subsequent  to the quarter  end, on January 29, 1999.  The  settlement
payments will be  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, in the period in which they are  received.  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
associated  with the  litigation  and  collection of the settlement of this note
receivable.  Consequently,  approximately  $2,500,000 of settlement  proceeds is
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,  will be 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 December 31,  1998,  the  Partnership  directly  owns one  operating
investment property,  the Northeast Plaza Shopping Center, a 121,000 square foot
retail center located in Sarasota,  Florida (see Notes 5 and 6). The Partnership
had no joint  venture  partnership  investments  at  December  31,  1998 (one at
December 31, 1997). On March 3, 1998, Boyer Lubbock Associates,  a joint venture
in which the Partnership had an interest, sold the Central Plaza Shopping Center
to an  unrelated  third  party for a net price of  $8,350,000.  The  Partnership
received  proceeds  of  approximately  $2,199,000  after the  assumption  of the
outstanding  first  mortgage  loan of  $4,122,000,  closing  costs and proration
adjustments of $232,000,  and the co-venture  partner's share of the proceeds of
$1,797,000.  In addition,  the Partnership received $82,000 upon the liquidation
of the  joint  venture,  which  represented  its share of the net cash flow from
operations  through the date of the sale. As a result of this  transaction,  the
Partnership made a Special Distribution to the Limited Partners of approximately
$2,284,000, or $106 per original $1,000 investment, on April 3, 1998.

      The 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 follow:

<PAGE>

                    Condensed Combined Summary of Operations
                  For the three months ended December 31, 1997
                                 (in thousands)

                                                1997
                                                ----

     Rental revenues and expense
        recoveries                             $   288
     Interest and other income                       5
                                               -------
                                                   293

     Property operating expenses                    85
     Interest expense                              110
     Depreciation and amortization                  22
                                               -------
                                                   217
                                               -------
     Net income                                $    76
                                               =======

     Net income:
      Partnership's share of net income        $    29
      Co-venturer's share of net income             47
                                               -------
                                               $    76
                                               =======


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

      The mortgage  note payable at December 31, 1998 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 are due until  maturity on March 29,  1999.
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.  Subsequent to
the quarter  end,  the sales  contract  expired  pursuant to its terms,  but the
parties continue to negotiate for a potential sale transaction.  While there are
no assurances  that this sale  transaction  will be completed,  the  Partnership
believes that the existing  mortgage debt will be refinanced during fiscal 1999.
The loan may be  prepaid  at  anytime  without  penalty.  The fair value of this
mortgage note payable  approximated  its carrying  value as of December 31, 1998
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  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 has appealed the judgment  pertaining to
its damages 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.  However,  since this sale
remains  contingent  upon,  among other things,  the buyer obtaining  sufficient
financing to complete the transaction,  there are no assurances that a sale will
be  consummated.  Subsequent  to the quarter  end,  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 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
-------------------------------

      With the fiscal  1998 sale of the Central  Plaza  Shopping  Center,  as of
December  31,  1998,  the  Partnership's   remaining  assets  consisted  of  the
wholly-owned  Northeast Plaza Shopping Center and the subordinated mortgage note
receivable  position related to the Briarwood and Gatewood properties which were
sold in fiscal 1985. As discussed further below, the subordinated  mortgage note
receivable  was  released in return for a cash  settlement  which was  completed
subsequent to the quarter end, 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 December 31, 1998. The focus of
the  property's  leasing  team has been with the renewal of the leases with five
tenants  occupying  37,300 square feet that were scheduled to expire in the next
twelve  months.  One of these tenants is one of the center's two anchor  tenants
which has a 25,600  square foot lease that was scheduled to expire in January of
1999. This tenant has 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  tenant and a 1,600 square foot hair salon signed one-year
lease  extensions.  The fifth tenant operates a 2,400 square foot restaurant and
has a lease  which  expires in June 1999.  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  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 has appealed the judgement pertaining to
its damages 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.  However,  since this sale
remains  contingent  upon,  among other things,  the buyer obtaining  sufficient
financing to complete the transaction,  there are no assurances that a sale will
be  consummated.  Subsequent  to the quarter  end,  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 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  have  agreed  to pay the
Partnership the aggregate  amount of $3 million and the Partnership has 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  subsequent  to
the quarter end, on January 29, 1999. The settlement payments will be 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, in the period in which they are received.  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 associated with the
litigation  and   collection  of  the   settlement  of  this  note   receivable.
Consequently,  approximately  $2,500,000 of settlement  proceeds is 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,  will be
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.

      At  December  31,  1998,  the  Partnership  had  available  cash  and cash
equivalents of $1,138,000.  Such cash and cash  equivalents will be used for the
working capital  requirements of the  Partnership and for  distributions  to the
partners.  The source of future  liquidity and  distributions to the partners is
expected  to be through  settlement  payments  from the  assignment  of the note
receivable   discussed  above,   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, 1998
------------------------------------

      The Partnership reported net income of $393,000 for the three months ended
December 31,  1998,  as compared to net income of $66,000 for the same period in
the prior year. This $327,000 increase in net income is attributable to the gain
of $500,000 realized in the current period due to the Briarwood note settlement,
as discussed  further above. The Partnership had been deferring a portion of the
gain on the sale of the venture's operating  investment  properties,  which were
sold in 1984, under the cost recovery method. The gain in the current period was
partially offset by an unfavorable change in the Partnership's  operating income
(loss).  The  Partnership  reported an  operating  loss of  $107,000  during the
current three-month period as compared to operating income of $37,000 during the
same period in the prior year. The unfavorable change in operating income (loss)
was   primarily   the  result  of  an   increase  of  $130,000  in  general  and
administrative   expenses  for  the  current  three-month  period.  General  and
administrative  expenses increased mainly due to an increase in certain required
professional  services  during the current  period.  Also, as discussed  further
above, the Partnership completed the sale of the Central Plaza property on March
3, 1998.  Therefore,  there was no income or loss from joint venture  operations
for the quarter ended December 31, 1998, as compared to income of $29,000 during
the same period in the prior year.

<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 have
agreed  to pay the  Partnership  the  aggregate  amount  of $3  million  and the
Partnership  has  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  subsequent to the quarter end, 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:  February 9, 1999