UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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

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

               FOR THE QUARTERLY PERIOD ENDED MARCH 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
             March 31, 1998 and September 30, 1997 (Unaudited)
                              (In thousands)

                                  ASSETS

                                                  March 31    September 30
                                                  --------    ------------

Operating investment property, at cost:
   Land                                           $    950    $     950
   Building and improvements                         4,088        4,088
                                                  --------    ---------
                                                     5,038        5,038
   Less accumulated depreciation                    (1,542)      (1,491)
                                                  --------    ---------
      Net operating investment property              3,496        3,547

Investment in joint venture, at equity                   -          215

Cash and cash equivalents                            3,291          973
Deferred expenses, net                                  21           32
                                                  --------    ---------
                                                  $  6,808    $   4,767
                                                  ========    =========

                        LIABILITIES AND PARTNERS' CAPITAL

Accounts payable - affiliates                     $      1    $       4
Accrued expenses                                        29           58
Mortgage note payable                                1,203        1,278
Partners' capital                                    5,575        3,427
                                                  --------    ---------
                                                  $  6,808    $   4,767
                                                  ========    =========








                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

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

                                   Three Months Ended    Six Months Ended
                                        March 31,            March 31,
                                   ------------------   ------------------
                                     1998     1997        1998     1997
                                     ----     ----        ----     ----

Revenues:
   Rental revenues                  $  119   $  119      $  239   $  239
   Interest and other income            26       14          54       27
                                    ------   ------      ------   ------
                                       145      133         293      266

Expenses:
   Interest expense                     33       36          67       73
   Management fees                       1        4           2        8
   Depreciation expense                 25       26          51       51
   General and administrative           78      102         128      143
                                    ------   ------      ------   ------
                                       137      168         248      275
                                    ------   ------      ------   ------

Operating income (loss)                  8      (35)         45       (9)

Partnership's share of ventures'
  income (losses)                     (184)     108        (155)     189

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

Net income                          $2,216   $   73      $2,282   $  180
                                    ======   ======      ======   ======

Net income per Limited 
  Partnership Unit                 $101.80   $ 3.36     $104.83   $ 8.27
                                   =======   ======     =======   ======

Cash distributions per Limited
  Partnership Unit                 $  1.31   $ 4.88     $  6.19   $ 9.76
                                   =======   ======     =======   ======

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



                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

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

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

Balance at September 30, 1996                $     -            $6,161
Cash distributions                                (2)             (210)
Net income                                         2               178
                                             -------            ------
Balance at March 31, 1997                    $     -            $6,129
                                             =======            ======

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




















                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

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

                                                       1998        1997
                                                       ----        ----
Cash flows from operating activities:
   Net income                                        $ 2,282     $   180
   Adjustments to reconcile net income to
    net cash provided by operating activities:
     Partnership's share of gain on sale of 
      investment property                             (2,392)          -
     Depreciation expense                                 51          51
     Amortization of deferred financing costs             11          11
     Partnership's share of ventures' income
      (losses)                                           155        (189)
     Changes in assets and liabilities:
      Accounts payable - affiliates                      (29)          -
      Accounts payable and accrued expenses               (3)        (32)
                                                     -------     -------
         Total adjustments                            (2,207)       (159)
                                                     -------     -------
         Net cash provided by operating activities        75          21

Cash flows from investing activities:
   Distributions from joint ventures                   2,452         157

Cash flows from financing activities:
   Distributions to partners                            (134)       (212)
   Principal payments on mortgage note payable           (75)        (69)
                                                     -------     -------
         Net cash used in financing activities          (209)       (281)
                                                     -------     -------

Net increase (decrease) in cash and cash equivalents   2,318        (103)

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

Cash and cash equivalents, end of period             $ 3,291     $   897
                                                     =======     =======

Cash paid during the period for interest             $    56     $    62
                                                     =======     =======


                             See accompanying notes.


<PAGE>


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

1.  General
    -------

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

      The  accompanying  financial  statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting  principles
which  requires  management to make  estimates and  assumptions  that affect the
reported amounts of assets and liabilities and disclosures of contingent  assets
and  liabilities  as of March 31, 1998 and  September  30, 1997 and revenues and
expenses  for the three- and  six-month  periods  ended March 31, 1998 and 1997.
Actual results could differ from the estimates and assumptions used.

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

      Management  fees  earned by the Adviser for the  six-month  periods  ended
March 31,  1998 and 1997  totalled  $2,000 and  $8,000,  respectively.  Accounts
payable - affiliates at March 31, 1998 and September 30, 1997 consists of $1,000
and $4,000, respectively, of management fees payable to the Adviser.

      Included in general and  administrative  expenses for the six months March
31,  1998  and  1997  is  $35,000  and   $33,000,   respectively,   representing
reimbursements  to an affiliate  of the General  Partner for  providing  certain
financial, accounting and investor communication services to the Partnership.

      Also  included in general and  administrative  expenses for the six months
ended March 31, 1998 and 1997 is $1,000 and $5,000,  respectively,  representing
fees paid to an affiliate,  Mitchell Hutchins Institutional Investors, Inc., for
managing the Partnership's cash assets.

3.  Real Estate Investments
    -----------------------

      As of  March  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 March 31, 1998 (two at March 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  Partnership's
share of the gain on the sale of the Central Plaza property totalled  $2,392,000
(net of the write-off of unamortized  excess basis of $17,000).  The Partnership
and its co-venture  partner had engaged the services of a nationally  affiliated
brokerage firm to market the Central Plaza property for sale during fiscal 1997.
The property was marketed  extensively  and sales  packages were  distributed to
national,  regional  and  local  prospective  purchasers.  As a result  of these
efforts,  three  offers  were  received.  After  evaluating  the  offers and the
relative strength of the prospective  purchasers,  an offer was selected and the
Partnership and the co-venturer negotiated a purchase and sale contract with the
prospective  buyer that was executed in January  1998.  The net sale price under
the terms of the purchase and sale agreement was $8,350,000,  which was net of a
$525,000  credit to the buyer in return for its assumption of the existing first
mortgage loan secured by the property.  This loan,  which contained a prepayment
penalty amount that was greater than the $525,000  credit to the buyer,  carried
an  interest  rate of 10% per annum.  Since this  interest  rate was higher than
current  market  rates  obtainable  by the  prospective  buyer,  the  credit was
negotiated.  The net  proceeds  from the sale were  greater  than if the venture
received a gross sale price of $8,875,000 and paid the prepayment penalty called
for under the loan agreement.  The loan was not prepayable without penalty until
February  2002.  Both the  Partnership  and the  co-venturer  believed the risks
associated  with holding this  property  until the  prepayment  penalty  expired
outweighed the reduction in net proceeds resulting from the interest rate credit
negotiated with the buyer.
<PAGE>

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

      The joint  ventures were  accounted for by using the equity method because
the  Partnership did not have a voting control  interest in the ventures.  Under
the equity method, the assets,  liabilities,  revenues and expenses of the joint
ventures did not appear in the Partnership's financial statements.  Instead, the
investments  were carried at cost  adjusted for the  Partnership's  share of the
ventures' earnings,  losses and distributions.  Summarized  operating results of
the Central  Plaza joint venture for the period from January 1, 1998 through the
date of sale (March 3, 1998) and for the period from October 1, 1997 through the
date of sale and the Central  Plaza and Pine Trail joint  ventures for the three
and six months ended March 31, 1997 are as follows:

                    Condensed Combined Summary of Operations
           For the three and six months ended March 31, 1998 and 1997
                                 (in thousands)

                                    Three Months Ended   Six Months Ended
                                         March 31,           March 31,
                                    ------------------   ----------------
                                       1998     1997        1998     1997
                                       ----     ----        ----     ----

     Rental revenues and expense
        recoveries                 $   155   $   866     $   443  $ 1,815
     Interest and other income           3         3           8        7
                                   -------   -------     -------  -------
                                       158       869         451    1,822

     Property operating expenses       130       251         215      612
     Interest expense                   61       332         171      665
     Depreciation and amortization     202       115         224      241
                                   -------   -------     -------  -------
                                       393       698         610    1,518
                                   -------   -------     -------  -------
     Operating income (loss)          (235)      171        (159)     304

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

     Net income                    $ 5,332   $   171     $ 5,408  $   304
                                   =======   =======     =======  =======

     Net income:
      Partnership's share of 
        net income                 $ 2,225   $   109     $ 2,254  $   191
      Co-venturers' share of 
        net income                   3,107        62       3,154      113
                                   -------   -------     -------  -------
                                   $ 5,332   $   105     $ 5,408  $   304
                                   =======   =======     =======  =======

               Reconciliation of Partnership's Share of Operations
   For the three and six months ended March 31, 1998 and 1997 (in thousands)

                                      Three Months Ended   Six Months Ended
                                            March 31,           March 31,
                                      ------------------   ----------------
                                       1998     1997        1998     1997
                                       ----     ----        ----     ----

      Partnership's share of net
        income, as shown above      $ 2,225   $   109     $ 2,254   $   191
      Amortization of excess basis      (17)       (1)        (17)       (2)
                                    -------   -------     -------   -------
      Partnership's share of
         ventures' net income       $ 2,208   $   108     $ 2,237   $   189
                                    =======   =======     =======   =======
<PAGE>

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

                                      Three Months Ended   Six Months Ended
                                            March 31,           March 31,
                                      ------------------   ----------------
                                       1998     1997        1998     1997
                                       ----     ----        ----     ----

      Partnership's share of
        ventures' income (loss)     $  (184) $   108      $  (155)  $  189
      Partnership's share of 
        gain on sale of 
        investment property           2,392        -        2,392        -
                                    -------  -------      -------   ------
                                    $ 2,208  $   108      $ 2,237   $  189
                                    =======  =======      =======   ======

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

      Note and  interest  receivable  at March 31, 1998 and  September  30, 1997
consists of a $3,445,336 note received in connection with the Partnership's sale
of its joint  venture  interest in the  Briarwood  joint  venture in December of
1984.  The note  has been  netted  against  deferred  gain on the sale of a like
amount  on the  Partnership's  balance  sheet.  The note  bears  interest  at 9%
annually,  matures on January 1, 2000 and is  subordinated  to a first  mortgage
loan. Interest and principal payments on the note are payable only to the extent
of net cash flow from the properties sold, as defined in the sale documents. Any
interest  not  received  accrues  additional  interest  of  9%  per  annum.  The
Partnership's policy has been to defer recognition of all interest income on the
note until collected, due to the uncertainty of its collectibility. To date, the
Partnership  has not received any interest  payments.  Per the terms of the note
agreement,   accrued  interest   receivable  as  of  March  31,  1998  would  be
approximately  $7,391,000.  Since the  properties  securing the note continue to
generate   operating   deficits  and  the   Partnership's   note  receivable  is
subordinated to other first mortgage debt,  there is significant  uncertainty as
to the collectibility of both the principal and accrued interest as of March 31,
1998. As a result, the portion of the remaining gain to be recognized,  which is
represented by the note and accrued  interest,  has been deferred until realized
in cash.

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

      The  mortgage  note  payable at March 31, 1998 and  September  30, 1997 is
secured by the  Partnership's  wholly-owned  Northeast Plaza Shopping Center. On
March 29, 1994, the Partnership refinanced the existing wraparound mortgage note
secured by Northeast Plaza, which had been in default for over two years, with a
new loan issued by the prior underlying first mortgage lender.  The new loan, in
the initial  principal amount of $1,722,000,  has a term of five years and bears
interest  at a fixed  rate  of 9% per  annum.  Monthly  principal  and  interest
payments of  approximately  $21,900 are due until maturity in May 1999. The loan
may be prepaid at anytime without penalty.  The fair value of this mortgage note
payable  approximated  its carrying value as of March 31, 1998 and September 30,
1997.

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

      Management  believes that the  Partnership's  efforts to sell or refinance
the Northeast  Plaza  property  have been impeded by potential  buyer and lender
concerns of an environmental  nature with respect to the property.  During 1990,
it was  discovered  that certain  underground  storage  tanks of a Mobil service
station located  adjacent to the shopping center had leaked and contaminated the
groundwater   in  the  vicinity  of  the  station.   Since  the  time  that  the
contamination was discovered,  Mobil Oil Corporation  ("Mobil") has investigated
the problem and is progressing  with efforts to remedy the soil and  groundwater
contamination  under the supervision of the Florida  Department of Environmental
Protection, which has approved Mobil's remedial action plan. During fiscal 1990,
the  Partnership  had  obtained  an  indemnification  agreement  from  Mobil Oil
Corporation  in which Mobil  agreed to bear the cost of all damages and required
clean-up expenses.  Furthermore,  Mobil indemnified the Partnership  against its
inability to sell, transfer,  or obtain financing on the property because of the
contamination. Subsequent to the discovery of the contamination, the Partnership
experienced difficulty in refinancing the mortgages on the property that matured
in  1991.  The  existence  of  contamination   on  the  property   impacted  the
Partnership's  ability to obtain  standard  market  financing.  Ultimately,  the
Partnership was able to refinance its first mortgage at a substantially  reduced
loan-to-value  ratio.  In  addition,  the  Partnership  was  unable  to sell the
property at an  uncontaminated  market  price.  The  Partnership  also  retained
outside  counsel and  environmental  consultants to review  Mobil's  remediation
efforts and has incurred significant  out-of-pocket  expenses in connection with
this situation.  Despite  repeated  requests by the Partnership for compensation
under the terms of the indemnification agreement, to date Mobil has disagreed as
to the  extent  of  the  indemnification  and  has  refused  to  compensate  the
Partnership for any of its damages. During the first quarter of fiscal 1993, the
Partnership  filed suit  against  Mobil for  breach of  indemnity  and  property
damage.  On April 28, 1995,  Mobil was successful in obtaining a Partial Summary
Judgment which removed the case from the Federal Court system. Subsequently, the
Partnership  filed an action in the Florida State Court  system.  This action is
for substantially all of the same claims and utilized the substantial  discovery
and trial  preparation  work  already  completed  for the Federal  case.  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,  to be
documented  by both sides'  experts,  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 has filed a motion for a new trial and
is  considering  an appeal if a new trial is not granted.  The final  outcome of
these legal proceedings cannot presently be determined.

<PAGE>



            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

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


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

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

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

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

      With the fiscal 1998 sale of the Central Plaza Shopping  Center and fiscal
1997 sale of the Partnership's  interest in the Pine Trail Shopping Center,  the
Partnership's  remaining  assets  consist of the  wholly-owned  Northeast  Plaza
Shopping Center and the subordinated  mortgage note receivable  position related
to  the  Briarwood  and  Gatewood  properties  which  were  sold  in  1984.  The
Partnership  expects to re-market the Northeast Plaza property for sale once the
lawsuit  against Mobil Oil  Corporation,  which is discussed  further below,  is
fully resolved. The sale of the Partnership's remaining assets would be followed
by  a  liquidation  of  the  Partnership.  It  is  currently  contemplated  that
dispositions of the Partnership's remaining assets could be completed within the
next 1 to 2 years.  There  are no  assurances,  however,  that the  sales of the
remaining assets and the liquidation of the Partnership will be completed within
this time frame.

      The occupancy  level at the Northeast  Plaza Shopping  Center in Sarasota,
Florida,  remained at 100% for the quarter  ended March 31, 1998.  Over the next
twelve  months,  leases  with four  tenants  occupying  34,500  square feet will
expire.  All four tenants are expected to renew their leases. The first of these
tenants,  one of the center's two anchor tenants, has a 25,600 square foot lease
that  expires in January of 1999 and is expected to exercise one of its two five
year  options and renew its lease with a 10%  increase in the rental  rate.  The
second  tenant,  which  operates a 6,500 square foot discount  retail store,  is
expected  to exercise an option and renew its lease for five years at a slightly
increased rental rate. The third tenant leases an outparcel where they operate a
cleaning business,  and the other operates a bookstore.  As previously reported,
management  believes  that the  Partnership's  efforts to sell or refinance  the
Northeast  Plaza property have been impeded by potential  lender  concerns of an
environmental  nature  with  respect  to  the  property.  During  1990,  it  was
discovered  that certain  underground  storage tanks at a Mobil service  station
located  adjacent to the shopping center had leaked and  contaminated the ground
water in the vicinity of the station.  Since the time that the contamination was
discovered,  Mobil has  investigated the leak and is progressing with efforts to
remedy the soil and ground  water  contamination  under the  supervision  of the
Florida  Department  of  Environmental  Protection,  which has approved  Mobil's
remedial action plan.  During fiscal 1990, the Partnership had obtained a formal
indemnification  agreement  from Mobil Oil  Corporation in which Mobil agreed to
bear the cost of all damages and required clean-up expenses.  Furthermore, Mobil
indemnified  the Partnership  against its inability to sell,  transfer or obtain
financing  on the  property  because  of the  contamination.  Subsequent  to the
discovery  of the  contamination,  the  Partnership  experienced  difficulty  in
refinancing the mortgages on the property that matured in 1991. The existence of
contamination  on the  property  impacted  the  Partnership's  ability to obtain
standard market financing. Ultimately, the Partnership was able to refinance its
first mortgage at a substantially reduced loan-to-value ratio. In addition,  the
Partnership was unable to sell the property at an  uncontaminated  market price.
The Partnership also retained outside counsel and  environmental  consultants to
review Mobil's  remediation efforts and has incurred  significant  out-of-pocket
expenses in connection with this  situation.  Despite  repeated  requests by the
Partnership for compensation under the terms of the  indemnification  agreement,
to date  Mobil has  disagreed  as to the extent of the  indemnification  and has
refused to compensate the Partnership for any of its damages.

      During the first  quarter of fiscal 1993,  the  Partnership  filed suit in
Federal  Court against  Mobil for breach of indemnity  and property  damage.  On
April 28, 1995,  Mobil was  successful in dismissing the action from the Federal
Court system on jurisdictional grounds.  Subsequently,  the Partnership filed an
action in the Florida State Court system.  This action is for  substantially all
of the same claims and utilized the substantial  discovery and trial preparation
work  already  completed  for  the  Federal  case.  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,  to be
documented  by both sides'  experts,  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 has filed a motion for a new trial and
is  considering  an appeal if a new trial is not granted.  The final  outcome of
these legal proceedings cannot presently be determined.

      At March 31, 1998, the Partnership had available cash and cash equivalents
of $3,291,000.  As noted above, such cash and cash equivalents includes the $2.3
million of net proceeds  received  from the sale of the Central  Plaza  property
which was distributed to the Limited Partners subsequent to the quarter-end. The
remainder of such cash and cash equivalents will be used for the working capital
requirements  of the  Partnership  and for  distributions  to the partners.  The
source of future  liquidity and  distributions to the partners is expected to be
through  cash  generated  from the  operations  of the  Partnership's  remaining
income-producing  investment  property  and proceeds  received  from the sale or
refinancing  of such  property.  Such  sources of  liquidity  are expected to be
sufficient to meet the  Partnership's  needs on both a short-term  and long-term
basis. In addition,  the Partnership has a note receivable that it received as a
portion of the  proceeds  from the sale of its interest in the  Briarwood  joint
venture in 1984.  The note and related  accrued  interest  receivable  have been
netted  against a deferred  gain of a like  amount on the  accompanying  balance
sheet. The interest owed on the note receivable is currently payable only to the
extent that the related  properties  generate  excess net cash flow. To date, no
payments have been received on the note, and it is uncertain whether any will be
received in the near future. Since the operating properties continue to generate
net cash flow deficits and the Partnership's  note receivable is subordinated to
the existing  first mortgage  debt,  there is significant  uncertainty as to the
collectibility of the principal and accrued interest. Proceeds, if any, received
on  the  note  would  represent  a  source  of  additional   liquidity  for  the
Partnership.

Results of Operations
Three Months Ended March 31, 1998
---------------------------------

      The  Partnership  reported net income of  $2,216,000  for the three months
ended March 31,  1998,  as compared to net income of $73,000 for the same period
in the  prior  year.  This  $2,143,000  increase  in  net  income  is  primarily
attributable  to the  $2,392,000  gain  realized  on the March  1998 sale of the
Central Plaza Shopping  Center,  as discussed  further above.  In addition,  the
Partnership  reported operating income of $8,000 during the current  three-month
period as compared to an operating loss of $35,000 during the same period in the
prior year. The favorable  change in operating income (loss) was the result of a
decrease of $31,000 in operating expenses and an increase of $12,000 in interest
income.  Operating  expenses  declined  mainly due to a decrease  in general and
administrative  expenses of $24,000 for the current three-month period.  General
and  administrative  expenses  decreased  mainly  due to a  decline  in  certain
required  professional  services  during the  current  period.  Interest  income
increased  due to an  increase in the  Partnership's  average  outstanding  cash
balances  during the current  three-month  period as a result of the receipt and
temporary   investment  of  the  Central  Plaza  sale  proceeds   prior  to  the
distribution to the Limited Partners in April 1998.

      The gain realized on the sale of the Central Plaza Shopping Center and the
favorable  change in the  Partnership's  operating  income (loss) were partially
offset by an unfavorable  change in the Partnership's  share of ventures' income
(losses) for the current  three-month  period.  The Partnership  reported a loss
from  its  share  of  ventures'   operations  of  $184,000  during  the  current
three-month  period as compared to income of $108,000  during the same period in
the prior year.  This  unfavorable  change is mainly due to the inclusion of the
operating  results of the Pine Trail joint venture in the prior year's  results.
As discussed  further above,  the Partnership sold its interest in Pine Trail in
August of 1997. As a result,  the current  period  results  reflect only the net
operating  losses of the Central  Plaza joint  venture  prior to the sale of the
property on March 3, 1998.

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

      The Partnership reported net income of $2,282,000 for the six months ended
March 31, 1998, as compared to net income of $180,000 for the same period in the
prior year. This $2,102,000 increase in net income is primarily  attributable to
the  $2,392,000  gain  realized  on the  March  1998 sale of the  Central  Plaza
Shopping  Center.  In addition,  the Partnership  reported  operating  income of
$45,000 during the current  six-month period as compared to an operating loss of
$9,000  during  the same  period  in the prior  year.  The  favorable  change in
operating  income  (loss) was the result of a decrease  of $27,000 in  operating
expenses  and an  increase of $27,000 in interest  and other  income.  Operating
expenses  declined  mainly  due to a  decrease  in  general  and  administrative
expenses of $15,000 for the current six-month period. General and administrative
expenses  decreased  mainly due to a decline in  certain  required  professional
services during the current period. Interest income increased due to an increase
in the  Partnership's  average  outstanding  cash  balances  during the  current
six-month  period as a result of the receipt  and  temporary  investment  of the
Central Plaza sale proceeds prior to the distribution to the Limited Partners in
April 1998.

      The gain realized on the sale of the Central Plaza Shopping Center and the
favorable  change in the  Partnership's  operating  income (loss) were partially
offset by an unfavorable  change in the Partnership's  share of ventures' income
(losses) for the current six-month period. The Partnership  reported a loss from
its share of  ventures'  operations  of $155,000  during the  current  six-month
period as  compared  to income of  $189,000  during the same period in the prior
year.  This  unfavorable  change is mainly due to the inclusion of the operating
results  of the Pine  Trail  joint  venture  in the  prior  year's  results.  As
discussed  further  above,  the  Partnership  sold its interest in Pine Trail in
August of 1997. As a result,  the current  period  results  reflect only the net
operating  losses of the Central  Plaza joint  venture  prior to the sale of the
property on March 3, 1998.


<PAGE>


                                     PART II
                                Other Information

Item 1. Legal Proceedings

     As discussed  further in the  Partnership's  Annual Report on Form 10-K for
the year ended  September 30, 1997, the Partnership had filed suit against Mobil
Oil  Corporation  during fiscal 1993 for breach of indemnity and property damage
related to the  contamination  of the soil and groundwater at the  Partnership's
Northeast Plaza Shopping Center. A jury trial against Mobil Oil Corporation took
place  during the  two-week  period  ended  April 17,  1998,  in state  court in
Sarasota,  Florida. The Partnership sought an injunctive order to force Mobil to
clean up the  contamination  and  sought  to  recover  damages  suffered  by the
Partnership as a result of the contamination.  During trial, Mobil stipulated to
the entry of an  injunctive  order,  to be  documented  by both sides'  experts,
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 has filed a motion for a new trial and is considering an appeal if a
new trial is not granted.  The final outcome of these legal  proceedings  cannot
presently be determined.

Item 2. through 5.      NONE

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits:          NONE

(b) Reports on Form 8-K:

     A Current  Report on Form 8-K,  dated March 3, 1998,  reporting the sale of
the Central Plaza Shopping Center was filed by the registrant  during the second
quarter of fiscal 1998 and is hereby incorporated herein by reference.




<PAGE>


         PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP


                                SIGNATURES


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

                                   PAINE WEBBER INCOME PROPERTIES THREE
                                         LIMITED PARTNERSHIP


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




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


Date:  May 12, 1998