UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                          Washington, D.C. 20549
                    ----------------------------------

                                 FORM 10-Q

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

                   FOR THE QUARTER ENDED MARCH 30, 2000

                                    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, 2000 and September 30, 1999 (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                     (1,746)      (1,695)
                                                  ---------    ---------
      Net operating investment property               3,292        3,343

Cash and cash equivalents                               554          809
                                                  ---------    ---------
                                                  $   3,846    $   4,152
                                                  =========    =========

                        LIABILITIES AND PARTNERS' CAPITAL

Accounts payable - affiliates                     $       -    $       1
Accounts payable and accrued expenses                 1,075          979
Mortgage note payable                                   871          967
Partners' capital                                     1,900        2,205
                                                  ---------    ---------
                                                  $   3,846    $   4,152
                                                  =========    =========
















                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                            STATEMENTS OF OPERATIONS
     For the three and six months ended March 31, 2000 and 1999 (Unaudited)
                     (In thousands, except per Unit amounts)

                                      Three Months Ended   Six Months Ended
                                           March 31,           March 31,
                                      ------------------   -----------------
                                       2000       1999      2000      1999
                                       ----       ----      ----      ----

Revenues:
   Rental revenues                   $   119   $   119    $   239   $   239
   Interest income                        10        22         21        32
                                     -------   -------    -------   -------
                                         129       141        260       271

Expenses:
   Environmental remediation
     expense                               -         -        300         -
   Interest expense                       40        30         83        60
   Management fees                         -         1          1         2
   Depreciation expense                   25        25         51        51
   General and administrative             31        46         73        89
                                     -------   -------    -------   -------
                                          96       102        508       202
                                     -------   -------    -------   -------
Operating income (loss)                   33        39       (248)       69

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

Net income (loss)                    $    33   $ 2,337    $  (248)  $ 2,730
                                     =======   =======    =======   =======

Net income (loss) per Limited
  Partnership Unit                   $  1.50   $107.38    $(11.45)  $125.42
                                     =======   =======    =======   =======

Cash distributions per Limited
  Partnership Unit                   $  1.31   $117.31    $  2.62   $118.62
                                     =======   =======    =======   =======

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

                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
          For the six months ended March 31, 2000 and 1999 (Unaudited)
                                 (In thousands)

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

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

Balance at September 30, 1999                 $     68           $ 2,137
Cash distributions                                  (1)              (56)
Net loss                                            (2)             (246)
                                              --------           -------
Balance at March 31, 2000                     $     65           $ 1,835
                                              ========           =======























                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS
          For the six months ended March 31, 2000 and 1999 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)

                                                        2000        1999
                                                        ----        ----

Cash flows from operating activities:
   Net income (loss)                                $   (248)   $  2,730
   Adjustments to reconcile net income (loss) to
    net cash used in operating activities:
     Gain on sale of operating investment property         -      (2,661)
     Depreciation expense                                 51          51
     Amortization of deferred financing costs              -          11
     Changes in assets and liabilities:
      Accounts payable  - affiliates                      (1)          -
      Accounts payable and accrued expenses               96        (134)
                                                    --------    --------
         Total adjustments                               146      (2,733)
                                                    --------    --------
         Net cash used in operating activities          (102)         (3)
                                                    --------    --------

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

Cash flows from financing activities:
   Distributions to partners                             (57)     (2,557)
   Principal payments on mortgage note payable           (96)        (83)
                                                    --------    --------
         Net cash used in financing activities          (153)     (2,640)
                                                    --------    --------

Net (decrease) increase in cash and
  cash equivalents                                      (255)         18

Cash and cash equivalents, beginning of period           809         911
                                                    --------    --------
Cash and cash equivalents, end of period            $    554    $    929
                                                    ========    ========

Cash paid during the period for interest            $     83    $     49
                                                    ========    ========






                             See accompanying notes.


<PAGE>


                      PAINE WEBBER INCOME PROPERTIES THREE
                               LIMITED PARTNERSHIP

                          Notes to Financial Statements
                                   (Unaudited)

1.   General
------------

      The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in the
Partnership's  Annual  Report  for the year ended  September  30,  1999.  In the
opinion of management,  the accompanying  financial  statements,  which have not
been audited,  reflect all  adjustments  necessary to present fairly the results
for the interim  period.  All of the adjustments  reflected in the  accompanying
interim financial statements are of a normal recurring nature.

      The  accompanying  financial  statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting  principles
which  requires  management to make  estimates and  assumptions  that affect the
reported amounts of assets and liabilities and disclosures of contingent  assets
and  liabilities  as of March 31, 2000 and  September  30, 1999 and revenues and
expenses  for the three- and  six-month  periods  ended March 31, 2000 and 1999.
Actual results could differ from the estimates and assumptions used.

      As of March 31, 2000, the Partnership has one remaining real estate asset,
the wholly-owned Northeast Plaza Shopping Center (see Note 4). The Partnership's
goal  during  fiscal  1999 had been to  pursue a  disposition  strategy  for its
investment  in  Northeast  Plaza which would have  enabled  the  Partnership  to
complete a liquidation  prior to the end of calendar year 1999.  For the reasons
set  forth  in  detail  in  Notes  5 and 6,  this  goal  was not  achieved.  The
Partnership  still hopes to complete a  liquidation  during  calendar year 2000.
However,  there  can be no  assurances  that the  disposition  of the  remaining
investment and a liquidation of the  Partnership  will be completed  within this
time frame.

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

      Management  fees  earned by the Adviser for the  six-month  periods  ended
March 31,  2000 and 1999  totalled  $1,000  and  $2,000,  respectively.  Regular
quarterly  distributions to the Limited Partners, upon which the management fees
are based, were suspended  effective for the quarter ended March 31, 2000. Since
distributions  are no longer  being paid,  no  management  fee was earned by the
Advisor for the quarter ended March 31, 2000.  Accounts  payable - affiliates at
September  30,  1999  consisted  of $1,000 of  management  fees  payable  to the
Adviser.

      Included in general and  administrative  expenses  the  six-month  periods
ended  March  31,  2000  and  1999  are  $38,000  and   $37,000,   respectively,
representing reimbursements to an affiliate of the General Partner for providing
certain  financial,  accounting  and  investor  communication  services  to  the
Partnership.

      Also  included  in general  and  administrative  expenses  for each of the
six-month  periods  ended March 31, 2000 and 1999 is $1,000,  representing  fees
paid to an affiliate,  Mitchell  Hutchins  Institutional  Investors,  Inc.,  for
managing the Partnership's cash assets.

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

      On  September  15,  1981,  the  Partnership  acquired  a 35%  interest  in
Briarwood Joint Venture,  an existing  Pennsylvania  general  partnership  which
owned  two  apartment   complexes,   comprising  686  units,  in  Bucks  County,
Pennsylvania (the Briarwood and Gatewood Apartments). The Partnership originally
invested approximately $4,815,000 (including an acquisition fee of $500,000 paid
to the  Adviser)  for its  interest.  The  Partnership's  interest  was acquired
subject to two institutional nonrecourse first mortgages with balances totalling
approximately $8,925,000 at the time of the closing.

      On December 20, 1984,  the joint  venture  partners  sold their  ownership
interests in the Briarwood Joint Venture for  $33,152,000.  After the payment of
mortgage obligations and closing costs, the Partnership's allocable share of the
proceeds  was  $10,935,000,  represented  by  cash  of  $7,490,000  and  a  note
receivable  of  $3,445,000.   For  financial  accounting  purposes,  a  gain  of
$7,255,000  resulted from the transaction of which  $3,810,000 was recognized at
the time of the sale and the  remainder  was  deferred  under the cost  recovery
method.  For income tax purposes,  a gain of $4,829,000 was recognized upon sale
and the remainder deferred  utilizing the installment  method. The difference in
the amount of gain recognized for financial accounting and tax purposes resulted
from accounting  differences  related to the carrying value of the Partnership's
investment.

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

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

4.    Operating Investment Property
-----------------------------------

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

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

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

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

      The  mortgage  note  payable at March 31, 2000 and  September  30, 1999 is
secured by the  Partnership's  wholly-owned  Northeast  Plaza  Shopping  Center.
During the first  quarter of fiscal 1999,  the  Partnership  had entered into an
agreement to sell  Northeast  Plaza to the master lessee in  conjunction  with a
refinancing  of the first  mortgage debt secured by the property.  The agreement
was  signed on  November  29,  1998 and was  contingent  on the  master-lessee's
ability to obtain a commitment for  sufficient  financing by January 29, 1999 to
pay the Partnership for its ownership interest.  This financing  commitment date
was subsequently extended to April 19, 1999. As discussed further in Note 6, the
master-lessee has been unable to secure a commitment for financing because of an
environmental   issue,  which  resulted  in  the  termination  of  the  purchase
agreement.

      On March 29, 1994,  the  Partnership  refinanced  the existing  wraparound
mortgage note secured by Northeast Plaza, which had been in default for over two
years, with a new loan issued by the prior underlying first mortgage lender. The
new loan,  in the initial  principal  amount of  $1,722,000,  had a term of five
years and bore interest at a fixed rate of 9% per annum.  Monthly  principal and
interest payments of approximately  $22,000 were due until maturity on March 29,
1999.  While the maturity date of the existing first mortgage loan was March 29,
1999,  this date was extended by the lender in February 1999 to June 29, 1999 to
allow for the master-lessee to complete its planned  refinancing and acquisition
of the  Partnership's  interest in the property.  As noted above,  however,  the
completion of a sale transaction has been affected by an environmental issue and
did not occur by June 29, 1999.  On July 16, 1999,  the lender  issued a default
notice as of June 29, 1999 and  assessed  default  interest at a rate of 25% per
annum on the outstanding balance of approximately  $998,000. On August 31, 1999,
the  Partnership  and the lender  executed a  forbearance  agreement.  Under the
forbearance agreement, the lender agreed not to foreclose or exercise any remedy
available  to  it  under  the  loan  agreement  until  December  15,  1999.  The
Partnership  agreed to pay a $35,000 extension fee; $10,000 of which was paid on
August 31, 1999 and $25,000 of which was payable by December 15, 1999. Under the
forbearance agreement, interest accrued at a rate of 18% on the unpaid principal
balance.  Monthly  principal  and interest  payments  were  increased to $30,000
beginning  August 31, 1999. On January 20, 2000, the lender agreed to extend the
forbearance  agreement to June 30, 2000. Interest will continue to accrue on the
unpaid  principal  balance at a rate of 18%, and monthly  principal and interest
payments remain at $30,000.  The Partnership agreed to pay the $25,000 fee which
was payable on December 15, 1999 plus an additional extension fee of $10,000. If
the Partnership  makes all payments due under the forbearance  agreement  during
its term and repays the loan in full by June 30, 2000, the lender will waive the
payment of the additional $10,000 extension fee (see Note 6).

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

      Management  believed that the  Partnership's  efforts to sell or refinance
the Northeast  Plaza  property from fiscal 1991 through fiscal 1998 were impeded
by potential buyer and lender concerns of an  environmental  nature with respect
to the property. During 1990, it was discovered that certain underground storage
tanks of a Mobil service  station  located  adjacent to the shopping  center had
leaked and contaminated  the ground water in the vicinity of the station.  Since
the time that the  contamination was discovered,  Mobil Oil Corporation  (Mobil)
has  investigated  the problem and is progressing  with efforts to remediate the
soil and  ground  water  contamination  under  the  supervision  of the  Florida
Department of  Environmental  Protection,  which has approved  Mobil's  remedial
action plan. During fiscal 1990, the Partnership had obtained an indemnification
agreement  from Mobil in which Mobil  agreed to bear the cost of all damages and
required  clean-up  expenses.  Furthermore,  Mobil  indemnified  the Partnership
against its  inability to sell,  transfer,  or obtain  financing on the property
because of the contamination.  Subsequent to the discovery of the contamination,
the  Partnership  experienced  difficulty  in  refinancing  the mortgages on the
property that matured in 1991.  The existence of  contamination  on the property
impacted  the  Partnership's   ability  to  obtain  standard  market  financing.
Ultimately,  the  Partnership  was able to  refinance  its first  mortgage  at a
substantially  reduced  loan-to-value  ratio.  In addition,  the Partnership was
unable to sell the property at an  uncontaminated  market price. The Partnership
also retained  outside counsel and  environmental  consultants to review Mobil's
remediation  efforts  and  incurred   significant   out-of-pocket   expenses  in
connection with this situation. Despite repeated requests by the Partnership for
compensation under the terms of the indemnification agreement, to date Mobil has
disagreed as to the extent of the  indemnification and has refused to compensate
the Partnership for any of its damages.

      During  the first  quarter  of fiscal  1993,  the  Partnership  filed suit
against  Mobil for breach of indemnity and property  damage.  On April 28, 1995,
Mobil was successful in obtaining a Partial  Summary  Judgment which removed the
case from the Federal  Court  system.  Subsequently,  the  Partnership  filed an
action in the  Florida  State  Court  system.  A jury  trial  against  Mobil Oil
Corporation took place during the two-week period ended April 17, 1998, in state
court in Sarasota,  Florida. The Partnership sought an injunctive order to force
Mobil to clean up the  contamination  and sought to recover damages  suffered by
the  Partnership  as a result of the  contamination.  During  the  trial,  Mobil
stipulated to the entry of an injunctive  order compelling Mobil to continue the
cleanup  until  state  water  quality  standards  are  achieved.  As  previously
reported, the Partnership had obtained a summary judgment as to liability on its
claims for trespass and nuisance.  The issues of damages on these two counts, as
well as the Partnership's  breach of contract claim, were submitted to the jury.
On April 17, 1998, the jury returned a verdict in favor of the defendant, Mobil.
The  Partnership's  subsequent  motion for a new trial was not granted.  A final
judgment  in  favor of Mobil as to the  Partnership's  damages  claims  has been
entered  with the Court.  In  addition,  a final  judgment  compelling  Mobil to
cleanup the  contamination  at the Northeast  Plaza Shopping  Center was entered
with the Court. The Partnership  subsequently began the process of appealing the
judgment  pertaining  to its  damages  claims,  and Mobil  filed a  cross-appeal
challenging the scope of the injunctive order.

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

      During the quarter ended June 30, 1999,  the  Partnership  was notified by
the Northeast Plaza Shopping Center master-lessee of the presence of groundwater
contamination  at the Shopping  Center which  appears to have been caused by the
operation of dry cleaning  equipment  at the Center.  On December 13, 1999,  the
Partnership submitted a Site Assessment Report to the state regulatory authority
that  confirms  the  presence of the  contamination,  describes  the location of
elevated  contaminant  concentrations,  and  outlines  an  initial  analysis  of
remedial   alternatives   based  on  preliminary   reports   obtained  from  the
master-lessee  and work performed to date by the Partnership's own environmental
consultants.   The   Partnership  is  in  the  process  of  completing   further
investigation  to assist in  assessing  the  extent  of the  contamination,  the
anticipated  cost and time to take  appropriate  action,  and the feasibility of
recovering   associated  costs  from  responsible   third  parties.   While  the
Partnership  believes that the cleanup costs should be the responsibility of the
lessee under the terms of the master lease, the Partnership is proceeding on its
own to begin  the  cleanup  process  in order to  protect  its  investment.  The
prospects for any future  recoveries of these costs are uncertain at the present
time.  The  Partnership  accrued a liability of $1 million during fiscal 1999 to
cover expected legal and  environmental  testing and remediation costs regarding
this  contamination   based  on  the  preliminary   reports  obtained  from  the
master-lessee   and  the  initial  work  performed  by  the   Partnership's  own
environmental consultants.  The Partnership has received comments from the state
regulatory  authority  on the Site  Assessment  Report and is  currently  in the
process of  drafting a Remedial  Action  Plan.  Until a Remedial  Action Plan is
approved  by  the  state  regulatory  authority,  it is  unlikely  that  a  sale
transaction could be completed. Based on the preliminary feedback from the state
regulatory  authority on the Site Assessment  Report,  the Partnership  believes
that the scope of the remediation work may be broader than originally  expected.
As a result, during the quarter ended December 31, 1999, the Partnership accrued
an additional liability of $300,000. Through March 31, 2000, the Partnership had
incurred  actual  legal  and  environmental  testing  expenses  of  $263,000  in
connection with this situation.  The remaining  balance of the accrued liability
of $1,037,000 is included in the balance of accrued expenses on the accompanying
balance  sheet.  This amount  represents an estimate of the potential  liability
associated with this  situation.  It is possible that this estimate could change
materially  in the near term as further  testing,  consulting  with  appropriate
state  environmental  agencies  and  actual  remediation  work  progresses.  The
Partnership  will  continue  to assess  and  revise  this  estimate  as  further
information  becomes available.  At the same time, the Partnership  continues to
work with the Northeast Plaza  master-lessee,  the current first mortgage lender
and a prospective lender in an attempt to complete a refinancing of the property
in combination with a sale of the  Partnership's  interest in the Center. At the
present time, the Partnership  hopes to have an approved Remedial Action Plan in
place  which  would allow  negotiations  for a sale of the  property to commence
prior  to the  June  30,  2000  expiration  of the  loan  forbearance  agreement
described in Note 5. Even if the  Partnership is able to accomplish  this, it is
likely that a further extension of the forbearance agreement will be required in
order to accommodate the timing of the closing of a sale transaction.  There can
be no  assurances  that the  mortgage  lender  will  agree to grant any  further
extensions.

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


<PAGE>



            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

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


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

      The following  discussion of financial condition includes  forward-looking
statements  which  reflect  management's  current  views with  respect to future
events and  financial  performance  of the  Partnership.  These  forward-looking
statements  are  subject to certain  risks and  uncertainties,  including  those
identified  in Item 7 of the  Partnership's  Annual  Report on Form 10-K for the
year ended  September  30, 1999 under the  heading  "Certain  Factors  Affecting
Future Operating Results," which could cause actual results to differ materially
from historical  results or those  anticipated.  The words "believe,"  "expect,"
"anticipate,"  and  similar  expressions  identify  forward-looking  statements.
Readers  are  cautioned  not to place undue  reliance  on these  forward-looking
statements,  which were made based on facts and conditions as they existed as of
the date of this report.  The  Partnership  undertakes no obligation to publicly
update or revise  any  forward-looking  statements,  whether  as a result of new
information, future events or otherwise.

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

      As of March 31, 2000, the  Partnership's  only remaining real estate asset
consists of the wholly-owned  Northeast Plaza Shopping Center. The Partnership's
goal  during  fiscal  1999 had been to  pursue a  disposition  strategy  for its
investment  in  Northeast  Plaza which would have  enabled  the  Partnership  to
complete a liquidation  prior to the end of calendar year 1999.  For the reasons
set forth in detail further below,  this goal was not achieved.  The Partnership
still hopes to complete a liquidation during calendar year 2000. However,  there
can be no assurances  that the  disposition  of the remaining  investment  and a
liquidation of the Partnership will be completed within this time frame.

      The occupancy  level at the Northeast  Plaza Shopping  Center in Sarasota,
Florida, remained at 100% for the quarter ended March 31, 2000. The focus of the
property's  leasing  team during  fiscal 1999 was the renewal of the leases with
five tenants  occupying  37,300 square feet that were scheduled to expire during
fiscal 1999. All five tenants renewed their leases. One of these tenants was one
of the center's  two anchor  tenants  which has a 25,600  square foot lease that
expired in January  of 1999.  This  tenant  exercised  one of its two  five-year
options and renewed its lease with a 10%  increase in the rental  rate. A second
tenant,  which operates a 6,500 square foot discount retail store,  exercised an
option and renewed its lease for five years at a slightly increased rental rate.
Additionally,  a 1,200 square foot  bookstore and a 1,600 square foot hair salon
signed  one-year  lease  extensions.  During the first quarter of fiscal 2000, a
lease with one tenant occupying 1,200 square feet was renewed. During the second
quarter,  the property's leasing team worked with five tenants occupying a total
of 6,800 square feet on renewals of their leases which were  scheduled to expire
within the next year.  Four of these  tenants,  representing  5,600 square feet,
renewed  their  leases,  and  negotiations  continue  with the fifth tenant on a
possible renewal.

      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.

<PAGE>

      During the first  quarter of fiscal 1993,  the  Partnership  filed suit in
Federal  Court against  Mobil for breach of indemnity  and property  damage.  On
April 28, 1995,  Mobil was  successful in dismissing the action from the Federal
Court system on jurisdictional grounds.  Subsequently,  the Partnership filed an
action in the Florida State Court system.  During November 1996, the Partnership
and Mobil attempted to settle the action through mediation. A settlement was not
achieved.  Mobil's  proposal  to settle  the case,  which  included  a  proposed
purchase of the  contaminated  portion of the Northeast  Plaza property from the
Partnership,  failed due to Mobil's  inability to obtain a zoning variance which
was  necessary to make such a transaction  possible.  A jury trial against Mobil
Oil  Corporation  took place during the two-week period ended April 17, 1998, in
state court in Sarasota,  Florida. The Partnership sought an injunctive order to
force Mobil to clean up the contamination and sought to recover damages suffered
by the  Partnership  as a  result  of the  contamination.  During  trial,  Mobil
stipulated to the entry of an injunctive  order compelling Mobil to continue the
cleanup until state water quality standards are achieved.  The experts currently
predict that the cleanup will be completed in approximately  one-to-three years.
As previously  reported,  the Partnership had obtained a summary  judgment as to
liability  on its claims for  trespass  and  nuisance.  The issues of damages on
these two counts,  as well as the  Partnership's  breach of contract claim, were
submitted to the jury.  On April 17, 1998,  the jury returned a verdict in favor
of the defendant, Mobil. The Partnership's subsequent motion for a new trial was
denied. A final judgment in favor of Mobil as to the Partnership's damage claims
has been entered with the Court. In addition,  a final judgment compelling Mobil
to cleanup the  contamination at the Northeast Plaza Shopping Center was entered
with the Court. The Partnership  subsequently began the process of appealing the
judgement  pertaining  to its damages  claims,  and Mobil  filed a  cross-appeal
challenging the scope of the injunctive order.

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

      During the quarter ended June 30, 1999,  the  Partnership  was notified by
the Northeast Plaza Shopping Center master-lessee of the presence of groundwater
contamination  at the Shopping  Center which  appears to have been caused by the
operation of dry cleaning  equipment  at the Center.  On December 13, 1999,  the
Partnership submitted a Site Assessment Report to the state regulatory authority
that  confirms  the  presence of the  contamination,  describes  the location of
elevated  contaminant  concentrations,  and  outlines  an  initial  analysis  of
remedial   alternatives   based  on  preliminary   reports   obtained  from  the
master-lessee  and work performed to date by the Partnership's own environmental
consultants.   The   Partnership  is  in  the  process  of  completing   further
investigation  to assist in  assessing  the  extent  of the  contamination,  the
anticipated  cost and time to take  appropriate  action,  and the feasibility of
recovering   associated  costs  from  responsible   third  parties.   While  the
Partnership  believes that the cleanup costs should be the responsibility of the
lessee under the terms of the master lease, the Partnership is proceeding on its
own to begin  the  cleanup  process  in order to  protect  its  investment.  The
prospects for any future  recoveries of these costs are uncertain at the present
time.  The  Partnership  accrued a liability of $1 million during fiscal 1999 to
cover expected legal and  environmental  testing and remediation costs regarding
this  contamination   based  on  the  preliminary   reports  obtained  from  the
master-lessee   and  the  initial  work  performed  by  the   Partnership's  own
environmental consultants.  The Partnership has received comments from the state
regulatory  authority  on the Site  Assessment  Report and is  currently  in the
process of  drafting a Remedial  Action  Plan.  Until a Remedial  Action Plan is
approved  by  the  state  regulatory  authority,  it is  unlikely  that  a  sale
transaction could be completed. Based on the preliminary feedback from the state
regulatory  authority on the Site Assessment  Report,  the Partnership  believes
that the scope of the remediation work may be broader than originally  expected.
As a result, during the quarter ended December 31, 1999, the Partnership accrued
an additional liability of $300,000. Through March 31, 2000, the Partnership had
incurred  actual  legal  and  environmental  testing  expenses  of  $263,000  in
connection with this situation.  The remaining  balance of the accrued liability
of $1,037,000 is included in the balance of accrued expenses on the accompanying
balance  sheet.  This amount  represents an estimate of the potential  liability
associated with this  situation.  It is possible that this estimate could change
materially  in the near term as further  testing,  consulting  with  appropriate
state  environmental  agencies  and  actual  remediation  work  progresses.  The
Partnership  will  continue  to assess  and  revise  this  estimate  as  further
information  becomes available.  At the same time, the Partnership  continues to
work with the Northeast Plaza  master-lessee,  the current first mortgage lender
and a prospective lender in an attempt to complete a refinancing of the property
in combination with a sale of the Partnership's interest in the Center.

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

      The  maturity  date of the  existing  first  mortgage  loan secured by the
Northeast  Plaza  property was March 29, 1999. The maturity date was extended by
the lender in February 1999 to June 29, 1999 to allow for the  master-lessee  to
complete its planned  refinancing and acquisition of the Partnership's  interest
in the property.  As noted above,  however, the completion of a sale transaction
has been affected by an environmental  issue and did not occur by June 29, 1999.
On July 16,  1999,  the lender  issued a default  notice as of June 29, 1999 and
assessed default interest at a rate of 25% per annum on the outstanding  balance
of  approximately  $998,000.  On August 31, 1999, the Partnership and the lender
executed a forbearance agreement.  Under the forbearance  agreement,  the lender
agreed not to foreclose  or exercise  any remedy  available to it under the loan
agreement  until  December 15,  1999.  The  Partnership  agreed to pay a $35,000
extension fee; $10,000 of which was paid on August 31, 1999 and $25,000 of which
was payable by December  15, 1999.  Under the  forbearance  agreement,  interest
accrues at a rate of 18% on the unpaid principal balance.  Monthly principal and
interest  payments were increased to $30,000  beginning August 31, 1999.  During
the  current  quarter,  on January  20,  2000,  the lender  agreed to extend the
forbearance  agreement to June 30, 2000. Interest will continue to accrue on the
unpaid  principal  balance at a rate of 18%, and monthly  principal and interest
payments remain at $30,000.  The Partnership agreed to pay the $25,000 fee which
was payable on December 15, 1999 plus an additional extension fee of $10,000. If
the Partnership  makes all payments due under the forbearance  agreement  during
its term and repays the loan in full by June 30, 2000, the lender will waive the
payment of the  additional  $10,000  extension  fee.  At the present  time,  the
Partnership  hopes to have an approved Remedial Action Plan in place which would
allow  negotiations for a sale of the property to commence prior to the June 30,
2000 expiration of the loan forbearance  agreement  described above. Even if the
Partnership is able to accomplish this, it is likely that a further extension of
the forbearance agreement will be required in order to accommodate the timing of
the closing of a sale transaction.  There can be no assurances that the mortgage
lender will agree to grant any further extensions.

      At March 31, 2000, the Partnership had available cash and cash equivalents
of $554,000. Such cash and cash equivalents will be used for the working capital
requirements   of  the   Partnership.   The  source  of  future   liquidity  and
distributions  to the  partners is expected to be from cash  generated  from the
operations of the Partnership's remaining  income-producing  investment property
and  proceeds  received  from the sale or  refinancing  of such  property.  Such
sources of liquidity  are expected to be  sufficient  to meet the  Partnership's
needs on both a short-term and long-term basis.

Results of Operations
Three Months Ended March 31, 2000
---------------------------------

      The Partnership  reported net income of $33,000 for the three months ended
March 31, 2000, as compared to net income of  $2,337,000  for the same period in
the  prior  year.  This   $2,304,000   decrease  in  net  income  was  primarily
attributable  to the gain of  $2,298,000  realized  in the prior year due to the
Briarwood note  settlement,  as discussed  further in Note 3 to the accompanying
financial statements.  In addition, the Partnership's operating income decreased
by $6,000 due to a $12,000 decrease in interest income and a $10,000 increase in
interest  expense.  Interest income  decreased due to a reduction in the average
amount of cash and cash equivalents  outstanding  during the current period,  as
compared to the same period in the perior year.  Interest expense  increased due
to the higher interest rate on the outstanding  mortgage note payable called for
under  the terms of the  forbearance  agreement  discussed  further  above.  The
decrease in interest income and the increase in interest  expense were partially
offset by a  $15,000  decline  in  general  and  administrative  expenses.  This
decrease in general and administrative expenses was mainly due to a reduction in
professional fees incurred for the three months ended March 31, 2000.

Six Months Ended March 31, 2000
-------------------------------

      The  Partnership  reported a net loss of $248,000 for the six months ended
March 31, 2000, as compared to net income of  $2,730,000  for the same period in
the prior year. This $2,978,000  unfavorable change in net operating results was
primarily attributable to the gain of $2,661,000 realized in the prior year from
the  Briarwood  note  settlement,   as  discussed  further  in  Note  3  to  the
accompanying  financial  statements.  In addition,  the Partnership  reported an
operating  loss of  $248,000  for the  current  six-month  period as compared to
operating  income of $69,000  during  the same  period in the prior  year.  This
unfavorable  change in operating  income (loss) was mainly due to the additional
accrual of $300,000 made in the current  period for the estimated  environmental
remediation  costs at Northeast Plaza, as discussed  further above. In addition,
interest income  decreased by $11,000,  due to a reduction in the average amount
of cash and cash equivalents  outstanding  during the current year, and interest
expense increased by $23,000, due to the higher interest rate on the outstanding
mortgage note payable  called for under the terms of the  forbearance  agreement
discussed  further above.  The accrual of environmental  remediation  costs, the
decrease in interest income and the increase in interest  expense were partially
offset by a  $15,000  decline  in  general  and  administrative  expenses.  This
decrease in general and administrative expenses was mainly due to a reduction in
professional fees incurred for the six months ended March 31, 2000.


<PAGE>


                                     PART II
                                Other Information

Item 1. Legal Proceedings

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

     The  status of the  Partnership's  litigation  with  Mobil Oil  Corporation
remains unchanged from what was reported in the  Partnership's  Annual Report on
Form 10-K for the year ended September 30, 1999.

Item 2. through 5.      NONE
------------------

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits:          NONE

(b)  Reports on Form 8-K:

     No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.


<PAGE>





            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                                   SIGNATURES

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


                      PAINE WEBBER INCOME PROPERTIES THREE
                               LIMITED PARTNERSHIP


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


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



Date:  May 12, 2000