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, 1997

                                      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, 1997 and September 30, 1996
                                 (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                           (1,440)     (1,389)
                                                      -----------    --------
                                                            3,598       3,649

Investments in joint ventures, at equity                    2,876       2,844
Cash and cash equivalents                                     897       1,000
Accounts receivable                                            99          99
Deferred expenses, net                                         42          53
Note and interest receivable, net                               -           -
                                                      -----------    --------
                                                      $     7,512    $  7,645
                                                      ===========    ========

                      LIABILITIES AND PARTNERS' CAPITAL

Accounts payable - affiliates                         $         4    $      4
Accounts payable and accrued expenses                          28          60
Mortgage note payable                                       1,351       1,420
Partners' capital                                           6,129       6,161
                                                      -----------    --------
                                                      $     7,512    $  7,645
                                                      ===========    ========

              STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
                For the six months ended March 31, 1997 and 1996
                                   (Unaudited)
                                 (In thousands)

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

Balance at September 30, 1995                 $    (61)           $5,619
Cash distributions                                  (2)             (209)
Net income                                           2               173
                                              --------            ------
Balance at March 31, 1996                     $    (61)           $5,583
                                              ========            ======

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

                           See accompanying notes.


<PAGE>


           PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                             STATEMENTS OF INCOME
          For the three and six months ended March 31, 1997 and 1996
                                 (Unaudited)
                   (In thousands, except per Unit amounts)

                                Three Months Ended           Six Months Ended
                                    March 31,                   March 31,
                                ------------------         --------------------
                                1997        1996             1997        1996
                                ----        ----             ----        ----

Revenues:
   Rental revenues            $  119       $ 119           $  239       $ 239
   Interest income                14           7               27          10
                              ------       -----           ------       -----
                                 133         126              266         249

Expenses:
   Interest expense               36          39               73          79
   Management fees                 4           4                8           8
   Depreciation expense           26          26               51          51
   General and administrative    102          87              143         175
                              ------       -----           ------       -----
                                 168         156              275         313
                              ------       -----           ------       -----

Operating loss                   (35)        (30)              (9)        (64)

Partnership's share of 
  ventures' income               108         122              189         239

                              ------      ------           ------      ------

Net income                    $   73      $   92           $  180      $  175
                              ======      ======           ======      ======

Net income per Limited 
  Partnership Unit            $ 3.36      $ 4.24           $ 8.27      $ 8.04
                              ======      ======           ======      ======


Cash distributions per Limited
  Partnership Unit            $ 4.88      $ 4.85           $ 9.76      $ 9.70
                              ======      ======           ======      ======


   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 CASH FLOWS
                For the six months ended March 31, 1997 and 1996
          Increase (Decrease) in Cash and Cash Equivalents (Unaudited)
                                 (In thousands)

                                                         1997           1996
                                                         ----           ----
Cash flows from operating activities:
   Net income                                         $    180        $   175
   Adjustments to reconcile net income to
    net cash provided by (used in) operating
     activities:
       Depreciation expense                                 51             51
       Amortization of deferred financing costs             11             11
       Partnership's share of ventures' income            (189)          (239)
       Changes in assets and liabilities:
       Accounts payable and accrued expenses               (32)           (16)
                                                      --------        -------
         Total adjustments                                (159)          (193)
                                                      --------        -------
         Net cash provided by (used in)
          operating activities                              21            (18)

Cash flows from investing activities:
   Distributions from joint ventures                       157            568

Cash flows from financing activities:
   Distributions to partners                              (212)          (211)
   Principal payments on mortgage note payable             (69)           (63)
                                                     ---------        -------
         Net cash used in financing activities            (281)          (274)
                                                     ---------        -------

Net (decrease) increase in cash and cash equivalents      (103)           276

Cash and cash equivalents, beginning of period           1,000            296
                                                     ---------        -------

Cash and cash equivalents, end of period             $     897        $   572
                                                     =========        =======

Cash paid during the period for interest             $      62        $    68
                                                     =========        =======














                           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, 1996.
     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, 1997 and September 30,
     1996 and revenues and expenses for each of the three- and six-month periods
     ended  March 31,  1997 and  1996.  Actual  results  could  differ  from the
     estimates and assumptions used.

2.   Related Party Transactions

     Management  fees  earned by the  Adviser  totalled  $8,000  for each of the
     six-month  periods  ended  March  31,  1997  and  1996.   Accounts  payable
     affiliates  at March 31, 1997 and  September 30, 1996 consists of $4,000 of
     management fees payable to the Adviser at both dates.

     Included in general and  administrative  expenses  for the six months ended
     March 31, 1997 and 1996 is $33,000 and $36,000, respectively,  representing
     reimbursements to an affiliate of the General Partner for providing certain
     financial,   accounting   and  investor   communication   services  to  the
     Partnership.

 3.  Real Estate Investments

     As  of  March  31,  1997,  the  Partnership  directly  owns  one  operating
     investment  property  (Northeast  Plaza) and has  investments  in two joint
     venture  partnerships  (three at March 31, 1996) as more fully described in
     the Partnership's  Annual Report. On June 19, 1996, the joint venture which
     owned the Camelot Apartments sold the operating  investment  property to an
     unrelated third party for $15,150,000.  The Partnership  received net sales
     proceeds of approximately  $5.9 million after deducting  closing costs, the
     repayment  of the  outstanding  first  mortgage  loans,  the  buyout  of an
     underlying  ground lease and the  co-venturers'  share of the net proceeds.
     The Partnership  made a special  distribution to the Limited  Partners from
     the  Camelot  sale  proceeds of  approximately  $5.5  million,  or $256 per
     original $1,000 investment,  on August 15, 1996. The remaining net proceeds
     were added to the Partnership's  cash reserves to provide for the potential
     capital needs of the Partnership's three remaining  investments.  The joint
     ventures  are  accounted  for  by  using  the  equity  method  because  the
     Partnership does not have a voting control interest in the ventures.  Under
     the equity method,  the assets,  liabilities,  revenues and expenses of the
     joint  ventures do not appear in the  Partnership's  financial  statements.
     Instead, the investments are carried at cost adjusted for the Partnership's
     share of the ventures' earnings, losses and distributions.


<PAGE>


     Summarized  operating  results of the joint  ventures for the three and six
     months ended March 31, 1997 and 1996 are as follows:

                    Condensed Combined Summary of Operations
           For the three and six months ended March 31, 1997 and 1996
                                 (in thousands)

                                   Three Months Ended       Six Months Ended
                                       March 31,                March 31,
                                   ------------------      -----------------
                                    1997      1996          1997     1996
                                    ----      ----          ----     ----

     Rental revenues and expense
        recoveries               $   866    $ 1,475       $1,815     $2,992
     Interest and other income         3         80            7        127
                                 -------    -------       ------     ------
                                     869      1,555        1,822      3,119

     Property operating
       expenses                      251        708          612      1,403
     Interest expense                332        440          665        870
     Depreciation and
       amortization                  115        196          241        404
                                 -------   --------       ------    -------
                                     698      1,344        1,518      2,677
                                 -------   --------       ------    -------
     Net income                  $   171   $    211       $  304    $   442
                                 =======   ========       ======    =======

     Net income:
      Partnership's share of
        combined income          $   109   $    147       $  191    $   289
      Co-venturers' share of
        combined income               62         64          113        153
                                 -------   --------       ------    -------
                                 $   171   $    211       $  304    $   442
                                 =======   ========       ======    =======

               Reconciliation of Partnership's Share of Operations
           For the three and six months ended March 31, 1997 and 1996
                                 (in thousands)

                                    Three Months Ended       Six Months Ended
                                        March 31,               March 31,
                                   -------------------      -----------------
                                     1997      1996           1997     1996
                                     ----      ----           ----     ----

      Partnership's share of
        income, as shown above      $  109    $ 147           $ 191     $  289
      Amortization of excess 
        basis                          (1)      (25)            (2)        (50)

                                    ------    -----           -----     ------
      Partnership's share of
         ventures' income           $  108    $ 122           $ 189     $  239
                                    ======    =====           =====     ======

4.  Note and Interest Receivable, Net

    Note and  interest  receivable  at March 31,  1997 and  September  30,  1996
    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 will accrue 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, 1997 would be approximately $6,496,000. 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,  1997.  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.
<PAGE>
5.  Mortgage Note Payable and Contingencies

    The  mortgage  note  payable at March 31,  1997 and  September  30,  1996 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, 1997.

    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 at a Mobil
    service  station  located  adjacent  to the  shopping  center had leaked and
    contaminated  the  groundwater  in  the  vicinity  of  the  station.   Mobil
    investigated the leak and is progressing with efforts to remedy the soil and
    groundwater contamination under the supervision of the Florida Department of
    Environmental  Regulation,  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.

    As a result of the  contamination of the groundwater at Northeast Plaza, the
    Partnership has incurred certain damages, primarily related to the inability
    to sell the  property  and to  delays  in the  process  of  refinancing  the
    property's mortgage  indebtedness.  The Partnership has incurred significant
    out-of-pocket   and  legal  expenses  in  connection   with  such  sale  and
    refinancing  efforts.  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 these  damages.  During  the  first
    quarter of fiscal 1993, the Partnership  filed suit in Federal Court against
    Mobil for breach of  indemnity  and  property  damage.  The  Partnership  is
    seeking   judgment   against   Mobil  which  would  award  the   Partnership
    compensatory  damages,  out-of-pocket costs,  attorneys' fees and such other
    relief as the court may deem proper. 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
    utilizes  the  substantial  discovery  and trial  preparation  work  already
    completed  for the Federal  case.  On  November  14,  1996,  the state court
    granted  the  Partnership's  Motion  for  Partial  Summary  Judgment  as  to
    liability with regard to the Partnership's claims for damages. During fiscal
    1996, the Partnership  agreed to a mediation session with Mobil,  which took
    place on November 25,  1996,  in an attempt to settle the case. A settlement
    was not reached at the mediation,  but discussions  are  continuing.  A jury
    trial was expected to commence by early April 1997. However,  the jury trial
    has been  delayed  because of a change in the  assignment  of the  presiding
    judge and a conflict in the new judge's schedule. Depositions,  hearings and
    settlement  discussions are continuing,  as are the Partnership's efforts to
    establish a firm trial date. The outcome of these legal  proceedings  cannot
    presently be determined.  Accordingly,  the out-of-pocket  costs, legal fees
    and  related  expenses  related  to this  situation  have been  expensed  as
    incurred  on the  Partnership's  income  statements  and no  estimate of any
    recoveries which could result from this litigation have been recorded.


<PAGE>



           PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

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


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

      The  operations  of  the  Partnership's   two  joint  venture   investment
properties  are stable and producing  excess cash flow as of March 31, 1997. The
occupancy level at Pine Trail Shopping Center in West Palm Beach,  Florida,  was
97% at the end of the quarter,  unchanged  from the previous  quarter.  The only
change in occupancy  during the quarter was the departure of a 1,000 square foot
tenant that closed its store due to poor sales. Additionally,  one lease renewal
was signed with a 1,740  square foot tenant that  extended its lease term for an
additional  five years.  Negotiations  to bring a new  restaurant  tenant to the
Center are  progressing,  and a lease is expected to be  finalized  in the third
quarter.  The prospective new restaurant tenant plans to construct a building at
its own cost on an out parcel to be leased from the Pine Trail joint venture for
a ten-year period.  Currently there is a retail bank building on this out parcel
which has been  leased but not  occupied  for over a year.  The bank  tenant has
agreed to terminate its lease and pay a  cancellation  fee. This fee is expected
to cover the proposed costs to complete the transaction  with the new restaurant
tenant, including demolition of the existing building and brokerage commissions.
In conjunction with obtaining  approval for demolition of the existing  building
and  construction  of the  new  building  on this  out  parcel,  the  property's
management team obtained approval from the Palm Beach County planning and zoning
authority to add as much as 11,000 square feet of expansion  space  elsewhere at
the Center.  While there are  currently  no specific  tenants  targeted for this
potential  expansion  space,  the  flexibility to expand will be an advantage in
negotiating new and renewal leases.

      The  Partnership  has discussed the possibility of selling its interest in
the Pine Trail Shopping  Center to its joint venture  partner and has reached an
agreement on the terms for such a potential  sale.  The proposed  sale price for
the  Partnership's  equity  interest  in the  Pine  Trail  Shopping  Center,  of
$6,150,000,  is supported by an independent appraisal of the property. The joint
venture partner is currently  seeking  financing which would be used to purchase
the  Partnership's  interest and repay the existing $7.6 million first  mortgage
loan.  There  can be no  assurances,  however,  that  this  transaction  will be
successfully consummated.

      At Central Plaza Shopping  Center in Lubbock,  Texas,  the occupancy level
remained at 92% for the quarter.  The property's  leasing team is continuing its
efforts to lease the remaining 11,500 square feet of vacant space at the Center.
The  largest of the vacant  spaces is  adjacent  to one of the  Center's  anchor
tenants.  The  leasing  staff is  working to locate a tenant for this space that
would bring additional  shoppers to the Center and complement the current tenant
mix. The leasing team is also investigating the possibility of a small expansion
of the Center to  accommodate a  prospective  tenant in this  location.  Another
vacant  space sits in the back corner of the Center,  behind one of the Center's
restaurant tenants, and has been extremely difficult to lease due to its lack of
visibility.

      The  Partnership and its co-venture  partner are exploring  potential sale
opportunities  for the Central Plaza property.  However,  it may be desirable to
complete a lease-up  of the  Center's  remaining  vacant  space  before any sale
transaction occurs. Accordingly, there are no assurances that a sale transaction
will be completed in the near future.

      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. Mobil 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
Regulation, 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. As a result of the contamination of the ground water at Northeast
Plaza, the Partnership has incurred certain  damages,  primarily  related to the
inability to sell the property and to delays in the process of  refinancing  the
property's  mortgage  indebtedness.  The  Partnership  has incurred  significant
out-of-pocket  and legal expenses in connection  with such sale and  refinancing
efforts. 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 these 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 utilizes the substantial  discovery
and trial  preparation work already  completed for the Federal case. On November
14, 1996, the state court granted the  Partnership's  Motion for Partial Summary
Judgment as to liability  with regard to the  Partnership's  claims for damages.
During fiscal 1996, the  Partnership  agreed to a mediation  session with Mobil,
which took  place on  November  25,  1996,  in an attempt to settle the case.  A
settlement was not reached at the mediation,  but discussions are continuing.  A
jury trial was expected to commence by early April 1997. However, the jury trial
has been delayed  because of a change in the  assignment of the presiding  judge
and a conflict in the new judge's schedule. Depositions, hearings and settlement
discussions are continuing, as are the Partnership's efforts to establish a firm
trial date. The  Partnership  continues to be concerned about the impact of this
contamination on the Partnership's  ability to sell this investment on favorable
terms in the future.  The outcome of these legal proceedings cannot presently be
determined.

      The Northeast  Plaza property,  which the  Partnership  master leases to a
local  manager/operator,  was 100%  leased as of March 31,  1997.  However,  the
physical  occupancy level was 92% at quarter end due to the move-out of a 10,000
square foot tenant. A new lease has been signed with an automobile  supply store
that will  occupy the 10,000  square foot space  beginning  next  quarter.  This
tenant has committed to a five-year lease with three five-year renewal options.

      Each of the Partnership's  three remaining  properties are retail shopping
centers.  As discussed  further above,  the Partnership has begun to explore the
potential  for selling its  remaining  investment  properties  in the near term.
Although no assurances can be given, it is currently  contemplated that sales of
the Partnership's remaining assets could be completed within the next 2 - to - 3
years. At the present time,  real estate values for retail  shopping  centers in
certain markets are being adversely  impacted by the effects of overbuilding and
consolidations among retailers which have resulted in an oversupply of space and
by the generally  flat rate of growth in retail sales.  Currently,  occupancy at
all  three  of the  Partnership's  retail  shopping  centers  remains  high  and
operations to date do not appear to have been affected by this general trend. It
remains  unclear at this time what impact,  if any, this general trend will have
on the  future  operations  and/or  market  values of the  Partnership's  retail
properties.  It is  possible  that the  current  market  conditions  for  retail
properties  in  general  will  affect  the  timing  of the  dispositions  of the
remaining investments. If favorable sales opportunities are not available in the
near term,  the  Partnership  may continue to hold the  investments  and,  where
necessary, obtain assumable mortgage financing which would allow the Partnership
the greatest  flexibility to pursue future sales  opportunities when such market
conditions improve.

      At March 31, 1997, the Partnership had available cash and cash equivalents
of $897,000.  Such cash and cash  equivalents  will be used for working  capital
requirements and  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  income-producing  investment properties and
proceeds  received from the sale or refinancing  of such  properties or sales of
the  Partnership's  interests in such properties.  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 fiscal 1985. 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,  which
matures on January 1, 2000, and none are expected 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.


<PAGE>


Results of Operations
Three Months Ended March 31, 1997
---------------------------------

      The Partnership  reported net income of $73,000 for the three months ended
March 31, 1997,  as compared to net income of $92,000 for the same period in the
prior year.  This $19,000  decrease in net income is  attributable  to a $14,000
decrease in the Partnership's share of ventures' income and a $5,000 increase in
the Partnership's  operating loss. The  Partnership's  share of ventures' income
decreased  mainly due to the inclusion of the  operating  results of the Camelot
Apartments,  which  was sold in June  1996,  in the  prior  year's  income.  The
Partnership's  share of income from the Camelot joint venture in the prior year,
net of the amortization of excess basis, was $40,000.  Partially  offsetting the
inclusion of the Camelot joint venture's  operating  results in the prior year's
income were increases in the Partnership's share of income from both the Central
Plaza and Pine Trail joint  ventures of $16,000 and $10,000,  respectively.  Net
income  increased  at  Central  Plaza  mainly  due to a 3%  increase  in average
occupancy  compared to the same period in the prior year and small  decreases in
interest and  depreciation  expenses.  Net income increased at Pine Trail mainly
due to an increase in rental revenues resulting from rental rate increases.

      The  Partnership's  operating  loss  increased  primarily due to a $15,000
increase  in general and  administrative  expenses.  General and  administrative
expenses  increased due to an increase in legal fees incurred during the current
three-month period in connection with the continued litigation against Mobil Oil
Corporation,   as  discussed   further  above.   The  increase  in  general  and
administrative  expenses was partially  offset by an increase in interest income
and a decline in interest expense in the current period.

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

      The  Partnership  reported net income of $180,000 for the six months ended
March 31, 1997, as compared to net income of $175,000 for the same period in the
prior year.  This $5,000  increase  in net income is  attributable  to a $55,000
decrease in the  Partnership's  operating  loss which was partially  offset by a
$50,000  decrease  in  the  Partnership's   share  of  ventures'   income.   The
Partnership's  operating  loss  decreased  due  to  a  $38,000  decline  in  the
Partnership's  operating  expenses  and a $17,000  increase in interest  income.
Operating   expenses   declined   mainly  due  to  a  decrease  in  general  and
administrative expenses of $32,000 for the current six-month period. General and
administrative  expenses  decreased  mainly as a result of 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 resulting from the retention of a
portion  of  the  Camelot  sale  proceeds  subsequent  to  the  June  1996  sale
transaction.

      The  Partnership's  share of ventures'  income decreased mainly due to the
inclusion of the operating results of the Camelot Apartments in the prior year's
income. The Partnership's  share of income from the Camelot joint venture in the
prior year, net of the  amortization  of excess basis,  was $104,000.  Partially
offsetting the inclusion of the Camelot joint venture's operating results in the
prior year's  income were  increases in the  Partnership's  share of income from
both the  Central  Plaza and Pine Trail joint  ventures of $35,000 and  $19,000,
respectively.  Net income increased at Central Plaza mainly due to a 3% increase
in average  occupancy  compared to the same period in the prior year and a small
decrease in depreciation  expense. Net income increased at Pine Trail mainly due
to an increase in rental  revenues  resulting  from rental rate  increases and a
small increase in occupancy when compared to the same period in the prior year.





<PAGE>


                                     PART II
                                Other Information

Item 1. Legal Proceedings

     As previously  disclosed,  the Partnership's General Partner was named as a
defendant  in  a  class  action   lawsuit   against   PaineWebber   Incorporated
("PaineWebber") and a number of its affiliates relating to PaineWebber's sale of
70 direct  investment  offerings,  including  the  offering of  interests in the
various limited partnership investments and REIT stocks, including those offered
by the  Partnership.  In  January  1996,  PaineWebber  signed  a  memorandum  of
understanding  with the plaintiffs in the class action outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding,  PaineWebber  irrevocably  deposited  $125 million into an escrow
fund under the  supervision of the United States District Court for the Southern
District of New York to be used to resolve the  litigation in accordance  with a
definitive  settlement  agreement  and a plan of  allocation.  On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which  provides for the  complete  resolution  of the class  action  litigation,
including  releases in favor of the  Partnership and PWPI, and the allocation of
the $125 million settlement fund among investors in the various partnerships and
REITs at issue in the case. As part of the settlement,  PaineWebber  also agreed
to provide class members with certain financial  guarantees  relating to some of
the  partnerships  and REITs.  The details of the  settlement are described in a
notice mailed  directly to class members at the direction of the court.  A final
hearing on the fairness of the proposed  settlement  was held in December  1996,
and in March 1997 the court announced its final approval of the  settlement.  As
part  of  the  settlement   agreement,   PaineWebber  has  agreed  not  to  seek
indemnification  from the related partnerships and real estate investment trusts
at issue in the litigation  (including the  Partnership) for any amounts that it
is  required  to pay  under  the  settlement.  In  addition,  in  December  1996
PaineWebber  agreed to settle the  Bandrowski  action  discussed  further in the
Annual Report.  Final  releases and  dismissals  with regard to this action were
received subsequent to the quarter ended March 31, 1997. Based on the settlement
agreements   discussed  above   covering  all  of  the  outstanding   unitholder
litigation, management does not expect that the resolution of these matters will
have a material impact on the  Partnership's  financial  statements,  taken as a
whole.

     With regard to the Partnership's  litigation  against Mobil Oil Corporation
related to the groundwater contamination at the Northeast Plaza Shopping Center,
on November 14, 1996 the Florida  state court granted the  Partnership's  Motion
for Partial  Summary  Judgment as to liability with regard to the  Partnership's
claims for damages.  During fiscal 1996, the  Partnership  agreed to a mediation
session  with Mobil,  which took place on November  25,  1996,  in an attempt to
settle the case. A settlement was not reached at the mediation,  but discussions
are  continuing.  A jury trial was  expected  to  commence  by early April 1997.
However,  the jury trial has been delayed  because of a change in the assignment
of the presiding judge and a conflict in the new judge's schedule.  Depositions,
hearings and settlement  discussions  are continuing,  as are the  Partnership's
efforts to establish a firm trial date.  The 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:

     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, 1997