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 DECEMBER 31, 1995

                                       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 nameof registrant as specified in its charter)



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


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


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



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



<PAGE>


           PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                                 BALANCE SHEETS
                    December 31, 1995 and September 30, 1995
                                   (Unaudited)
                                 (In thousands)

                                     ASSETS

                                                      December 31 September 30

Operating investment property, at cost:
   Land                                                  $    950     $   950
   Building and improvements                                4,088       4,088
                                                         --------     -------
                                                            5,038       5,038
   Less accumulated depreciation                           (1,313)     (1,287)
                                                         --------     -------
      Net operating investment property                     3,725       3,751

Investments in joint ventures, at equity                    2,867       3,030
Cash and cash equivalents                                     417         296
Deferred expenses, net                                         69          74
Note and interest receivable, net                               -           -
                                                         --------    --------
                                                          $ 7,078     $ 7,151
                                                          =======     =======

                        LIABILITIES AND PARTNERS' CAPITAL

Accounts payable - affiliates                            $      4     $     4
Accrued expenses                                               21          40
Mortgage note payable                                       1,518       1,549
Partners' capital                                           5,535       5,558
                                                         --------    --------
                                                          $ 7,078     $ 7,151
                                                          =======     =======


             STATEMENTS OF CHANGES IN PARTNERS'  CAPITAL (DEFICIT)
              For the three months ended December 31, 1995 and 1994
                                   (Unaudited)
                                 (In thousands)

                                                   General             Limited
                                                   Partners            Partners

Balance at September 30, 1994                       $    (59)          $5,776
Cash distributions                                        (1)            (105)
Net income                                                 1              137
                                                    --------           ------
Balance at December 31, 1994                        $    (59)          $5,808
                                                    ========           ======

Balance at September 30, 1995                       $    (61)          $5,619
Cash distributions                                        (1)            (105)
Net income                                                 1               82
                                                    --------           ------
Balance at December 31, 1995                        $    (61)          $5,596
                                                    ========           ======



                             See accompanying notes.


<PAGE>


           PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                              STATEMENTS OF INCOME
              For the three months ended December 31, 1995 and 1994
                                   (Unaudited)
                                 (In thousands)
                                                      1995            1994
                                                      ----            ----
Revenues:
   Rental revenues                                    $ 119           $ 119
   Interest income                                        4               3
                                                      -----           -----
                                                        123             122

Expenses:
   Interest expense                                      40              43
   Management fees                                        4               4
   Depreciation expense                                  25              25
   General and administrative                            88              72
                                                     ------           -----
                                                        157             144
                                                     -------          ------
Operating loss                                          (34)            (22)
Partnership's share of ventures' income                 117             160
                                                     -------          ------

Net income                                           $    83          $  138
                                                     =======          ======

Net income per Limited Partnership Unit                $3.80           $6.35
                                                       =====           =====

Cash distributions per Limited
  Partnership Unit                                     $4.85           $4.85
                                                       =====           =====


   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 three months ended December 31, 1995 and 1994
               Increase (Decrease) in Cash and Cash Equivalents
                                   (Unaudited)
                                 (In thousands)

                                                         1995           1994
                                                         ----           ----
Cash flows from operating activities:
   Net income                                         $     83       $    138
   Adjustments to reconcile net income to
    net cash provided by (used for) 
     operating activities:
     Depreciation expense                                   25             25
     Amortization of deferred financing costs                5              6
     Partnership's share of ventures' income              (117)          (160)
     Changes in assets and liabilities:
      Interest and other receivables                         -             (3)
      Accounts payable and accrued expenses                (18)             3
                                                     ---------       --------
        Total adjustments                                 (105)          (129)
                                                     ---------       --------
        Net cash provided by (used for) 
          operating activities                             (22)            9

Cash flows from investing activities:
   Distributions from joint ventures                       280            143

Cash flows from financing activities:
   Distributions to partners                              (106)          (106)
   Principal payments on mortgage note payable             (31)           (29)
                                                     ---------       ---------
         Net cash used for financing activities           (137)          (135)
                                                     ---------       --------

Net increase in cash and cash equivalents                  121             17

Cash and cash equivalents, beginning of period             296            217
                                                     ---------        -------

Cash and cash equivalents, end of period              $    417        $   234
                                                      ========        =======

Cash paid during the period for interest              $     35        $    37
                                                      ========        =======














                             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, 1995.

     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.

2.   Real Estate Investments

     The Partnership  directly owns one operating investment property (Northeast
     Plaza) and has  investments in three joint venture  partnerships  which own
     operating  properties as more fully described in the  Partnership's  Annual
     Report.  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.

     Summarized  operating  results of the three  joint  ventures  for the three
     months ended December 31, 1995 and 1994 are as follows:

                   Condensed Combined Summary of Operations
              For the three months ended December 31, 1995 and 1994
                                 (in thousands)

                                                  1995              1994
                                                  ----              ----

     Rental revenues and expense
        recoveries                              $1,518            $1,523
     Interest and other income                      46                38
                                                ------            ------
                                                 1,564             1,561

     Property operating expenses                   695               621
     Interest expense                              430               423
     Depreciation and amortization                 208               210
                                               -------           -------
                                                 1,333             1,254
                                               -------           -------
     Net income                                $   231           $   307
                                               =======           =======

     Net income:
     Partnership's share of
        combined income                        $   142           $   185
     Co-venturers' share of
        combined income                             89               122
                                               -------           -------
                                               $   231           $   307
                                               =======           =======


<PAGE>


               Reconciliation of Partnership's Share of Operations
              For the three months ended December 31, 1995 and 1994
                                 (in thousands)

                                                  1995              1994
                                                  ----              ----

      Partnership's share of income,
         as shown above                       $    142           $   185
      Amortization of excess basis                 (25)              (25)
                                              --------           --------
      Partnership's share of
         ventures' income                     $    117           $   160
                                              ========           =======

3.  Note and Interest Receivable, Net

    Note and interest  receivable  at December 31, 1995 and  September  30, 1995
    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  December  31,  1995  would be  approximately  $5,282,755.  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 December 31, 1995.  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.

4.  Related Party Transactions

    Management  fees  earned  by the  Adviser  totalled  $4,000  for each of the
    three-month  periods  ended  December  31, 1995 and 1994.  Accounts  payable
    affiliates at December 31, 1995 and September 30, 1995 consists of $4,000 of
    management fees payable to the Adviser at both dates.

    Included in general and  administrative  expenses for the three months ended
    December   31,  1995  and  1994  is  $18,000  and   $21,000,   respectively,
    representing  reimbursements  to an  affiliate  of the  General  Partner for
    providing certain financial,  accounting and investor communication services
    to the Partnership.


<PAGE>


5.  Mortgage Note Payable and Contingencies

    The mortgage  note payable at December  31, 1995 and  September  30, 1995 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.

    Management believes that the Partnership's  efforts to sell or refinance the
    Northeast  Plaza  property  have been impeded by potential  buyer and lender
    concerns of an  environmental  nature with respect to the  property.  During
    1990, it was discovered  that certain  underground  storage tanks of a Mobil
    service  station  located  adjacent  to the  shopping  center had leaked and
    contaminated the groundwater in the vicinity of the station.  Since the time
    that the  contamination  was discovered,  Mobil Oil Corporation  (Mobil) has
    investigated  the problem and is progressing with efforts to remedy the soil
    and  groundwater   contamination   under  the  supervision  of  the  Florida
    Department of Environmental Regulation,  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.

    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 refused to compensate the Partnership  for any of these damages.  During
    the first quarter of fiscal 1993, the  Partnership  filed suit 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.  The  discovery  phase of the lawsuit is currently in
    progress.  On April  28,  1995,  Mobil Oil  Corporation  was  successful  in
    obtaining a Partial Summary Judgment which removed the case from the Federal
    Court  system.  Subsequently,  the  Partnership  has  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.  A jury trial is  scheduled  for
    September 23, 1996. The outcome of these legal proceedings  cannot presently
    be determined.

    The  Partnership  is involved in certain  other legal  actions.  The General
    Partner believes these that such actions will be resolved without a material
    adverse effect on the Partnership's financial statements, taken as a whole.





<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 four remaining  investment  properties
are stable and producing  excess cash flow as of December 31, 1995. Three of the
remaining  properties are retail shopping  centers,  two of which are located in
Florida and one of which is located in Texas.  At the present time,  real estate
values for retail shopping centers in certain markets have begun to be adversely
affected by overbuilding and consolidations  among retailers which have resulted
in an  oversupply  of  space.  Currently,  occupancy  levels at all three of the
Partnership's  retail  properties  remain high,  and operations to date have not
been  significantly  affected by this general trend.  At the Pine Trail Shopping
Center,  the  national  restaurant  chain  which  renovated  a  building  on  an
out-parcel  at the property and opened for business  during the first quarter of
fiscal 1995 is  generating  increased  shopper  traffic and new business for the
Center's other tenants.  Road  construction  near the center has been completed,
and the  traffic  flow to Pine  Trail  has  improved  as a  result.  Pine  Trail
maintained  a 95%  occupancy  level as of  December  31,  1995.  The Pine  Trail
property did lose two tenants  which had occupied  10,000 square feet during the
first  quarter of fiscal 1996.  However,  prior to the end of the  quarter,  the
leasing team executed new agreements to re-lease one-half of this vacated space.

     At  Central  Plaza,  management  has  been  working  on a plan to  increase
occupancy,  upgrade the property's  tenant mix and increase  rental rates.  Such
plans had involved a possible  15,000 square foot store expansion for one of the
center's  anchor tenants.  However,  subsequent to the end of the first quarter,
this  tenant's  board  of  directors  rejected  the  proposed  expansion  plans.
Nonetheless,  there were other positive leasing developments at Central Plaza in
the first  quarter.  Two leases,  covering  5,550  square feet were signed which
improved the occupancy level at the property to 96% as of December 31, 1995. The
property's management and leasing team has also completed a lease amendment with
a 5,600 square foot tenant, which resulted in a higher effective rental rate and
an extended lease term. In addition,  management is currently  negotiating  with
another prospective tenant interested in leasing approximately 2,500 square feet
of space.

      As discussed in the Partnership's Annual Report,  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 of a Mobil service station located adjacent to the shopping center
had leaked and  contaminated  the  groundwater  in the  vicinity of the station.
Since the time that the contamination was discovered, Mobil has investigated the
problem  and is  progressing  with  efforts to remedy  the soil and  groundwater
contamination  under the supervision of the Florida  Department of Environmental
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 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 refused to compensate
the  Partnership  for any of these  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 Oil  Corporation  was successful in
obtaining a Partial  Summary  Judgment  which  removed the case from the Federal
Court system. Subsequently, the Partnership filed an action in the Florida State
Court  system.  This  action is for  substantially  all of the same  claims  and
utilizes the substantial  discovery and trial preparation work already completed
for the Federal  case. A jury trial is scheduled  for  September  23, 1996.  The
Partnership is seeking  judgment against Mobil which would award the Partnership
compensatory damages,  costs, attorneys' fees and such other relief as the Court
may deem  proper.  The outcome of these legal  proceedings  cannot  presently be
determined.

     The average occupancy level at the Camelot Apartments  decreased to 91% for
the quarter ended  December 31, 1995 from 96% at September 30, 1995. The capital
improvement  program  implemented  at the property in 1994,  which  included the
continuation  of a roof  replacement  process,  has enabled  management to raise
rental rates over the past year.  Despite the drop in occupancy,  total revenues
have remained stable at Camelot as a result of the rental rate increases.  Given
the  current  strength  of the  national  real  estate  market  with  respect to
multi-family  apartment  properties,  management  began to actively  market this
property  for sale during the fourth  quarter of fiscal 1995.  In addition,  the
Partnership has engaged in preliminary  discussions with its co-venture partners
regarding the possible sale of the  Partnership's  interest in the Camelot joint
venture.  In  accordance  with the terms of the  joint  venture  agreement,  the
co-venturers  have the right to match any third party offer  obtained to buy the
property.  Accordingly, a negotiated sale to the co-venturers at the appropriate
fair market value may represent the most  expeditious and  advantageous  way for
the Partnership to sell this investment.  The decision as to whether to complete
a transaction to sell the Partnership's  interest in the Camelot Apartments will
be based on an  evaluation  of the current  fair market  value of the  operating
investment  property and an assessment of the national and local market  factors
affecting  the  appreciation  potential of the property in the  relatively  near
term.  Accordingly,  there can be no assurances that a sale  transaction will be
consummated  in the near  term.  A  portion  of the  property's  cash  flow will
continue to be reinvested to address certain deferred maintenance items and make
selected  capital  improvements  during  fiscal  1996 in  order to  enhance  the
property's  curb appeal.  The Camelot  joint venture has two  outstanding  first
mortgage  loans  which had a  combined  principal  balance of  $4,241,000  as of
December 31, 1995. One of these first mortgage loans matured on January 1, 1996.
At the present  time,  the venture is in the process of  finalizing an agreement
with this lender for a six-month  extension of the maturity date in return for a
fee of $5,600. The venture's other first mortgage loan is scheduled to mature on
July 1, 1997.  At the present  time,  the venture is  negotiating  with  several
different potential lending sources to refinance the mortgage loan which matures
in fiscal 1996. The principal balance of this mortgage loan represents less than
20% of the total estimated  market value of the venture's  operating  investment
property.  In light of the venture's low leverage level,  the current  favorable
interest rate  environment  and the continued  strong supply of capital for real
estate lending, management expects to be able to secure a loan to refinance this
maturing obligation.

      At  December  31,  1995,  the  Partnership  had  available  cash  and cash
equivalents of $417,000. 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.

Results of Operations
For the Three Months Ended December 31, 1995

      The Partnership  reported net income of $83,000 for the three months ended
December  31, 1995 as compared to net income of $138,000  for the same period in
the prior year. This unfavorable  change in net operating  results for the first
quarter  of  fiscal  1996 is due to a  decrease  in the  Partnership's  share of
ventures' income of approximately  $43,000 and an increase in the  Partnership's
operating loss of $12,000. The Partnership's share of ventures' income decreased
primarily as a result of  decreases in net income at both Central  Plaza and the
Camelot  Apartments.  Net income decreased at the Camelot Apartments as a result
of an increase in expenses  related to the  preparation  of the  property  for a
possible  sale during fiscal 1996.  Net income at Central  Plaza  decreased as a
result of a decline in tenant reimbursement  revenues and an increase in repairs
and maintenance expenses due to the unusually harsh winter weather.


<PAGE>



      The  Partnership's  operating loss increased as a result of an increase in
general  and  administrative  expenses  of  approximately  $16,000.  General and
administrative  expenses  increased mainly due to additional  expenses  incurred
related to an independent  valuation of the Partnership's  operating  properties
which was  commissioned in conjunction  with  management's  ongoing  refinancing
efforts and portfolio management responsibilities.



<PAGE>


                                     PART II
                                Other Information


Item 1. Legal Proceedings

     In  November  1994,  a series of  purported  class  actions  (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of 70 limited  partnership  investments,  including those offered by
the Partnership.  The lawsuits were brought against PaineWebber Incorporated and
Paine Webber Group Inc.  (together  "PaineWebber"),  among others,  by allegedly
dissatisfied  partnership  investors.  In March  1995,  after the  actions  were
consolidated under the title In re PaineWebber Limited  Partnership  Litigation,
the  plaintiffs  amended their  complaint to assert claims  against a variety of
other defendants,  including Third Income Properties,  Inc. which is the General
Partner of the Partnership and an affiliate of PaineWebber. On May 30, 1995, the
court certified class action treatment of the claims asserted in the litigation.

     The amended complaint in the New York Limited  Partnership  Actions alleges
that, in connection with the sale of interests in Paine Webber Income Properties
Three Limited  Partnership,  PaineWebber and Third Income  Properties,  Inc. (1)
failed to provide adequate disclosure of the risks involved;  (2) made false and
misleading   representations  about  the  safety  of  the  investments  and  the
Partnership's  anticipated  performance;  and (3)  marketed the  Partnership  to
investors for whom such  investments  were not  suitable.  The  plaintiffs,  who
purport to be suing on behalf of all persons who invested in Paine Webber Income
Properties Three Limited Partnership, also allege that following the sale of the
partnership   interests,   PaineWebber   and  Third  Income   Properties,   Inc.
misrepresented   financial   information   about  the  Partnerships   value  and
performance.  The amended  complaint  alleges that  PaineWebber and Third Income
Properties, Inc. violated the Racketeer Influenced and Corrupt Organizations Act
("RICO")  and the federal  securities  laws.  The  plaintiffs  seek  unspecified
damages,   including  reimbursement  for  all  sums  invested  by  them  in  the
partnerships,  as well as  disgorgement  of all fees and other income derived by
PaineWebber from the limited partnerships. In addition, the plaintiffs also seek
treble damages under RICO.

     In January 1996,  PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions 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 plan of allocation which the parties expect
to submit  to the  court for its  consideration  and  approval  within  the next
several months. Until a definitive settlement and plan of allocation is approved
by the court,  there can be no assurance  what, if any,  payment or non-monetary
benefits will be made  available to investors in Paine Webber Income  Properties
Three Limited Partnership.  Pursuant to provisions of the Partnership  Agreement
and other contractual  obligations,  under certain circumstances the Partnership
may be required to indemnify  Third Income  Properties,  Inc. and its affiliates
for costs and liabilities in connection with this litigation. Management has had
discussions with  representatives of PaineWebber and, based on such discussions,
the  Partnership  does not  believe  that  PaineWebber  intends  to  invoke  the
aforementioned  indemnifications  in  connection  with  the  settlement  of this
litigation.

Item 2. through 5.      NONE

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits:          NONE

(b)  Reports on Form 8-K:

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




<PAGE>





           PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP


                                   SIGNATURES


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

                      PAINE WEBBER INCOME PROPERTIES THREE
                               LIMITED PARTNERSHIP


                                   By:  THIRD INCOME PROPERTIES, INC.
                                        General Partner




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


Date:  February 13, 1996