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 JUNE 30, 1999

                                    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
                June 30, 1999 and September 30, 1998 (Unaudited)
                                 (In thousands)

                                     ASSETS

                                                   June 30     September 30
                                                   -------     ------------

Operating investment property, at cost:
   Land                                           $     950    $     950
   Building and improvements                          4,088        4,088
                                                  ---------    ---------
                                                      5,038        5,038
   Less accumulated depreciation                     (1,670)      (1,593)
                                                  ---------    ---------
      Net operating investment property               3,368        3,445

Cash and cash equivalents                               920          911
Deferred expenses, net of accumulated
   amortization                                           -           11
                                                  ---------    ---------
                                                  $   4,288    $   4,367
                                                  =========    =========

                        LIABILITIES AND PARTNERS' CAPITAL


Accounts payable - affiliates                     $       1    $       1
Accrued expenses                                         29          171
Estimated environmental remediation liability         1,000            -
Mortgage note payable in default                        999        1,124
Partners' capital                                     2,259        3,071
                                                  ---------    ---------
                                                  $   4,288    $   4,367
                                                  =========    =========











                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                            STATEMENTS OF OPERATIONS
     For the three and nine months ended June 30, 1999 and 1998 (Unaudited)
                    (In thousands, except per Unit amounts)

                                  Three Months Ended      Nine Months Ended
                                       June 30,                June 30,
                                  ------------------     ------------------
                                    1999      1998         1999       1998
                                    ----      ----         ----       ----
Revenues:
   Rental revenues                $    119  $   119       $   358  $   358
   Interest income                      12      168            44      222
                                  --------  -------       -------  -------
                                       131      287           402      580

Expenses:
   Interest expense                     23       32            83       99
   Management fees                       1        1             3        3
   Depreciation expense                 26       26            77       77
   Estimated environmental
     remediation expenses            1,000        -         1,000        -
   General and administrative           38      238           127      366
                                  --------  -------       -------  -------
                                     1,088      297         1,290      545
                                  --------  -------       -------  -------
Operating income (loss)               (957)     (10)         (888)      35

Partnership's share of
   venture's losses                      -        -             -     (155)

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

Gain on sale of operating
  investment property                    -        -         2,661        -
                                  --------   -------      -------  -------
Net income (loss)                 $   (957)  $  (10)      $ 1,773  $ 2,272
                                  ========   ======       =======  =======

Net income (loss) per
  Limited Partnership Unit        $ (43.96)  $(0.46)      $ 81.46  $104.37
                                  ========   ======       =======  =======

Cash distributions per
  Limited Partnership Unit        $   1.31  $107.31       $119.93  $113.50
                                   ========  =======      =======  =======

      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 nine months ended June 30, 1999 and 1998 (Unaudited)
                                 (In thousands)

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

Balance at September 30, 1997                 $     33           $ 3,394
Cash distributions                                  (2)           (2,446)
Net income                                          23             2,249
                                              --------           -------
Balance at June 30, 1998                      $     54           $ 3,197
                                              ========           =======

Balance at September 30, 1998                 $     52           $ 3,019
Cash distributions                                  (1)           (2,584)
Net income                                          18             1,755
                                              --------           -------
Balance at June 30, 1999                      $     69           $ 2,190
                                              ========           =======























                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS
          For the nine months ended June 30, 1999 and 1998 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)
                                                             1999        1998
                                                             ----        ----
Cash flows from operating activities:
   Net income                                             $   1,773   $   2,272
   Adjustments to reconcile net income to
    net cash provided by operating activities:
     Partnership's share of gain on sale of
       investment property                                        -      (2,392)
     Gain on sale of operating investment property           (2,661)          -
     Depreciation expense                                        77          77
     Amortization of deferred financing costs                    11          16
     Partnership's share of venture's losses                      -         155
     Changes in assets and liabilities:
      Accounts payable - affiliates                               -          (3)
      Accrued expenses                                         (142)        (23)
      Estimated environmental remediation liability           1,000           -
                                                          ---------   ---------
         Total adjustments                                   (1,715)     (2,170)
                                                          ---------   ---------
         Net cash provided by operating activities               58         102
                                                          ---------   ---------

Cash flows from investing activities:
   Distributions from joint ventures                              -       2,452
   Net proceeds from collection of mortgage
     note receivable                                          2,661           -
                                                          ---------   ---------
         Net cash provided by investing activities            2,661       2,452
                                                          ---------   ---------

Cash flows from financing activities:
   Distributions to partners                                (2,585)      (2,448)
   Principal payments on mortgage note payable                (125)        (114)
                                                          ---------   ---------
         Net cash used in financing activities              (2,710)      (2,562)
                                                          ---------   ---------

Net increase (decrease) in cash and cash equivalents              9          (8)

Cash and cash equivalents, beginning of period                  911         973
                                                          ---------   ---------

Cash and cash equivalents, end of period                  $     920   $     965
                                                          =========   =========

Cash paid during the period for interest                  $      72   $      83
                                                          =========   =========

                             See accompanying notes.


<PAGE>


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


1.   General
     -------

      The accompanying financial statements,  footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in the
Partnership's  Annual  Report  for the year ended  September  30,  1998.  In the
opinion of management,  the accompanying  financial  statements,  which have not
been audited,  reflect all  adjustments  necessary to present fairly the results
for the interim  period.  All of the adjustments  reflected in the  accompanying
interim financial statements are of a normal recurring nature.

      The  accompanying  financial  statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting  principles
which  requires  management to make  estimates and  assumptions  that affect the
reported amounts of assets and liabilities and disclosures of contingent  assets
and  liabilities  as of June 30, 1999 and  September  30, 1998 and  revenues and
expenses  for the three and  nine-month  periods  ended June 30,  1999 and 1998.
Actual results could differ from the estimates and assumptions used.

      As of June 30, 1999, the  Partnership has one remaining real estate asset,
the  wholly-owned  Northeast  Plaza  Shopping  Center (see Note 4). As discussed
further in Note 3, the  subordinated  mortgage  note  receivable  related to the
Briarwood and Gatewood properties which were sold in fiscal 1985 was released in
return for a cash settlement  completed in January 1999. As discussed further in
Note 6, the Partnership  continues to negotiate with the master lessee regarding
a potential  sale of the Northeast  Plaza  property.  The  Partnership  also has
certain litigation outstanding related to Mobil Oil Corporation's  contamination
of  the  Northeast  Plaza  property.  The  sale  or  other  disposition  of  the
Partnership's  remaining asset and the resolution of the outstanding  litigation
would be followed by a liquidation of the Partnership.  It had been contemplated
that the disposition of the Partnership's  remaining asset could be completed by
the end of calendar  year 1999.  However,  at the present  time, in light of the
current status of the Northeast Plaza sale transaction, it appears unlikely that
this goal will be achieved. See Notes 5 and 6 below for a discussion of the sale
transaction and certain other issues regarding the Northeast Plaza property.

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

      Management  fees earned by the Adviser for each of the nine-month  periods
ended June 30, 1999 and 1998 totalled  $3,000.  Accounts payable - affiliates at
both June 30, 1999 and September  30, 1998 consist of $1,000 of management  fees
payable to the Adviser.

      Included in general and administrative  expenses for the nine months ended
June 30,  1999 and  1998 is  $56,000  and  $53,000,  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 nine
months  ended  June 30,  1999  and  1998 is  $1,000  and  $3,000,  respectively,
representing  fees  paid  to  an  affiliate,   Mitchell  Hutchins  Institutional
Investors, Inc., for managing the Partnership's cash assets.

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

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

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

      The principal  amount of the note  receivable  of  $3,445,336  was to bear
interest at 9% annually and was subordinated to a first mortgage loan.  Interest
and  principal  payments on the note were payable only to the extent of net cash
flow from the properties sold, as defined in the sales  documents.  Any interest
not  received  was  to  accrue   additional   interest  of  9%  per  annum.  The
Partnership's policy was to defer recognition of all interest income on the note
until collected, due to the uncertainty of its collectibility. Until the quarter
ended June 30, 1998,  the  Partnership  had not  received any interest  payments
since the  inception of the note.  During the quarter  ended June 30, 1998,  the
Partnership  received  $149,000 from the borrower which was recorded as interest
income during fiscal 1998. Per the terms of the note agreement, accrued interest
receivable as of September 30, 1998 would have been approximately $8,112,000.

      On June 22, 1998,  the  Partnership  initiated a lawsuit in  Massachusetts
state court in connection with this note  receivable.  The suit alleged that the
defendants in this  lawsuit,  acting as agents for the  Partnership,  improperly
released  six of the  ten  properties  (including  the  Briarwood  and  Gatewood
apartment  properties) from the mortgage that secured the note  receivable,  and
that they  improperly  extended the maturity date of the note by ten years.  The
defendants  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 have
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 have been  recognized as deferred
gains on the sale of the Briarwood and Gatewood properties,  in keeping with the
originally expected accounting for the principal balance of the note, 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.    Real Estate Investments
      -----------------------

      As  of  June  30,  1999,  the  Partnership  directly  owns  one  operating
investment property,  the Northeast Plaza Shopping Center, a 121,000 square foot
retail center located in Sarasota,  Florida (see Notes 5 and 6). The Partnership
had no joint venture partnership investments at June 30, 1999 and 1998. On March
3, 1998, Boyer Lubbock Associates,  a joint venture in which the Partnership had
an interest,  sold the Central Plaza Shopping Center to an unrelated third party
for  a  net  price  of  $8,350,000.   The  Partnership   received   proceeds  of
approximately  $2,199,000 after the assumption of the outstanding first mortgage
loan of $4,122,000, closing costs and proration adjustments of $232,000, and the
co-venture  partner's  share of the proceeds of  $1,797,000.  In  addition,  the
Partnership  received  $82,000 upon the liquidation of the joint venture,  which
represented its share of the net cash flow from  operations  through the date of
the  sale.  As a result  of this  transaction,  the  Partnership  made a Special
Distribution to the Limited  Partners of approximately  $2,284,000,  or $106 per
original $1,000 investment, on April 3, 1998.

      The Central  Plaza joint  venture  was  accounted  for by using the equity
method because the  Partnership  did not have a voting  control  interest in the
venture. Under the equity method, the assets, liabilities, revenues and expenses
of the joint venture did not appear in the Partnership's  financial  statements.
Condensed combined financial  statements of this joint venture for the period in
fiscal 1998 prior to the sale of the property follow:
<PAGE>

                    Condensed Combined Summary of Operations
                     For the nine months ended June 30, 1998
                                 (in thousands)

                                                    Nine Months Ended
                                                      June 30, 1998
                                                      -------------

     Rental revenues and expense recoveries            $    443
     Interest and other income                                8
                                                       --------
                                                            451

     Property operating expenses                            215
     Interest expense                                       171
     Depreciation and amortization                          224
                                                       --------
                                                            610
                                                       --------
     Operating loss                                        (159)

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

     Net income                                        $  5,408
                                                       ========

     Net income:
      Partnership's share of net income                $  2,254
      Co-venturer's share of net income                   3,154
                                                       --------
                                                       $  5,408
                                                       ========

               Reconciliation of Partnership's Share of Operations
             For the nine months ended June 30, 1998 (in thousands)

                                                    Nine Months Ended
                                                      June 30, 1998
                                                      -------------

      Partnership's share of net income,
         as shown above                                $ 2,254
      Amortization of excess basis                         (17)
                                                       -------
      Partnership's share of venture's net income      $ 2,237
                                                       =======

      The Partnership's share of venture's net income is presented as follows in
the accompanying fiscal 1998 statements of operations (in thousands):

                                                    Nine Months Ended
                                                      June 30, 1998
                                                      -------------

      Partnership's share of venture's losses          $   (155)
      Partnership's share of gain on
        sale of investment property                       2,392
                                                       --------
                                                       $  2,237
                                                       ========

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

     The  mortgage  note  payable at June 30,  1999 and  September  30,  1998 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,  has a term of five
years and bears interest at a fixed rate of 9% per annum.  Monthly principal and
interest payments of approximately  $22,000 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. The current lender had indicated
a willingness to work with the Partnership on a further short-term loan maturity
extension to accommodate the timing of a sale transaction. However, as discussed
further  in Note 6, in  light  of the  most  recent  environmental  issue at the
property, the timing of a sale transaction is uncertain at the present time, and
no further  extensions have been granted.  As a result,  as of June 30, 1999 the
Partnership  is in  default  of the first  mortgage  agreement.  There can be no
assurances  regarding  what  actions,  if any, the mortgage  lender will take to
enforce its legal remedies in light of this default situation.

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

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

      During  the first  quarter  of fiscal  1993,  the  Partnership  filed suit
against  Mobil for breach of indemnity and property  damage.  On April 28, 1995,
Mobil was successful in obtaining a Partial  Summary  Judgment which removed the
case from the Federal  Court  system.  Subsequently,  the  Partnership  filed an
action in the Florida State Court system.  During November 1996, the Partnership
and Mobil attempted to settle the action through mediation. A settlement was not
achieved.  Mobil's  proposal  to settle  the case,  which  included  a  proposed
purchase of the  contaminated  portion of the Northeast  Plaza property from the
Partnership,  failed due to Mobil's  inability to obtain a zoning variance which
was  necessary to make such a transaction  possible.  A jury trial against Mobil
Oil  Corporation  took place during the two-week period ended April 17, 1998, in
state court in Sarasota,  Florida. The Partnership sought an injunctive order to
force Mobil to clean up the contamination and sought to recover damages suffered
by the  Partnership as a result of the  contamination.  During the trial,  Mobil
stipulated to the entry of an injunctive  order compelling Mobil to continue the
cleanup until state water quality standards are achieved.  The experts currently
predict that the cleanup will be completed in approximately  one to three years.
As previously  reported,  the Partnership had obtained a summary  judgment as to
liability  on its claims for  trespass  and  nuisance.  The issues of damages on
these two counts,  as well as the  Partnership's  breach of contract claim, were
submitted to the jury.  On April 17, 1998,  the jury returned a verdict in favor
of the defendant, Mobil. The Partnership's subsequent motion for a new trial was
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  has appealed the judgment  pertaining  to its
damage claims,  and Mobil has 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 has been stayed until  mid-October 1999 pending the resolution
of this potential sale transaction.  To the extent that this sale transaction is
not  completed,  the  Partnership  reserves all rights against Mobil for damages
under the  indemnification  contract with Mobil. No assurance can be given as to
whether  Mobil will  perform  its  obligations  under the  contract or as to the
outcome of any  litigation  against  Mobil,  should  Mobil  fail to perform  its
obligations.

      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. The Partnership has confirmed
the presence of this contamination and is in the process of 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.  The  Partnership  has accrued a liability of $1 million as of June 30,
1999 for potential costs regarding this  contamination  based on the preliminary
reports  obtained from the  master-lessee  and the work performed to date by the
Partnership's own environmental consultants. There can be no assurances that the
actual  costs   incurred  in  connection   with  this   situation  will  not  be
significantly  higher or lower than this preliminary  estimate.  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.


<PAGE>



            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

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


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

      The following  discussion of financial condition includes  forward-looking
statements  which  reflect  management's  current  views with  respect to future
events and  financial  performance  of the  Partnership.  These  forward-looking
statements  are  subject to certain  risks and  uncertainties,  including  those
identified  in Item 7 of the  Partnership's  Annual  Report on Form 10-K for the
year ended  September  30, 1998 under the  heading  "Certain  Factors  Affecting
Future Operating Results," which could cause actual results to differ materially
from historical  results or those  anticipated.  The words "believe,"  "expect,"
"anticipate,"  and  similar  expressions  identify  forward-looking  statements.
Readers  are  cautioned  not to place undue  reliance  on these  forward-looking
statements,  which were made based on facts and conditions as they existed as of
the date of this report.  The  Partnership  undertakes no obligation to publicly
update or revise  any  forward-looking  statements,  whether  as a result of new
information, future events or otherwise.

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

      As of June 30, 1999,  the  Partnership's  only remaining real estate asset
consists of the  wholly-owned  Northeast  Plaza  Shopping  Center.  As discussed
further  below,  the  subordinated  mortgage  note  receivable  related  to  the
Briarwood and Gatewood  properties was released in return for a cash  settlement
which was completed during the quarter ended March 31, 1999, and the Partnership
continues to negotiate with the master lessee  regarding a potential sale of the
Northeast  Plaza  property.   The  Partnership   also  has  certain   litigation
outstanding  related to Mobil Oil  Corporation's  contamination of the Northeast
Plaza property.  The sale or other  disposition of the  Partnership's  remaining
asset and the resolution of the  outstanding  litigation  would be followed by a
liquidation of the Partnership. It had been contemplated that the disposition of
the Partnership's remaining asset could be completed by the end of calendar year
1999.  However,  at the  present  time,  in light of the  current  status of the
Northeast  Plaza  sale  transaction,  as  discussed  further  below,  it appears
unlikely that this goal will be achieved.

      The occupancy  level at the Northeast  Plaza Shopping  Center in Sarasota,
Florida,  remained at 100% for the quarter ended June 30, 1999.  The  property's
leasing  team is currently  working with two tenants  occupying a total of 6,800
square feet on renewals of their leases. Based on current negotiations, both are
expected to renew their leases. As previously reported, management believed that
the Partnership's efforts to sell or refinance the Northeast Plaza property from
fiscal 1991 through fiscal 1998 were impeded by potential  lender concerns of an
environmental  nature  with  respect  to  the  property.  During  1990,  it  was
discovered  that certain  underground  storage tanks at a Mobil service  station
located  adjacent to the shopping center had leaked and  contaminated the ground
water in the vicinity of the station.  Since the time that the contamination was
discovered,  Mobil has  investigated the leak and is progressing with efforts to
remedy the soil and ground  water  contamination  under the  supervision  of the
Florida  Department  of  Environmental  Protection,  which has approved  Mobil's
remedial action plan.  During fiscal 1990, the Partnership had obtained a formal
indemnification  agreement  from Mobil Oil  Corporation in which Mobil agreed to
bear the cost of all damages and required clean-up expenses.  Furthermore, Mobil
indemnified  the Partnership  against its inability to sell,  transfer or obtain
financing  on the  property  because  of the  contamination.  Subsequent  to the
discovery  of the  contamination,  the  Partnership  experienced  difficulty  in
refinancing the mortgages on the property that matured in 1991. The existence of
contamination  on the  property  impacted  the  Partnership's  ability to obtain
standard market financing. Ultimately, the Partnership was able to refinance its
first mortgage at a substantially reduced loan-to-value ratio. In addition,  the
Partnership was unable to sell the property at an  uncontaminated  market price.
The Partnership also retained outside counsel and  environmental  consultants to
review Mobil's  remediation efforts and has incurred  significant  out-of-pocket
expenses in connection with this  situation.  Despite  repeated  requests by the
Partnership for compensation under the terms of the  indemnification  agreement,
to date  Mobil has  disagreed  as to the extent of the  indemnification  and has
refused to compensate the Partnership for any of its damages.

      During the first  quarter of fiscal 1993,  the  Partnership  filed suit in
Federal  Court against  Mobil for breach of indemnity  and property  damage.  On
April 28, 1995,  Mobil was  successful in dismissing the action from the Federal
Court system on jurisdictional grounds.  Subsequently,  the Partnership filed an
action in the Florida State Court system.  During November 1996, the Partnership
and Mobil attempted to settle the action through mediation. A settlement was not
achieved.  Mobil's  proposal  to settle  the case,  which  included  a  proposed
purchase of the  contaminated  portion of the Northeast  Plaza property from the
Partnership,  failed due to Mobil's  inability to obtain a zoning variance which
was  necessary to make such a transaction  possible.  A jury trial against Mobil
Oil  Corporation  took place during the two-week period ended April 17, 1998, in
state court in Sarasota,  Florida. The Partnership sought an injunctive order to
force Mobil to clean up the contamination and sought to recover damages suffered
by the  Partnership  as a  result  of the  contamination.  During  trial,  Mobil
stipulated to the entry of an injunctive  order compelling Mobil to continue the
cleanup until state water quality standards are achieved.  The experts currently
predict that the cleanup will be completed in approximately  one to three years.
As previously  reported,  the Partnership had obtained a summary  judgment as to
liability  on its claims for  trespass  and  nuisance.  The issues of damages on
these two counts,  as well as the  Partnership's  breach of contract claim, were
submitted to the jury.  On April 17, 1998,  the jury returned a verdict in favor
of the defendant, Mobil. The Partnership's subsequent motion for a new trial was
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  has appealed the judgement  pertaining to its
damage claims,  and Mobil has 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 has been stayed until  mid-October 1999 pending the resolution
of this potential sale transaction.  To the extent that this sale transaction is
not  completed,  the  Partnership  reserves all rights against Mobil for damages
under the  indemnification  contract with Mobil. No assurance can be given as to
whether  Mobil will  perform  its  obligations  under the  contract or as to the
outcome of any  litigation  against  Mobil,  should  Mobil  fail to perform  its
obligations.

      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. The Partnership has confirmed
the presence of this contamination and is in the process of 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.  The  Partnership  has accrued a liability of $1 million as of June 30,
1999 for potential costs regarding this  contamination  based on the preliminary
reports  obtained from the  master-lessee  and the work performed to date by the
Partnership's own environmental consultants. There can be no assurances that the
actual  costs   incurred  in  connection   with  this   situation  will  not  be
significantly  higher or lower than this preliminary  estimate.  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.  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.  The current  lender had  indicated a
willingness to work with the  Partnership on a further  short-term loan maturity
extension to accommodate the timing of a sale transaction.  However, in light of
the most  recent  environmental  issue at the  property,  the  timing  of a sale
transaction  is uncertain at the present time,  and no further  extensions  have
been granted.  As a result, as of June 30, 1999 the Partnership is in default of
the first mortgage agreement. There can be no assurances regarding what actions,
if any, the mortgage  lender will take to enforce its legal remedies in light of
this default situation.

      The  Partnership  also had a note receivable that it received as a portion
of the proceeds from the sale of its interest in the Briarwood  joint venture in
fiscal 1985.  The interest owed on the note  receivable  was payable only to the
extent of net cash flow from the properties securing the note, as defined in the
note  agreement.  Until the quarter ended June 30, 1998, the Partnership had not
received  any interest  payments  since the  inception  of the note.  During the
quarter ended June 30, 1998, the Partnership received $149,000 from the borrower
which was recorded as interest  income during fiscal 1998. On June 22, 1998, the
Partnership  initiated a lawsuit in Massachusetts state court in connection with
this note  receivable.  The suit alleged that the  defendants  in this  lawsuit,
acting  as  agents  for  the  Partnership,  improperly  released  six of the ten
properties  (including the Briarwood and Gatewood apartment properties) from the
mortgage that secured the note receivable, and that they improperly extended the
maturity  date of the  note by ten  years.  The  defendants  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 have 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 have been recognized as deferred gains on the sale of the Briarwood and
Gatewood properties,  in keeping with the originally expected accounting for the
principal  balance of the note,  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 June 30, 1999.

      At June 30, 1999, the Partnership had available cash and cash  equivalents
of $920,000. Such cash and cash equivalents will be used for the working capital
requirements  of the  Partnership  and for  distributions  to the partners.  The
source of future  liquidity and  distributions to the partners is expected to be
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.

      As noted above, it is possible,  although not likely, that the Partnership
may be liquidated prior to the end of calendar year 1999.  Notwithstanding this,
the  Partnership  believes that it has made all necessary  modifications  to its
existing  systems  to make them year 2000  compliant  and does not  expect  that
additional costs associated with year 2000 compliance,  if any, will be material
to the Partnership's results of operations or financial position.

Results of Operations
Three Months Ended June 30, 1999
--------------------------------

      The Partnership reported a net loss of $957,000 for the three months ended
June 30,  1999,  as compared to a net loss of $10,000 for the same period in the
prior year.  This  increase  in net loss was  primarily  attributable  to the $1
million  accrual made by the  Partnership  in the current  period for  potential
costs associated with the most recent contamination issue at the Northeast Plaza
Shopping  Center,  as  described  further  above.  There was also a decrease  of
$156,000 in interest  income due to the interest earned during the prior year on
the Central Plaza Shopping Center sale proceeds prior to the distribution to the
Limited Partners which occurred in April 1998. These unfavorable  changes in the
Partnership's  net  operating  results  were  partially  offset by a decline  of
$200,000  in general and  administrative  expenses  for the current  three-month
period. The reduction in general and  administrative  expenses was mainly due to
additional  legal fees incurred in the prior period in connection with the Mobil
Oil litigation discussed further above.

Nine Months Ended June 30, 1999
-------------------------------

      The  Partnership  reported  net income of  $1,773,000  for the nine months
ended June 30, 1999, as compared to net income of $2,272,000 for the same period
in the prior  year.  This  $499,000  decrease  in net income was mainly due to a
$923,000  unfavorable  change in the Partnership's  operating income (loss). The
unfavorable change in operating income (loss) was primarily the result of the $1
million  accrual made by the  Partnership  in the current  period for  potential
costs associated with the most recent contamination issue at the Northeast Plaza
Shopping  Center,  as described  further  above.  In addition,  interest  income
decreased  by  $178,000  for the  current  nine-month  period.  Interest  income
decreased mainly due to the interest earned during the prior  nine-month  period
on the Central Plaza Shopping Center sale proceeds prior to the  distribution to
the Limited  Partners which occurred in April 1998. The  unfavorable  changes in
the  Partnership's  operating  income (loss) were partially offset by a $239,000
reduction  in general and  administrative  expenses  for the current  nine-month
period. The reduction in general and  administrative  expenses was mainly due to
additional  legal fees incurred in the prior period in connection with the Mobil
Oil litigation discussed further above.

      A $269,000 increase in gain realized from the sale of operating investment
property and a $155,000 decrease in the Partnership's  share of venture's losses
partially  offset the  unfavorable  change in  operating  income  (loss) for the
current nine-month period. The increase in gain on sale of operating  investment
property  represents the difference  between the $2,661,000 gain realized due to
the Briarwood  note  settlement in the current  period and the  $2,392,000  gain
realized on the sale of the Central Plaza Shopping  Center in the prior year, as
discussed  further above. The decrease in the  Partnership's  share of venture's
losses resulted from the sale of the Central Plaza property on March 3, 1998, as
discussed further in the Annual Report. As a result, there was no income or loss
from joint venture operations for the nine months ended June 30, 1999.



<PAGE>


                                     PART II
                                Other Information

Item 1. Legal Proceedings

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

     The  status of the  Partnership's  litigation  with  Mobil Oil  Corporation
remains unchanged from what was reported in the  Partnership's  Annual Report on
Form 10-K for the year ended September 30, 1998.

Briarwood/Gatewood Litigation
-----------------------------

      On June 22, 1998,  the  Partnership  initiated a lawsuit in  Massachusetts
state court in connection with the note  receivable  obtained by the Partnership
in connection  with the 1984 sale of its interest in the Briarwood joint venture
(which owned the Briarwood and Gatewood  properties).  The suit alleged that the
defendants in this  lawsuit,  acting as agents for the  Partnership,  improperly
released  six of the  ten  properties  (including  the  Briarwood  and  Gatewood
apartment  properties) from the mortgage that secured the note  receivable,  and
that they  improperly  extended the maturity date of the note by ten years.  The
defendants  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 have
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. As a result of the  settlement,  the  Partnership no longer
has an interest in the note receivable.

Item 2. through 5.      NONE

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits:          NONE

(b) Reports on Form 8-K:

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




<PAGE>





                  PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP


                                   SIGNATURES


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

                      PAINE WEBBER INCOME PROPERTIES THREE
                               LIMITED PARTNERSHIP


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




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


Date:  August 16, 1999