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, 1997

                                       OR

         |_|  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                    For the transition period from _________to ______.

                         Commission File Number: 0-10979

            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
            --------------------------------------------------------
             (Exact name of registrant as specified in its charter)

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

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

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

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

         PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

                                 BALANCE SHEETS
              December 31, 1997 and September 30, 1997 (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                     (1,517)        (1,491)
                                                 ----------       --------
      Net operating investment property               3,521          3,547

Investments in joint ventures, at equity                139            215

Cash and cash equivalents                               978            973
Deferred expenses, net                                   26             32
                                                 ----------      ---------
                                                 $    4,664      $   4,767
                                                 ==========      =========

                        LIABILITIES AND PARTNERS' CAPITAL

Accounts payable - affiliates                    $        1      $       4
Accrued expenses                                         35             58
Mortgage note payable                                 1,241          1,278
Partners' capital                                     3,387          3,427
                                                 ----------      ---------
                                                 $    4,664      $   4,767
                                                 ==========      =========








                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

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

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

Balance at September 30, 1996                $     -            $  6,161
Cash distributions                                (1)               (105)
Net income                                         1                 116
                                             -------            --------
Balance at December 31, 1996                 $     -            $  6,172
                                             =======            ========

Balance at September 30, 1997                $    33            $  3,394
Cash distributions                                (1)               (105)
Net income                                         1                  65
                                             -------            --------
Balance at December 31, 1997                 $    33            $  3,354
                                             =======            ========




















                             See accompanying notes.


<PAGE>


            PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

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

                                              1997                1996
                                              ----                ----
Revenues:
   Rental revenues                           $  119              $  119
   Interest and other income                     29                  14
                                             ------              ------
                                                148                 133

Expenses:
   Interest expense                              34                  37
   Management fees                                1                   4
   Depreciation expense                          26                  26
   General and administrative                    50                  40
                                             ------              ------
                                                111                 107
                                             ------              ------
Operating income                                 37                  26

Partnership's share of ventures' income          29                  91
                                             ------              ------

Net income                                   $   66              $  117
                                             ======              ======

Net income per Limited Partnership Unit      $ 3.03              $ 5.37
                                             ======              ======

Cash distributions per Limited
  Partnership Unit                           $  4.88               $4.88
                                             =======               =====


   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, 1997 and 1996 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)

                                                              1997       1996
                                                              ----       ----
Cash flows from operating activities:
   Net income                                               $    66    $   117
   Adjustments to reconcile net income to
    net cash provided by operating activities:
     Depreciation expense                                        26         26
     Amortization of deferred financing costs                     6          6
     Partnership's share of ventures' income                    (29)       (91)
     Changes in assets and liabilities:
      Accounts payable - affiliates                              (3)         -
      Accounts payable and accrued expenses                     (23)       (23)
                                                            -------    -------
        Total adjustments                                       (23)       (82)
                                                            -------    -------
        Net cash provided by operating activities                43         35

Cash flows from investing activities:
   Distributions from joint ventures                            105         93
                                                            -------    -------

Cash flows from financing activities:
   Distributions to partners                                   (106)      (106)
   Principal payments on mortgage note payable                  (37)       (35)
                                                            -------    -------
         Net cash used in financing activities                 (143)      (141)
                                                            -------    -------

Net increase (decrease) in cash and cash equivalents              5        (13)

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

Cash and cash equivalents, end of period                    $   978    $   987
                                                            =======    =======

Cash paid during the period for interest                    $    28    $    31
                                                            =======    =======


                             See accompanying notes.


<PAGE>


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


1.  General
    -------

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

      The  accompanying  financial  statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting  principles
which  requires  management to make  estimates and  assumptions  that affect the
reported amounts of assets and liabilities and disclosures of contingent  assets
and  liabilities as of December 31, 1997 and September 30, 1997 and revenues and
expenses for the  three-month  periods ended December 31, 1997 and 1996.  Actual
results could differ from the estimates and assumptions used.

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

      Management  fees earned by the Adviser for the  three-month  periods ended
December 31, 1997 and 1996 totalled  $1,000 and $4,000,  respectively.  Accounts
payable - affiliates  at December 31, 1997 and  September  30, 1997  consists of
$1,000 and $4,000, respectively, of management fees payable to the Adviser.

      Included in general and administrative expenses for the three months ended
December  31, 1997 and 1996 is $18,000 and $16,000,  respectively,  representing
reimbursements  to an affiliate  of the General  Partner for  providing  certain
financial, accounting and investor communication services to the Partnership.

      Also included in general and administrative  expenses for the three months
ended December 31, 1997 and 1996 is $125 and $4,632, respectively,  representing
fees paid to an affiliate,  Mitchell Hutchins Institutional Investors, Inc., for
managing the Partnership's cash assets.

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

      As of December 31,  1997,  the  Partnership  directly  owns one  operating
investment property (Northeast Plaza) and has an investment in one joint venture
partnership (two at December 31, 1996) which owns an operating  property as more
fully  described in the  Partnership's  Annual  Report.  On August 1, 1997,  the
Partnership  sold its  interest in the Pine Trail  Shopping  Center to its joint
venture  partner  for  a  net  price  of  $6,150,000.  Funds  to  complete  this
transaction  were provided from a refinancing of the first mortgage debt secured
by the Pine Trail  property.  As a result of this  transaction,  the Partnership
made a special  capital  distribution  to the  Limited  Partners  of $285.25 per
original $1,000  investment on September 15, 1997. The Partnership  recognized a
gain of $3,565,000 (net of the write-off of unamortized excess basis of $50,000)
in the fourth quarter of fiscal 1997 in connection  with this sale  transaction.
The  amount of the gain  represents  the  difference  between  the net  proceeds
received and the equity method carrying value of the Partnership's investment in
the Pine  Trail  joint  venture  as of the date of the sale.  The  Partnership's
remaining  joint venture  investment is an interest in Central  Plaza, a 151,857
square foot  shopping  center in Lubbock,  Texas.  As  discussed  further in the
Annual Report,  the Partnership and its co-venture  partner engaged the services
of a nationally  affiliated  brokerage firm to market the Central Plaza property
for sale during  fiscal 1997.  The property was marketed  extensively  and sales
packages  were   distributed  to  national,   regional  and  local   prospective
purchasers.  As a result of these  efforts,  three offers were  received.  After
evaluating the offers and the relative  strength of the prospective  purchasers,
an offer was  selected  and the  Partnership  and the  co-venturer  negotiated a
purchase  and sale  contract  with the  prospective  buyer that was  executed in
January  1998.  The net sale  price  under  the terms of the  purchase  and sale
agreement would be $8,350,000, which is net of a $525,000 credit to the buyer in
return for its  assumption  of the existing  first  mortgage loan secured by the
property.  This loan, which contains a prepayment penalty amount that is greater
than the  $525,000  credit to the  buyer,  carries an  interest  rate of 10% per
annum.  Since this interest rate is higher than current market rates  obtainable
by the prospective  buyer, the credit was negotiated.  The net proceeds from the
sale under the proposed terms are greater than if the venture received the gross
sale price of $8,875,000  and paid the  prepayment  penalty called for under the
loan agreement.  The loan is not prepayable without penalty until February 2002.
Both the  Partnership  and the  co-venturer  believe the risks  associated  with
holding  this  property  until  the  prepayment  penalty  expires  outweigh  the
reduction in net proceeds  resulting  from the interest  rate credit  negotiated
with the  prospective  buyer as part of the current sale  contract.  The sale is
scheduled to close in the second quarter of fiscal 1998. However, since the sale
remains subject to certain due diligence contingencies and the lender's approval
of the loan assumption,  there are no assurances that a sale transaction will be
completed.  If this sale transaction is completed,  the Partnership would expect
to  receive  net  proceeds  of  approximately  $2.2  million,   which  would  be
distributed to the Limited Partners within  approximately 30 days of the closing
date.

      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 Central Plaza joint venture for the three months ended December 31, 1997 and
the  Central  Plaza and Pine Trail joint  ventures  for the three  months  ended
December 31, 1996 are as follows:

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

                                                  1997              1996
                                                  ----              ----

     Rental revenues and expense
        recoveries                            $    288           $   949
     Interest and other income                       5                 4
                                              --------           -------
                                                   293               953

     Property operating expenses                    85               389
     Interest expense                              110               333
     Depreciation and amortization                  22               126
                                              --------           -------
                                                   217               848
                                              --------           -------
     Net income                               $     76           $   105
                                              ========           =======

     Net income:
      Partnership's share of income           $     29           $    92
      Co-venturers' share of income                 47                13
                                              --------           -------
                                              $     76           $   105
                                              ========           =======

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

                                                  1997              1996
                                                  ----              ----

      Partnership's share of income,
         as shown above                       $     29           $    92
      Amortization of excess basis                   -                (1)
                                              --------           -------
      Partnership's share of
         ventures' income                     $     29           $    91
                                              ========           =======

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

      Note and interest  receivable  at December 31, 1997 and September 30, 1997
consists of a $3,445,336 note received in connection with the Partnership's sale
of its joint  venture  interest in the  Briarwood  joint  venture in December of
1984.  The note  has been  netted  against  deferred  gain on the sale of a like
amount  on the  Partnership's  balance  sheet.  The note  bears  interest  at 9%
annually,  matures on January 1, 2000 and is  subordinated  to a first  mortgage
loan. Interest and principal payments on the note are payable only to the extent
of net cash flow from the properties sold, as defined in the sale documents. Any
interest  not  received  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,  1997  would  be
approximately  $7,158,000.  Since the  properties  securing the note continue to
generate   operating   deficits  and  the   Partnership's   note  receivable  is
subordinated to other first mortgage debt,  there is significant  uncertainty as
to the  collectibility of both the principal and accrued interest as of December
31, 1997. As a result, the portion of the remaining gain to be recognized, which
is  represented  by the note and  accrued  interest,  has  been  deferred  until
realized in cash.

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

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

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

      Management  believes that the  Partnership's  efforts to sell or refinance
the Northeast  Plaza  property  have been impeded by potential  buyer and lender
concerns of an environmental  nature with respect to the property.  During 1990,
it was  discovered  that certain  underground  storage  tanks of a Mobil service
station located  adjacent to the shopping center had leaked and contaminated the
groundwater   in  the  vicinity  of  the  station.   Since  the  time  that  the
contamination was discovered,  Mobil Oil Corporation  ("Mobil") has investigated
the problem and is progressing  with efforts to remedy the soil and  groundwater
contamination  under the supervision of the Florida  Department of Environmental
Protection, which has approved Mobil's remedial action plan. During fiscal 1990,
the  Partnership  had  obtained  an  indemnification  agreement  from  Mobil Oil
Corporation  in which Mobil  agreed to bear the cost of all damages and required
clean-up expenses.  Furthermore,  Mobil indemnified the Partnership  against its
inability to sell, transfer,  or obtain financing on the property because of the
contamination. Subsequent to the discovery of the contamination, the Partnership
experienced difficulty in refinancing the mortgages on the property that matured
in  1991.  The  existence  of  contamination   on  the  property   impacted  the
Partnership's  ability to obtain  standard  market  financing.  Ultimately,  the
Partnership was able to refinance its first mortgage at a substantially  reduced
loan-to-value  ratio.  In  addition,  the  Partnership  was  unable  to sell the
property at an  uncontaminated  market  price.  The  Partnership  also  retained
outside  counsel and  environmental  consultants to review  Mobil's  remediation
efforts and has incurred significant  out-of-pocket  expenses in connection with
this situation.  Despite  repeated  requests by the Partnership for compensation
under the terms of the indemnification  agreement,  to date Mobil has refused to
compensate the Partnership  for any of its damages.  During the first quarter of
fiscal 1993,  the  Partnership  filed suit against Mobil for breach of indemnity
and property  damage.  On April 28, 1995,  Mobil was  successful  in obtaining a
Partial  Summary  Judgment which removed the case from the Federal Court system.
Subsequently, the Partnership filed an action in the Florida State Court system.
This  action  is for  substantially  all of the same  claims  and  utilizes  the
substantial  discovery  and trial  preparation  work already  completed  for the
Federal case.  The  Partnership  is seeking  judgment  against Mobil which would
award the Partnership compensatory damages, out-of-pocket costs, attorneys' fees
and such other  relief as the court may deem proper.  On November 14, 1996,  the
state court granted the Partnership's  Motion for Partial Summary Judgment as to
liability with regard to the Partnership's  claims for damages,  due to trespass
and  nuisance.  By obtaining a summary  judgment of liability  and  subsequently
defeating  Mobil's appeal of the summary  judgment,  the  Partnership has firmly
established  Mobil Oil  Corporation's  liability  for the  trespass and nuisance
caused by the  contamination.  The trial on these counts will focus  directly on
the damages  suffered by the Partnership.  In addition,  the trial court found a
reasonable  evidentiary basis for the Partnership to amend its complaint to seek
punitive  damages  against Mobil for certain  intentional  or grossly  negligent
conduct which caused the  contamination  of the Center.  The jury will determine
the Partnership's  entitlement to compensatory  and/or punitive damages, if any.
Finally,  the trial court  granted the  Partnership  leave to seek an injunction
against  Mobil to  force  them to  complete  the  cleanup  of the  Center  on an
expedited  basis. If the Partnership is successful at trial, the injunction will
likely advance the completion of the cleanup by several years.  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.  The
matter is set for a jury trial during the two-week  period  commencing  April 6,
1998. The completion of discovery is expected to occur during the second quarter
of fiscal 1998.  The  Partnership  is seeking  damages in excess of  $2,000,000.
Subject to the  foregoing,  it is  impossible  to determine  at this time,  with
reasonable  certainty,  the likely range of potential  recovery,  if any, by the
Partnership.


<PAGE>



         PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP

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


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

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

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

      On August 1, 1997,  the  Partnership  sold its  interest in the Pine Trail
Shopping  Center to its joint  venture  partner  for a net price of  $6,150,000.
Funds to complete this transaction were provided from a refinancing of the first
mortgage  debt  secured  by  the  Pine  Trail  property.  As a  result  of  this
transaction,  the Partnership made a special capital distribution to the Limited
Partners of $285.25 per original  $1,000  investment on September 15, 1997.  The
net price of $6,150,000 is the amount the Partnership would have received from a
third-party sale at any sale price between  $13,800,000 and  $18,500,000.  Under
the  terms of the Pine  Trail  joint  venture  agreement,  the  Partnership  was
entitled to the first  $6,150,000 as a first priority from the net sale proceeds
after the  payment  of closing  costs and  adjustments  as well as the  mortgage
indebtedness  of  approximately  $7,700,000.  Then the  co-venture  partner  was
entitled to the next  $4,156,000,  with any remaining  net sale  proceeds  split
50%/50%.  Under these terms, the Partnership  would not receive any amount above
$6,150,000 until the sale price of the property exceeded $18,500,000.  If a sale
price of over  $18,500,000  were achieved,  the  Partnership and the co-venturer
would have shared equally in any excess over  $18,500,000.  Management  believed
that a sale price of $18,500,000  was unlikely to be achieved for several years,
which was supported by the most recent independent appraisal of Pine Trail which
valued the property at $16,250,000. The net operating income from the Pine Trail
Shopping  Center was not  expected  to improve  significantly  for the next five
years because of the  long-term  leases and fixed rental rates on the anchor and
out-parcel  leases,  which  comprised  73% of the  property's  total base rental
income and nearly 82% of the total net leasable  area.  One anchor's  lease term
was to  expire  in  January  2002,  two other  anchor  leases  were to expire in
November  2006,  and the fourth anchor lease was to expire in January 2012. As a
result of these  circumstances,  management believed that accepting the net sale
price of $6,150,000 for the interest was in the Partnership's best interests.

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

      As noted above, the Partnership's remaining joint venture investment is an
interest in Central  Plaza,  a 151,857  square foot shopping  center in Lubbock,
Texas.  The occupancy  level at Central Plaza remained at 92% as of December 31,
1997, unchanged from the prior quarter end. There are currently no leases due to
expire at the property  until 1999. As discussed  further in the Annual  Report,
the Partnership and its co-venture  partner engaged the services of a nationally
affiliated  brokerage  firm to market the Central Plaza property for sale during
fiscal  1997.  The property was marketed  extensively  and sales  packages  were
distributed to national,  regional and local prospective purchasers. As a result
of these efforts,  three offers were received.  After  evaluating the offers and
the relative strength of the prospective  purchasers,  an offer was selected and
the Partnership and the co-venturer negotiated a purchase and sale contract with
the  prospective  buyer that was  executed in January  1998.  The net sale price
under the terms of the purchase and sale agreement would be $8,350,000, which is
net of a  $525,000  credit  to the  buyer in return  for its  assumption  of the
existing first mortgage loan secured by the property.  This loan, which contains
a prepayment  penalty  amount that is greater  than the  $525,000  credit to the
buyer,  carries an interest  rate of 10% per annum.  Since this interest rate is
higher than current market rates obtainable by the prospective buyer, the credit
was  negotiated.  The net proceeds  from the sale under the  proposed  terms are
greater than if the venture received the gross sale price of $8,875,000 and paid
the  prepayment  penalty  called for under the loan  agreement.  The loan is not
prepayable  without  penalty until February 2002.  Both the  Partnership and the
co-venturer  believe the risks  associated  with holding this property until the
prepayment penalty expires outweigh the reduction in net proceeds resulting from
the interest rate credit  negotiated with the  prospective  buyer as part of the
current sale  contract.  The sale is scheduled to close in the second quarter of
fiscal 1998.  However,  since the sale remains  subject to certain due diligence
contingencies  and the lender's  approval of the loan  assumption,  there are no
assurances that a sale transaction  will be completed.  If this sale transaction
is  completed,   the  Partnership  would  expect  to  receive  net  proceeds  of
approximately  $2.2 million,  which would be distributed to the Limited Partners
within approximately 30 days of the closing date.

      The occupancy  level at the Northeast  Plaza Shopping  Center in Sarasota,
Florida,  remained at 100% for the quarter ended  December 31, 1997.  During the
quarter, two current tenants signed lease renewals. Both of these tenants occupy
1,200 square foot spaces at the property.  One of the tenants  operates a retail
bookstore. This tenant's lease expired at the end of December, and they signed a
new lease for an additional year with a small increase in their rental rate. The
other  tenant uses its 1,200  square foot space for a clothing  store,  and they
elected to renew their lease for an additional  three years,  with a rental rate
increase  effective in the third year.  There is one lease for 6,500 square feet
that will expire in the upcoming 12 months, and this tenant is expected to renew
its lease. As previously  reported,  management  believes that the Partnership's
efforts to sell or refinance the Northeast  Plaza  property have been impeded by
potential  lender  concerns  of an  environmental  nature  with  respect  to the
property.  During 1990, it was discovered that certain underground storage tanks
at a Mobil service  station  located  adjacent to the shopping center had leaked
and contaminated the ground water in the vicinity of the station. Since the time
that the  contamination  was discovered,  Mobil has investigated the leak and is
progressing with efforts to remedy the soil and ground water contamination under
the supervision of the Florida Department of Environmental Protection, which has
approved Mobil's  remedial action plan.  During fiscal 1990, the Partnership had
obtained a formal indemnification  agreement from Mobil Oil Corporation in which
Mobil  agreed to bear the cost of all damages and  required  clean-up  expenses.
Furthermore,  Mobil  indemnified the Partnership  against its inability to sell,
transfer  or obtain  financing  on the  property  because of the  contamination.
Subsequent to the discovery of the  contamination,  the Partnership  experienced
difficulty  in  refinancing  the mortgages on the property that matured in 1991.
The  existence  of  contamination  on the property  impacted  the  Partnership's
ability to obtain standard  market  financing.  Ultimately,  the Partnership was
able to refinance its first mortgage at a  substantially  reduced  loan-to-value
ratio.  In  addition,  the  Partnership  was unable to sell the  property  at an
uncontaminated  market price.  The Partnership also retained outside counsel and
environmental consultants to review Mobil's remediation efforts and has incurred
significant  out-of-pocket  expenses in connection with this situation.  Despite
repeated  requests by the  Partnership for  compensation  under the terms of the
indemnification  agreement,  to date Mobil has disagreed as to the extent of the
indemnification  and has refused to compensate  the  Partnership  for any of its
damages.

      During the first  quarter of fiscal 1993,  the  Partnership  filed suit in
Federal  Court against  Mobil for breach of indemnity  and property  damage.  On
April 28, 1995,  Mobil was  successful in dismissing the action from the Federal
Court system on jurisdictional grounds.  Subsequently,  the Partnership filed an
action in the Florida State Court system.  On November 14, 1996, the state court
granted the  Partnership's  Motion for Partial Summary  Judgment as to liability
with  regard  to the  Partnership's  claims  for  damages  due to  trespass  and
nuisance.  By  obtaining  a  summary  judgment  of  liability  and  subsequently
defeating  Mobil's appeal of the summary  judgment,  the  Partnership has firmly
established  Mobil Oil  Corporation's  liability  for the  trespass and nuisance
caused by the  contamination.  The trial on these counts will focus  directly on
the damages  suffered by the Partnership.  In addition,  the trial court found a
reasonable  evidentiary basis for the Partnership to amend its complaint to seek
punitive  damages  against Mobil for certain  intentional  or grossly  negligent
conduct which caused the  contamination  of the Center.  The jury will determine
the Partnership's  entitlement to compensatory  and/or punitive damages, if any.
Finally,  the trial court  granted the  Partnership  leave to seek an injunction
against  Mobil to  force  them to  complete  the  cleanup  of the  Center  on an
expedited  basis. If the Partnership is successful at trial, the injunction will
likely advance the completion of the cleanup by several years.

      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.  The matter is set for a jury trial  during the  two-week
period  commencing  April 6, 1998.  The  completion  of discovery is expected to
occur  during the second  quarter of fiscal  1998.  The  Partnership  is seeking
damages in excess of  $2,000,000.  It is  impossible  to determine at this time,
with reasonable  certainty,  the likely range of potential recovery,  if any, by
the Partnership.

      At  December  31,  1997,  the  Partnership  had  available  cash  and cash
equivalents  of $978,000.  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 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 1984.  The note
and related accrued interest receivable have been netted against a deferred gain
of a like amount on the  accompanying  balance  sheet.  The interest owed on the
note  receivable  is  currently  payable  only to the  extent  that the  related
properties  generate  excess  net cash  flow.  To date,  no  payments  have been
received on the note,  and it is  uncertain  whether any will be received in the
near future.  Since the operating  properties continue to generate net cash flow
deficits and the  Partnership's  note receivable is subordinated to the existing
first mortgage debt, there is significant  uncertainty as to the  collectibility
of the principal and accrued  interest.  Proceeds,  if any, received on the note
would represent a source of additional liquidity for the Partnership.

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

      The Partnership  reported net income of $66,000 for the three months ended
December 31, 1997,  as compared to net income of $117,000 for the same period in
the prior year. This $51,000 decrease in net income is primarily attributable to
a  $62,000  decrease  in  the  Partnership's  share  of  ventures'  income.  The
Partnership's share of ventures' income decreased mainly due to the inclusion of
the  operating  results of the Pine  Trail  joint  venture  in the prior  period
results.  As discussed  further above, the Partnership sold its interest in Pine
Trail in August of 1997.  The net  income of the  Central  Plaza  joint  venture
improved in the current  three-month  period mainly due to an increase in tenant
reimbursement  income and a reduction in certain  administrative  expenses.  The
Partnership's  operating income improved by $11,000 for the current  three-month
period  primarily  as a result of an increase  of $15,000 in interest  and other
income.

<PAGE>


                                     PART II
                                Other Information

Item 1. Legal Proceedings

     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, 1997.

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 12, 1998