The genetic potential, inbreeding depression, heritability, selection response and correlation were studied during 2011-12 in parental cultivars and their F3 populations of upland cotton at the University of Agriculture, Peshawar, Pakistan. Eight upland cotton genotypes i.e., SLH-284, CIM-446, CIM-473, CIM-496, CIM-499, CIM-506, CIM-554 and CIM-707 and their 56 F3 populations were sown in a randomized complete block design with three replications. Mean squares revealed significant differences among the parental lines and F3 populations for all the characters. On average, the F3 populations showed best performance than parental cultivars for yield contributing traits and eventually increased seed cotton yield. Majority of the F3 populations revealed inbreeding depression for various traits. However, some of the F3 populations revealed negative values for inbreeding depression by transgressing their F2 populations in performance. The PCV and GCV values were comparable for almost all the traits which revealed that genotypes played greater role rather than environment and indicating less influence of environment on majority of the traits. Heritabilities (broad sense) were low to high with desirable selection response for all the traits. Seed cotton yield had significant positive correlation with all the traits, except days to first flowering where the association was non-significant. Parental cultivars viz., CIM-496, SLH-284, CIM-554 and CIM-707 and their F3 populations i.e. CIM-506 × SLH-284, CIM-707 × CIM-554, CIM-473 × CIM-496, SLH-284 × CIM-707, SLH-284 × CIM-473 and CIM-473 × CIM-707 revealed maximum values for seed cotton yield and major yield contributing traits. The promising F3 populations authenticated stability even after segregation which can be further studied for enhancement in seed cotton and lint yields.