**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**





**x 
Annual
      Report
      Pursuant to Section 13 or 15(d) of**


**the
      Securities Exchange Act of 1934.**


**For
      the fiscal year ended December 31, 2005**


**or**


**o Transition
      Report
      Pursuant to Section 13 or 15(d) of the**


**Securities
      Exchange Act of 1934.**


**For
      the transition period from ______ to ______**





Commission
      File Number 33-35938




**PAINEWEBBER
      R&D PARTNERS III, L.P.**


(Exact
      name of registrant as specified in its charter)





**Delaware**
            **13-3437420**(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)**1285
                Avenue of the Americas, New York, New York**
            **10019**(Address
                of principal executive offices)
            (Zip
                code)


Registrant’s
      telephone number, including area code: (212) 713-2000




**Securities
      registered pursuant to Section 12(b) of the Act:**




Name
                of each exchange onTitle
                of each class
            
            Which
                registeredNone
            
            None




**Securities
      registered pursuant to Section 12(g) of the Act:**




Limited
      Partnership Units




No
      voting
      stock has been issued by the Registrant. Neither a public nor other market
      exists for the Units, and no such market is expected to develop, therefore
      there
      was no quoted market price for the 50,000 Units.




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes **o** No **x**




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Exchange Act. Yes **o**    No
**x** .




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
      **o**




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of the Registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K **x**.





Indicate
      by check mark whether the Registrant is an accelerated filer Yes **o**    
No
      **x**




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes **o**   
No
      **x**









**SPECIAL
      NOTE REGARDING**


**FORWARD
      LOOKING STATEMENTS**





The
      Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
      forward-looking statements. Except for the historical information contained
      herein, the matters discussed herein are forward-looking statements. Such
      forward-looking statements involve known and unknown risks, uncertainties and
      other factors that may cause the actual results, performance, actions or
      achievements of the Partnership or industry results to be materially different
      from any future results, performance, actions or achievements expressed or
      implied by such forward-looking statements. Such factors include, among others,
      the following: general economic and business conditions; fluctuations in the
      value of securities for which only a limited, or no, public market exists;
      dependence on the development of new technologies; dependence on timely
      development and introduction of new and competitively priced products; the
      need
      for regulatory approvals; the Sponsor Companies having insufficient funds to
      commercialize products to their maximum potential; the restructuring of Sponsor
      Companies; the dependence of the Partnership on the skills of certain scientific
      personnel; and the dependence of the Partnership on the General
      Partner.









**PART
      I**




**Item
              1.**
            **Business.**




PaineWebber
      R&D Partners III, L.P. (the “Partnership” or “Registrant”) is a Delaware
      limited partnership of which Paine Webber Development Corporation (“PWDC” or
“General Partner”), an indirect, wholly-owned subsidiary of UBS Americas Inc.
      (“UBS Americas”) which is a wholly-owned subsidiary of UBS AG, is the general
      partner and manager of the Partnership.




As
      of
      December 31, 2005, the Partnership had an investment in Cephalon Clinical
      Partners, L.P. (“CCP”). (See Note 5 of the “Notes to Financial Statements”
included in this filing on Form 10-K.) In addition, as of December 31,
      2005, the Partnership owned marketable securities as described in Note 3 of
      the
“Notes to Financial Statements” included in this filing on Form
      10-K.




The
      General Partner intends to liquidate the Partnership’s remaining investments in
      a manner that preserves value for the limited partners while minimizing
      associated expenses. However, since the Partnership’s limited partnership
      interest in CCP is illiquid and has uncertain prospects, the General Partner
      has
      continued to consider ways in which it could terminate the Partnership while
      preserving any value that may accrue with respect to that interest. The General
      Partner is now in the final stages of formulating a plan that will result in
      the
      liquidation of all the Partnership’s remaining assets, including its interest in
      CCP and termination of the Partnership all in accordance with the terms of
      the
      Partnership Agreement. While the exact timing and method of liquidating the
      Partnership’s assets is not certain, the Partnership expects its assets to be
      liquidated and the Partnership terminated in mid-2006.




**Partnership
      Management**




The
      Partnership has contracted with the General Partner, pursuant to a management
      agreement (the “Management Contract”), responsibility for management and
      administrative services necessary for the operation of the Partnership. The
      General Partner has waived its management fee for services rendered to the
      Partnership.




-1-




**(Item
      1 Continued)**





**Distributions**





The
      following table sets forth the proportion of each distribution to be received
      by
      limited partners of the Partnership (the “Limited Partners”) and the General
      Partner (collectively the “Partners”). All distributions to the Limited Partners
      have been made pro rata in accordance with their individual capital
      contributions.





Limited
              Partners
            
            General
              PartnerI.
            
            
            Until
                the value of the aggregate distributions for each limited partnership
                unit
                (“Unit”) equals $1,000 plus simple interest on such amount accrued at 5%
                per annum (“Contribution Payout”). Contribution Payout as of December 31,
                2005 is $1,725 per Unit
            
            
            99
            %
            
            1
            %II.
            
            
            After
                Contribution Payout and until the value of the aggregate distributions
                for
                each Unit equals $5,000 (“Final Payout”)
            
            
            80
            %
            
            20
            %III.
            
            
            After
                Final Payout
            
            
            75
            %
            
            25
            %




During
      the year ended December 31, 2000, the Partnership made a cash distribution
      which
      resulted in aggregate distributions per Unit to reach Contribution Payout.
      As a
      result, the General Partner will be allocated 20% of future cash distributions
      until Final Payout. No cash or security distributions were remitted by the
      Partnership during the year ended December 31, 2005. As of this date, the
      Partnership has made cash and security distributions, as valued on the dates
      of
      distribution, since inception of $1,483 and $98 per Unit,
      respectively.




**Profit
      and Loss Allocation**




Profits
      and losses of the Partnership are allocated as follows: (i) until cumulative
      profits and losses for each Unit equals Contribution Payout, 99% to Limited
      Partners and 1% to the General Partner, (ii) after Contribution Payout and
      until
      cumulative profits and losses for each Unit equals Final Payout, 80% to Limited
      Partners and 20% to the General Partner, and (iii) after Final Payout, 75%
      to
      Limited Partners and 25% to the General Partner. As of December 31, 2005, the
      cumulative profits of the Partnership were $794 per Unit.




Pursuant
      to the terms of the Agreement of Limited Partnership, upon termination of the
      Partnership, the General Partner is required to pay to the Partnership an amount
      in cash equal to the debit balance in the General Partner’s capital account.
      Such amount then becomes part of the assets of the Partnership. As of December
      31, 2005, the debit balance in the General Partner’s capital account was
      $1,532,114.




**Other**




At
      December 31, 2005, the Partnership had no employees, and PWDC had no employees
      other than its executive officers (see Item 10. Directors
      and Executive Officers of the Registrant ).
      The
      Partnership is engaged in one primary business segment, the management of
      investments in technology and biotechnology products and companies.




-2-




**(Item
      1 Continued)**





**Item
              1A.**
            **Risk
                Factors**




The
      operation of the Partnership is subject to certain risks, including those
      described below. References in this Item 1A to “we”, “us” or “our” mean the
      Partnership or the General Partner, as appropriate.





Our
      remaining assets include an illiquid investment with uncertain prospects that
      has prevented us from liquidating and terminating. This has forced us to sell
      our marketable securities to pay operating expenses.





For
      the
      past several years, our only assets have been marketable securities, cash and
      an
      investment in CCP. There is no established trading market for our investment
      in
      CCP and its prospects are uncertain. We have been attempting to find a way
      to
      liquidate our remaining assets, including our investment in CCP, so that we
      may
      terminate the Partnership, while preserving for our limited partners any value
      that may be realized from our investment in CCP. The various options that we
      have explored to liquidate our investment in CCP have presented regulatory
      and
      administrative issues, with the result being that we have been unable to
      liquidate and terminate the Partnership. Since we have no source of revenue
      or
      funding, we have been forced to sell our marketable securities to pay operating
      expenses. Had we not been forced to make these sales to pay operating expenses,
      we would be able to sell our marketable securities in a manner that may result
      in higher sales prices. The overall effect of the retention of our investment
      in
      CCP has been to diminish our assets and to reduce the amount that will be
      available to our limited partners when we liquidate and terminate.





As
      we
      notified our limited partners on December 1, 2005, we are in the final stages
      of
      formulating a plan that will result in the liquidation of our remaining assets,
      including our interest in CCP. While the exact timing and method of our
      liquidation is not certain, we continue to expect that our assets will be
      liquidated and that we will terminate in mid-2006.





There
      is no established market for units of our limited partnership interests and we
      have determined not to permit any sales, assignments or other transfers of
      units, except transfers that occur as a result of the laws of descent and
      distribution or by operation of law. In
      addition to being illiquid, our units are not expected to be income
      producing.





Should
      any of our limited partners desire or need to liquidate their investment in
      our
      units, they will be unable to do so because we have determined not to permit
      any
      sales, assignments or other transfers of units, except transfers that occur
      as a
      result of the laws of descent and distribution or by operation of law. As a
      result, our limited partners can expect to hold their units until we terminate.
      We do not expect to make any distributions of cash or property to our limited
      partners prior to our making our final liquidating distribution.




**Item
              2.**
            **Properties.**




The
      Partnership does not own or lease any office, manufacturing or laboratory
      facilities.




**Item
              3.**
            **Legal
                Proceedings.**




None.




**Item
              4.**
            **Submission
                of Matters to a Vote of Security
                Holders.**




None.




-3-




**PART
      II**




**Item
              5.**
            **Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity
                Securities.**




There
      is
      no existing public market for the Units, and no such market is expected to
      develop. Effective
      December 1, 2005, the General Partner no longer permits any sale, assignment
      or
      other transfers of units, except transfers that occur as a result of the laws
      of
      descent and distribution or by operation of law. As
      of
      December 31, 2005, there were 4,469 Limited Partners. The Partnership purchased
      none of its limited partnership Units during the year ended December 31,
      2005.




The
      Partnership distributes to the Partners, when available, the net proceeds from
      royalty distributions, net proceeds from dispositions of portfolio securities
      and any other cash in excess of amounts that are necessary for the operation
      of
      the Partnership’s business. During the years ended December 31, 2005, 2004,
      and 2003, the Partnership made no distributions to the Partners.




**Item
              6.**
            **Selected
                Financial Data.**




See
      the
“Selected Financial Data” on Page F-2 included in this filing on Form
      10-K.




**Item
              7.**
            **Ma****nagement’s
                Discussion and Analysis****of Financial Condition and Results of
                Operations.**




**Liquidity
      and Capital Resources**




Partners’
      capital of $2.0 million at December 31, 2004, increased to $2.3 million at
      December 31, 2005, resulting from the Partnership’s recognition of net income of
      $0.3 million (as discussed in Results of Operations below).




The
      Partnership’s funds are invested in marketable securities until cash is needed
      to pay for the ongoing management and administrative expenses of the Partnership
      or for distribution to the Partners. Liquid assets increased from $2.1 million
      at December 31, 2004 to $2.3 million at December 31, 2005. The increase of
      $0.2
      million resulted from the increase in market values as of these dates of $0.5
      million offset (i) by the sale of marketable securities having a value as
      December 31, 2004 of $0.2 million and (ii) the payment of expenses. On December
      1, 2005, the Board of Directors of the General Partner authorized the
      Partnership to sell at the then prevailing market price at the end of each
      month, as many shares of marketable securities required to pay the Partnership’s
      operating expenses for which no other funds are available to the
      Partnership.




**Results
      of Operations**




Year
      ended December 31, 2005 compared to the year ended December 31,
      2004:





Net
      income (loss) for the years ended December 31, 2005 and 2004 was $0.3 million
      and $(0.5) million, respectively. The favorable variance of $0.8 million
      resulted from an increase in revenues of $0.7 million and a decrease in expenses
      of $0.1 million.





Net
      revenues were $0.4 million for the year ended December 31, 2005 as compared
      to
      $(0.3) million for the year ended December 31, 2004. Unrealized appreciation
      (depreciation) for the years ended December 31, 2005 and 2004 was $0.5 million
      and $(0.2) million, respectively. At December 31, 2005, the Partnership’s
      investments in 0.025 million shares of Genzyme General Division (“GENZ”) had a
      market value of $70.78 per share as compared to $58.07 per share as of December
      31, 2004. The Partnership recognized unrealized appreciation of $0.3 million
      for
      the year ended December 31, 2005. The market value of Repligen Corporation
      (“Repligen”) increased from $2.88 per share as of December 31,
      2004
      to $4.00 per share as of December 31, 2005 resulting in the recognition of
      unrealized appreciation of $0.2 million on its investment of 0.131 million
      shares. At December 31, 2004, the Partnership’s investment in 0.026 million
      shares of GENZ had a market value of $1.5 million ($58.07 per share) as compared
      to a market value of $1.3 million ($49.29 per share) as of December 31, 2003.
      The Partnership recognized unrealized appreciation of $0.2 million for the
      year
      ended December 31, 2004. The market value of the Partnership’s investment in
      Repligen of 0.192 million shares as of December 31, 2004 was $0.54 million
      ($2.88 per share) as compared to $0.84 million ($4.37 per share) as of December
      31, 2003. The Partnership recognized unrealized depreciation of $0.4 million
      for
      the year ended December 31, 2004, which included the change in unrealized
      appreciation previously recorded of $0.1 million related to the sale of Repligen
      shares during the year ended December 31, 2004.


-4-




**(Item
      7 Continued)**




Expenses
      decreased by $0.1 million from December 31, 2004 to December 31, 2005 resulting
      primarily from decreases in legal and printing expenses.





Year
      ended December 31, 2004 compared to the year ended December 31,
      2003 :





Net
      loss
      for the year ended December 31, 2004 was $0.5 million as compared to net income
      for the year ended December 31, 2003 of $0.6 million. The unfavorable variance
      of $1.1 million resulted primarily from an unfavorable change in unrealized
      depreciation of marketable securities.





Net
      revenues, comprised primarily of unrealized appreciation (depreciation) for
      the
      years ended December 31, 2004 and 2003 were $(0.2) million (refer to the year
      ended December 31, 2005 compared to the year ended December 31, 2004) and $0.9
      million, respectively. The market value of the Partnership’s investment of 0.286
      million shares of Repligen as of December 31, 2003 and 2002 was $1.3 million
      ($4.37 per share) and $0.9 million ($3.04 per share), respectively. The
      Partnership recognized unrealized appreciation of $0.4 million for the year
      ended December 31, 2003. During the year ended December 31, 2003, in accordance
      with Genzyme Corporation’s decision to eliminate its tracking stock structure
      and pursuant to its Restated Articles of Organization, each share of Genzyme
      Molecular Oncology (“GMO”) common stock was converted to 0.05653 shares of GENZ
      common stock. The Partnership’s investment of 0.461 million shares of GMO was
      converted to 0.026 million shares of GENZ. As of December 31, 2003, the market
      value of the Partnership’s investment in Genzyme Corporation was $1.3 million as
      compared to $0.8 million as of December 31, 2002. The Partnership recognized
      unrealized appreciation of $0.5 million for the year ended December 31, 2003.





There
      were no material variances in expenses for the year ended December 31, 2004
      as
      compared to this same period in 2003.




**Critical
        Accounting Policies**





The
      General Partner makes judgments in valuing its investments in product
      development projects. (See Note 5 of the “Notes to Financial Statements”
included in this filing on Form 10-K.) The General Partner’s judgment involves
      estimating the prospect of the projects producing a commercially viable product.
      These estimates are based on the General Partner’s experience in evaluating
      similar investments,


publicly
      available information from the sponsor companies of the projects and other
      sources the General Partner considers reliable. Based on these estimates, as
      of
      December 31, 2005, the Partnership is carrying its investment, a limited
      partnership interest in CCP, at zero.




**Item
              7A.**
            **Quantitative
                and Qualitative Disclosures about Market
                Risks**





The
      Partnership’s non-cash assets subject to market risk consist of 25,375 shares of
      GENZ and 131,000 shares of Repligen. The Partnership acquired these shares
      in
      connection with its investments in projects. The Partnership holds these shares
      until cash is needed for the payment of Partnership expenses or to make cash
      distributions to the Partners.





The
      carrying values of marketable securities subject to equity price risks are
      based
      on quoted market prices as of the dates of the Statements of Financial
      Condition. Market prices are subject to fluctuation and, consequently, the
      amount realized in the subsequent sale may significantly differ from the
      reported market value. Fluctuation in the market price of a security may result
      from perceived changes in the underlying economic characteristics of the issuer,
      the relative price of alternative investments and general market conditions.
      Furthermore, amounts realized in the sale of a particular security may be
      affected by the relative quantity of the security being sold.





The
      table
      below summarizes the Partnership’s equity price risks as of December 31, 2005
      and 2004 and shows the effects of a hypothetical 30% increase and a 30% decrease
      in market prices as of those dates. The selected hypothetical change does not
      reflect what could be considered the best or worst case scenarios. Indeed,
      results could be far worse due to the nature of the equity markets.





Market
                Value
            
            Hypothetical
              Price
                Change
            
            Estimated
              Market
                Value After Hypothetical
              Change
                in Price
            
            Estimated
              Partners’
                Capital
              After
                Hypothetical
              Change
                inPriceAs
                of December 31, 2005
            
            $
            2,320,067
            
            
            30%
                increase
              30%
                decrease
            
            $
              $
            3,016,087
              1,624,047
            
            $
              $
            2,941,071
              1,549,031As
                of December 31, 2004
            
            $
            2,067,430
            
            
            30%
                increase
              30%
                decrease
            
            $
              $
            2,687,659
              1,447,201
            
            $
              $
            2,607,906
              1,367,448






-5-





**Item
              8.**
            **Financial
                Statements and Supplementary
                Data.**




The
      information in response to this item may be found under the following captions
      included in this filing on Form 10-K:




Report
      of Independent Registered Public Accounting Firm (Page
      F-4)


Statements
      of Financial Condition (Page F-5)


Statements
      of Operations (Page F-6)


Statements
      of Changes in Partners’ Capital (Deficit) (Page
      F-6)


Statements
      of Cash Flows (Page F-7)


Notes
      to Financial Statements (Pages F-8 to F-12)




**Item
                9.**
            **Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure.**




None.




**Item
              9A.**
            **Controls
                and Procedures**




(a)  **Evaluation
      of Disclosure Controls and Procedures** .
      The
      President (Principal Executive Officer) and Vice President (Principal Financial
      and Accounting Officer) of the General Partner, after evaluating the
      effectiveness of the Partnership’s disclosure controls and procedures (as
      defined in the Securities Exchange Act of 1934 Rules 13(a)-15(e) and 15(d)-15(e)
      as of a date within 90 days of the filing date of this Annual Report on Form
      10-K (the “Evaluation Date”)), have concluded that as of the Evaluation Date,
      the Partnership’s disclosure controls and procedures were adequate and effective
      to ensure that material information relating to the Partnership would be made
      known to them by others within the General Partner, or its affiliates
      particularly during the period in which this Annual Report on Form 10-K was
      being prepared.




(b)  **Changes
      in Internal Controls** .
      There
      were no significant changes in the Partnership’s internal controls or in other
      factors that could significantly affect the Partnership’s internal controls
      subsequent to the date of their evaluation, nor any significant deficiencies
      or
      material weaknesses in such internal controls requiring corrective actions.
      As a
      result, no corrective actions were taken.




-6-




**PART
      III**




**Item
              10.**
            **Directors
                and Executive Officers of the
                Registrant.**




The
      Registrant has no directors or executive officers. The Registrant is managed
      by
      PWDC, which is the General Partner of the Partnership.




Pursuant
      to the Management Contract, the General Partner is responsible for the
      management and administrative services necessary for the operation of the
      Partnership. The
      following table sets forth certain information with respect to the persons
      who
      are directors and executive officers of the General Partner as of December
      31,
      2005:




**Name**
            
            **Age**
            
            **Position
                and Date Appointed****Directors**Robert
                J. Chersi
            
            44
            
            Director
                since March 2001Stephen
                R. Dyer
            
            46
            
            Director
                since April 1999Rosemarie
                Albergo
            
            48
            
            Director
                since December 2003**Executive
                Officers**Stephen
                R. Dyer
            
            46
            
            President
                since March 2001Robert
                J. Chersi
            
            44
            
            Vice
                President since March 2001Rosemarie
                Albergo
            
            48
            
            Treasurer
                since March 2001Geraldine
                L. Banyai
            
            64
                *
            
            Secretary
                since June 1999





*
            Geraldine
                L. Banyai resigned as Secretary effective March 6,
                2006.




The
      directors have a one-year term of office. The officers are elected by a majority
      of the directors and hold office until their successors are chosen by the
      directors.




-7-




**(Item
      10 Continued)**




**Directors**




**Robert
      J. Chersi** is the
      Chief Financial Officer of UBS Financial Services Inc. (“UBS FS”) and a member
      of the Group Managing Board of UBS AG. He served most recently (prior to the
      UBS
      AG merger) as Senior Vice President and Controller of UBS FS. Mr. Chersi joined
      UBS FS in 1995 following the Kidder, Peabody & Co. Incorporated (“Kidder”)
      acquisition. Previous to his employment with Kidder, Mr. Chersi worked for
      the
      accounting firm KPMG Peat Marwick from 1983-1988 serving banking and brokerage
      industry clients. Mr. Chersi is a Certified Public Accountant and earned a
      Bachelor of Business Administration in Accounting from Pace University where
      he
      graduated summa cum laude in 1983.




**Stephen
      R. Dyer** is an
      Executive Director of UBS FS. Prior to joining UBS FS in 1988, Mr. Dyer had
      been
      employed at L.F. Rothschild & Co., Incorporated and Thomson McKinnon
      Securities, Inc. He received his Bachelor of Science degree from Boston College
      and a Masters of Business Administration from Indiana University. Mr. Dyer
      is a
      Certified Public Accountant.




**Rosemarie
      Albergo** is
      a
      Director of UBS FS. Prior to joining UBS FS in 1983, Ms. Albergo was employed
      at
      KPMG. She received her Bachelor of Business Administration degree from Pace
      University and is a Certified Public Accountant.




**Executive
      Officers**




**Stephen
      R Dyer** ,
      President, see “Directors” above.




**Robert
      J. Chersi** ,
      Vice-President, see “Directors” above.




**Rosemarie
      Albergo,** **** Treasurer,
      see “Directors” above.




**Geraldine
      L. Banyai** ,
      Secretary, joined UBS FS in June 1993 as Assistant Secretary of UBS FS and
      was
      elected Secretary in March, 1999. Ms. Banyai was elected Divisional Vice
      President in April 1996 and Corporate Vice President in April 1997. In November
      1996, Ms. Banyai was elected Assistant Secretary of UBS Americas. Prior to
      joining UBS FS, Ms. Banyai was employed by the Philadelphia Savings Fund Society
      (“PSFS”) in Philadelphia for 35 years and served as Vice President and Corporate
      Secretary of PSFS and 28 of its subsidiaries.




**Code
      of Ethics**




Neither
      the General Partner nor the Partnership has adopted a code of ethics with
      respect to the General Partner’s officers and directors. A code of ethics has
      not been adopted because the General Partner believes that such a policy is
      not
      required for the protection of the Limited Partners because the Partnership
      does
      not engage in any substantial business activities, the Partnership intends
      to
      terminate, and all the General Partner’s officers and directors are officers and
      employees of UBS Americas or its affiliates. As such, they are obligated to
      conduct all their business activities, including those on behalf of the
      Partnership, in a fair, honest and ethical fashion.




-8-




**Item
              11.**
            **Executive
                Compensation**




No
      compensation was paid directly to executive officers of PWDC by the Registrant.
      PWDC serves as General Partner for the Registrant, and pursuant to a Management
      Contract, is entitled to receive an annual management fee for management and
      administrative services provided to the Partnership. As of January 1, 1997,
      the
      General Partner elected to discontinue the management fee charged to the
      Partnership. See the section entitled “Related Party Transactions” under the
      caption “Notes to Financial Statements” on pages F-8 through F-12 included in
      this filing on Form 10-K.




**Item
              12.**
            **Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters.**




There
      are
      no investors known to the Partnership to be beneficial owners at March 1, 2006
      of more than five percent of the Registrant’s Units. No member of management of
      PWDC had any beneficial interest in the Registrant’s Units.




**Item
              13.**
            **Certain
                Relationships and Related
                Transactions.**




Information
      in response to this item may be found in the section entitled “Related Party
      Transactions” under the caption “Notes to Financial Statements” on pages F-8
      through F-12 included in this filing on Form 10-K.




**Item
              14.**
            **Principal
                Accountant Fees and
                Services.**




**Audit
      Fees**




Fees
      for
      audit services totaled $65,000 and $62,500 for the years ended December 31,
      2005
      and 2004, respectively, including fees associated with the annual audit and
      the
      review of the Partnership’s quarterly reports on Form 10-Q.




**Tax
      Fees**




Fees
      for
      tax services, including tax compliance and tax advice, totaled $9,500 and
      $12,500 for the years ended December 31, 2005 and 2004,
      respectively.




**Audit-Related
      and All Other Fees**




No
      fees
      were paid to the principal accountant for audit-related or other services for
      the years ended December 31, 2005 and 2004.




-9-




**PART
      IV**




**Item
              15.**
            **Exhibits
                and Financial Statement
                Schedules**




The
      following documents are filed as part of the filing on Form 10-K.




**Exhibits**




**31.1**
            President
                (Principal Executive Officer) Executive Officer - Certification pursuant
                to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
                of
                1934, as adopted pursuant to Section 302of
                the Sarbanes-Oxley Act of 2002.





**31.2**
            Vice
                President (Principal Financial and Accounting Officer) - Certification
                pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
                Act of 1934, as adopted pursuant to Section 302of
                the Sarbanes-Oxley Act of 2002.





**32.1**
            President
                (Principal Executive Officer) Executive Officer - Certification pursuant
                to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act
                of 1934
                and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
                the
                Sarbanes-Oxley Act of 2002.





**32.2**
            Vice
                President (Principal Financial and Accounting Officer) - Certification
                pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange
                Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section
                906
                of the Sarbanes-Oxley Act of 2002.





**Financial
      Statements**




The
      financial statements, together with the report of Ernst & Young LLP, are
      listed in the accompanying index to financial statements and notes to financial
      statements appearing on page F-1.




Report
      of Independent Registered Public Accounting Firm (Page
      F-4)


Statements
      of Financial Condition (Page F-5)


Statements
      of Operations (Page F-6)


Statements
      of Changes in Partners’ Capital (Deficit) (Page
      F-6)


Statements
      of Cash Flows (Page F-7)


Notes
      to Financial Statements (Pages F-8 to F-12)




-10-






**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) 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, on this 31st day of March
      2006.




**PAINEWEBBER
      R&D PARTNERS III, L.P.**




By:  PaineWebber
      Development Corporation


(General
      Partner)




By: 
      /s/ Stephen
      R. Dyer


Stephen
      R. Dyer


President


(Principal
      Executive Officer)




By: 
      /s/ Robert
      J. Chersi


Robert
      J.
      Chersi


Vice
      President


(Principal
      Financial and Accounting Officer)




-11-





**PAINEWEBBER
      R&D PARTNERS III, L.P.**


**(a
      Delaware Limited Partnership)**




**Index
      to Financial Statements**





Description
            PageIndex
                to Financial Statements
            F-1Selected
                Financial Data
            F-2Quarterly
                Financial Information (Unaudited)
            F-3Report
                of Independent Registered Public Accounting
                Firm
            F-4Statements
                of Financial Condition, at December 31, 2005 and
                2004
            F-5Statements
                of Operations, for the years ended December 31,
                2005, 2004 and 2003
            F-6Statements
                of Changes in Partners’ Capital (Deficit), for the
                years ended December 31, 2005, 2004 and 2003
            F-6Statements
                of Cash Flows, for the years ended December 31,
                2005, 2004 and 2003
            F-7Notes
                to Financial Statements
            F-8
                to F-12





All
      Schedules are omitted either because they are not applicable or the information
      required to be submitted has been included in the financial statements or notes
      thereto.




F-1




**PAINEWEBBER
                  R&D PARTNERS III, L.P.****(a
                  Delaware Limited Partnership)****Selected
                  Financial Data**At
                  and for the years ended December 31,
              
              2005
              
              2004
              
              2003
              
              2002
              
              2001Operating
                  Results:Revenues
              
              $
              403,189
              
              $
              (249,105
              )
              $
              858,752
              
              $
              (2,703,179
              )
              $
              (798,940
              )Net
                  income (loss)
              
              $
              257,374
              
              $
              (451,876
              )
              $
              614,931
              
              $
              (2,866,290
              )
              $
              (966,353
              )Net
                  income (loss) per partnership interest (A):Limited
                  partners
              
              $
              5
              
              $
              (9
              )
              $
              12
              
              $
              (57
              )
              $
              (19
              )General
                  partner
              
              $
              2,574
              
              $
              (4,519
              )
              $
              6,149
              
              $
              (28,623
              )
              $
              (9,664
              )Financial
                  Condition:Total
                  assets
              
              $
              2,333,114
              
              $
              2,082,760
              
              $
              2,533,265
              
              $
              1,907,451
              
              $
              4,783,593Partners'
                  capital
              
              $
              2,245,051
              
              $
              1,987,677
              
              $
              2,439,553
              
              $
              1,824,622
              
              $
              4,690,912Distributions
                  to partners:Cash
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
 
 (A)
                  Based on 50,000 limited partnership units and a 1% general partnership
                  interest.
   F-2
  **PAINEWEBBER
                    R&D PARTNERS III, L.P.****(a
                    Delaware Limited Partnership)****Quarterly
                    Financial Information
                    (Unaudited)**Net
                    Income (Loss)Net
                    income
                
                Per
                    Partnership Unit (A)Revenues
                
                (Loss)
                
                Limited
                    Partners
                
                General
                    PartnerCalendar
                    20054th
                    Quarter
                
                $
                94,583
                
                $
                56,750
                
                $
                1.12
                
                $
                567.503rd
                    Quarter
                
                
                425,669
                
                
                381,109
                
                
                7.55
                
                
                3,811.092nd
                    Quarter
                
                
                136,355
                
                
                103,028
                
                
                2.04
                
                
                1,030.281st
                    Quarter
                
                
                (253,418
                )
                
                (283,513
                )
                
                (5.61
                )
                
                (2,835.13
                )Calendar
                    20044th
                    Quarter
                
                $
                295,376
                
                $
                252,437
                
                $
                5.00
                
                $
                2,524.373rd
                    Quarter
                
                
                43,212
                
                
                (19,187
                )
                
                (0.38
                )
                
                (191.87
                )2nd
                    Quarter
                
                
                (139,432
                )
                
                (187,183
                )
                
                (3.71
                )
                
                (1,871.83
                )1st
                    Quarter
                
                
                (448,261
                )
                
                (497,943
                )
                
                (9.86
                )
                
                (4,979.43
                )Calendar
                    20034th
                    Quarter
                
                $
                (213,681
                )
                $
                (279,029
                )
                $
                (5.52
                )
                $
                (2,790.29
                )3rd
                    Quarter
                
                
                201,849
                
                
                118,688
                
                
                2.35
                
                
                1,186.882nd
                    Quarter
                
                
                538,194
                
                
                492,208
                
                
                9.75
                
                
                4,922.081st
                    Quarter
                
                
                332,390
                
                
                283,064
                
                
                5.60
                
                
                8,830.64
   F-3
  **Report
          of Independent Registered Public Accounting
          Firm**








To
      the
      Partners of PaineWebber R&D Partners III, L.P.





We
      have
      audited the accompanying statements of financial condition of PaineWebber
      R&D Partners III, L.P. (the “Partnership”) as of December 31, 2005 and 2004,
      and the related statements of operations, changes in partners’ capital
      (deficit), and cash flows for each of the three years in the period ended
      December 31, 2005. These financial statements are the responsibility of the
      Partnership’s management. Our responsibility is to express an opinion on these
      financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. We were not engaged to perform
      an
      audit of the Partnership’s internal control over financial reporting. Our audit
      included consideration of internal control over financial reporting as a basis
      for designing audit procedures that are appropriate in the circumstances, but
      not for the purpose of expressing an opinion on the effectiveness of the
      Partnership's internal control over financial reporting. Accordingly we express
      no such opinion. An audit also includes examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements, assessing
      the accounting principles used and significant estimates made by management,
      and
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of the Partnership at December 31,
      2005 and 2004, and the results of its operations and its cash flows for each
      of
      the three years in the period ended December 31, 2005, in conformity with U.S.
      generally accepted accounting principles.





/s/
      Ernst
& Young LLP





New
      York,
      New York


March
      27,
      2006




F-4




**PAINEWEBBER
                  R&D PARTNERS III, L.P.****(a
                  Delaware Limited Partnership)****Statements
                  of Financial Condition**December
                  31,
              
              December
                  31,2005
              
              2004Asset:Marketable
                  securities, at market value
              
              $
              2,333,114
              
              $
              2,082,760Liabilities
                  and partners' capital:Accrued
                  liabilities
              
              $
              88,063
              
              $
              95,083Partners'
                  capital
              
              
              2,245,051
              
              
              1,987,677Total
                  liabilities and partners' capital
              
              $
              2,333,114
              
              $
              2,082,760
  See
                  notes to financial statements.
   F-5
  **PAINEWEBBER
                  R&D PARTNERS III, L.P.****(a
                  Delaware Limited Partnership)****Statements
                  of Operations**For
                  the years ended December 31,
              
              2005
              
              2004
              
              2003Revenues:Interest
                  income
              
              $
              770
              
              $
              76
              
              $
              924Realized
                  loss on sale of marketable securities
              
              
              (60,735
              )
              
              (78,022
              )
              
              —Unrealized
                  appreciation (depreciation) ofmarketable
                  securities
              
              
              463,154
              
              
              (171,159
              )
              
              857,828403,189
              
              
              (249,105
              )
              
              858,752Expenses:General
                  and administrative costs
              
              
              145,815
              
              
              202,771
              
              
              243,821Net
                  income (loss)
              
              $
              257,374
              
              $
              (451,876
              )
              $
              614,931Net
                  income (loss) per partnership unit:Limited
                  partners (based on 50,000 units)
              
              $
              5.10
              
              $
              (8.95
              )
              $
              12.18General
                  partner
              
              $
              2,573.74
              
              $
              (4,518.76
              )
              $
              6,149.31
  **Statements
                  of Changes in Partners' Capital
                  (Deficit)**Limited
              
              GeneralFor
                  the years ended December 31, 2005, 2004 and 2003
              
              Partners
              
              Partner
              
              TotalBalance
                  at January 1, 2003
              
              $
              3,360,940
              
              
              (1,536,318
              )
              
              1,824,622Net
                  income
              
              
              608,782
              
              
              6,149
              
              
              614,931Balance
                  at December 31, 2003
              
              
              3,969,722
              
              
              (1,530,169
              )
              
              2,439,553Net
                  loss
              
              
              (447,357
              )
              
              (4,519
              )
              
              (451,876
              )Balance
                  at December 31, 2004
              
              
              3,522,365
              
              $
              (1,534,688
              )
              $
              1,987,677Net
                  income
              
              
              254,800
              
              
              2,574
              
              
              257,374Balance
                  at December 31, 2005
              
              $
              3,777,165
              
              $
              (1,532,114
              )
              $
              2,245,051See
                  notes to financial statements.
   F-6
  **PAINEWEBBER
                  R&D PARTNERS III, L.P.****(a
                  Delaware Limited Partnership)****Statements
                  of Cash Flows**For
                  the years ended December 31,
              
              2005
              
              2004
              
              2003Cash
                  flows from operating activities:Net
                  income (loss)
              
              $
              257,374
              
              $
              (451,876
              )
              $
              614,931Adjustments
                  to reconcile net income (loss) tocash
                  provided by operating activities:Unrealized
                  (appreciation) depreciationof
                  marketable securities
              
              
              (463,154
              )
              
              171,159
              
              
              (857,828
              )Decrease
                  in operating assets:Marketable
                  securities
              
              
              212,800
              
              
              279,346
              
              
              232,014(Decrease)
                  increase in operating liabilities:Accrued
                  liabilities
              
              
              (7,020
              )
              
              5,601
              
              
              6,653Due
                  to bank
              
              
              —
              
              
              (4,230
              )
              
              4,230Cash
                  provided by operating activities
              
              
              —
              
              
              —
              
              
              —Decrease
                  in cash
              
              
              —
              
              
              —
              
              
              —Cash
                  at beginning of period
              
              
              —
              
              
              —
              
              
              —Cash
                  at end of period
              
              $
              —
              
              $
              —
              
              $
              —Supplemental
                  disclosure of cash flow information:The
                  Partnership paid no cash for interest or taxes during the years
                  ended
                  December 31, 2005, 2004 and 2003.


See
        notes to financial statements.




F-7





**PAINEWEBBER
      R&D PARTNERS III, L.P.**


**(a
        Delaware Limited Partnership)**


**NOTES
        TO FINANCIAL STATEMENTS**
 **December
        31, 2005**






**1.**
              **Organization
                  and Business**




PaineWebber
      R&D Partners III, L.P. (the “Partnership”) is a Delaware limited partnership
      of which Paine Webber Development Corporation (“PWDC” or the “General Partner”),
      an indirect, wholly-owned subsidiary of UBS Americas Inc. (“UBS Americas”) which
      is a wholly-owned subsidiary of UBS AG is the general partner and manager of
      the
      Partnership. The Partnership will terminate on December 15, 2015, unless its
      term is extended or reduced by the General Partner.




The
      principal objective of the Partnership has been to provide long-term capital
      appreciation to investors through investing in the development and
      commercialization of new products with technology and biotechnology companies
      (“Sponsor Companies”), which have been expected to address significant market
      opportunities. The Partnership has been engaged in diverse product development
      projects (the “Projects”) including product development contracts, participation
      in other partnerships and investments in securities of Sponsor Companies.




The
      General Partner intends to liquidate the Partnership’s remaining investments in
      a manner that preserves value for the limited partners while minimizing
      associated expenses. However, since the Partnership’s limited partnership
      interest in Cephalon Clinical Partners, L.P. (“CCP”) (note 5) is illiquid and
      has uncertain prospects, the General Partner has continued to consider ways
      in
      which it could terminate the Partnership while preserving any value that may
      accrue with respect to that interest. The General Partner is now in the final
      stages of formulating a plan that will result in the liquidation of all the
      Partnership’s remaining assets, including its interest in CCP and termination of
      the Partnership all in accordance with the terms of the Partnership
      Agreement.




F-8




**PAINEWEBBER
        R&D PARTNERS III, L.P.**
 **(a
          Delaware Limited Partnership)**
 **NOTES
          TO FINANCIAL STATEMENTS**
 **December
          31, 2005**








**(Note
      1 Continued)**




The
      following table sets forth the proportion of each distribution to be received
      by
      limited partners of the Partnership (the “Limited Partners”) and the General
      Partner (collectively the “Partners”). All distributions to the individual
      Limited Partners have been made pro rata in accordance with their individual
      capital contributions.





**Limited
                Partners**
            
            **General
                Partner**I.
            
            
            Until
                the value of the aggregate distributions for each limited partnership
                unit
                (“Unit”) equals $1,000 plus simple interest on such amount accrued at 5%
                per annum (“Contribution Payout”). Contribution Payout as of December 31,
                2005 is $1725 per Unit
            
            
            99
            %
            
            1
            %II.
            
            
            After
                Contribution Payout and until the value of the aggregate distributions
                for
                each Unit equals $5,000 (“Final Payout”)
            
            
            80
            %
            
            20
            %III.
            
            
            After
                Final Payout
            
            
            75
            %
            
            25
            %


During
      the year ended December 31, 2000, the Partnership made a cash distribution
      which
      resulted in aggregate distributions per Unit to reach Contribution Payout.
      As a
      result, the General Partner will be allocated 20% of future cash distributions
      until Final Payout. No cash or security distributions were remitted by the
      Partnership during the year ended December 31, 2005, 2004 and 2003. As of
      December 31, 2005, the Partnership has made cash and security distributions,
      as
      valued on the dates of distribution, since inception of $1,483 and $98 per
      Unit,
      respectively.





Profits
      and losses of the Partnership are allocated as follows: (i) until cumulative
      profits and losses for each Unit equals Contribution Payout, 99% to Limited
      Partners and 1% to the General Partner, (ii) after Contribution Payout and
      until
      cumulative profits and losses for each unit equals Final Payout, 80% to Limited
      Partners and 20% to the General Partner, and (iii) after Final Payout, 75%
      to
      Limited Partners and 25% to the General Partner. As of December 31, 2005, the
      cumulative profits of the Partnership were $794 per Unit.





Pursuant
      to the terms of the Agreement of Limited Partnership, upon termination of the
      Partnership, the General Partner is required to pay to the Partnership an amount
      in cash equal to the debit balance in the General Partner’s capital account.
      Such amount then becomes part of the assets of the Partnership. As of December
      31, 2005, the debit balance in the General Partner’s capital account was
      $1,532,114.





**2.**
            **Summary
                of Significant Accounting Policies**




The
      financial statements are prepared in conformity with accounting principles
      generally accepted in the United States which require management to make certain
      estimates and assumptions that affect the amounts reported in the financial
      statements and accompanying notes. Actual results could differ from those
      estimates.




F-9




**PAINEWEBBER
        R&D PARTNERS III, L.P.**
 **(a
          Delaware Limited Partnership)**
 **NOTES
          TO FINANCIAL STATEMENTS**
 **December
          31, 2005**




**(Note
      2 Continued)**




Marketable
      securities consist of a money market fund and common stock which are recorded
      at
      market value. Marketable securities are not considered cash equivalents for
      the
      Statements of Cash Flows.




Realized
      and unrealized gains or losses are generally determined on a specific
      identification method and are reflected in the Statements of Operations during
      the period in which the sale or change in value occurs.




The
      Partnership invests in product development contracts with Sponsor Companies
      either directly or through product development limited partnerships. The
      Partnership expenses product development costs when incurred by the Sponsor
      Companies and such costs are reflected as expenditures under product development
      projects. Income received and/or accrued from investments in Projects is
      reflected in the Statements of Operations for the period in which the income
      is
      earned.




**3.**
            **Marketable
                Securities**




The
      Partnership held the following marketable securities at:





**December
                31, 2005**
            
            **December
                31, 2004****Carrying
                Value**
            
            **Cost**
            
            **Carrying
                Value**
            
            **Cost**Money
                market fund
            
            $
            13,047
            
            $
            13,047
            
            $
            15,330
            
            $
            15,330Genzyme
                General Division (25,375 and 26,065 common shares as of December
                31, 2005
                and 2004, respectively)
            
            
            1,796,057
            
            
            629,493
            
            
            1,513,608
            
            
            646,609Repligen
                Corporation (131,000 and 192,300 common shares as of December 31,
                2005 and
                2004, respectively)
            
            
            524,010
            
            
            413,337
            
            
            553,822
            
            
            606,757$
            2,333,114
            
            $
            1,055,877
            
            $
            2,082,760
            
            $
            1,268,696




During
      the year ended December 31, 2005, the Partnership sold 690 shares of its
      investment in Genzyme General Division (“GENZ”) for average proceeds of $73.19
      per share. The cost basis of the shares was $24.81 per share resulting in the
      recognition of a gain from the sale of $33,382. The market value of the shares
      as of this date was $70.78 per share as compared to a carrying value of $58.07
      per share as of December 31, 2004. The Partnership recognized unrealized
      appreciation on its remaining investment of 25,375 shares in the amount of
      $299,565 which is net of the amount of $22,951 for the change in unrealized
      appreciation previously recorded on the shares sold during 2005. At December
      31,
      2004 and 2003, the Partnership recorded its investment of 26,065 shares of
      at a
      market value of $58.04 per share and $49.29 per share resulting in unrealized
      appreciation for the year ended December 31, 2004 of
      $228,851. In accordance with Genzyme Corporation’s decision to eliminate its
      tracking stock structure and pursuant to its Restated Articles of Organization,
      on June 30, 2003, each share of Genzyme Molecular Oncology (“GMO”) common stock
      was converted to 0.05653 shares of GENZ. The Partnership’s investment of 461,091
      shares of GMO was exchanged for 26,065 shares of GENZ. The exchange of GMO
      shares was based on 130% of the average daily closing prices for GMO for the
      twenty consecutive business days commencing May 8, 2003. Gains associated with
      the exchange, as well as changes in the market value of the shares have been
      included in unrealized appreciation of marketable securities in the Statement
      of
      Operations. The market value of the Partnership’s investment in GMO as of
      December 31, 2002 was $806,910. The Partnership recognized unrealized
      appreciation on in its investment in Genzyme Corporation of $477,847 for the
      year ended December 31, 2003.




F-10




**PAINEWEBBER
      R&D PARTNERS III, L.P.**


**(a
          Delaware Limited Partnership)**
 **NOTES
          TO FINANCIAL STATEMENTS**
 **December
          31, 2005**


**(Note
      3 Continued)**




During
      the year ended December 31, 2005, the Partnership sold 61,300 shares of Repligen
      Corporation (“Repligen”) for an average price of $1.62 per share as compared to
      a cost basis of $3.155 per share. The Partnership recorded a loss on the sale
      of
      $94,117 for this period. During 2004, the Partnership sold 93,400 shares of
      Repligen Corporation (“Repligen”) for total proceeds of $216,654 resulting in
      the recognition of loss upon the sale of $78,022 for the year ended December
      31,
      2004. The market value per share of Repligen was $4.00 per share, $2.88 per
      share, and $4.37 per share at December 31, 2005, 2004 and 2003, respectively.
      The market value as of December 31, 2002 was $3.04 per share. The Partnership
      recognized unrealized appreciation (depreciation) of $163,589, $(400,010),
      $379,981 for the years ended December 31, 2005, 2004 and 2003, respectively.
      Unrealized appreciation (depreciation) for the years ended December 31, 2005
      and
      2004, includes the change in unrealized depreciation previously recorded of
      $16,890 and $113,483, respectively, related to the sale of Repligen
      shares.




On
      March
      3, 2003, the Board of Directors of Repligen adopted a shareholder rights plan
      to
      help protect investors against potential hostile takeover attempts. Under the
      plan a dividend was declared of one purchase right for each outstanding share
      of
      common stock held as of March 17, 2003. (The Partnership continued to own
      285,700 Repligen shares as of this date). The rights are not immediately
      exercisable and will be “triggered” upon such time that a purchaser acquires 15%
      or more of Repligen’s outstanding common stock. The rights entitle the holder to
      purchase $100 worth of Repligen common stock at a purchase price of $50.00.
      As
      of December 31, 2005, the Partnership has recorded these rights at a zero
      value.




F-11




**PAINEWEBBER
        R&D PARTNERS III, L.P.**
 **(a
          Delaware Limited Partnership)**
 **NOTES
          TO FINANCIAL STATEMENTS**
 **December
          31, 2005**


**4.**
            **Related
                Party Transactions**




The
      General Partner is entitled to receive an annual management fee for management
      and administrative services provided to the Partnership. As of January 1, 1997,
      the General Partner elected to discontinue the management fee charged to the
      Partnership.




The
      money
      market fund invested in by the Partnership is managed by an affiliate of UBS
      Financial Services Inc. (“UBS FS”).




PWDC
      and
      UBS FS, and its affiliates, have acted in an investment banking capacity for
      several of the Sponsor Companies. In addition, PWDC and its affiliates have
      had
      direct limited partnership interests in some of the same product development
      limited partnerships as the Partnership.




Pursuant
      to the terms of the Partnership Agreement, the General Partner is required
      to
      restore its deficit capital account, if any, by remitting cash equal to such
      amount to the Partnership.




**5.**
            **Product
                Development Projects**




As
      of
      December 31, 2005, the Partnership has an interest in one remaining Project:
      a
      $6.0 million investment in CCP, a $45.0 million limited partnership formed
      to
      fund the development, clinical testing, manufacturing and marketing of
      MyotrophinTM for use in the treatment of amyotrophic lateral sclerosis and
      certain other peripheral neuropathies. If CCP produces a product for commercial
      sale, Cephalon, Inc. (as Sponsor Company) has the option to license the
      Partnership’s technology to manufacture and market the product developed. In
      addition, Cephalon, Inc. has the option to purchase the Partnership’s interest
      in the technology. As of December 31, 2005, the Partnership is carrying this
      investment at zero. Since the Partnership’s limited partnership interest in CCP
      is illiquid and has uncertain prospects, the General Partner has continued
      to
      consider ways in which it could terminate the Partnership while preserving
      for
      the Partners any value that may accrue with respect to this interest.




At
      December 31, 2002, the Partnership had a $6.0 million investment in Alkermes
      Clinical Partners, L.P. (“ACP”), a $46.0 million limited partnership formed to
      fund the development, clinical testing, manufacturing and marketing of Cereport
      (formerly known as RMP-7) for use in the treatment of diseases of the brain
      and
      central nervous system by enabling the delivery of drugs across the blood brain
      barrier. In October 2003 the general partner of ACP solicited proxies from
      the
      limited partners of ACP for their consideration and vote upon the proposed
      termination, liquidation and dissolution of ACP. In November 2003, the General
      Partner of the Partnership voted the Partnership’s interest in ACP in favor of
      the termination. On December 17, 2003, ACP was terminated. There was no
      liquidating distribution to ACP’s limited partners (including the
      Partnership).





**6.**
            **Income
                Taxes**





The
      Partnership is not subject to federal, state or local income taxes. Each Partner
      separately takes into account, on their individual tax return, their share
      of
      the income, gains, losses deductions or credits for the Partnership’s taxable
      year whether or not any distribution is made to any Partner. Accordingly, no
      provision has been made in the accompanying financial statements for federal,
      state or local taxes.




**7.**
            **Subsequent
                Event**





On
      March
      21, 2006, the Partnership engaged Robert A. Stanger & Co, Inc. (“Stanger”)
      to solicit purchasers for the Partnership’s investment in CCP. The Partnership
      is required to pay Stanger a fee of $45,000, $30,000 of which is currently
      due
      and payable and the balance of $15,000 is payable on the earlier of June 15,
      2006 and the date on which t he Partnership enters into a definitive agreement
      to sell its investment in CCP. The Partnership also agreed to indemnify Stanger
      and its affiliates against certain liabilities arising from its engagement
      by
      the Partnership




F-12