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, 1997
                                       or
          ( ) 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. Employer
 incorporation 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 on
      Title of each class                                which registered
      -------------------                                ----------------
            None                                               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 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

      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).

<PAGE>

                             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 or achievements
of the Partnership or industry results to be materially different from any
future results, performance 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.

<PAGE>
                                     PART I

Item 1.  BUSINESS.

      PaineWebber R&D Partners III, L.P. (the "Partnership" or "Registrant") is
a Delaware limited partnership that commenced operations on June 3, 1991, with a
total of $43.1 million available for investment. Paine Webber Development
Corporation ("PWDC" or "General Partner"), an indirect, wholly-owned subsidiary
of Paine Webber Group Inc. ("PWG"), is the general partner and manager of the
Partnership. The principal objective of the Partnership is to provide long-term
capital appreciation to investors through investing in the development and
commercialization of new products (the "Projects") with technology and
biotechnology companies ("Sponsor Companies"), which are expected to address
significant market opportunities. The Partnership will terminate on December 31,
2015, unless its term is extended or reduced by the General Partner.

      The Partnership has completed the funding of its seven Projects at an
aggregate investment since inception of $32.5 million. As of December 31, 1997,
the Partnership had ongoing Projects with Alkermes, Inc., Cephalon, Inc. and
Gensia, Inc. The remaining Projects have either terminated or are near
termination. (See Exhibit B, the Annual Letter to the Limited Partners, for a
detailed discussion of the current status of the Partnership's active Projects.)
In addition to the investments in Projects, as of December 31, 1997, the
Partnership owned equity investments, warrants and marketable securities as
described in Notes 3 and 5 of the "Notes to the Financial Statements" included
in this filing on Form 10-K.

      At a meeting of the Board of Directors of PWDC in January 1997, the Policy
Regarding Requests for Partner Lists attached as Exhibit C was adopted.


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. An
Advisory Board, which has acted as special advisor to the General Partner, is
periodically provided with updates regarding the status of the Partnerhsip's
Projects (see Exhibit A for a brief biography of the current Advisory Board
members). All fees and expenses of the Advisory Board are paid for by the
General Partner.

      Under the Management Contract, 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 has eliminated
charging a management fee for services rendered to the Partnership.

<PAGE>

(ITEM 1 CONTINUED)

DISTRIBUTIONS

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

<TABLE>
<CAPTION>

                                                                   LIMITED        GENERAL
                                                                   PARTNERS       PARTNER
                                                                   --------       -------
<S>                                                                  <C>           <C>
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"). At December 31, 1997,
     Contribution Payout was $1,325 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%

</TABLE>

      At December 31, 1997, the Partnership has made cash and security
distributions, as valued on the dates of distribution, since inception of $1,143
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, 1997, the cumulative profits of the Partnership were $588 per Unit.


OTHER

      At December 31, 1997, the Partnership had no employees, and PWDC, the
General Partner, 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 products and companies.

ITEM 2.  PROPERTIES.

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

<PAGE>

ITEM 3.  LEGAL PROCEEDINGS.

In re:  PaineWebber Limited Partnership Litigation

      As previously disclosed on the Partnership's Form 10-K for the year ended
December 31, 1996, PWDC, the General Partner of the Partnership, was named as a
defendant in a class action lawsuit against PaineWebber Incorporated ("PWI") and
a number of its affiliates in the United States District Court for the Southern
District of New York (the "Court") relating to PWI's sale of approximately 50
direct investment offerings, including the offering of interests in the
Partnership. In January 1996, PWI signed a memorandum of understanding with the
plaintiffs in the class action outlining the terms under which the parties
agreed to settle the case. Under a settlement, PWI agreed to pay the class $125
million and certain additional consideration. The additional consideration
included the assignment of fees and income attributable to the general
partnership interest in the Partnership as well as guarantees of certain minimum
returns to class members. In March 1997, the Court approved the settlement as
fair and that order was affirmed by the United States Court of Appeals for the
Second Circuit in July 1997. Distribution of the settlement fund to the class
awaits the Court's determination of the amount of plaintiffs' counsel's fees and
disbursements to be awarded from the settlement fund.

      In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against PWI
and various affiliated entities, including the General Partner of the
Partnership, concerning the plaintiffs' purchases of various limited partnership
interests. The complaint alleged, among other things, that PWI and its related
entities committed fraud and misrepresentation and breached fiduciary duties
allegedly owed to the plaintiffs by selling or promoting limited partnership
investments that were unsuitable for the plaintiffs and by overstating the
benefits, understating the risks and failing to state material facts concerning
the investments. The complaint sought compensatory damages of $15 million plus
punitive damages. In June 1996, additional complaints similar to the Abbate
action, but involving fewer plaintiffs, were filed in Sacramento, San Diego and
Arizona. In September 1996, the California Superior Court dismissed many of
Abbate plaintiffs' claims as barred by the applicable statutes of limitation.
Certain of the other complaints were also dismissed with prejudice while others
remained pending. In March 1997, all of these actions were settled. The
settlement had no effect on the Partnership or the General Partner.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         None.

<PAGE>
                                     PART II

ITEM 5.     MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
            MATTERS.

      There is no existing public market for the Units, and no such market is
expected to develop. Units are transferable subject to certain restrictions as
set forth in the Partnership Agreement and applicable securities laws. As of
December 31, 1997, there were 4,732 Limited Partners.

      The Partnership distributes to the Partners, when available, the net
proceeds from royalty distributions, interest payments on portfolio securities
and 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 year ended December 31, 1997, the Partnership made cash
distributions to its Partners of $27,777,777 ($550 per Unit; $277,777 to the
general partnership interest). The Partnership made cash distributions to its
Partners of $24,895,837 ($493 per Unit; $245,837 to the general partnership
interest) and $5,050,505 ($100 per Unit; $50,505 to the general partnership
interest) for the years ended December 31, 1996 and 1995, respectively. In
addition, in 1995, the Partnership distributed to its Partners 202,261 warrants
of Alkermes, Inc. ("Alkermes") (4 warrants per Unit; 2,261 warrants to the
general partnership interest). The warrants were valued at $303,392 ($6 per
Unit; $3,392 to the general partnership interest) on the date of distribution.


ITEM 6.  SELECTED FINANCIAL DATA.

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


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

LIQUIDITY AND CAPITAL RESOURCES

      Partners' capital of $10.6 million at December 31, 1997, decreased by
$21.8 million from $32.4 million at December 31, 1996. For the year ended
December 31, 1997, the Partnership recognized net income of $5.9 million (as
discussed in Results of Operations below) which was offset by cash distributions
to the Partners in the amount of $27.7 million.

      The Partnership's funds are invested in marketable securities and a money
market fund until cash is needed to pay for the ongoing management and
administrative expenses of the Partnership or for distribution to the Partners.
Liquid assets at December 31, 1997, totaled $8.5 million, an increase of $7.6
million from the balance of $0.9 million at December 31, 1996. During 1997, the
restriction on the saleability of the Partnership's investment in common shares
of Biocompatibles International plc ("Biocompatibles") expired. The Partnership
reclassed this investment to marketable securities and recorded the shares at
December 31, 1997, at an aggregate market value of $6.6 million. In addition,
the Partnership received common shares of Gensia Sicor, Inc. ("Gensia") with a
market value at December 31, 1997, of $0.8 million. Also, during 1997, the
Partnership sold 1.285 million shares of Biocompatibles for proceeds of $28.0
million of which $27.7 million was distributed to the Partners. The balance of
the liquid assets at December 31, 1997, is to be used for the payment of
administrative costs related to managing the Partnership's business and future
distributions to the Partners.


RESULTS OF OPERATIONS

      Year ended December 31, 1997 compared to the year ended December 31, 1996:

      Net income for the years ended December 31, 1997 and 1996 was $5.9 million
and $39.5 million, respectively. The decrease of $33.6 million was a result of a
decrease in revenues of $34.5 million offset by a decrease in expenses of $0.9
million.

<PAGE>

(ITEM 7 CONTINUED)

      Revenues for the years ended December 31, 1997 and 1996 were $6.3 million
and $40.8 million, respectively. The decrease in revenues of $34.5 million is
due to a decrease in unrealized appreciation of marketable securities and
investments of $32.1 million and a decrease in gain on sale of product
development projects of $6.0 million (see Results of Operations for the year
ended December 31, 1996 as compared to the year ended December 31, 1995) offset
by an increase in realized gain on sale of marketable securities and investments
of $2.7 million and an increase in income from product development projects of
$0.9 million. Unrealized (depreciation) appreciation for the years ended
December 31, 1997 and 1996 was $(4.9) million and $27.2 million, respectively,
The Partnership recognized unrealized depreciation of $4.9 million during 1997
primarily from its investment in 0.815 million shares of Biocompatibles to
reflect a decrease in the market value from December 31, 1996 of $13.94 per
share to $8.124 per share at December 31, 1997. During 1996, in accordance with
Statement No. 115, the Partnership recorded its investment in 2.1 million
restricted shares of Biocompatibles at a market value of $29.3 million ($13.94
per share) as compared to its cost basis of $2.1 million. Accordingly, the
Partnership recognized unrealized appreciation of $27.2 million for the year
ended December 31, 1996. Realized gain on sale of marketable securities and
investments was $10.1 million for the year ended December 31, 1997, resulting
from the sale by the Partnership of 1.285 million shares of Biocompatibles with
an aggregate carrying value at December 31, 1996, of $17.9 million for proceeds
of $28.0 million. Realized gain on sale of marketable securities and investments
for the year ended December 31, 1996, was $7.4 million (see Results of
Operations for the year ended December 31, 1996 as compared to the year ended
December 31, 1995). During the year ended December 31, 1997, the Partnership
recognized income from product development projects of $0.9 million resulting
from its limited partnership investment in Gensia Clinical Partners, L.P.
("GCP"). During 1997 the Partnership received 0.13 million common shares of
Gensia with a market value on the date of distribution of $0.9 million as a
payment made pursuant to certain product agreements between Gensia Sicor, Inc.
and GCP.

      Expenses decreased from $1.3 million at December 31, 1996 to $0.4 million
at December 31, 1997, primarily as a result of the General Partner's decision to
discontinue charging a management fee to the Partnership.


      Year ended December 31, 1996 compared to the year ended December 31, 1995:

      Net income for the years ended December 31, 1996 and 1995 was $39.5
million and $5.3 million, respectively. The favorable variance of $34.2 million
resulted from an increase in revenues of $25.9 million and a decrease in
expenses of $8.3 million.

      Revenues increased from $14.9 million in 1995 to $40.8 million in 1996
resulting primarily from increases in (i) unrealized appreciation of investments
of $17.4 million, (ii) the gain from the sale of a product development project
of $6.0 million, and (iii) the gain on the sale of marketable securities and
investments of $3.0 million offset by a decrease on the gain upon distribution
of warrants of $0.3 million. Unrealized appreciation for the years ended
December 31, 1996 and 1995 was $27.2 million and $9.7 million, respectively. As
of December 31, 1996, in accordance with Statement No. 115, the Partnership
recorded its investment of 2.1 million restricted shares of Biocompatibles at
its market value of $29.3 million ($13.94 per share) as compared to its carrying
value of $2.1 million ($1.00 per share) at December 31, 1995 resulting in
unrealized appreciation of $27.2 million. At December 31, 1995, the
Partnership's investment of 0.65 million unrestricted shares of Biocompatibles
had a market value of $4.8 million ($7.375 per share) as compared to a carrying
value of $0.65 million ($1.00 per share). The Partnership's investment of 0.36
million shares of GelTex Pharmaceuticals, Inc. ("GelTex") had a market

<PAGE>

(ITEM 7 CONTINUED)

value of $4.4 million ($12.25 per share) and a carrying value of $1.0 million.
Accordingly, the Partnership recognized unrealized appreciation on its equity
investments in Biocompatibles and GelTex of $4.15 million and $3.4 million,
respectively. Also, as of December 31, 1995, the Partnership held exercisable
warrants to purchase common shares of Athena Neurosciences, Inc. ("Athena") and
Alkermes whereby the market value for each of the common shares as of this date
exceeded the exercise prices of the warrants. The Partnership recorded its
investments in these warrants at their intrinsic values (the excess of the
market price over the exercise price), and accordingly, recognized unrealized
appreciation of $2.1 million. In 1996, the Partnership sold its rights, title
and interest in its callable warrant to purchase 500,000 shares of Athena as
well as its various product program agreements with Athena for a purchase price
of $6.0 million and recognized a gain of this amount from the sale. The
Partnership recognized a gain from the sale of investments of $7.4 million and
$4.4 million for the years ended December 31, 1996 and 1995, respectively.
During 1996, the Partnership sold its investments of (i) 0.65 million shares of
Biocompatibles for proceeds of $5.3 million with a carrying value of $4.8
million resulting in a gain of $0.5 million; (ii) 0.36 million shares of GelTex
for proceeds of $6.8 million with a carrying value of $4.4 million resulting in
a gain of $2.4 million; (iii) 0.024 million shares of Alkermes for net proceeds
of $0.3 million with a carrying value of $0.2 million resulting in a gain of
$0.1 million; and (iv) 0.3 million shares of Elan Corporation, plc for proceeds
of $8.3 million and a carrying value of $6.1 million resulting in a gain of $2.2
million. In addition, the Partnership sold its entitlement to Biocompatibles
Rights for total proceeds of $2.2 million and recognized a gain on the sale of
this amount. In October 1995, the Partnership sold 0.75 million shares of
Biocompatibles common stock at an aggregate sales price of $3.5 million and
recognized a gain upon the sale of $2.8 million. In November 1995, the
Partnership exercised its warrant to purchase 0.1 million shares of Cephalon,
Inc. common stock at an aggregate exercise price of $1.5 million and
simultaneously sold the shares at a selling price of $3.1 million, net of
commissions. Accordingly, the Partnership recognized a gain upon sale of $1.6
million. The Partnership distributed to its Partners in 1995 warrants to
purchase 0.2 million shares of Alkermes common stock. The exercise price of the
warrants was $1.0 million ($5.00 per share) compared to the market value of the
shares on the date of distribution of $1.3 million ($6.50 per share). The
Partnership recognized a gain upon distribution of $0.3 million.

      Expenses for the years ended December 31, 1996 and 1995 were $1.3 million
and $9.6 million, respectively. The decrease of $8.3 million resulted primarily
from decreases in (i) expenditures under Projects of $5.6 million; (ii)
write-down of an investment of $2.3 million and (iii) management fees of $0.3
million. Expenditures under Projects for the years ended December 31, 1996 and
1995 was $0.5 million and $6.1 million, respectively. In 1995, the Partnership
accrued expenditures under Projects in the amount of $3.2 million. Also, in
1995, the Partnership funded its final commitment to a Project in the amount of
$2.9 million. In 1995, GenPharm International, Inc. ("GenPharm") was
restructured resulting in a spin-off of its European subsidiary, Pharming BV. In
connection with the spin-off, the Partnership received 14,395 shares of Pharming
BV stock which the General Partner had valued at $1.2 million. In addition,
based on a review of the current and future financial prospects of GenPharm, the
General Partner had determined that the Partnership's investment in GenPharm's
convertible preferred stock, with a carrying value of $3.5 million, should be
valued at zero. Accordingly, the Partnership recognized a net write-down of its
GenPharm related investments in the amount of $2.3 million. Management fees were
further reduced in 1995 as a result of the General Partner's decision to
discontinue the management fee charged with respect to certain Projects.

<PAGE>

(ITEM 7 CONTINUED)

YEAR 2000

      Like other financial and business organizations around the world, the
Partnership could be adversely affected if the computer systems utilized by the
Partnership and other service providers do not properly process and calculate
date-related information from and after January 1, 2000. This is commonly known
as the "Year 2000 Problem." The Partnership intends to work with its software
vendors to ensure that the Partnership's software is year 2000 compliant. The
Partnership does not expect the incremental expenses associated with the year
2000 and the potential disruption to operations to be significant.

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 Auditors (Page F-4)
                Statements of Financial Condition (Page F-5)
                Statements of Operations (Page F-6)
                Statements of Changes in Partners' Capital (Page F-6)
                Statements of Cash Flows (Page F-7)
                Notes to Financial Statements (Pages F-8 to F-16)


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         None.

<PAGE>
                                    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. Based in part on discussions with the Advisory Board, the
General Partner assesses and manages the Partnership's Projects. As part of its
ongoing role in all Projects, the General Partner participates as a member of
the board of directors of the corporate general partner of certain Projects or
similar body with the Sponsor Companies with overall responsibility for each
Project during the development phase. The General Partner makes regular visits
to the facilities of Sponsor Companies in order to monitor the progress of
Projects, and its representatives take part in important decisions with respect
to development and commercial strategies. During the commercialization phase,
the General Partner continues to review the Sponsor Companies' performance. In
addition, the General Partner monitors the industries in which it undertakes
Projects by attending trade shows, screening trade journals and reviewing
changes in legislative and regulatory conditions.

      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, 1997:




NAME                           AGE              POSITION AND DATE APPOINTED
----                           ---              ---------------------------
DIRECTORS
     Dhananjay M. Pai          35               Director since December 1996
     Gerald F. Goertz, Jr.     40               Director since April 1995
     William J. Nolan          50               Director since February 1997

EXECUTIVE OFFICERS
     Dhananjay M. Pai          35               President since December 1996
     William J. Nolan          50               Treasurer since February 1997
     Dorothy F. Haughey        73               Secretary since July 1985


      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.

<PAGE>
(ITEM 10 CONTINUED)

DIRECTORS

      MR. PAI is a Managing Director of PWI. Before joining the Principal
Transactions Group of PWI in 1990, Mr. Pai was a Vice President in the
Investment Banking Division of Drexel Burnham Lambert from 1988 to 1990. From
1983 to 1988, Mr. Pai held various positions within the Finance Division of
Drexel Burnham Lambert. Mr. Pai is a Director and President of PaineWebber
Capital, an Advisory Board Member of Rifkin Acquisition Partners LLLP, and
either a Director or Officer of certain affiliates of PWI. He holds a Bachelor
of Science degree from Wharton School of Business and a Master of Business
Administration from New York University.

      MR. GOERTZ is a Senior Vice President and Director of Specialized
Investment Services of PWI. Prior to joining PWI in December 1990, Mr. Goertz
was with CG Realty Advisors and the Freeman Company. Mr. Goertz received his
Bachelor of Arts degree in Business Administration in 1979 from Vanderbilt
University and his Juris Doctorate and Master of Business Administration from
Memphis State University in 1982.

      MR. NOLAN is Treasurer of Paine Webber Group Inc. and Executive Vice
President and Treasurer of PWI. He is a member of PaineWebber's Asset/Liability
Management Commitee. Prior to his employment with PWI in 1984, Mr. Nolan was
with Becker-Paribas and Bankers Trust Company. Mr. Nolan received a Bachelor of
Arts degree from Colgate University and a Master of Business Administration from
Stanford University Graduate School of Business.


EXECUTIVE OFFICERS

      MR. PAI, President, see "Directors" above.

      MR. NOLAN, Treasurer, see "Directors" above.

      MS. HAUGHEY, Secretary, joined PWI in 1962. She is the Secretary of PWI.

<PAGE>

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-16 included in this filing on Form 10-K.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         None.


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-16 included in this filing on Form 10-K.

<PAGE>

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

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

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 Auditors (Page F-4)
                Statements of Financial Condition (Page F-5)
                Statements of Operations (F-6)
                Statements of Changes in Partners' Capital (Page F-6)
                Statements of Cash Flows (Page F-7)
                Notes to Financial Statements (Pages F-8 to F-16)

REPORTS ON FORM 8-K

      None.

<PAGE>

                                   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
1998.

         PAINEWEBBER R&D PARTNERS III, L.P.

         By: PaineWebber Development Corporation
             (General Partner)

         By: /s/ Dhananjay M. Pai
         ------------------------
             Dhananjay M. Pai
             President and Principal Executive Officer

         By: /s/ Anthony M. DiIorio
         --------------------------
             Anthony M. DiIorio
             Principal Financial and Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated*, each on this 31st day of March 1998.


/s/ Dhananjay M. Pai
--------------------
Dhananjay M. Pai
President (principal executive officer) and Director

/s/ William J. Nolan
--------------------
William J. Nolan
Director

/s/ Gerald F. Goertz, Jr.
-------------------------
Gerald F. Goertz, Jr.
Director

* The capacities listed are with respect to PWDC, the General Partner of the
Registrant.

<PAGE>

                       PAINEWEBBER R&D PARTNERS III, L.P.
                        (a Delaware Limited Partnership)

                          Index to Financial Statements


Description                                                 Page
-----------                                                 ----

Index to Financial Statements                               F-1

Selected Financial Data                                     F-2

Quarterly Financial Information (Unaudited)                 F-3

Report of Independent Auditors                              F-4

Statements of Financial Condition,
    at December 31, 1997 and 1996                           F-5

Statements of Operations,
    for the years ended December 31, 1997, 1996 and 1995    F-6

Statements of Changes in Partners' Capital,
    for the years ended December 31, 1997, 1996 and 1995    F-6

Statements of Cash Flows,
    for the years ended December 31, 1997, 1996 and 1995    F-7

Notes to Financial Statements                               F-8 to F-16


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.

<PAGE>

PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)

<TABLE>
<CAPTION>

Selected Financial Data
------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,                      1997                1996               1995                1994                1993
------------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                <C>                <C>                  <C>               <C>
Operating Results:

   Revenues                              $  6,351,971       $  40,810,648      $  14,856,172        $   3,751,749     $   3,014,763
   Net income (loss)                     $  5,930,581       $  39,513,429      $   5,306,891        $  (7,819,966)    $  (6,338,119)

Net income (loss) per partnership unit:

   Limited partners (A)                  $     117.43       $      782.37      $      105.08        $     (154.84)    $     (125.49)
   General partner                       $  59,305.81       $  395,134.29      $   53,068.91        $  (78,199.66)    $  (63,381.19)

Financial Condition:

   Total assets                          $ 10,675,272       $  32,633,103      $  17,914,426        $  19,508,779     $  31,142,666
   Partners' capital                     $ 10,595,607       $  32,442,803      $  17,825,211        $  17,872,217     $  28,813,825

Distributions to partners:
   Cash                                  $ 27,777,777       $  24,895,837      $   5,050,505        $           -     $           -
   Alkermes, Inc. warrants
    (at intrinsic value) (B)             $          -       $           -      $     303,392        $           -     $           -
   Cephalon, Inc. warrants
    (at intrinsic value) (B)             $          -       $           -      $           -        $   3,121,642     $           -
   Gensia, Inc. warrants
    (at intrinsic value) (B)             $          -       $           -      $           -        $           -     $   1,527,465

------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(A) Based on 50,000 limited partnership units.
(B) The excess of market value per share at the date of distribution over the
    exercise price per share.

                                       F-2
<PAGE>


PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)


Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------
                                                                                           Net Income (Loss)
                                                       Net Income                        Per Partnership Unit (A)
                             Revenues                    (Loss)                Limited Partners        General Partner
----------------------------------------------------------------------     -------------------------------------------------
<S>                 <C>                      <C>                      <C>                        <C>
 Calendar 1997

 4th Quarter        $        (1,756,963)     $         (2,052,718)    $                (40.64)   $         (20,527.18)

 3rd Quarter                 (8,334,209)               (8,374,462)                    (165.81)             (83,744.62)

 2nd Quarter                  5,755,092                 5,711,687                      113.09               57,116.87

 1st Quarter                 10,688,051                10,646,074                      210.79              106,460.74

----------------------------------------------------------------------------------------------------------------------------

Calendar 1996

 4th Quarter         $       14,014,291       $        13,844,845      $               274.14    $         138,448.45

 3rd Quarter                  2,874,006                 2,702,018                       53.50               27,020.18

 2nd Quarter                 17,562,388                17,134,012                      339.25              171,340.12

 1st Quarter                  6,359,963                 5,832,554                      115.48               58,325.54

----------------------------------------------------------------------------------------------------------------------------

Calendar 1995

4th Quarter         $         4,945,967      $           (428,166)    $                 (8.47)  $           (4,281.66)

3rd Quarter (B)               6,088,165                 5,327,420                      105.48               53,274.20

2nd Quarter (C)               3,594,170                 1,933,280                       38.28               19,332.80

1st Quarter                     227,870                (1,525,643)                     (30.21)             (15,256.43)

----------------------------------------------------------------------------------------------------------------------------
</TABLE>

(A) Based on 50,000 partnership units and a 1% general partnership interest.
(B) Amounts have been restated from the amounts reported as of September 30,
    1995.
(C) Amounts have been restated from the amounts reported as of June 30, 1995.

                                       F-3

<PAGE>

Report of Independent Auditors


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. as of December 31, 1997 and 1996, and the
related statements of operations, changes in partners' capital, and cash flows
for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as 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 PaineWebber R&D Partners III,
L.P. at December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.


/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP

New York, New York
March 23, 1998

                                       F-4

<PAGE>

PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)

Statements of Financial Condition

<TABLE>
<CAPTION>

                                                                December 31,         December 31,
                                                                        1997                 1996
--------------------------------------------------------------------------------------------------
<S>                                                      <C>                    <C>
Assets:

      Marketable securities, at market value             $         8,479,372    $         911,375

      Investments, at fair value                                   2,150,000           31,423,754

      Advances to product development projects                        35,972              297,974

      Royalty income receivable                                        9,928                    -

                                                           ==================     ================
Total assets                                             $        10,675,272    $      32,633,103
                                                           ==================     ================


Liabilities and partners' capital:

      Accrued liabilities                                $            76,052    $          99,420

      Payable to Paine Webber Development Corp.                        3,613                3,613

      Other liability                                                      -               87,267

                                                           ------------------     ----------------
                                                                      79,665              190,300

      Partners' capital                                           10,595,607           32,442,803

                                                           ==================     ================
Total liabilities and partners' capital                  $        10,675,272    $      32,633,103
                                                           ==================     ================

</TABLE>

--------------------------------------------------------------------------------
See notes to financial statements.

                                       F-5

<PAGE>

PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)

Statements of Operations

<TABLE>
<CAPTION>


For the years ended December 31,                                        1997                 1996                  1995
------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                    <C>                  <C>
Revenues:
      Interest income                                    $           176,464    $         170,677    $          210,351
      Income from product development projects                       946,778               19,500               146,208
      Unrealized  (depreciation) appreciation of
       marketable securities and investments                      (4,876,389)          27,169,770             9,733,309
      Realized gain from sale of product development
        project                                                            -            6,000,000                     -
      Realized gain on distribution of warrants                            -                    -               303,392
      Net realized gain on sale of marketable
        securities and investments                                10,105,118            7,450,701             4,462,912
                                                           ------------------     ----------------     -----------------
                                                                   6,351,971           40,810,648            14,856,172
                                                           ------------------     ----------------     -----------------

Expenses:
      Expenditures under product development projects                262,002              528,193             6,074,149
      Management fee                                                       -              569,334               857,658
      General and administrative costs                               159,388              189,072               242,330
      Amortization of organization costs                                   -               10,620                25,144
      Write-down of investment                                             -                    -             2,350,000
                                                           ------------------     ----------------     -----------------
                                                                     421,390            1,297,219             9,549,281
                                                           ------------------     ----------------     -----------------

Net income                                               $         5,930,581    $      39,513,429    $        5,306,891
                                                           ==================     ================     =================

Net income per partnership unit:
      Limited partners (based on 50,000 units)           $            117.43    $          782.37    $           105.08
      General partner                                    $         59,305.81    $      395,134.29    $        53,068.91

</TABLE>

--------------------------------------------------------------------------------


Statements of Changes in Partners' Capital

<TABLE>
<CAPTION>

                                                                Limited               General
For the years ended December 31, 1997, 1996 and 1995           Partners               Partner               Total
------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                    <C>                  <C>
Balance at January 1, 1995                               $        17,693,584    $         178,633    $       17,872,217

Distributions to partners:
      Cash                                                        (5,000,000)             (50,505)           (5,050,505)
      Alkermes, Inc. warrants                                       (300,000)              (3,392)             (303,392)

Net income                                                         5,254,961               51,930             5,306,891
                                                           ------------------     ----------------     -----------------

Balance at December 31, 1995                                      17,648,545              176,666            17,825,211

Cash distributions to partners                                   (24,650,000)            (245,837)          (24,895,837)
Net income                                                        39,118,295              395,134            39,513,429
                                                           ------------------     ----------------     -----------------

Balance at December 31, 1996                                      32,116,840              325,963            32,442,803

Cash distributions to partners                                   (27,500,000)            (277,777)          (27,777,777)
Net income                                                         5,871,275               59,306             5,930,581
                                                           ------------------     ----------------     -----------------

Balance at December 31, 1997                             $        10,488,115    $         107,492    $       10,595,607
                                                           ==================     ================     =================

</TABLE>

--------------------------------------------------------------------------------
See notes to financial statements.

                                       F-6
<PAGE>


PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)

Statements of Cash Flows

<TABLE>
<CAPTION>

For the years ended December 31,                                        1997                 1996                  1995
------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                    <C>                  <C>
Cash flows from operating activities:
Net income                                               $         5,930,581    $      39,513,429    $        5,306,891
Adjustments to reconcile net income  to
  cash provided by operating activities:
  Amortization of organization costs                                       -               10,620                25,144
  Unrealized depreciation (appreciation)
   of marketable securities and investments                        4,876,389          (27,169,770)           (9,733,309)
  Realized gain on distribution of warrants                                -                    -              (303,392)
  Write-down of investment                                                 -                    -             2,350,000

Decrease (increase) in operating assets:
  Marketable securities                                           16,829,368              517,023             9,578,818
  Investments                                                              -           11,264,892              (250,000)
  Interest receivable                                                      -               37,739                41,960
  Advances to product development projects                           262,002              528,193              (363,151)
  Royalty income receivable                                           (9,928)                   -                     -
  Other assets                                                             -               35,723                   750

(Decrease) increase in operating liabilities:
  Liabilities under product development projects                           -                    -            (1,456,326)
  Payable to PaineWebber Development Corporation                           -               (2,108)                3,327
  Accrued liabilities                                                (23,368)              15,926               (94,348)
  Other liability                                                    (87,267)              87,267                     -
                                                           ------------------     ----------------     -----------------
Cash provided by operating activities                             27,777,777           24,838,934             5,106,364
                                                           ------------------     ----------------     -----------------

Cash flows from financing activities:
  Distributions to partners                                      (27,777,777)         (24,895,837)           (5,050,505)
                                                           ------------------     ----------------     -----------------

(Decrease) increase in cash                                                -              (56,903)               55,859

Cash at beginning of period                                                -               56,903                 1,044
                                                           ------------------     ----------------     -----------------

Cash at end of period                                    $                 -    $               -    $           56,903
                                                           ==================     ================     =================

--------------------------------------------------------------------------------------------------

</TABLE>

Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the years ended
December 31, 1997, 1996 and 1995.

Supplemental schedule of non-cash activities:

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,                                        1997                 1996                  1995
------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                    <C>                  <C>
Distribution of investments to partners:
  Alkermes, Inc. warrants                                $                 -    $               -    $          303,392

------------------------------------------------------------------------------------------------------------------------
</TABLE>

See notes to financial statements.

                                       F-7
<PAGE>

                       PAINEWEBBER R&D PARTNERS III, L.P.
                        (a Delaware Limited Partnership)

                          Notes to Financial Statements



1.    ORGANIZATION AND BUSINESS

      PaineWebber R&D Partners III, L.P. (the "Partnership") is a Delaware
limited partnership that commenced operations on June 3, 1991. Paine Webber
Development Corporation ("PWDC" or the "General Partner"), an indirect,
wholly-owned subsidiary of Paine Webber Group Inc., 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. Once
the product development phase has been completed, the Sponsor Companies have the
option to license and commercialize the products resulting from the product
development project, and the Partnership has the right to receive payments based
upon the sale of such products. The Partnership obtained warrants to purchase
the common stock of Sponsor Companies to provide additional capital appreciation
to the Partnership which was not directly dependent upon the outcome of the
Projects (see Note 5).

                                       F-8

<PAGE>

                       PAINEWEBBER R&D PARTNERS III, L.P.
                        (a Delaware Limited Partnership)

                          Notes to Financial Statements


(Note 1 Continued)

      All distributions from the Partnership to the General Partner and the
limited partners of the Partnership (the "Limited Partners"; collectively, the
"Partners") have been made pro rata in accordance with their respective capital
contributions. The table below sets forth the proportion of each distribution to
be received by the Limited Partners and the General Partner, respectively:

<TABLE>
<CAPTION>


                                                                                 Limited           General
                                                                                 Partners          Partner
                                                                                 --------          -------
<S>                                                                                 <C>              <C>
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"); At
         December 31, 1997, Contribution Payout was $1,325 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%

</TABLE>

      During the year ended December 31, 1997, the Partnership made cash
distributions of $27,777,777 ($550 per Unit; $277,777 to the General Partner).
At December 31, 1997, the Partnership has made cash and security distributions,
as valued on the dates of distribution, since inception of $1,143 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, 1997, the cumulative profits of the Partnership were $588 per Unit.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      The financial statements are prepared in conformity with generally
accepted accounting principles which require management to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Such estimates and assumptions include the
carrying value of non-marketable securities. Actual results could differ from
those estimates.

      In accordance with the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("Statement No. 115"), the Partnership accounts for its investments
in restricted common stock (where the restriction period expires in one year or
less) at market value with unrealized gains and losses reflected in the
Statements of Operations during the period in which the change in value occurs.
Investments in restricted common stock, whereby the restriction period exceeds
one year, are accounted for at the lower of cost or fair value.

      Marketable securities consist of a money market fund that is valued at
market value. Marketable securities are not considered cash equivalents for the
Statements of Cash Flows.

                                       F-9

<PAGE>

                       PAINEWEBBER R&D PARTNERS III, L.P.
                        (a Delaware Limited Partnership)

                          Notes to Financial Statements


(NOTE 2 CONTINUED)

      The Partnership's investments in stock of non-public companies are subject
to fluctuations in value dependent on the underlying value of the issuing
company. Non-publicly traded securities are valued at cost, except when a
decrease is required based on the General Partner's evaluations of the project
technology or Sponsor Company. These evaluations of value are made based on
currently available information and may not necessarily represent the amount, if
any, which may ultimately be realized.

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

      The General Partner incurred offering and organizational costs in the
amount of $1,813,138 and $125,724, respectively, that were reimbursed at the
Partnership's closings. Offering expenses have been charged against partners'
capital. Organizational costs incurred during the formation of the Partnership
were amortized over a period of 60 months from the date of the commencement of
operations.

      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 in the accompanying Statements of Operations. 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.

      The Partnership carries warrants at a zero value in cases where the
Sponsor Company's stock is not publicly traded or the exercise period has not
been attained. To the extent that the Partnership's warrants are currently
exercisable and the Sponsor Company's stock is publicly traded, the warrants are
carried at intrinsic value (the excess of market price per share over the
exercise price per share), which approximates fair value.

                                      F-10

<PAGE>

                       PAINEWEBBER R&D PARTNERS III, L.P.
                        (a Delaware Limited Partnership)

                          Notes to Financial Statements



3.   MARKETABLE SECURITIES AND INVESTMENTS

     MARKETABLE SECURITIES

     The Partnership held the following marketable securities at:

<TABLE>
<CAPTION>

                                                     December 31, 1997                    December 31, 1996
                                                     -----------------                    -----------------
                                                 Market              Cost             Market              Cost
                                                 ------              ----             ------              ----
<S>                                           <C>                <C>                <C>                <C>
Money market fund                             $ 1,057,907        $ 1,057,907        $ 911,375          $ 911,375
Biocompatibles International plc
   (815,000 common shares)                      6,620,596            815,000             ----               ----
Gensia Sicor, Inc.
   (137,772 common shares)                        800,869            936,850             ----               ----
                                              -----------        -----------        ---------          ---------
                                              $ 8,479,372        $ 2,809,757        $ 911,375          $ 911,375
                                              ===========        ===========        =========          =========
</TABLE>

      Biocompatibles International plc ("Biocompatibles") is a development stage
company engaged in the research, development and commercialization of coatings
and new materials which reduce compatibility problems associated with certain
medical devices. As of January 1, 1997, the Partnership had agreed not to sell,
assign, transfer or otherwise dispose of its investment of 2,100,000 common
shares for a period which expired in April 1997 - (see Investments). Upon
expiration of the restriction period, the Partnership sold 1,285,000 shares of
Biocompatibles for proceeds of $28,017,867. The carrying value of the shares at
December 31, 1996, was $17,912,749 ($13.94 per share) and, accordingly, the
Partnership recognized a realized gain for the year ended December 31, 1997, of
$10,105,118. The remaining investment of 815,000 shares has been recorded at a
market value of $8.124 per share as of December 31, 1997 and, accordingly, the
Partnership recognized unrealized depreciation of $4,740,408 for the year then
ended (See Note 7 Subsequent Event).

      During 1997, the Partnership received 137,772 common shares of Gensia
Sicor, Inc. ("Gensia") as a distribution from its limited partnership investment
in Gensia Clinical Partners, L.P. ("GCP"). The shares had a market value on the
date of distribution of $6.80 per share (see Note 5). As of December 31, 1997,
the market value of Gensia shares decreased to $5.813 per share and,
accordingly, the Partnership recognized unrealized depreciation of $135,981.

                                      F-11

<PAGE>

                       PAINEWEBBER R&D PARTNERS III, L.P.
                        (a Delaware Limited Partnership)

                          Notes to Financial Statements


(Note 3 Continued)

INVESTMENTS

         The Partnership held the following investments at:

<TABLE>
<CAPTION>

                                                     December 31, 1997                    December 31, 1996
                                                     -----------------                    -----------------
                                             Carrying Value          Cost         Carrying Value          Cost
                                             --------------          ----         --------------          ----
<S>                                        <C>                 <C>              <C>               <C>
Biocompatibles International plc:
   2,100,000 Restricted                    $           ----    $       ----     $     29,273,754  $    2,100,000
   Common Shares
GenPharm International, Inc.                           ----            ----                    0            ----
   1,000,000 Shares of Series E
   Convertible Preferred Stock
Genzyme Molecular Oncology                        1,000,000       1,000,000                 ----            ----
  Division
   713,091 Restricted Common Shares
Medarex, Inc.                                             0            ----                 ----            ----
    281,708 Restricted Common Shares
Pharming BV                                       1,150,000       3,500,000            1,150,000       3,500,000
   14,395 Shares of Class A Stock
PharmaGenics, Inc.                                     ----            ----            1,000,000       1,000,000
   480,242 Shares of Series C
   Convertible Preferred Stock
                                           ---------------    ---------------    ---------------   ---------------
                                           $     2,150,000    $     4,500,000    $    31,423,754   $     6,600,000
                                           ===============    ===============    ===============   ===============

</TABLE>

      At December 31, 1996, in accordance with Statement No. 115, the
Partnership recorded its investment of 2,100,000 restricted shares of
Biocompatibles at the market value of $13.94 per share as compared to a carrying
value of $1.00 per share. Accordingly, the Partnership recognized unrealized
appreciation of $27,173,754 for the year then ended. Upon expiration of the
restriction period in April 1997, the Partnership sold 1,285,000 Biocompatibles
shares and reclassed the remaining investment of 815,000 shares from Investments
to Marketable Securities. In 1996, the Partnership sold 650,000 shares of
Biocompatibles for proceeds of $5,291,129 (average price per share of $8.14).
The carrying value as of December 31, 1995 of the shares, including unrealized
appreciation of $4,143,750 for the year then ended, was $4,793,750 ($7.375 per
share). Accordingly, the Partnership recognized a realized gain of $497,379. In
1995, the Partnership sold 750,000 Biocompatibles shares for proceeds of
$3,537,782 as compared to a carrying value at December 31, 1994, of $750,000 and
recognized a realized gain of $2,787,782. In connection with a Rights Issue by
Biocompatibles in April 1996, the Partnership was entitled to purchase one right
for every six shares owned (aggregating 458,333 Rights). In May 1996, the
Partnership sold its entitlement to the Rights at a price of (pound)1.25 per
Right. The Partnership received aggregate proceeds, net of commissions, of
$865,798 ((pound)571,484) and recognized a gain of this amount from the sale for
the year ended December 31, 1996. A second Rights Issue by Biocompatibles in
November 1996 entitled the Partnership to purchase four Rights for every 23
shares owned (aggregating 365,217 Rights). In December 1996, the

                                      F-12

<PAGE>

                       PAINEWEBBER R&D PARTNERS III, L.P.
                        (a Delaware Limited Partnership)

                          Notes to Financial Statements

(Note 3 Continued)

Partnership sold its entitlement to the rights at a price of (pound)2.20
per Right for aggregate proceeds, net of commissions, of $1,339,815
((pound)803,477). The Partnership recognized a gain of this amount for the year
ended December 31, 1996.

      GenPharm International, Inc. ("GenPharm") is a biotechnology company which
is pursuing the research and development of transgenic technology for human
medical applications. In 1995, GenPharm's restructuring resulted in the spin-off
of its European subsidiary, Pharming BV. In connection with this spin-off, the
Partnership received 14,395 shares of Pharming BV Class A stock which the
General Partner valued at $1,150,000. Concurrently, the Partnership's investment
of 1,000,000 shares of GenPharm's convertible preferred stock was valued at zero
based on a review of the current and future financial prospects of GenPharm at
that time. Accordingly, the Partnership recognized a net write-down of its
GenPharm related investments of $2,350,000 for the year ended December 31, 1995.
Pursuant to an Agreement and Plan of Reorganization dated as of May 5, 1997,
GenPharm was acquired by Medarex, Inc. ("Medarex") whereby the outstanding
common and preferred stock of GenPharm was exchanged for Medarex common stock.
In October 1997, the Partnership received 281,708 common shares of Medarex in
exchange for its investment of 1,000,000 Series E convertible preferred shares.
The Medarex shares are not saleable until after December 31, 1998. The market
value of unrestricted Medarex common stock at December 31, 1997, was $5.25 per
share.

      PharmaGenics, Inc. ("PharmaGenics") is an integrated drug discovery
company engaged in the research and development of pharmaceuticals for the
treatment of cancer as well as other human diseases. The Partnership funded
$5,000,000 in connection with its Project with PharmaGenics which the
Partnership expensed in previous years. In 1995, the Partnership made a loan to
PharmaGenics in the amount of $1,000,000 which was subsequently converted into
480,242 shares of Series C Convertible Preferred Stock. In June 1997, the
Partnership exercised its option to exchange its rights, title and interests in
the various program agreements with PharmaGenics in return for 2,028,428
additional shares of PharmaGenics prefered stock. PharmaGenics preferred stock
was not publicly traded; therefore, no gain or loss was recognized on the
exchange. On June 18, 1997, the acquisition by Genzyme Corporation ("Genzyme")
of PharmaGenics to form Genzyme Molecular Oncology ("GMO") was completed. On
this date, the Partnership's total investment in PharmaGenics of 2,508,670
preferred shares was converted into 713,091 restricted common shares of GMO,
subject to certain adjustments. GMO common stock is not publicly traded;
therefore, the Partnership has recorded its investment in GMO stock at the
carrying value attributable to its investment in PharmaGenics preferred stock of
$1,000,000. Pursuant to the terms of the acquisition, the Partnership will be
entitled to sell its GMO stock approximately nine months following the
completion of an initial public offering by GMO.

      In 1996, the Partnership sold its investment of 357,233 common shares of
GelTex Pharmaceuticals Inc. for proceeds of $6,805,351 (average price per share
of $19.05). The Partnership recorded the shares at December 31, 1995, at their
market value of $4,376,104 ($12.25 per share), including unrealized appreciation
recorded in 1995 of $3,376,104. Accordingly, the Partnership recognized a gain
of $2,429,247 for the year ended December 31, 1996. At December 31, 1995, the
Partnership held an exercisable warrant to purchase 500,000 common shares of
Athena Neurosciences, Inc. ("Athena") in which the market value of the common
shares of $12.25 per share exceeded the exercise price of $8.20 per share.
Accordingly, for the year ended December 31, 1995, the Partnership recorded this
warrant at

                                      F-13

<PAGE>

                       PAINEWEBBER R&D PARTNERS III, L.P.
                        (a Delaware Limited Partnership)

                          Notes to Financial Statements


(NOTE 3 CONTINUED)

its intrinsic value of $2,025,000 and recognized unrealized appreciation of this
amount. As a result of a merger between Athena and Elan Corporation, plc
("Elan"), the Partnership's warrant to purchase Athena shares was converted into
a warrant to purchase 295,600 Elan shares. In 1996, the Partnership exercised
its Elan warrant at an aggregate exercise price of $4,099,972 ($13.87 per share)
and subsequently sold the shares for proceeds of $8,320,588 (average price per
share of $28.15). The Partnership recognized a gain of $2,195,616 upon the sale
for the year ended December 31, 1996.

4.    RELATED PARTY TRANSACTIONS

      The General Partner received an annual management fee for management and
administrative services provided to the Partnership. The management fee was
payable quarterly in advance and was adjusted annually on the first of each
fiscal year in an amount proportionate to the increase for the prior year in the
Consumer Price Index published by the United States Department of Labor. As of
January 1, 1997, the General Partner has eliminated the management fee charged
to the Partnership. The management fees paid by the Partnership to the General
Partner for the years ended December 31, 1996 and 1995, were $569,334 and
$857,658, respectively.

      The money market fund invested in by the Partnership is managed by an
affiliate of PaineWebber Incorporated ("PWI").

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

5.    PRODUCT DEVELOPMENT PROJECTS

      Of the Partnership's seven original Projects, the following three Projects
are currently active: a $6.0 million investment in Alkermes Clinical Partners,
L.P., a $46.0 million limited partnership formed to fund the development,
clinical testing, manufacturing and marketing of Receptor-Mediated
Permeabilizers 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;
a $6.0 million investment in Cephalon Clinical Partners, L.P., a $45.0 million
limited partnership formed to fund the development, clinical testing,
manufacturing and marketing of Myotrophin(TM) for use in the treatment of
amyotrophic lateral sclerosis and certain other peripheral neuropathies; and a
$4.0 million investment in Gensia Clinical Partners, L.P., a $26.2 million
limited partnership formed to fund the development, clinical testing,
manufacturing and marketing of the GenESA(TM) System, a product designed to
enhance the diagnosis of heart disease.

      The remaining four Projects have been terminated or are near termination.
On April 18, 1996, Repligen Corporation ("Repligen") terminated its arrangements
with Repligen Clinical Partners, L.P. ("RCP") regarding the development and
marketing of RCP's recombinant platelet factor-4 ("rPF4") program in which the
Partnership funded $6.0 million. Repligen and RCP have agreed that the rights to
the rPF4 technologies will remain with RCP. The general partner of RCP is
seeking third parties who may be willing to either purchase or license the rPF4
technologies so that residual proceeds or royalties, if any, may be distributed
to the partners of RCP (including the Partnership). However, there can be no
assurance that a third party can be identified that is interested in purchasing
or licensing the rPF4 technologies or that there will be any residual proceeds
or royalties available for distribution.

                                      F-14

<PAGE>

                       PAINEWEBBER R&D PARTNERS III, L.P.
                        (a Delaware Limited Partnership)

                          Notes to Financial Statements


(NOTE 5 CONTINUED)

      On May 31, 1996, the Partnership sold, transferred and assigned its
rights, title, and interest in the callable warrant to purchase 500,000 shares
of Athena as well as its various program agreements with Athena for the
development of Diastat(R) for a purchase price of $6,000,000 and recognized a
gain of this amount from the sale of this product development project for the
year ended December 31, 1996.

      On June 2, 1997, the Partnership exchanged its interests in its various
program agreements with PharmaGenics in return for additional shares of
PharmaGenics preferred stock (see Note 3). The Partnership expects no returns
resulting from its Project with Cadre Technologies, Inc. for the development of
software tools for database applications.

      Pursuant to certain product agreements between GCP and Gensia, Gensia was
required to remit a milestone payment to GCP upon the approval of the
GenESA(TM)System by the U.S. Food and Drug Administration. Such approval was
received in September 1997 and, as part of the agreements, Gensia remitted
payment to GCP in shares of Gensia common stock. The Partnership, as a limited
partner in GCP, received 137,772 shares of Gensia with a market value on the
date of distribution of $6.80 per share and, accordingly, recognized income from
product development projects in the amount of $936,850 for the year ended
December 31, 1997 (see Note 3 - Marketable Securities).

      If the Projects produce any product for commercial sale, the Sponsor
Companies have the option to license the Partnership's technology to manufacture
and market the products developed. In addition, the Sponsor Companies have the
option to purchase the Partnership's interest in the technology. In
consideration for granting such purchase options, the Partnership has received
warrants to purchase shares of common stock of certain of the Sponsor Companies.
At December 31, 1997, the Partnership owned the following warrants:

<TABLE>
<CAPTION>

                                     Number of              Exercise                               12/31/97
                                  Shares that can             Price             Exercise         Market Price
                                   be Purchased             per Share            Period           Per Share*
-------------------------------------------------------------------------------------------------------------------
<S>                                 <C>                     <C>              <C>                    <C>
Cayenne Software, Inc.               35,512                 $  25.91         Current to 7/98        $2.063

Repligen Corporation                133,000                 $   2.50         Current to 3/01        $0.781
                                    252,700                 $   3.50         Current to 3/01
-------------------------------------------------------------------------------------------------------------------
</TABLE>

              * The share prices of these technology companies are generally
              highly volatile and the shares are often thinly traded. The market
              prices listed above may have changed significantly subsequent to
              December 31, 1997, and/or may change significantly in the future.
              The market prices above may not, therefore, be indicative of the
              ultimate values, if any, that may be realized by the Partnership.

                                      F-15

<PAGE>
                       PAINEWEBBER R&D PARTNERS III, L.P.
                        (a Delaware Limited Partnership)

                          Notes to Financial Statements


(NOTE 5 CONTINUED)

      Upon the exercise by the Partnership of its exchange option with
PharmaGenics in June 1997, the Partnership's warrant to purchase 1,000,000
shares of PharmaGenics at an exercise price of $2.15 per share was terminated.
In addition, the Partnership's purchase option warrant to purchase 666,667
PharmaGenics' shares was cancelled upon the closing of the acquisition of
PharmaGenics by Genzyme.

      On October 23, 1995, the Partnership distributed to its Partners a warrant
to purchase 202,261 shares of Alkermes common stock. The intrinsic value of the
warrant on the date of distribution was $303,392 ($1.50 per share) and,
accordingly, the Partnership recognized a gain of this amount. In November 1995,
the Partnership exercised its warrant to purchase 113,330 shares of Cephalon,
Inc. ("Cephalon") common stock at an aggregate exercise price of $1,536,128. The
shares were subsequently sold by the Partnership for total proceeds, net of
commissions, of $3,100,947 (average price per share of $27.362). Accordingly,
the Partnership recognized a gain of $1,564,819 for the year ended December 31,
1995.


6.    INCOME TAXES

      The Partnership is not subject to federal, state or local income taxes.
Accordingly, the individual partners are required to report their distributive
share of realized income or loss on their individual federal and state income
tax returns.


7.    SUBSEQUENT EVENT

      As of March 23, 1998, the market value of the Biocompatibles' shares had
decreased to approximately $2.2 million ($2.69 per share) from approximately
$6.6 million ($8.124 per share) as of December 31, 1997, resulting in unrealized
depreciation to the Partnership of approximately $4.4 million.

                                      F-16