EXHIBIT B

PAINEWEBBER R&D PARTNERS III, L.P.                            1997 ANNUAL REPORT
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LETTER TO LIMITED PARTNERS

To Our Limited Partners:

PaineWebber R&D Partners III, L.P. (the "Partnership" or "R&D III") continued to
receive reports of significant developments from a number of sponsor companies
during 1997, including Alkermes, Inc. ("Alkermes"), Gensia Sicor, Inc.
("Gensia"), Cephalon, Inc. ("Cephalon") and certain other companies in which R&D
III has equity investments. In addition, R&D III made cash distributions
totaling $5,500 per $10,000 investment in the Partnership during the year.

R&D III was formed in 1991 and invested in a portfolio of seven product
development programs as well as four equity investments. The objective of each
investment is to obtain attractive returns for investors by accelerating the
development and commercialization of new products. In addition to cash
distributions derived from revenues of product sales in each product development
program, investors may benefit by the growth of the companies through the
issuance of warrants to purchase the companies' common stock. In each program,
the management team of PaineWebber Development Corporation has worked closely
with the sponsor companies to monitor the progress of each product development
program.

In addition to the product development programs in which the Partnership
invested, R&D III made four equity investments in privately-held companies, of
which three are active. R&D III invested $3.5 million in Biocompatibles
International plc ("Biocompatibles"), a U.K.-based development stage company
engaged in the research, development and commercialization of coatings which
reduce compatibility problems with certain medical devices. Biocompatibles
completed its initial public offering on the London Stock Exchange in 1995.
Through December 31, 1997, the Partnership distributed approximately $36.8
million from sales of 2.685 million shares of Biocompatibles common stock and
continues to hold 815,000 shares.

R&D III invested $3.5 million in Series E Convertible Preferred Stock of
GenPharm International, Inc. ("GenPharm"). In 1995, GenPharm completed a
restructuring by spinning-off its European subsidiary, Pharming BV, to its
shareholders. R&D III currently owns 14,395 shares of Pharming BV Class A stock.
In May 1997, GenPharm signed a definitive merger agreement with Medarex, Inc.
("Medarex") by which GenPharm shareholders would receive up to $65 million in
Medarex common stock. Upon the closing of the transaction in October 1997, the
Partnership received 281,708 shares and expects to receive additional Medarex
shares in late 1998 subject to the receipt of certain fees and payments relating
principally to the litigation brought against GenPharm by Cell Genesys, Inc. and
certain other matters.

R&D III invested $6 million, including a $1 million equity investment, in a
product development program using PharmaGenics Inc.'s ("PGI") proprietary
combinatorial chemistry procedure ("COMPILE") to discover novel therapeutics. In
February 1997, PGI signed a definitive agreement to be acquired by Genzyme
Corporation ("Genzyme") in a transaction valued at $28 million. The transaction
was approved by shareholders of PGI and Genzyme and in June 1997, R&D III
received 713,091 shares of Genzyme Molecular Oncology Inc. ("GMO"), a newly
formed private subsidiary of Genzyme.

During 1997, several of the sponsor companies of the Partnership's active
product development programs made significant announcements and attained certain
milestones. Alkermes completed its fourth Phase II clinical trial for RMP-7 and
the chemotherapeutic agent carboplatin in patients with recurrent, malignant
brain tumors and has commenced designing its Phase III study.

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Alkermes also announced the signing of a joint development and commercialization
agreement with Alza Corp. valued at up to $60 million.

Earlier in the year, the U.S. Food and Drug Administration's ("FDA") Peripheral
and Central Nervous System Drug Advisory Committee did not recommend approval of
Cephalon's New Drug Application for its product Myotrophin(TM) used in the
treatment of amyotrophic lateral sclerosis ("ALS" or "Lou Gehrig's disease").
Cephalon is awaiting the final recommendation of the FDA, due before May 11,
1998.

Finally, in September, Gensia received marketing clearance from the FDA for the
GenESA(R) System which triggered a "milestone payment" of approximately 20% of
the aggregate capital contributions of limited partners of Gensia Clinical
Partners, L.P. in Gensia common stock. R&D III received 137,772 shares of Gensia
common stock. The Partnership intends to sell the common shares and distribute
cash at a future date. In October, Gensia commenced selling the GenESA System in
the U.S. market.

During 1997, R&D III made cash distributions to its limited partners totaling
$5,500 per $10,000 investment in the Partnership. The source of the
distributions was the sale of 1.285 million shares of Biocompatibles common
stock for proceeds of approximately $28 million. Total cash distributions since
the inception of the Partnership through December 31, 1997 are $11,430 per
$10,000 investment. The Partnership intends to continue to liquidate the
security positions it holds subject to market conditions and distribute the
proceeds to its limited partners.

In addition to potential returns from product development programs and equity
investments, R&D III has made three distributions of warrants, allowing
investors to purchase the common stock of certain sponsor companies at
predetermined prices. In October 1995, investors received a warrant to purchase
40 shares of Alkermes common stock per $10,000 investment in R&D III. The
Alkermes warrant is exercisable at a price of $5.00 per share through March 31,
2000. In January 1994, investors received a warrant to purchase 100 shares of
Cephalon common stock per $10,000 investment in R&D III. The Cephalon warrant
was exercisable at a price of $11.32 per share through August 31, 1997 and is
exercisable at a price of $13.82 per share from September 1, 1997 through August
31, 1999. In August 1993, investors received a warrant to purchase 60 shares of
Gensia common stock per $10,000 in R&D III. The Gensia warrant was exercisable
at a price of $17.47 per share through July 1996 and is currently exercisable at
$19.47 per share through July 1998. The value of all of the distributed warrants
has ranged from $980 based on the respective dates of distribution to $4,860 at
peak per $10,000 investment in R&D III.

Included in the Product Portfolio Status and Equity Investment sections are more
detailed discussions on the companies, status of the product development
programs and specific information concerning the securities associated with each
investment. Please refer to prior annual reports for information pertaining to
the Partnership's terminated or concluded investments with Athena Neurosciences,
Inc. and GelTex Pharmaceuticals, Inc.

Thank you for your continued interest in R&D III.

Sincerely,

Robin Stanley
Vice President
PaineWebber Development Corporation

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                            PRODUCT PORTFOLIO STATUS

ALKERMES, INC.

COMPANY

Alkermes, Inc. ("Alkermes") is developing innovative products based on
sophisticated drug delivery techniques for the treatment of central nervous
system disorders and for enhancing the effectiveness of existing
biopharmaceutical products. Alkermes' lead products are ProLease(R), Medisorb(R)
and RMP-7(TM) which focus on two drug delivery opportunities: (i) controlled,
sustained release of injectable drugs lasting several days to several weeks; and
(ii) the delivery of drugs into the brain past the blood-brain barrier.

PROGRAM

R&D III committed $6.0 million to Alkermes Clinical Partners, L.P., a $46.0
million limited partnership, formed to fund the development and human clinical
trials of receptor mediated permeabilizers ("RMPs"). Since June 30, 1996, the
research and development revenue from the partnership ended and Alkermes has
been using, and intends to continue to use, its own resources to continue to
develop RMP-7. During the year, Alkermes entered into a development and
commercialization agreement with Alza Corporation to accelerate and expand the
development of RMP-7. The agreement provides for Alkermes to receive up to $60
million, including a $10 million initial payment, over the course of the
agreement based upon attainment of certain milestones. The agreement further
provides that Alkermes will retain manufacturing responsibility and Alza will
have the option to acquire exclusive worldwide commercialization rights to
RMP-7. Alkermes has completed four Phase II clinical trials of RMP-7 and
carboplatin in patients with recurrent malignant brain tumors. The company is
currently designing its Phase III clinical study.

WARRANT

R&D III distributed the Alkermes warrant to the limited partners in October
1995. Investors received a warrant to purchase 40 shares of Alkermes common
stock per $10,000 investment in R&D III with an exercise price of $5.00 per
share through March 31, 2000. Based on the closing price of $6.50 per share on
the date of distribution, a warrant to purchase 40 shares of Alkermes common
stock had a value of approximately $60 per $10,000 unit. The available gain from
the distributed Alkermes warrant has ranged from $60 at distribution to $985 per
$10,000 investment in R&D III.

CAYENNE SOFTWARE, INC.

COMPANY

Cayenne Software, Inc. ("Cayenne") is a publicly traded company which supplies
modeling, database design and development solutions for commercial and technical
applications and database development. In July 1996, Cadre Technologies, Inc.
("Cadre") merged with Bachman Information Systems, Inc. to form Cayenne
Software, Inc. (NNM: CAYN).

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PROGRAM

R&D III committed $1.5 million to Cadre's product development program which
funded the development of software tools for database applications. R&D III does
not expect any returns from this program.

WARRANT

In July 1996, Cadre warrants were converted into Cayenne warrants with the
Partnership owning a warrant to purchase 35,512 Cayenne common shares at an
exercise price of $25.91 per share through July, 1998. Warrants from this
transaction have not been distributed to investors. The common stock of Cayenne
closed at a price of $2.063 per share on December 31, 1997.


CEPHALON, INC.

COMPANY

Cephalon, Inc. ("Cephalon") discovers and develops pharmaceutical products for
the treatment of neurological disorders. The company focuses primarily on
neurodegenerative diseases, which are characterized by the death of neurons, the
specialized conducting cells of the nervous system. Cephalon's product
development programs are directed toward promoting neuronal survival using
neurotrophic factors and various classes of small molecules.

PROGRAM

R&D III committed $6.0 million to Cephalon Clinical Partners, L.P., a $45
million limited partnership formed to fund the development and human clinical
trials of Myotrophin(TM) for use in the treatment of amyotrophic lateral
sclerosis ("ALS" or "Lou Gehrig's disease") and certain peripheral neuropathies.
ALS is a fatal disorder of the nervous system characterized by the chronic,
progressive degeneration of motor neurons. Peripheral neuropathies refer to a
family of disorders of the peripheral nervous system characterized by a
degeneration of peripheral motor and sensory nerves. Myotrophin is a recombiant
form of an insulin-like growth factor, a naturally occurring neurotrophic factor
which is believed to participate in the nervous system's normal attempt to
recover from injury.

Earlier this year, the FDA's Peripheral and Central Nervous System Drugs
Advisory Committee ("the Panel") ruled that a Phase III study of Myotrophin
showed no significant evidence that the drug was effective. The Panel, citing
insufficient evidence on the matter of efficacy, voted to reject Cephalon's New
Drug Application ("NDA") based on the findings of two studies, the first
conducted in North America and the second in Europe. Cephalon has since
withdrawn and resubmitted the NDA after being informed by the Federal Drug
Administration that the Myotrophin NDA requires more in-depth analysis by the
agency before a final decision on the NDA can be made. The company anticipates
the FDA will reschedule the company's NDA for Myotrophin with a decision being
reached by May 11, 1998.

Also earlier in the year, Cephalon announced a joint development agreement with
Chiron Corporation for Myotrophin covering the North American and European
markets. In May, Cephalon and Chiron announced that they had filed a joint
Marketing Authorization Application for clearance to market Myotrophin in Europe
for the treatment of ALS. Currently, Myotrophin has been approved to be used
only as a Treatment Investigational New Drug ("IND") in which patients can
obtain the drug on a compassionate-use basis.
Cephalon has indicated that it will be

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exploring the use of Myotrophin in treating post-polio syndrome,
demo-neuropathy, multiple sclerosis, diabetic neuropathy and certain other
neuromuscular disorders.

WARRANT

R&D III distributed the Cephalon warrant to limited partners in January 1994.
Investors received a warrant to purchase 100 shares of Cephalon common stock
(per $10,000 investment in R&D III) with an exercise price of $11.32 per share
through August 1997 and $13.82 per share from September 1997 through August
1999. Based on the closing price of $17.50 per share on the date of distribution
and the initial exercise price of $11.32 per share, a warrant to purchase 100
shares of Cephalon common stock had a value of approximately $618 per $10,000
unit. The available gain from the distributed Cephalon warrant has ranged from
$618 at distribution to $3,018 per $10,000 investment in R&D III.


GENSIA SICOR, INC.

COMPANY

Gensia Sicor, Inc. ("Gensia") is a vertically integrated pharmaceutical company
which focuses on the production of specialty bulk drug substances by synthesis
or fermentation, and the development, manufacturing and marketing of injectable
pharmaceuticals. The company has focused its product development efforts on the
worldwide oncology and injectable pharmaceutical markets.

During 1997, Gensia completed the sale of a majority interest in Gensia
Automedics, Inc. ("Gensia Automedics") to a private investor group led by Galen
Associates. As part of its corporate restructuring, Gensia had earlier
transferred its medical device assets, including the GenESA(R) System, to the
newly established subsidiary, Gensia Automedics. Also, Gensia created Metabasis
Therapeutics, Inc. ("Metabasis"), as a majority owned subsidiary, through which
its research efforts will be directed at discovering and developing small
molecule pharmaceuticals that are intended to target the treatment of pain,
diabetes (Type II) , inflammation and cardiovascular disease.

PROGRAM

R&D III committed $4.0 million to Gensia Clinical Partners, L.P. ("GCP"), a
$26.2 million limited partnership formed to fund the development and human
clinical trials of the GenESA System, a product designed to enhance the
diagnosis of cardiovascular disease. The GenESA System combines a drug,
arbutamine, and a computer-controlled drug administration system designed to
pharmacologically stress the heart. It is expected that this system will aid in
the diagnosis of patients who are suspected of having cardiovascular disease but
who are unable to undergo a traditional stress test due to an inability to
exercise adequately. Arbutamine is a drug developed to stimulate the heart
pharmacologically and thereby elicit certain cardiovascular responses similar to
those caused by exercise.

In September 1997, Gensia announced that it had received marketing clearance
from the FDA for the GenESA System for use in the diagnosis of coronary artery
disease in conjunction with radio-nuclide myocardial perfusion imaging and
echocardiography for patients who are unable to exercise adequately. Gensia
Automedics commenced U.S. marketing of the GenESA System in October, 1997. The
FDA approval of the GenESA System for marketing clearance triggered the
"milestone payment" to GCP, including R&D III. The "milestone payment"

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was paid in Gensia common stock representing 20% of the initial capital
contributions. In October 1997, R&D III received 137,772 shares of Gensia common
stock, valued at $936,850 on the date of distribution.

WARRANT

R&D III distributed the Gensia warrant in August 1993. Investors received a
warrant to purchase 60 shares of Gensia common stock per $10,000 investment in
R&D III with an exercise price of $17.47 per share, which expired July 1996 and
$19.47 per share from August 1996 through July 1998. Based on the closing price
of $22.50 on the date of distribution and the initial exercise price of $17.47
per share, a warrant to purchase 60 shares of Gensia common stock had a value of
approximately $302 per $10,000 unit. The available gain from the distributed
Gensia warrant has ranged from $302 at distribution to $857 per $10,000
investment in R&D III.


REPLIGEN CORPORATION

COMPANY

Repligen Corporation ("Repligen") redirected its focus under new management in
1996 from the clinical development of biological products to the development of
enabling technology for the discovery of new drugs. The company's technology is
designed to increase the efficiency of the process by which new drug candidates
are identified. In 1996, Repligen announced to limited partners of Repligen
Clinical Partners, L.P. ("RCP"), including the Partnership, that the company had
terminated the research funding program with recombinant Platelet Factor-4
("rPF4"), the product being developed with funding from RCP. Repligen announced
in April 1996 that rPF4 had been evaluated in several clinical trials and showed
an excellent safety profile and potentially useful clinical activity.

PROGRAM

R&D III committed $6.0 million to RCP, a $45.0 million limited partnership
formed to fund the further clinical development of rPF4. rPF4 was being
developed to reverse the effects of heparin, a drug commonly used in patients
undergoing heart surgery and in other situations to prevent the formation of
blood clots. rPF4 may also retard the growth of solid tumors by inhibiting the
formation of new blood vessels necessary for tumors to grow.

Since the RCP funds have been depleted, Repligen has returned the rights to rPF4
to RCP in exchange for the termination of the research program. The Board of
Directors of the general partner of RCP is continuing to explore various
alternatives to maximize the value of the rPF4 technology to limited partners of
RCP.

WARRANTS

R&D III holds a warrant to purchase 385,700 shares of Repligen common stock, of
which 133,000 shares are exercisable at $2.50 per share and 252,700 are
exercisable at $3.50 per share. The warrant is exercisable through March 31,
2001. As of December 31, 1997, the closing price of Repligen common stock was
$0.781.

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                               EQUITY INVESTMENTS


BIOCOMPATIBLES INTERNATIONAL PLC

Biocompatibles International plc ("Biocompatibles") is a U.K.-based, development
stage company engaged in the research, development and commercialization of
coatings and new materials which reduce compatibility problems associated with
certain medical devices including stents, catheters and coatings of certain
eye-care products. The company has indicated that it is seeking to form
strategic partnerships with one or two companies to provide the basis for the
commercialization of its products and technologies globally. Discussions with
Johnson & Johnson broke off earlier in the year regarding its stent products.
The company indicated that it was in discussions with a small group of companies
regarding partnering agreements, primarily covering the cardiovascular products.

R&D III invested $3.5 million in Biocompatibles convertible preferred stock in
1993 at a cost of $10.00 per share. The stock converted into ordinary shares
after the completion of the company's initial public offering on the London
Stock Exchange in April 1995 at a price of $2.67 per share. Simultaneously with
the company's initial public offering, the preferred stock held by R&D III
converted to common shares and split 10-for-1.

During 1997, R&D III sold 1,285,000 shares of Biocompatibles for proceeds of
$28,017,867. Cash distributions were made in May and August 1997 aggregating
$5,500 per $10,000 investment in the Partnership. The Partnership continues to
hold 815,000 shares of Biocompatibles. As of December 31, 1997, the closing
price of Biocompatibles shares was approximately $8.124 per share.*


GENZYME MOLECULAR ONCOLOGY

R&D III funded $5.0 million to a product development program utilizing
Pharmagenics Inc.'s ("PGI") proprietary combinatorial chemistry procedure
(COMPILE) to discover novel therapeutics and made an equity investment in the
amount of $1.0 million for 480,242 shares of PGI Series C Convertible Preferred
stock.

Early in 1997, PGI announced the signing of a definitive agreement to be
acquired by Genzyme Corporation ("Genzyme"). In June, shareholders of Genzyme
and PGI voted to approve the acquisition which was valued at approximately $28
million. The acquisition closed in June, with PGI shareholders receiving
approximately four million shares, or approximately forty percent of the initial
equity in the new division of a new Genzyme tracking stock, Genzyme Molecular
Oncology ("GMO"). GMO, a private company with its own common stock, develops
molecular approaches to cancer diagnosis and therapy through genomics, gene
therapy and a small-molecule combinatorial chemistry drug discovery program.

In June, R&D III's PGI shares were converted into 713,091 restricted common
shares of GMO, 127,264 shares attributable to its equity investment and 585,827
shares attributable to the "buyout" of the development program. It is
anticipated that PGI shareholders, including R&D III, will receive their GMO
common shares within six to nine months following the completion of an initial
public offering of GMO.



*    As of March 23, 1998, the closing price of Biocompatibles shares was
     approximately $2.69 per share.

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MEDAREX, INC.

R&D III purchased $3.5 million of GenPharm International Inc. ("GenPharm")
Series E Convertible Preferred Stock. In 1995, GenPharm completed a
restructuring of the company resulting in the spin off of its European
subsidiary, Pharming BV. As a part of the company's restructuring, R&D III
received 14,395 shares of Pharming BV Class A stock. Pharming BV, a private
company, is principally engaged in the development of proprietary technology for
the production of human health care proteins in the mammary glands of transgenic
animals.

In May, GenPharm announced the signing of a definitive merger agreement with
Medarex, Inc. ("Medarex") by which holders of GenPharm stock would receive up to
$65 million in Medarex common stock. The shareholders of GenPharm, including R&D
III, and Medarex approved the merger agreement and the transaction closed in
October. R&D received 281,708 shares of Medarex common stock, which are the
subject of a lock-up agreement which extends through December 31, 1998. As
provided for in the merger agreement, GenPharm shareholders expect to receive
additional Medarex shares in late 1998 subject to the receipt of certain fees
and payments due from third parties in connection with the litigation brought
against GenPharm by Cell Genesys, Inc. and other matters.

Medarex is a biopharmaceutical company developing antibody-based therapeutics.
The company employs several core technologies including bispecific antibodies
which enhance and direct the body's own immune system to fight disease, the
HuMAb-Mouse antibody development system for the creation of high affinity human
antibodies, and immunotoxin technology. Medarex has five products in clinical
development including the anti-cancer Bispecifics MDX-210 and MDX-447, MDX-33
for autoimmune diseases, MDX-RA for the prevention of secondary cataracts, and
MDX-22 for acute myeloid leukemia.