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, 1999
                                       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.

                                        2
<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 has been 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 have been 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.

    As of December 31, 1999, the Partnership had ongoing Projects with Alkermes,
Inc. and Cephalon, Inc. (See Exhibit A, 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,
1999, the Partnership owned warrants and marketable securities as described in
Notes 3 and 5 of the "Notes to Financial Statements" included in this filing on
Form 10-K.

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.
Until September 1999, an Advisory Board had acted as special advisor to the
General Partner. All fees and expenses of the Advisory Board were 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.

                                        3
<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:

                                                          Limited    General
                                                          Partners   Partner
                                                          --------   -------
      I.      Until the value of the aggregate
              distributions for each limited
              partnership unit ("Unit") equals $1,000
              plus simple interest on such amount
              accrued at 5% per annum ("Contribution
              Payout"); At December 31, 1999,
              Contribution Payout was $1,425 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%

    At December 31, 1999, the Partnership has made cash and security
distributions, as valued on the dates of distribution, since inception of $1,283
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, 1999, the cumulative profits of the Partnership were $653 per Unit.

Other

    At December 31, 1999, 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 and biotechnology products and companies.

Item 2. Properties.

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

                                        4
<PAGE>

Item 3. Legal Proceedings.

    None.

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

    None.

                                        5
<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, 1999, there were 4,680 Limited Partners.

    The Partnership distributes to the Partners, when available, the net
proceeds from royalty distributions, net proceeds from dispositions of portfolio
securities and any other cash in excess of amounts that are necessary for the
operation of the Partnership's business. During the year ended December 31,
1999, the Partnership made a cash distribution to the Partners of $7,070,707
($140 per Unit; $70,707 to the general partnership interest). During the year
ended December 31, 1998, the Partnership made no distributions to the Partners.
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).

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 $9.1 million at December 31, 1998, decreased to $6.8
million at December 31, 1999, resulting from the Partnership's recognition of
net income of $4.8 million (as discussed in Results of Operations below) offset
by cash distributions to the Partners of $7.1 million.

    The Partnership's funds are invested in marketable securities until cash is
needed to pay for the ongoing management and administrative expenses of the
Partnership or for distribution to the Partners. Liquid assets decreased from
$9.1 million at December 31, 1998 to $6.8 million at December 31, 1999. The
decrease resulted primarily from the sale of securities with a carrying value at
December 31, 1998 of $5.3 million (and a distribution of the proceeds to the
Partners) offset by an increase in the market values of marketable securities
held as of these dates of $3.1 million. The balance of the liquid assets at
December 31, 1999, 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, 1999 compared to the year ended December 31, 1998:

    Net income (loss) for the years ended December 31, 1999 and 1998 was $4.8
million and $(1.5) million, respectively. The increase of $6.3 million resulted
from an increase in revenues of this amount.

    Net revenues for the years ended December 31, 1999 and 1998 were $4.9
million and $(1.3) million, respectively. The increase resulted primarily from a
favorable change in unrealized appreciation (depreciation) of marketable
securities of $5.1 million and an increase in realized gain on sale of
marketable securities of $1.1 million. For the years ended December 31, 1999 and
1998 unrealized appreciation (depreciation) was $3.1 million and $(2.0) million,
respectively. For the year ended

                                        6
<PAGE>

(Item 7 Continued)

December 31, 1999, the Partnership recognized unrealized appreciation of $2.7
million on its investment of 0.713 million shares of Genzyme Molecular Oncology
("GMO") resulting from the increase in its market value from $3.25 per share at
December 31, 1998 to $7.00 per share as of December 31, 1999. In addition, the
Partnership had a warrant to purchase 7,293 shares of Alkermes, Inc.
("Alkermes") at an exercise price of $5.00 per share. At December 31, 1999 the
market value of Alkermes was $49.125 per share. Accordingly, the Partnership
recorded the warrant at the intrinsic value of $44.125 per share and recognized
unrealized appreciation of $0.3 million for the year then ended. Net unrealized
depreciation for the year ended December 31, 1998 was $2.0 million resulting
primarily from the Partnership's investment of 0.815 million shares of
Biocompatibles International plc ("Biocompatibles"), 0.723 million shares of
Medarex, Inc. ("Medarex") and 0.713 million shares of GMO. The market value of
Biocompatibles decreased from $8.124 per share at December 31, 1997 to $1.427
per share as of December 31, 1998, resulting in unrealized depreciation for the
year ended December 31, 1998 of $5.5 million. During the year ended December 31,
1998, in accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", the
Partnership recorded its investment in 0.282 million Medarex restricted shares
(with a restriction period of less than one year) at a market value of $3.03125
per share at December 31, 1998 and, accordingly, recognized unrealized
appreciation of $0.9 million. Previously, such shares were recorded at zero
value. Also, the Partnership recorded its investment of 0.441 million Medarex
shares received in 1998 at $1.3 million and recognized unrealized appreciation
of this amount. In November 1998, GMO shares began trading on the NASDAQ
National Market. Accordingly the Partnership recorded its investment at the
market value as of December 31, 1998 of $2.3 million ($3.25 per share) as
compared to its cost basis of $1.0 million. The Partnership recognized
unrealized appreciation of $1.3 million as of this date. During the year ended
December 31, 1999, the Partnership recognized a net gain from the sale of
marketable securities of $1.7 million. The Partnership sold its investment in
Biocompatibles with a carrying value as of December 31, 1998 of $1.2 million for
proceeds of $1.3 million and realized a gain of $0.1 million for the year ended
December 31, 1999. The sale of shares of Pharming Group N.V. (with a carrying
value at December 31, 1998 of $1.3 million) for proceeds of $0.8 million
resulted in a loss of $0.5 million for this same period. In addition, the
Partnership recognized a gain of $2.1 million from its sale of Medarex for
proceeds of $4.3 million as compared to a carrying value at December 31, 1998 of
$2.2 million. For this same period in 1998 the Partnership recognized a gain on
the sale of marketable securities of $0.6 million. The Partnership sold its
rights as a former stockholder of GenPharm International, Inc. and received
proceeds of this amount upon the sale.

    There were no material variances in expenses for the years ended December
31, 1999 and 1998.

    Year ended December 31, 1998 compared to the year ended December 31, 1997:

    The Partnership recognized a net loss for the year ended December 31, 1998
of $1.5 million as compared to net income of $5.9 million for the year ended
December 31, 1997. The unfavorable variance of $7.4 million resulted from a
decrease in revenues of $7.7 million offset by a decrease in expenses of $0.3
million.

    Net revenues for the years ended December 31, 1998 and 1997 were $(1.4)
million and $6.3 million, respectively. The decrease in revenues resulted
primarily from decreases in (i) net realized gain on sale of marketable
securities of $9.5 million and (ii) income from product development projects of
$0.9

                                        7
<PAGE>

(Item 7 Continued)

million offset by a favorable change in net unrealized depreciation of
marketable securities of $2.9 million. During the year ended December 31, 1997
the Partnership sold 1.285 million shares of Biocompatibles for proceeds of
$28.0 million. The carrying value of the shares as of December 31, 1996 was
$17.9 million resulting in a realized gain upon the sale of $10.1 million. For
the year ended December 31, 1998, the Partnership assigned its interest in
contingent payment rights as a former shareholder of GenPharm International,
Inc. for proceeds of $0.6 million and recognized a gain of this amount upon the
sale. 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. Net unrealized
depreciation for the year ended December 31, 1998 was $2.0 million (see Results
of Operations for the year ended December 31, 1999 as compared to the year ended
December 31, 1998). Unrealized depreciation for the year ended December 31, 1997
was $4.9 million resulting primarily from its investment of 0.815 million shares
of Biocompatibles. The market value of the shares decreased from $13.94 per
share at December 31, 1996 to $8.124 per share at December 31, 1997.

    Expenses decreased from 1997 to 1998 primarily due to the write-off in 1997
of the Partnership's investment in Repligen Clinical Partners, L.P. with a
carrying value of $0.2 million which was determined to be worthless.

Year 2000

    Currently, the Partnership utilizes computer programs, through services
provided by a third-party servicing agent. The servicing agent has informed the
Partnership that it has successfully completed a comprehensive plan achieving
Year 2000 compliance. The incremental costs associated with the plan were borne
by the servicing agent.

    The Partnership has not been advised by the Sponsor Companies of any Year
2000 complications experienced by them. The Partnership will continue to monitor
the Sponsor Companies as it relates to this issue.

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-13)

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

    None.

                                        8
<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. As part of its ongoing role in all Projects, the General Partner
has participated 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 has made visits to the facilities of Sponsor Companies in order
to monitor the progress of Projects, and its representatives have taken part in
important decisions with respect to development and commercial strategies.
During the commercialization phase, the General Partner has continued to review
the Sponsor Companies' performance. In addition, the General Partner has
monitored 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, 1999:

        Name                          Age         Position and Date Appointed
        ----                          ---         ---------------------------
Directors
   Dhananjay M. Pai                   37     Director since December 1996
   William J. Nolan                   52     Director since February 1997
   Stephen R. Dyer                    40     Director since April 1999

Executive Officers
   Dhananjay M. Pai                   37     President since December 1996
   William J. Nolan                   52     Treasurer since February 1997
   Geraldine L. Banyai                59     Secretary since June 1999

    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.

                                        9
<PAGE>

(Item 10 Continued)

Directors

    Mr. Pai is a Managing Director of PaineWebber Incorporated ("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, Inc., 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. 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 Committee. 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.

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

Executive Officers

    Mr. Pai, President, see "Directors" above.

    Mr. Nolan, Treasurer, see "Directors" above.

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

                                       10
<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-13 included in this filing on Form 10-K.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

    There are no investors known to the Partnership to be beneficial owners at
March 1, 2000 of more than five percent of the Registrant's Units. No member of
management of PWDC had any beneficial interest in the Registrant's Units.

Item 13. Certain Relationships and Related Transactions.

    Information in response to this item may be found in the section entitled
"Related Party Transactions" under the caption "Notes to Financial Statements"
on pages F-8 through F-13 included in this filing on Form 10-K.

                                       11
<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 (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-13)

Reports on Form 8-K

    None.

                                       12
<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 30th day of March
2000.

      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/ Robert J. Chersi
          --------------------
          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 30th day of March 2000.

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

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

/s/ Stephen R. Dyer
-------------------
Stephen R. Dyer
Director

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

                                       13
<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, 1999 and 1998                                  F-5

Statements of Operations,
   for the years ended December 31, 1999, 1998 and 1997           F-6

Statements of Changes in Partners' Capital,
   for the years ended December 31, 1999, 1998 and 1997           F-6

Statements of Cash Flows,
   for the years ended December 31, 1999, 1998 and 1997           F-7

Notes to Financial Statements                                     F-8 to F-13

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

                                       F-1
<PAGE>

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

<TABLE>
<CAPTION>
Selected Financial Data
---------------------------------------------------------------------------------------------------------------
Years ended December 31,              1999           1998            1997             1996            1995
---------------------------------------------------------------------------------------------------------------
<S>                             <C>            <C>             <C>            <C>              <C>
Operating Results:

   Revenues                     $    4,926,324 $   (1,331,137) $    6,351,971 $     40,810,648 $    14,856,172
   Net income (loss)            $    4,762,147 $   (1,500,762) $    5,930,581 $     39,513,429 $     5,306,891

Net income (loss) per partnership unit:

   Limited partners (A)         $        94.29 $       (29.72) $       117.43 $         782.37 $        105.08
   General partner              $    47,621.47 $   (15,007.62) $    59,305.81 $     395,134.29 $     53,068.91

Financial Condition:

   Total assets                 $    6,866,129 $    9,169,050  $   10,675,272 $     32,633,103 $    17,914,426
   Partners' capital            $    6,786,285 $    9,094,845  $   10,595,607 $     32,442,803 $    17,825,211

Distributions to partners:
   Cash                         $    7,070,707 $            -  $   27,777,777 $     24,895,837 $     5,050,505
   Alkermes, Inc. warrants
    (at intrinsic value) (B)    $            - $            -  $            - $              - $       303,392
---------------------------------------------------------------------------------------------------------------
</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)

<TABLE>
<CAPTION>
Quarterly Financial Information (Unaudited)
-------------------------------------------------------------------------------------------
                                                                Net Income (Loss)
                                                            Per Partnership Unit (A)
                                      Net Income       ------------------------------------
                    Revenues            (Loss)         Limited Partners    General Partner
-------------------------------------------------------------------------------------------
<S>              <C>               <C>               <C>                 <C>
 Calendar 1999

 4th Quarter     $   1,292,891     $   1,265,494     $        25.05      $   12,654.94

 3rd Quarter         3,568,742         3,523,495              69.77          35,234.95

 2nd Quarter           (54,065)         (102,442)             (2.03)         (1,024.42)

 1st Quarter           118,756            75,600               1.50             756.00

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

 Calendar 1998

 4th Quarter     $     317,820     $     266,757     $         5.27      $    2,667.57

 3rd Quarter         1,707,607         1,669,150              33.05          16,691.50

 2nd Quarter          (344,621)         (386,987)             (7.66)         (3,869.87)

 1st Quarter        (3,011,943)       (3,049,682)            (60.38)        (30,496.82)

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

 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

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

(A) Based on 50,000 partnership units and a 1% general partnership interest.
</TABLE>

                                       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, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. 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, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.

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

New York, New York
March 27, 2000

                                       F-4
<PAGE>

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

Statements of Financial Condition

<TABLE>
<CAPTION>
                                                 December 31,     December 31,
                                                        1999             1998
------------------------------------------------------------------------------
<S>                                             <C>              <C>
Assets:

     Marketable securities, at market value     $  6,846,730     $  9,147,266

     Advances to product development projects         19,399           21,784
                                                ------------     ------------
Total assets                                    $  6,866,129     $  9,169,050
                                                ============     ============

Liabilities and partners' capital:

     Accrued liabilities                        $     79,844     $     74,205

     Partners' capital                             6,786,285        9,094,845
                                                ------------     ------------
Total liabilities and partners' capital         $  6,866,129     $  9,169,050
                                                ============     ============
------------------------------------------------------------------------------
</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,                        1999             1998               1997
-------------------------------------------------------------------------------------------------
<S>                                             <C>              <C>                <C>
Revenues:
     Interest income                            $    149,437     $     59,496       $    176,464
     Income from product development projects              -                -            946,778
     Unrealized  appreciation (depreciation) of
       marketable securities and investments       3,079,020       (1,989,383)        (4,876,389)
     Net realized gain on sale of marketable
       securities and investments                  1,697,867          598,750         10,105,118
                                                ------------     ------------       ------------
                                                   4,926,324       (1,331,137)         6,351,971
                                                ------------     ------------       ------------
Expenses:
     Expenditures under product development
       projects                                        2,385           24,116            262,002
     General and administrative costs                161,792          145,509            159,388
                                                ------------     ------------       ------------
                                                     164,177          169,625            421,390
                                                ------------     ------------       ------------

Net income (loss)                               $  4,762,147     $ (1,500,762)      $  5,930,581
                                                ============     ============       ============

Net income (loss) per partnership unit:
     Limited partners (based on 50,000 units)   $      94.29     $     (29.72)      $     117.43
     General partner                            $  47,621.47     $ (15,007.62)      $  59,305.81

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

<CAPTION>

Statements of Changes in Partners' Capital

For the years ended December 31, 1999,             Limited           General
1998 and 1997                                      Partners          Partner            Total
-------------------------------------------------------------------------------------------------
<S>                                             <C>              <C>                <C>
Balance at January 1, 1997                      $ 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

Net loss                                          (1,485,754)         (15,008)        (1,500,762)
                                                ------------     ------------       ------------

Balance at December 31, 1998                       9,002,361           92,484          9,094,845

Cash distributions to partners                    (7,000,000)         (70,707)        (7,070,707)
Net income                                         4,714,526           47,621          4,762,147
                                                ------------     ------------       ------------
Balance at December 31, 1999                    $  6,716,887     $     69,398       $  6,786,285
                                                ============     ============       ============
-------------------------------------------------------------------------------------------------
</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,                        1999             1998               1997
-------------------------------------------------------------------------------------------------
<S>                                             <C>              <C>                <C>
Cash flows from operating activities:
Net income (loss)                               $  4,762,147     $ (1,500,762)      $  5,930,581
Adjustments to reconcile net income (loss)  to
  cash provided by operating activities:
  Unrealized (appreciation) depreciation
   of marketable securities and investments       (3,079,020)       1,989,383          4,876,389

Decrease (increase) in operating assets:
  Marketable securities                            5,379,556         (507,277)        16,829,368
  Advances to product development projects             2,385           14,188            262,002
  Royalty income receivable                                -            9,928             (9,928)

Increase (decrease) in operating liabilities:
  Payable to PaineWebber Development Corporation           -           (3,613)                 -
  Accrued liabilities                                  5,639           (1,847)           (23,368)
  Other liability                                          -                -            (87,267)
                                                ------------     ------------       ------------
Cash provided by operating activities              7,070,707                -         27,777,777
                                                ------------     ------------       ------------

Cash flows from financing activities:
  Distributions to partners                       (7,070,707)               -        (27,777,777)
                                                ------------     ------------       ------------

Decrease in cash                                           -                -                  -

Cash at beginning of period                                -                -                  -
                                                ------------     ------------       ------------
Cash at end of period                           $          -     $          -       $          -
                                                ============     ============       ============
-------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the years ended
December 31, 1999, 1998 and 1997.
-------------------------------------------------------------------------------------------------
</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 had
the option to license and commercialize the products resulting from the product
development project, and the Partnership has had 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:

                                                           Limited     General
                                                           Partners    Partner
                                                           --------    -------
   I. Until the value of the aggregate distributions
      for each limited partnership unit ("Unit")
      equals $1,000 plus simple interest on such
      amount accrued at 5% per annum ("Contribution
      Payout"); At December 31, 1999, Contribution
      Payout was $1,425 per Unit........................     99%          1%

  II. After Contribution Payout and until the value of
      the aggregate distributions for each Unit equals       80%         20%
      $5,000 ("Final Payout")...........................

 III. After Final Payout................................     75%         25%

      For the year ended December 31, 1999, the Partnership made cash
distributions totalling $7,070,707 ($140 per Unit; $70,707 to the General
Partner). At December 31, 1999, the Partnership has made cash and security
distributions, as valued on the dates of distribution, since inception of $1,283
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, 1999, the cumulative profits of the Partnership were $653 per Unit.

2. Summary of Significant Accounting Policies

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

      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 accounted for its investments
in restricted common stock (where the restriction period expired 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
occurred. Investments in restricted common stock, whereby the restriction period
exceeded one year, were accounted for at the lower of cost or fair value.

                                       F-9
<PAGE>

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

                          NOTES TO FINANCIAL STATEMENTS

(Note 2 Continued)

      Marketable securities consist of a money market fund, common stock and
warrants which are recorded at market value. The Partnership's warrants are
currently exercisable and the Sponsor Company's stock is publicly traded,
therefore, the warrants are carried at intrinsic value (the excess, if any, of
market price per share over the exercise price per share), which approximates
fair value. Marketable securities are not considered cash equivalents for the
Statements of Cash Flows.

      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 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.

      Certain reclassifications have been made in prior year amounts to conform
to current year presentations.

3. Marketable Securities

      The Partnership held the following marketable securities at:

                                  December 31, 1999        December 31, 1998
                                ----------------------   ----------------------
                                 Carrying                 Carrying
                                   Value       Cost         Value       Cost
                                ----------  ----------   ----------  ----------
Money market fund               $1,450,164  $1,450,164   $1,565,184  $1,565,184

Biocompatibles International
  plc (815,000 common shares)         ----        ----    1,162,957     815,000

Gensia Sicor, Inc.
  (137,772 common shares)             ----        ----      624,280     936,850

Genzyme Molecular Oncology
  (713,091 common shares)        4,991,638   1,000,000    2,317,546   1,000,000

Medarex, Inc.
  (281,708 restricted common
  shares)                             ----        ----      853,927        ----
  (441,207 unrestricted
  common shares)                      ----        ----    1,337,409        ----

Pharming Group N.V.
  (129,555 ordinary shares)           ----        ----    1,285,963   3,500,000

Alkermes, Inc.
  (Warrant to purchase 7,293
  shares)                          321,804        ----         ----        ----

Repligen Corporation
  (Warrant to purchase
  133,000 shares)                   83,124        ----         ----        ----
                                ----------  ----------   ----------  ----------
                                $6,846,730  $2,450,164   $9,147,266  $7,817,034
                                ==========  ==========   ==========  ==========

                                      F-10
<PAGE>

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

                          NOTES TO FINANCIAL STATEMENTS

(Note 3 Continued)

    During the year ended December 31, 1999, the Partnership recognized net
realized gain from sale of marketable securities of $1,697,867 resulting from
its investments in Biocompatibles International plc ("Biocompatibles"), Gensia
Sicor, Inc. ("Gensia"), Medarex, Inc.("Medarex") and Pharming Group N.V.
("Pharming"). Upon the sale of Biocompatibles the Partnership received aggregate
proceeds of $1,302,967 (average price of $1.60 per share) and recognized a gain
of $140,010. Aggregate proceeds from the sale of Gensia were $558,564 (average
price of $4.05 per share) resulting in a loss of $65,715. The sale of Pharming
generated proceeds of $796,804 ($6.15 per share) which resulted in a loss of
$489,159. The Partnership sold its shares of Medarex for proceeds of $4,304,067
(average price of $5.9538 per share) and recognized a gain upon the sale of
$2,112,731.

    The market value of the Biocompatible shares at December 31, 1998, was
$1.427 per share as compared to $8.124 per share at December 31, 1997.
Accordingly, the Partnership recognized unrealized depreciation on its
investment of 815,000 shares for the year ended December 31, 1998, of
$5,457,916. During the year ended December 31, 1997, the Partnership sold
1,285,000 shares of Biocompatibles with a carrying value as of December 31, 1996
of $17,912,749 ($13.94 per share) for total proceeds of $28,017,867.
Accordingly, the Partnership recognized a gain for the year ended December 31,
1997 of $10,105,118. The remaining investment of 815,000 shares was recorded at
the market value of $8.124 per share as of December 31, 1997, and the
Partnership recognized unrealized depreciation on these shares for the year then
ended of $4,740,408.

    During 1997, the Partnership received 137,772 common shares of Gensia with a
market value on the date of distribution of $6.80 per share as a distribution
from its limited partnership investment in Gensia Clinical Partners, L.P.
("GCP"). As of December 31, 1997 and 1998, the market value of Gensia shares was
$5.813 per share and $4.53125 per share. The Partnership recognized unrealized
depreciation for the years ended December 31, 1997 and 1998 of $135,981 and
$176,589, respectively.

    In 1997, upon the acquisition of GenPharm International, Inc. ("GenPharm")
by Medarex the Partnership's investment of 1,000,000 GenPharm convertible
preferred shares was converted to 281,708 restricted shares of Medarex. The
Partnership (as a former GenPharm shareholder) also received certain contingent
payment rights (the "Rights") entitling the Partnership to additional Medarex
shares to be received prior to December 31, 1998. The Medarex shares received in
1997 were saleable on or after January 1, 1999. In accordance with Statement No.
115, in 1998, the Partnership recorded its investment in the Medarex shares at a
market value of $853,927 ($3.03125 per share). Accordingly, the Partnership
recognized unrealized appreciation of this amount for the year then ended. In
July 1998, pursuant to an Offer to Purchase by a third party, the Partnership
partially assigned its interest in the Rights for cash proceeds of $598,750 and
recognized a gain upon the sale of this amount for the year ended December 31,
1998. In September 1998, the Partnership received 441,207 unrestricted Medarex
shares in connection with its remaining interest in the Rights. The Partnership
recorded the shares as of December 31, 1998, at the aggregate market value of
$1,337,409 and recognized unrealized appreciation of this amount for the year
ended December 31, 1998.

    In connection with an initial public offering in July 1998, the
Partnership's investment in Pharming Group N.V. ("Pharming") of 14,395
restricted Class A shares was converted into 129,555 ordinary shares (as a
result of a 9:1 stock split). The shares were not salable until January 1, 1999.
In accordance with Statement No. 115, as of December 31, 1998, the Partnership
recorded the investment (with a carrying value as of this date of $1,150,000) at
the market value of $1,285,963 and accordingly the Partnership recognized
unrealized appreciation of $135,963.

                                      F-11
<PAGE>

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

                          NOTES TO FINANCIAL STATEMENTS

(Note 3 Continued)

    In November 1998, Genzyme Molecular Oncology ("GMO") commenced trading on
the NASDAQ National Market. The Partnership recorded the investment at its
market value of $2,317,545 ($3.25 per share) at December 31, 1998 as compared to
a carrying value at December 31, 1997 of $1,000,000. The Partnership recognized
unrealized appreciation of $1,317,545 for the year ended December 31, 1998. As
of December 31, 1999, the market value of the shares was $4,991,638 ($7.00 per
share) and, accordingly, the Partnership recognized unrealized appreciation of
$2,674,092 for the year ended December 31, 1999. (See Note 7 - Subsequent
Events).

    At December 31, 1999, the market value of Repligen Corporation ("Repligen")
was $3.125 per share. The Partnership recorded its warrant to purchase 133,000
shares with an exercise price of $2.50 per share at the intrinsic value of
$83,124 and recognized unrealized appreciation of this amount for the year ended
December 31, 1999 (see Note 5). The Partnership owns a warrant to purchase 7,293
shares of Alkermes, Inc. ("Alkermes") at an exercise price of $5.00 per share.
At December 31, 1999, the market value of Alkermes was $49.125 per share. As of
this date, the Partnership recorded the warrant at its intrinsic value of
$321,804 and recognized unrealized appreciation of this amount for the year then
ended. (See Note 7 - Subsequent Events).

4. Related Party Transactions

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

    The money market fund invested in by the Partnership is managed by an
affiliate of 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 two 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; and 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.

    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).

                                      F-12
<PAGE>

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

                          NOTES TO FINANCIAL STATEMENTS

(Note 5 Continued)

    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, 1999, the Partnership owned warrants to purchase 133,000 shares
and 252,700 shares of Repligen Corporation at an exercise price of $2.50 per
share and $3.50 per share, respectively. The exercise period expires March 2001.
The market price of Repligen Corporation stock at December 31, 1999 was $3.125
per share. Also, as of this date, the Partnership owned a warrant to purchase
7,293 shares of Alkermes at $5.00 per share. The market price of Alkermes at
December 31, 1999 was $49.125 per share. The warrant expires March 31, 2000 (see
Note 3).

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 Events

    In March 2000 the Partnership exercised its Repligen warrants for 385,700
shares at an aggregate exercise price of $1,216,950. The Partnership sold
100,000 shares for aggregate proceeds of $1,584,026 (average price per share of
$15.84) and, accordingly, recognized a gain of approximately $1,200,000 for the
quarter ended March 31, 2000.

    In January 2000 the Partnership exercised its warrant for 7,293 Alkermes
shares at an aggregate exercise price of $36,465. In March 2000 the Partnership
sold the Alkermes shares for aggregate net proceeds of $1,372,515 ($188.21 per
share) and recognized a gain from the sale of approximately $1,000,000 for the
three months ended March 31, 2000.

    During the quarter ended March 31, 2000, the Partnership sold 252,000 shares
of GMO for aggregate proceeds of $8,968,599 (average price per share of $35.59).
The Partnership recognized a gain of approximately $7,200,000 for this period.

                                      F-13
<PAGE>

PaineWebber R&D Partners III                                           Exhibit A
Annual Report 1999
Letter to Limited Partners

To Our Limited Partners:

In 1999, the companies with active development products sponsored by PaineWebber
R&D Partners III, L.P. ("R&D III" or the "Partnership") have continued in their
clinical development efforts. Alkermes, Inc. ("Alkermes") completed two Phase II
clinical trials using Cereport(R) (formerly known as RMP-7(TM)) in combination
with carboplatin for the treatment of brain tumors. Alkermes reports it is
currently compiling the data from these trials and will present a final report
to its marketing partner ALZA Corporation ("ALZA") in the coming months.
Cephalon, Inc. ("Cephalon") is continuing its efforts to develop Myotrophin(TM)
for amyotrophic lateral sclerosis, or ALS. Cephalon reports it has received the
latest data from the Japanese clinical study and the treatment Investigational
New Drug application will be submitted to the FDA to determine if Myotrophin
meets FDA safety and efficacy standards.

During the course of the year, the Partnership liquidated most of the remaining
shares held in fund equity. The Partnership's shares of SICOR Inc., (formerly
Gensia Sicor, Inc.) were liquidated for total proceeds of $558,564 which equals
$110.60 per $10,000 investment in R&D III, Biocompatibles International plc's
remaining 815,000 shares were sold for aggregate proceeds of $1,302,967 with
Partnership proceeds of $257.99 per $10,000 investment in R&D III the remaining
position in Medarex, Inc. was liquidated for proceeds equal to $852.20 per
$10,000 investment in R&D III. All of these proceeds were included in the
October 25, 1999 distribution.

Total cash distributions since inception of the Partnership through December 31,
1999, were $12,830 per $10,000 investment. The General Partner intends to
eventually liquidate the remaining security positions it holds in Genzyme
Molecular Oncology common stock and the Repligen Corporation warrant subject to
market conditions and will distribute the proceeds to the limited partners.

In addition to potential returns from the 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 at a price of $11.32 per share which expired August 31,
1997 and at a price of $13.82 per share starting from September 1, 1997 and
expired on August 31, 1999. In August 1993, investors received a warrant to
purchase 60 shares of Gensia common stock per $10,000 investment in R&D III. The
Gensia warrant was exercisable at $17.47 per share through 1996 and at $19.47
per share until expiration in July, 1998. The value of all of the distributed
warrants has ranged from $980 based on the respective dates of distribution to
$5,974 at peak per $10,000 investment in R&D III.
<PAGE>

Included in the Product Portfolio Status and Equity Investment sections are more
detailed discussions on the companies, the status of the product development
programs and specific information concerning the securities associated with each
investment, all of which has been obtained from the sponsor companies and other
sources believed by the Partnership to be accurate. Neither the Partnership, its
General Partner nor its affiliates assume responsibility for the accuracy of
such information. Please refer to prior annual reports for information
pertaining to the Partnership's terminated or concluded investments.

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

Sincerely,

Robin Stanley
Vice President
Paine Webber Development Corporation
<PAGE>

                            Product Portfolio Status
                                 Alkermes, Inc.
                                 --------------

Company
Alkermes, Inc. is a leader in the development of products based on sophisticated
drug delivery technologies. Alkermes develops injectable sustained-release
microsphere formulations for pharmaceutical products based on three proprietary
drug delivery technologies: ProLease(R), which is designed to enable single
injections lasting a few days to several months to be made of proteins or
peptides otherwise given by more frequent injection; Medisorb(R), which extends
Alkermes' technology for injectable sustained release and is designed for more
traditional small molecule pharmaceutical compounds and Cereport(TM) (formerly
known as RMP-7(TM)) which focuses on two drug delivery opportunities; 1)
controlled, sustained release of injectable drugs lasting several days to
several weeks; and 2) 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. ("ACP"), a
$46.0 million limited partnership formed to complete the development and human
clinical trials of receptor mediated permeabilizers ("RMPs"). Since June 30,
1996 the research and development revenue from ACP ended and Alkermes has been
using and has indicated that it intends to continue to use, its own resources to
continue to develop Cereport. In September 1997, Alkermes entered into a
development and commercialization agreement with Alza Corporation ("Alza") to
accelerate and expand the development of Cereport. 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 Cereport.

During 1999, Alkermes completed two Phase II clinical trials using Cereport in
combination with Carboplatin in patients for the treatment of recurrent
malignant brain tumors. Alkermes is currently compiling the data from these
trials and will present a final report to Alza in the coming months. Alza will
then determine whether to continue the clinical development of Cereport. If Alza
decides not to exercise their option to continue the development of Cereport,
Alkermes will then consider whether to continue the development of Cereport on
their own or to seek another partner. If Alza exercises its option, Alza will
make additional payments to cover costs associated with advanced clinical
development. If Cereport is commercialized successfully by Alza, Alkermes will
receive payments from Alza.

Warrant
R&D III distributed the Alkermes warrant to 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
<PAGE>

available gain from the distributed Alkermes warrant has ranged from $60 at
distribution to $2,100 as of December 31, 1999 per $10,000 investment in R&D
III.

                                 Cephalon, Inc.

Company
Cephalon, Inc., ("Cephalon") discovers and develops pharmaceutical products for
the treatment of neurological disorders, sleep disorders and cancer. Cephalon's
research strategy is focused primarily on understanding the cellular mechanisms
of cell survival and cell death. Cephalon's research programs currently consist
of four core technology areas: neurotrophic factors, gene transcription
regulators, signal transduction modulators and protease inhibitors.

Program
R&D III committed $6.0 million to Cephalon Clinical Partners, L.P., a $45.0
million limited partnership formed to fund the development and human clinical
trials of Myotrophin(TM) in the treatment of amyotrophic lateral sclerosis
("ALS") and certain peripheral neuropathies. ALS is a fatal disorder of the
nervous system characterized by a degeneration of peripheral motor and sensory
nerves. Myotrophin is a recombinant form of 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. Cephalon is developing
Myotrophin Injection, in collaboration with Chiron Corporation ("Chiron"), for
the treatment of ALS. Cephalon will be resubmitting data to the FDA in the
coming months to review the approval status of Myotrophin for the treatment of
ALS.

Warrant
R&D III distributed the Cephalon warrant to the 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 until August 1997 and $13.82 per share from September 1997 until
expiration on August 31, 1999. The value of the Cephalon warrant has ranged from
$618 to $3,018 per $10,000 investment in R&D III.

                                   Sicor Inc.
Company
Sicor Inc. ("Sicor") is a vertically integrated specialty pharmaceutical company
focused on the development, manufacturing and marketing of pharmaceutical
products for world-wide oncology and injectable pharmaceutical markets. Sicor
manufactures and develops finished injectable pharmaceuticals and produces
specialty bulk drug substances.

Program
R&D III committed $4.0 million to Gensia Clinical Partners, L.P. ("GCP"), a
$26.3 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, and thereby elicit certain cardiovascular
responses similar to those caused by exercise.

GCP was organized in July 1991, to provide funding for the continued development
of the GenESA System and the rights to the GenESA System technology were
transferred at that
<PAGE>

time. The GCP Purchase Option was granted in connection with the GCP partnership
agreement. In October 1997, R&D III received 137,772 shares of Gensia common
stock as the "milestone payment" from Gensia.

In 1998, Gensia Sicor and Automedics, Inc. announced that they determined not to
exercise an option granted by GCP to purchase the technology associated with the
GenESA System under the GCP Purchase Plan Option and informed Gensia Development
Corporation, the General Partner of the GCP , of this decision. This decision
was based on, among other things, the lack of market acceptance of the GenESA
System since its U.S. market introduction in October 1997 and its European
market introduction in the second quarter of 1995. At the same time, Sicor and
Automedics also informed Protocol Systems, Inc. ("Protocol Systems"), the
supplier of the GenESA device, that Automedics planned no additional purchases
of the GenESA device under a supply agreement which provided for the purchase of
devices through the year 2002.

Sicor announced in August 1999, that it had entered into an agreement with
Protocol Systems settling a lawsuit alleging a breach of a development and
supply agreement that provided for the purchase of a device to be used in the
GenESA System. In late 1999, Automedics withdrew from the market the remaining
GenESA and informed its customers that it would no longer supply the GenESA drug
for any remaining GenESA devices.

At this time Gensia Development Corporation is determining the final alternative
of terminating GCP, after considering other alternatives to maximize the value
of the technology, on behalf of the limited partners of GCP.

Warrant
R&D III distributed the 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 through July 1996, and an exercise
price of $19.47 per share from August 1996 until expiration in 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. The available gain from the
distributed Gensia warrant has ranged from $302 to $856 per $10,000 investment
in R&D III.

                              Repligen Corporation

Company
Repligen Corporation ("Repligen") is a biopharmaceutical company engaged in the
discovery of novel therapeutics for autism, organ transplant and cancer.
Repligen's products offer patients improved treatment options based on
modulation of newly discovered disease mechanisms. Repligen's major programs
currently include developing the hormone secretin for use in autism therapy,
enabling bone marrow transplants between genetically unmatched donors using
CTLA4-Ig, and manufacturing and marketing Protein A to biopharmaceutical
companies for use in the manufacture or production of therapeutic antibodies.

Program
R&D III committed $6.0 million to Repligen Clinical Partnership ("RCP"), a $45
million limited partnership formed to fund further clinical development of
recombinant Platelet
<PAGE>

Factor-4 ("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.

In 1996, Repligen announced to limited partners in RCP, including the
Partnership, that the company terminated the research funding program with rPF4.
Since the RCP funds had been depleted, Repligen 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 currently working on terminating RCP
by proxy vote for approval from the RCP limited partners.

Warrant
R&D III holds a warrant to purchase 133,000 shares of Repligen common stock at
an exercise price of $2.50 per share and a warrant to purchase 252,700 shares of
Repligen common stock at an exercise price of $3.50 per share, both which expire
on March 31, 2001. R&D III will facilitate the exercise procedure on behalf of
limited partners subject to market conditions and will distribute the proceeds.

                               EQUITY INVESTMENTS

                           Genzyme Molecular Oncology

R&D III funded $5.0 million to a product development program utilizing
PharmaGenics Inc.'s ("PGI") proprietary combinatorial chemistry procedure to
discover novel therapeutics and made an equity investment in the amount of $1.0
million for 480,242 shares of PGI Convertible Preferred stock. Genzyme
Corporation acquired PGI in exchange for four million shares of Genzyme
Molecular Oncology ("GMO") stock (traded under the NASDAQ ticker symbol GZMO).
R&D III's total investment in PGI preferred shares was converted into 713,091
shares of GZMO, which became unrestricted in November, 1998. The market value as
of December 31, 1999 for GZMO was $7.00 per share. The Partnership will
distribute proceeds from these shares when they are liquidated.

GMO is developing a new generation of cancer products focusing on cancer
vaccines and angiogenesis inhibitors. It is shaping these new therapies through
the integration of its gene discovery, gene therapy, small molecule drug
discovery, protein therapeutic, and genetic diagnostic efforts. GMO announced
that its SAGE(TM) (Serial Analysis of Gene Expression) technology has supplied
researchers with a database of new information regarding the patterns of
expressed genes in human cancer and normal tissues. A summary of the SAGE data
was published in the article "Analysis of Human Transcriptomes" in the December
1999 issue of Nature Genetics. GMO's patented SAGE technology enables the
company to identify genes as diagnostic markers and therapeutic targets for
potential cancer product development. GMO also licenses SAGE to commercial and
academic collaborators for use in their own research. SAGE is a high-efficiency
method of comprehensively identifying and quantifying genes expressed in a
tissue or cell line. It can be used in a wide variety of applications such as
identifying diseases-related genes, analyzing the effects of drugs on tissues,
and providing insight into disease pathways. SAGE is an integral part of GMO's
therapeutic discovery efforts with particular emphasis on the identification of
novel tumor antigens and anti-angiogenic factors.
<PAGE>

GMO announced the initiation of two cancer vaccine trials in 1999, a Phase I/II
clinical trial for melanoma and a Phase I trial for breast cancer. The melanoma
trial is evaluating a gene therapy approach that utilizes both the MelanA/MART-1
and gp100 melanoma tumor antigens delivered to dendritic cells in a single
vaccine. The trial is being conducted at the Massachusetts General Hospital by
Dr. Frank Haluska and will enroll and treat approximately 24 patients with
metastatic melanoma, the most severe form of skin cancer. It is anticipated this
trial will be completed in 2000.

The breast cancer clinical trial is being conducted by principal investigator
Dr. David Avigan, clinical director of the bone marrow transplant program at
Beth Israel Deaconess Medical Center and is expected to be completed this year.
GMO has an exclusive license to this technology for therapeutic uses from the
Dana-Farber Cancer Institute.