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, 2000
                                       OR
          ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934.
                 FOR THE TRANSITION PERIOD FROM ______ TO ______

                         Commission File Number 33-35938
                       PAINEWEBBER R&D PARTNERS III, L.P.
             (Exact name of registrant as specified in its charter)

                    DELAWARE                                     13-3437420
        (State or other jurisdiction of                       (I.R.S. Employer
         incorporation or organization)                      Identification No.)

1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK                     10019
    (Address of principal executive offices)                      (Zip code)
         Registrant's telephone number, including area code: (212) 713-2000

                                 ===============

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                 ===============

                                                       Name of each exchange on
   Title of each class                                     Which registered
   -------------------                                     ----------------
           None                                                  None

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                          Limited Partnership Units

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


      Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes    X     No
                                              ------       ------

                                 ===============

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


                             SPECIAL NOTE REGARDING
                           FORWARD LOOKING STATEMENTS

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

<PAGE>

                                     PART I


ITEM 1.     BUSINESS.


      PaineWebber R&D Partners III, L.P. (the "Partnership" or "Registrant") is
a Delaware limited partnership that commenced operations on June 3, 1991, with a
total of $43.1 million available for investment. Paine Webber Development
Corporation ("PWDC" or "General Partner"), an indirect, wholly-owned subsidiary
of UBS Americas Inc. (formerly Paine Webber Group Inc. ("PWG")), (1) 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, 2000, 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, 2000, the Partnership owned marketable securities as described
in Note 3 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 for
which it is entitled to receive an annual management fee. As of January 1, 1997,
the General Partner ceased to charge a management fee for services rendered to
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.





----------

(1)  On November 3, 2000, pursuant to the Agreement and Plan of Merger dated as
     of July 12, 2000 by and among PWG, UBS AG and UBS Americas Inc., PWG merged
     with and into UBS Americas Inc. The General Partner does not expect this
     transaction to have a material effect on the Partnership.

<PAGE>

(ITEM 1 CONTINUED)

DISTRIBUTIONS

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

                                                          Limited       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, 2000, Contribution Payout was
            $1,475 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%


      As of June 30, 2000, the Partnership made a cash distribution which
resulted in aggregate distributions per Unit to reach Contribution Payout as of
this date. As a result, the General Partner was allocated 20% of the total cash
distribution over Contribution Payout. The total distribution amounted to
$11,672,828 ($200 per Unit; $1,672,828 to the General Partner). At December 31,
2000, the Partnership has made cash and security distributions, as valued on the
dates of distribution, since inception of $1,483 and $98 per Unit, respectively.

PROFIT AND LOSS ALLOCATION

      Profits and losses of the Partnership are allocated as follows: (i) until
cumulative profits and losses for each Unit equals Contribution Payout, 99% to
Limited Partners and 1% to the General Partner, (ii) after Contribution Payout
and until cumulative profits and losses for each Unit equals Final Payout, 80%
to Limited Partners and 20% to the General Partner, and (iii) after Final
Payout, 75% to Limited Partners and 25% to the General Partner. As of December
31, 2000, the cumulative profits of the Partnership were $862 per Unit.

OTHER

      At December 31, 2000, 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.

<PAGE>

ITEM 3.     LEGAL PROCEEDINGS.

      None.


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

      None.


<PAGE>

                                     PART II


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

      There is no existing public market for the Units, and no such market is
expected to develop. Units are transferable subject to certain restrictions as
set forth in the Partnership Agreement and applicable securities laws. As of
December 31, 2000, there were 4,653 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. As of June 30, 2000, the Partnership
made a cash distribution which resulted in aggregate distributions per Unit to
reach Contribution Payout. As a result, the General Partner was allocated 20% of
the total cash distribution over Contribution Payout. The total distribution
amounted to $11,672,828 ($200 per Unit: $1,672,828 to the General Partner).
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 Partner). During the year ended December 31, 1998, the Partnership made
no distributions to the Partners.


ITEM 6.     SELECTED FINANCIAL DATA.

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


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

LIQUIDITY AND CAPITAL RESOURCES

      Partners' capital of $6.8 million at December 31, 1999, decreased to $5.7
million at December 31, 2000, resulting from the Partnership's recognition of
net income of $10.6 million (as discussed in Results of Operations below) offset
by a cash distribution to the Partners of $11.7 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
$6.8 million at December 31, 1999 to $5.7 million at December 31, 2000. The
change of $1.1 million resulted primarily from (i) increases in the market
values of marketable securities held as of these dates of $1.0 million, (ii) the
sale of marketable securities during the year ended December 31, 2000 for cash
proceeds in excess of their carrying values at December 31, 1999 of $9.5 million
offset by (iii) cash distributions to the Partners of $11.7 million. The balance
of the liquid assets at December 31, 2000, 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, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999:

      Net income for the years ended December 31, 2000 and 1999 was $10.6
million and $4.8 million, respectively. The increase of $5.8 million resulted
from an increase in revenues of this amount.

      Net revenues for the year ended December 31, 2000 were $10.7 million as
compared to $4.9 million for this same period in 1999. The increase was due
primarily to an increase in net realized gain on sale of marketable securities
of $7.8 million offset by an unfavorable change in unrealized appreciation of


<PAGE>

(ITEM 7 CONTINUED)

$2.1 million. Realized gain on sale of marketable securities for the year ended
December 31, 2000 and 1999 was $9.5 million and $1.7 million, respectively.
During the year ended December 31, 2000, the Partnership sold 0.252 million
shares of Genzyme Molecular Oncology ("GMO") for proceeds of $9.0 million
(average price per share of $35.59) with a carrying value of $1.8 million ($7.00
per share) at December 31, 1999 and recognized a gain of $7.2 million. Also, the
Partnership sold 0.1 million shares of Repligen Corporation ("Repligen") for
proceeds of $1.6 million (average price per share of $15.84) and recognized a
gain of $1.3 million for the year ended December 31, 2000. The Partnership
exercised its warrant for 7,293 shares of Alkermes, Inc. ("Alkermes"), (recorded
at its intrinsic value as of December 31, 1999 of $44.125 per share) at $5.00
per share and sold the shares for $188.20 per share recognizing a gain of $1.0
million for the year ended December 31, 2000. During the year ended December 31,
1999, the Partnership recognized a net gain from the sale of marketable
securities of $1.7 million resulting primarily from its investments in Pharming
Group N.V. ("Pharming") and Medarex, Inc. ("Medarex"). The sale of Pharming
shares (with a carrying value of $1.3 million) for proceeds of $0.8 million
resulted in a loss of $0.5 million for this 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.
Unrealized appreciation of marketable securities for the year ended December 31,
2000 was $1.0 million resulting from the Partnership's investments of 0.461
million shares of GMO. The market value of GMO increased from $7.00 per share as
of December 31, 1999 to $9.1875 per share as of December 31, 2000. For the year
ended December 31, 1999, the Partnership recognized unrealized appreciation of
$2.7 million on its investment of 0.713 million shares of GMO resulting from the
increase in its market value of $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 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 intrinisc value of
$44.125 per share and recognized unrealized appreciation of $0.4 million for the
year then ended.

      There were no material variances in expenses for the year ended December
31, 2000 as compared to the same period in 1999.

      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 year ended December 31, 1999
unrealized appreciation was $3.1 million (see Year Ended December 31, 2000
compared to the Year Ended December 31, 1999). 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 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.


<PAGE>

(ITEM 7 CONTINUED)

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 (see Year Ended December 31, 2000 compared to Year Ended December 31,
1999). 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.


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-12)


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

      None.

<PAGE>

                                    PART III


ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

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

      Pursuant to the Management Contract, the General Partner is responsible
for the management and administrative services necessary for the operation of
the Partnership. 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, 2000:

          NAME                       AGE          POSITION AND DATE APPOINTED
-------------------------           -----      ---------------------------------
DIRECTORS
      Dhananjay M. Pai (1)            38        Director since December 1996
      William J. Nolan (1)            53        Director since February 1997
      Stephen R. Dyer                 41        Director since April 1999

EXECUTIVE OFFICERS
      Dhananjay M. Pai (2)            38        President since December 1996
      William J. Nolan (3)            53        Treasurer since February 1997
      Geraldine L. Banyai             60        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.

      (1)   As of March 1, 2001, Dhananjay M. Pai and William J. Nolan were
            replaced as directors by Robert J. Chersi and Jerome T. Fadden.

      (2)   As of March 1, 2001, Dhananjay M. Pai was replaced as President by
            Stephen R. Dyer.

      (3)   As of March 1, 2001, William J. Nolan was replaced as Treasurer by
            Rosemarie Albergo.

<PAGE>

(ITEM 10 CONTINUED)

DIRECTORS

      MR. PAI was a Managing Director of UBS PaineWebber Inc. (formerly
PaineWebber Incorporated ("PWI")). He resigned from PWI on January 1, 2001.
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 was Treasurer of PWG and Executive Vice President and Treasurer
of PWI. He resigned his positions on January 26, 2001. 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.



<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-12 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, 2001 of more than five percent of the Registrant's Units. No member of
management of PWDC had any beneficial interest in the Registrant's Units.


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

<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 (Deficit) (Page F-6)
                Statements of Cash Flows (Page F-7)
                Notes to Financial Statements (Pages F-8 to F-12)


REPORTS ON FORM 8-K

       None.

<PAGE>

                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 2nd day of April
2001.

         PAINEWEBBER R&D PARTNERS III, L.P.

         By:  PaineWebber Development Corporation
              (General Partner)


         By:   /s/  Stephen R. Dyer
              ------------------------------------------
              Stephen R. Dyer
              President and Principal Executive Officer


         By:   /s/  Robert J. Chersi
              ------------------------------------------
              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 2nd day
         of April 2001.

          /s/  Stephen R. Dyer
         ----------------------------------------------------
         Stephen R. Dyer
         President (principal executive officer) and Director


          /s/  Robert J. Chersi
         ----------------------------------------------------
         Robert J. Chersi
         Principal Financial and Accounting Officer and Director


          /s/  Jerome T. Fadden
         ----------------------------------------------------
         Jerome T. Fadden
         Director




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

<PAGE>

                       PAINEWEBBER R&D PARTNERS III, L.P.
                        (A DELAWARE LIMITED PARTNERSHIP)


                          INDEX TO FINANCIAL STATEMENTS



DESCRIPTION                                                        PAGE
-----------                                                        ----

Index to Financial Statements                                      F-1

Selected Financial Data                                            F-2

Quarterly Financial Information (Unaudited)                        F-3

Report of Independent Auditors                                     F-4

Statements of Financial Condition,
    at December 31, 2000 and 1999                                  F-5

Statements of Operations,
    for the years ended December 31, 2000, 1999 and 1998           F-6

Statements of Changes in Partners' Capital (Deficit),
    for the years ended December 31, 2000, 1999 and 1998           F-6

Statements of Cash Flows,
    for the years ended December 31, 2000, 1999 and 1998           F-7

Notes to Financial Statements                                      F-8 to F-12




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





                                      F-1
<PAGE>

<TABLE>
<CAPTION>

PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)


SELECTED FINANCIAL DATA
-------------------------------------------------------------------------------------------------------------------

Years ended December 31,             2000              1999             1998              1997             1996

-------------------------------------------------------------------------------------------------------------------
<S>                             <C>               <C>              <C>               <C>              <C>
Operating Results:

   Revenues                     $  10,710,670     $  4,926,324     $ (1,331,137)     $  6,351,971     $ 40,810,648
   Net income (loss)            $  10,543,808     $  4,762,147     $ (1,500,762)     $  5,930,581     $ 39,513,429

<CAPTION>
Net income (loss) per partnership interest (A):

<S>                             <C>               <C>              <C>               <C>              <C>
   Limited partners             $      208.77     $      94.29     $     (29.72)     $     117.43     $     782.37
   General partner              $  105,438.08     $  47,621.47     $ (15,007.62)     $  59,305.81     $ 395,134.29


Financial Condition:

   Total assets                 $   5,743,455     $  6,866,129     $  9,169,050      $ 10,675,272     $ 32,633,103
   Partners' capital            $   5,657,265     $  6,786,285     $  9,094,845      $ 10,595,607     $ 32,442,803

Distributions to partners:
   Cash                         $  11,672,828     $  7,070,707     $          -      $ 27,777,777     $ 24,895,837

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


(A) Based on 50,000 limited partnership units and a 1% general partnership
    interest.






                                      F-2

<PAGE>

PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)


QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
--------------------------------------------------------------------------------
                                                          Net Income (Loss)
                                                       Per Partnership Unit (A)
                                                     ---------------------------
                                     Net Income      Limited         General
                     Revenues          (Loss)        Partners        Partner
--------------------------------------------------------------------------------
Calendar 2000

4th Quarter       $ (3,201,347)   $ (3,244,727)   $   (64.24)    $ (32,447.27)

3rd Quarter            249,743         207,185          4.10         2,071.85

2nd Quarter         (1,369,686)     (1,414,086)       (28.00)      (14,140.86)

1st Quarter         15,031,960      14,995,436        296.91       149,954.36

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

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)

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

(A) Based on 50,000 limited partnership units and a 1% general partnership
    interest.




                                      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, 2000 and 1999, and the
related statements of operations, changes in partners' capital (deficit), and
cash flows for each of the three years in the period ended December 31, 2000.
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, 2000 and 1999, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.




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

New York, New York
March 9, 2001

                                       F-4

<PAGE>

PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)

STATEMENTS OF FINANCIAL CONDITION


                                                  December 31,     December 31,
                                                          2000            1999
--------------------------------------------------------------------------------
Assets:

     Marketable securities, at market value       $  5,743,455     $ 6,846,730

     Advances to product development projects                -          19,399

                                                  ------------     -----------
Total assets                                      $  5,743,455     $ 6,866,129
                                                  ============     ===========


Liabilities and partners' capital:

     Accrued liabilities                          $     86,190     $    79,844

     Partners' capital                               5,657,265       6,786,285

                                                  ------------     -----------
Total liabilities and partners' capital           $  5,743,455     $ 6,866,129
                                                  ============     ===========

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


                                       F-5

<PAGE>

PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)

<TABLE>
<CAPTION>

STATEMENTS OF OPERATIONS

For the years ended December 31,                                     2000                 1999                   1998
----------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                  <C>                   <C>
Revenues:
      Interest income                                     $       211,215      $       149,437       $         59,496
      Income from product development projects                     23,785                    -                      -
      Unrealized  appreciation (depreciation) of
       marketable securities and investments                    1,009,868            3,079,020             (1,989,383)
      Net realized gain on sale of marketable
        securities and investments                              9,465,802            1,697,867                598,750
                                                            --------------       --------------        ---------------
                                                               10,710,670            4,926,324             (1,331,137)
                                                            --------------       --------------        ---------------

Expenses:
      Expenditures under product development projects                   -                2,385                 24,116
      General and administrative costs                            166,862              161,792                145,509
                                                            --------------       --------------        ---------------
                                                                  166,862              164,177                169,625
                                                            --------------       --------------        ---------------

Net income (loss)                                         $    10,543,808      $     4,762,147       $     (1,500,762)
                                                            ==============       ==============        ===============

Net income (loss) per partnership unit:
      Limited partners (based on 50,000 units)            $        208.77      $         94.29       $         (29.72)
      General partner                                     $    105,438.08      $     47,621.47       $     (15,007.62)

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

<TABLE>
<CAPTION>

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
                                                               Limited              General
For the years ended December 31, 2000, 1999 and 1998          Partners              Partner                Total
----------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                  <C>                   <C>
Balance at January 1, 1998                                $    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

Cash distributions to partners                                (10,000,000)          (1,672,828)           (11,672,828)
Net income                                                     10,438,370              105,438             10,543,808
                                                            --------------       --------------        ---------------

Balance at December 31, 2000                              $     7,155,257      $    (1,497,992)      $      5,657,265
                                                            ==============       ==============        ===============

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

See notes to financial statements.


                                       F-6

<PAGE>

PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)

<TABLE>
<CAPTION>

STATEMENTS OF CASH FLOWS


For the years ended December 31,                                     2000                 1999                   1998
----------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                  <C>                   <C>
Cash flows from operating activities:
Net income (loss)                                         $    10,543,808      $     4,762,147       $     (1,500,762)
Adjustments to reconcile net income (loss)  to
  cash provided by operating activities:
  Unrealized  (appreciation) depreciation
   of marketable securities and investments                    (1,009,868)          (3,079,020)             1,989,383

Decrease (increase) in operating assets:
  Marketable securities                                         2,113,143            5,379,556               (507,277)
  Advances to product development projects                         19,399                2,385                 14,188
  Royalty income receivable                                             -                    -                  9,928

Increase (decrease) in operating liabilities:
  Payable to PaineWebber Development Corporation                        -                    -                 (3,613)
  Accrued liabilities                                               6,346                5,639                 (1,847)
                                                            --------------       --------------        ---------------
Cash provided by  operating activities                         11,672,828            7,070,707                      -
                                                            --------------       --------------        ---------------

Cash flows from financing activities:
  Distributions to partners                                   (11,672,828)          (7,070,707)                     -
                                                            --------------       --------------        ---------------

Decrease in cash                                                        -                    -                      -

Cash at beginning of period                                             -                    -                      -
                                                            --------------       --------------        ---------------

Cash at end of period                                     $             -      $             -       $              -
                                                            ==============       ==============        ===============
</TABLE>
--------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the years ended
December 31, 2000, 1999 and 1998.
--------------------------------------------------------------------------------

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 UBS Americas Inc. (formerly Paine Webber Group Inc.
("PWG")) (1) 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).







----------

(1)  On November 3, 2000, pursuant to the Agreement and Plan of Merger dated as
     of July 12, 2000 by and among PWG, UBS AG and UBS Americas Inc., PWG merged
     with and into UBS Americas Inc. The General Partner does not expect this
     transaction to have a material effect on the Partnership.


                                      F-8
<PAGE>

                       PAINEWEBBER R&D PARTNERS III, L.P.
                        (A DELAWARE LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENTS


(NOTE 1 CONTINUED)

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

                                                           LIMITED      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, 2000, Contribution Payout was
            $1,475 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%


      As of June 20, 2000, the Partnership made a cash distribution which
resulted in aggregate distributions per Unit to reach Contribution Payout as of
this date. As a result, the General Partner was allocated 20% of the total cash
distribution over Contribution Payout. The total distribution amounted to
$11,672,828 ($200 per Unit; $1,672,828 to the General Partner). At December 31,
2000, the Partnership has made cash and security distributions, as valued on the
dates of distribution, since inception of $1,483 and $98 per Unit, respectively.

      Profits and losses of the Partnership are allocated as follows: (i) until
cumulative profits and losses for each Unit equals Contribution Payout, 99% to
Limited Partners and 1% to the General Partner, (ii) after Contribution Payout
and until cumulative profits and losses for each unit equals Final Payout, 80%
to Limited Partners and 20% to the General Partner, and (iii) after Final
Payout, 75% to Limited Partners and 25% to the General Partner. As of December
31, 2000, the cumulative profits of the Partnership were $862 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.

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

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


                                       F-9
<PAGE>
                       PAINEWEBBER R&D PARTNERS III, L.P.
                        (A DELAWARE LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENTS


(NOTE 2 CONTINUED)

      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.

      In 1999, since the Partnership's warrants were currently exercisable and
the Sponsor Company's stock was publicly traded, the warrants were carried at
intrinsic value (the excess of market price per share over the exercise price
per share), which approximated fair value.

3.    MARKETABLE SECURITIES

      The Partnership held the following marketable securities at:

<TABLE>
<CAPTION>
                                               DECEMBER 31, 2000          DECEMBER 31, 1999
                                            -----------------------   -----------------------
                                             CARRYING                  CARRYING
                                               VALUE        COST         VALUE        COST
                                            ----------   ----------   ----------   ----------
<S>                                         <C>          <C>          <C>          <C>
Money market fund                           $  542,944   $  542,944   $1,450,164   $1,450,164

Genzyme Molecular Oncology
   (461,091 and 713,091 common shares at
   December 31, 2000 and December 31,
   1999, respectively)                       4,236,274      646,609    4,991,638    1,000,000

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

Repligen Corporation
   (285,700 common shares at December 31,
   2000 and a warrant to purchase 133,000
   common shares at December 31, 1999)         964,237      901,433       83,124           --
                                            ----------   ----------   ----------   ----------
                                            $5,743,455   $2,090,986   $6,846,730   $2,450,164
                                            ==========   ==========   ==========   ==========
</TABLE>

      During the year ended December 31, 2000 the Partnership sold 252,000
shares of Genzyme Molecular Oncology ("GMO") for proceeds of $8,968,599 (average
price per share of $35.59). The shares had a carrying value as of December 31,
1999 of $1,764,000 ($7.00 per share) and, accordingly, the Partnership
recognized a gain from the sale of $7,204,599. As of December 31, 2000 the
Partnership recorded its remaining investment of 461,091 shares at the market
value of $9.1875. Accordingly, the Partnership recognized unrealized
appreciation of $1,008,637 for the year then ended. In November 1998, GMO
commenced trading on the NASDAQ National Market. The Partnership recorded the
investment of 713,091 shares 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 $4,991,637 ($7.00 per share) and, accordingly, the Partnership
recognized unrealized appreciation of $2,674,092 for the year ended December 31,
1999.

                                      F-10
<PAGE>
                       PAINEWEBBER R&D PARTNERS III, L.P.
                        (A DELAWARE LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENTS

(NOTE 3 CONTINUED)

      At December 31, 1999 the Partnership owned warrants to purchase 133,000
and 252,700 shares of Repligen Corporation ("Repligen") at exercise prices of
$2.50 per share and $3.50 per share, respectively. The market value of Repligen
as of that date was $3.125 per share. The Partnership recorded its warrant to
purchase 133,000 shares at the intrinsic value of $83,124. During the year ended
December 31, 2000, the Partnership exercised the warrants 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). The Partnership
recognized a gain from the sale for the year ended December 31, 2000 of
$1,246,957. The market value of the remaining 285,700 shares as of December 31,
2000 was $3.375 per share.

      The Partnership owned a warrant to purchase 7,293 shares of Alkermes, Inc.
("Alkermes") at an exercise rice 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. During the year
ended December 31, 2000 the Partnership exercised the warrant at an aggregate
exercise price of $36,465 and sold the Alkermes shares for aggregate net
proceeds of $1,372,515 ($188.20 per share). The Partnership recognized a gain
from the sale of $1,014,246 for the year ended December 31, 2000.

      During the year ended December 31, 1999, the Partnership sold its shares
of Medarex, Inc. ("Medarex") for aggregate proceeds of $4,304,067 (average price
of $5.9538 per share). The carrying value of the shares at December 31, 1998,
was $2,191,336 ($3.03125 per share). Accordingly, the Partnership recognized a
gain upon the sale for the year ended December 31, 1999 of $2,112,731. Also,
during the year ended December 31, 1999, the Partnership sold its investments in
Biocompatibles International plc ("Biocompatibles"), Gensia Sicor, Inc.
("Gensia") 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 for the year ended December 31, 1999 of
$140,010. Aggregate proceeds from the sale of Gensia were $558,564 (average
price of $4.05 per share) resulting in a loss for the year ended December 31,
1999 of $65,716. The sale of Pharming generated proceeds of $796,804 ($6.15 per
share) which resulted in a loss of $489,159 for this same period.

      The market value of the Biocompatibles 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.
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 FASB 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 if
$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 of 14,395 restricted Class A shares was
converted into 129,555 ordinary shares (as a result of a 9:1 stock split).

                                      F-11
<PAGE>

                       PAINEWEBBER R&D PARTNERS III, L.P.
                        (A DELAWARE LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENTS



(NOTE 3 CONTINUED)

The shares were not salable until January 1, 1999. In accordance with FASB
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.

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"; currently, UBS PaineWebber Inc.)

      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. As of
December 31, 2000 the Partnership is carrying these investments at zero.

      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.
As of December 31, 2000, the Partnership had exercised all of its warrants.

6.    INCOME TAXES

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



                                      F-12
<PAGE>

EXHIBIT A

PAINEWEBBER R&D PARTNERS III, L.P.                            2000 ANNUAL REPORT
--------------------------------------------------------------------------------

To Our Limited Partners:

During 2000, PaineWebber R&D Partners III, L.P.'s (the "Partnership" or "R&D
Partners III") sponsor companies reported the continuation of the clinical
trials from the products still under observation from Alkermes Clinical
Partners, L.P. and Cephalon Clinical Partners, L.P. Depending upon the outcome
of such trials, the Partnership may explore options available for liquidating
its investments in the sponsor development programs so that the Partnership may
move towards termination. Gensia Development Corporation, the general partner of
Gensia Clinical Partners, L.P. ("GCP") reports that it distributed a proxy
statement to its limited partners which, if approved, would result in the
termination of GCP.

Since its inception in 1991, R&D Partners III has distributed cash of $14,830
for every $10,000 investment in the Partnership through December 31, 2000. In
addition to potential returns from the product development programs and equity
investments, investors received warrants from R&D Partners III allowing
investors to purchase the common stock of certain sponsor companies at
predetermined prices. The value of all distributed warrants has ranged from
$980, as valued based on the respective dates of distribution, to $11,554 at
peak, per $10,000 investment in R&D Partners III. The Partnership continues to
hold 461,091 shares of Genzyme Molecular Oncology and 285,700 shares of Repligen
Corporation at year end. The Partnership intends to liquidate such positions and
distribute net proceeds according to market conditions.

The following Product Portfolio Status and Equity Investment sections contain
information only on those product development programs and investments that are
currently active. The information contained in these sections has been obtained
from public and other sources believed by the Partnership to be accurate,
although the Partnership has not verified such information. Therefore, neither
the General Partner of the Partnership, the Partnership, nor their affiliates
can assume any 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 Partners III.

Sincerely,



Robin Stanley
Vice President
PaineWebber Development Corporation


<PAGE>


P R O D U C T   P O R T F O L I O    S T A T U S


ALKERMES, INC.


COMPANY
Alkermes continues to establish itself as one of the world's premier drug
delivery companies through the application of sophisticated drug delivery
systems to pharmaceutical agents. Alkermes' diversified technology portfolio
currently consists of four proprietary delivery systems, including Cereport(R)
(formerly known as RMP-7(TM)), a blood brain barrier permeabilizer.


PROGRAM
In 1992, R&D Partners III committed $6.0 million to Alkermes Clinical Partners
L.P., a $46.0 million limited partnership formed to complete the development and
human clinical trials of Cereport. Cereport is designed to improve the passage
into the brain of pharmaceutical compounds by transiently increasing the
permeability of the blood-brain barrier.

In 1997, Alkermes entered into an agreement with ALZA Corporation ("ALZA")
relating to the development and commercialization of Cereport. ALZA made a $10
million payment to Alkermes to fund the clinical development of Cereport. In
return, ALZA received the option to acquire exclusive worldwide
commercialization rights to Cereport.

Alkermes reports that during 2000 it completed two clinical trials using
Cereport in combination with carboplatin for the treatment of brain tumors. The
Phase I clinical trial, ALK-01-042, which was a collaborative study with the
National Cancer Institute, ("NCI") was designed to study Cereport plus
carboplatin with radiotherapy in pediatric patients with newly diagnosed brain
stem gliomas. The treatment evaluation for this study involves follow-up
evaluations at six weeks, every three months for two years, every six months for
three years and then once a year thereafter.

The Phase II clinical trial, evaluating intravenous Cereport and carboplatin in
patients with childhood brain tumors that have not responed to previous
treatment, was also a collaborative study with the NCI. Patients received
infusions of carboplatin and Cereport for two days every four weeks for up to
twelve courses and will receive follow-up evaluations every three months. These
evaluations are continuing and data is to be reviewed this year.


WARRANT
R&D Partners 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 Partners III, with an exercise price of
$5.00 per share

<PAGE>


through March 31, 2000. The available gain from the distributed Alkermes warrant
has ranged from $60 at distribution to $7,680 per $10,000 investment in R&D III.
R&D Partners III continued to hold a warrant to purchase 7,293 shares at an
exercise price of $5.00 per share. In March 2000, the Partnership exercised the
warrant and sold the underlying shares for an average net sales price of $188.20
per share. These proceeds were included in the June 2000 distribution to the
limited partners.


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 Partners 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(R), a product for use in the treatment of
amyotrophic lateral sclerosis ("ALS") and certain peripheral neuropathies.
Myotrophin is a recombinant form of an insulin-like growth factor, a naturally
occurring neurotrophic factor that is believed to participate in the nervous
system's normal attempt to recover from injury. ALS is a fatal disorder of the
nervous system characterized by chronic, progressive degeneration of motor
neurons.

In 1996, Cephalon submitted a New Drug Application with the FDA for Myotrophin.
Cephalon continues to report that the status of the U.S. regulatory approval of
the Myotrophin Injection application for the treatment of ALS continues to
remain uncertain. To date, the FDA has not released a formal statement regarding
the status of Myotrophin. Cephalon reports it is continuing to conduct an
exploratory study in small fiber peripheral neuropathy and they will continue to
investigate alternatives that would allow the development of Myotrophin to
proceed.


WARRANT
R&D Partners 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 Partners 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 at distribution to $3,018 per $10,000 investment in R&D
Partners III.


<PAGE>


SICOR INC.


COMPANY
Gensia Sicor Pharmaceuticals ("GSP") is a wholly owned subsidiary of SICOR Inc.
The company's strategy is targeted toward acute-care multisource products in the
fields of oncology, cardiology and anesthesiology. It also offers full service
contract manufacturing support and service to a number of pharmaceutical and
biotechnology companies.


PROGRAM
R&D Partners III committed $4.0 million to Gensia Clinical Partners, L.P.
("GCP"), a $26.3 million limited partnership formed to complete the development
and human clinical trials of the GenESA(R) System, a product designed to enhance
the diagnosis of cardiovascular disease. 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 time. The GCP
Purchase Option was granted in connection with the GCP partnership agreement in
October 1997, when R&D Partners III received 137,772 shares of Gensia common
stock as the "milestone payment" from Gensia. R&D Partners III liquidated these
shares in 1999 at an average net price of $4.05 per share and distributed the
proceeds in October 1999.

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 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, Gensia Sicor and Automedics also informed
Protocol Systems, Inc., 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.

In November 2000, Gensia Development Corporation, the general partner of GCP,
distributed a termination proposal to the limited partners of GCP, which, if
approved, would result in the termination of GCP. Gensia Development Corporation
is recommending that the limited partners of GDC approve the termination as it
believes there are no alternatives left to maximize the value of the technology
owned by GCP.


WARRANT
R&D Partners 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 Partners 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. The available gain from the distributed Gensia warrant has ranged
from $302 to $856 per $10,000 investment in R&D Partners III.


<PAGE>


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 of production of therapeutic antibodies.


PROGRAM
R&D Partners III committed $6.0 million to Repligen Clinical Partners ("RCP"), a
$45 million limited partnership formed to fund further clinical development of
recombinant Platelet 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. In 1996,
Repligen announced to limited partners of RCP, including R&D Partners III, that
the company terminated the research funding program with rPF4 and returned the
rights to rPF4 to RCP. The limited partners of RCP voted to terminate the
partnership in October 2000.


WARRANT
R&D Partners III received 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 at an exercise price of $3.50 per share. During the first quarter
2000, R&D Partners III exercised all 385,700 warrants for an aggregate exercise
price of $1,216,950. The Partnership sold 100,000 shares in March 2000 at an
average net price per share of $15.84. The Partnership continues to hold 285,700
shares, which it intends to liquidate subject to market conditions. As of
December 31, 2000, the market value of Repligen was $3.375 per share.


E Q U I T Y   I N V E S T M E N T S


GENZYME MOLECULAR ONCOLOGY

R&D Partners III funded $5.0 million to a 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 Series C Convertible Preferred stock. In 1997,
PGI was acquired by Genzyme Corporation in exchange for approximately four
million shares of Genzyme Molecular Oncology ("GZMO"), a Genzyme private
tracking stock. R&D Partners III's total investment in PGI preferred shares were
converted into 713,091 restricted shares of GZMO. In November 1998, the GZMO
shares commenced trading on the NASDAQ

<PAGE>


National Market. During the first quarter of 2000, the Partnership liquidated
252,000 shares of GZMO for net proceeds of $8.9 million, for an average sale
price of $35.59 per share. Proceeds of the GZMO shares were included in the
distribution made on June 14, 2000. The Partnership currently holds 461,091
common shares of GZMO. The price per share as of December 31, 2000 was $9.1875.

GZMO is developing a new generation of cancer products focusing on cancer
vaccines, angiogenesis inhibitors and cancer pathway regulators. It is shaping
these new therapies through the integration of its gene discovery, gene therapy,
small molecule drug discovery, and protein therapeutic efforts. GZMO has
initiated a Phase I/II clinical trial for a melanoma cancer vaccine and a breast
cancer vaccine. They have completed two Phase I cancer vaccine studies in over
50 patients with late stage melanoma. The results of these studies showed that
the vaccine was safe and well-tolerated, with significant tumor regression in a
small subset of patients. GZMO continues its efforts to develop cancer
immunotherapies, angiogenesis inhibitors and cancer pathway regulators, by
entering into collaborations with academic and commercial leaders in each of
these fields. GZMO has formed over two dozen commercial and academic
collaborations since its inception.