**United
      States**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**Form
        10-K**


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


**the
      Securities Exchange Act of 1934.**




**For
      the fiscal year ended December 31, 2006**




**or**




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


**Securities
      Exchange Act of 1934.**




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





Commission
      File Number 33-35938




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


(Exact
      name of registrant as specified in its charter)





**Delaware**
            **13-3588219**(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)**1285
                Avenue of the Americas, New York, New York**
            **10019**(Address
                of principal executive offices)
            (Zip
                code)




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




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




Name
                of each exchange onTitle
                of each class
            Which
                registeredNone
            None




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




Limited
      Partnership Units




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




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




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Exchange Act. Yes  oNo x .




Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes xNo
o




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of the Registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K (X). Yes o
      No x





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




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
o 
No x







**SPECIAL
      NOTE REGARDING**


**FORWARD
      LOOKING STATEMENTS**





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


2




**PART
      I**




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




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




As
      of
      December 31, 2005, the Partnership had an investment in Cephalon Clinical
      Partners, L.P. (“CCP”) which it sold during the year ended December 31, 2006.
      (See Note 5 of the “Notes to Financial Statements” included in this filing on
      Form 10-K.) In addition, as of December 31, 2006, the Partnership owned
      marketable securities as described in Note 3 of the “Notes to Financial
      Statements” included in this filing on Form 10-K.




The
      Partnership’s Agreement of Limited Partnership (the “Agreement”) provides that
      the Partnership will terminate upon the occurrence of certain events, which
      include the sale, authorized by an affirmative vote of a majority-in-interest,
      of all of the Partnership’s assets.




On
      February 15, 2007, the Partnership filed with the Securities and Exchange
      Commission a definitive Schedule 14A which included a Consent Solicitation
      Statement, dated February 16, 2007, in which the General Partner sought the
      consent of the Partnership’s Limited Partners (hereinafter defined) to a
      proposal to sell all of the assets of the Partnership which, if approved, would
      result in a final liquidating distribution and termination of the Partnership.
      The solicitation expired on March 28, 2007. The proposal was approved by the
      required majority-in-interest of limited partnership interests. As a result,
      the
      Partnership is required to sell its remaining assets, including its marketable
      securities, in open-market transactions at prevailing prices prior to April
      15,
      2007.




**Partnership
      Management**




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


3


**(Item
      1 Continued)**





**Distributions**





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





Limited
              Partners
            
            General
              PartnerI.
            
            Until
                the value of the aggregate distributions for each limited partnership
                unit
                (“Unit”) equals $1,000 plus simple interest on such amount accrued at 5%
                per annum (“Contribution Payout”). Contribution Payout as of December 31,
                2006 is $1,775 per Unit
            
            
            99
            %
            
            1
            %II.
            
            After
                Contribution Payout and until the value of the aggregate distributions
                for
                each Unit equals $5,000 (“Final Payout”)
            
            
            80
            %
            
            20
            %III.
            
            After
                Final Payout
            
            
            75
            %
            
            25
            %




During
      the year ended December 31, 2000, the Partnership made a cash distribution
      which
      resulted in aggregate distributions per Unit to reach Contribution Payout.
      As a
      result, the General Partner will be allocated 20% of future cash distributions
      until Final Payout (except for distributions which are made in connection with
      the dissolution of the Partnership). No cash or security distributions have
      been
      remitted by the Partnership since this time. As of this date, the Partnership
      has made cash and security distributions, as valued on the dates of
      distribution, since inception of $1,483 and $98 per Unit, respectively. The
      Agreement provides that upon termination of the Partnership, the Partnership’s
      assets will be distributed to all Partners (after satisfying claims of
      creditors) pro rata in accordance with their respective capital account balances
      on the date of termination.




**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, 2006, the
      cumulative profits of the Partnership were $784 per Unit.




Pursuant
      to the terms of the Agreement, upon termination of the Partnership, the General
      Partner is required to pay to the Partnership an amount in cash equal to the
      debit balance in the General Partner’s capital account. Such amount then becomes
      part of the assets of the Partnership that will be available for distribution
      to
      the Partners, after satisfying claims of creditors. As of December 31, 2006,
      the
      debit balance in the General Partner’s capital account was $1,536,932. In 1995,
      the General Partner was named as a defendant in a class action lawsuit relating,
      among other things, to the sale of the Partnership’s limited partnership
      interests. In connection with the settlement of that lawsuit, in July 2003,
      the
      General Partner deposited in escrow with counsel for the plaintiffs in the
      lawsuit the amount of $1,497,992. Under the terms of that settlement, the
      escrowed funds may only be used to fund the negative balance in the General
      Partner’s capital account upon the Partnership’s termination.




4




**(Item
      1 Continued)**




**Other**




At
      December 31, 2006, the Partnership had no employees, and PWDC had no employees
      other than its executive officers (see Item 10. Directors
      and Executive Officers of the Registrant ).
      The
      Partnership was engaged in one primary business segment, the management of
      investments in technology and biotechnology products and companies.





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





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





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





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




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




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




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




None.




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




None.




5




**PART
      II**




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




There
      is
      no existing public market for the Units, and no such market is expected to
      develop. Effective
      December 1, 2005, the General Partner no longer permits any sale, assignment
      or
      other transfers of units, except transfers that occur as a result of the laws
      of
      descent and distribution or by operation of law. As
      of
      December 31, 2006, there were 4,449 Limited Partners. The Partnership purchased
      none of its limited partnership Units during the year ended December 31,
      2006.




The
      Partnership distributes to the Partners, when available, the net proceeds from
      royalty distributions, net proceeds from dispositions of portfolio securities
      and any other cash in excess of amounts that are necessary for the operation
      of
      the Partnership’s business. During the years ended December 31, 2006, 2005,
      and 2004, the Partnership made no distributions to the Partners.




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




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




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




**Liquidity
      and Capital Resources**




Partners’
      capital of $2.3 million at December 31, 2005, decreased to $1.8 million at
      December 31, 2006, resulting from the Partnership’s recognition of a net loss of
      $0.5 million (as discussed in Results of Operations below).




The
      Partnership’s funds are invested in marketable securities until cash is needed
      to pay for the ongoing management and administrative expenses of the Partnership
      or for distribution to the Partners. Liquid assets decreased from $2.3 million
      at December 31, 2005 to $1.7 million at December 31, 2006. The decrease of
      $0.6
      million resulted from the decrease in market values as of these dates of $0.3
      million and the sale of marketable securities to pay expenses having a value
      at
      December 31, 2005 of $0.3 million. On December 1, 2005, the Board of Directors
      of the General Partner authorized the Partnership to sell at the then prevailing
      market price at the end of each month, as many shares of marketable securities
      required to pay the Partnership’s operating expenses for which no other funds
      are available to the Partnership.




**Results
      of Operations**




Year
      ended December 31, 2006 compared to the year ended December 31,
      2005:





Net
      income (loss) for the years ended December 31, 2006 and 2005 was $(0.5) million
      and $0.3 million, respectively. The unfavorable variance of $0.8 million
      resulted from a decrease in revenues of $0.7 million and an increase in expenses
      of $0.1 million.





Net
      revenues were $(0.3) million for the year ended December 31, 2006 as compared
      to
      $0.4 million for the year ended December 31, 2005. Unrealized appreciation
      (depreciation) for the years ended December 31, 2006 and 2005 was $(0.4) million
      and $0.5 million, respectively. Realized gain on sale of investment for the
      year
      ended December 31, 2006 was $0.1 million. At December 31, 2006, the
      Partnership’s investment in 0.024 million shares of Genzyme General Division
      (“GENZ”) had a market value of $61.58 per share as compared to $70.78 per share
      as of December 31, 2005. The Partnership recognized unrealized depreciation
      of
      $0.2 million for the year ended December 31, 2006. The market value of Repligen
      Corporation (“Repligen”) decreased from $4.00 per share as of
      December





6




**(Item
      7 Continued)**





31,
      2005
      to $2.81 per share as of December 31, 2006 resulting in the recognition of
      unrealized depreciation of $0.1 million on its investment of 0.085 million
      shares. Also included in unrealized depreciation in the accompanying Statements
      of Operations for the year ended December 31, 2006, is the amount of $0.1
      million representing the change in net unrealized appreciation relating to
      the
      sale of Repligen and GENZ shares. At December 31, 2005, the Partnership’s
      investment in 0.025 million shares of GENZ had a market value of $70.78 per
      share as compared to $58.07 per share as of December 31, 2004. The Partnership
      recognized unrealized appreciation of $0.3 million for the year ended December
      31, 2005. The market value of the Partnership’s investment in Repligen of 0.131
      million shares as of December 31, 2005 was $4.00 per share as compared to $2.88
      per share as of December 31, 2004. The Partnership recognized unrealized
      appreciation of $0.2 million for the year ended December 31, 2005. During the
      year ended December 31, 2006, pursuant to an Offer to Purchase by Cephalon,
      Inc., the Partnership sold its partnership interest in CCP for proceeds of
      $0.1
      million and recognized a gain upon the sale of this amount.





Expenses
      increased by $0.1 million from December 31, 2005 to December 31, 2006 resulting
      primarily from increases in legal and other expenses relating to the General
      Partner’s efforts to formulate a plan for the liquidation of the Partnership’s
      assets and termination of the Partnership.





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





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





Net
      revenues were $0.4 million for the year ended December 31, 2005 as compared
      to
      $(0.3) million for the year ended December 31, 2004. Unrealized appreciation
      (depreciation) for the years ended December 31, 2005 and 2004 was $0.5 million
      (refer to year ended December 31, 2006 compared to the year ended December
      31,
      2005) and $(0.2) million, respectively. At December 31, 2004, the Partnership’s
      investment in 0.026 million shares of GENZ had a market value of $1.5 million
      ($58.07 per share) as compared to a market value of $1.3 million ($49.29 per
      share) as of December 31, 2003. The Partnership recognized unrealized
      appreciation of $0.2 million for the year ended December 31, 2004. The market
      value of the Partnership’s investment in Repligen of 0.192 million shares as of
      December 31, 2004 was $0.54 million ($2.88 per share) as compared to $0.84
      million ($4.37 per share) as of December 31, 2003. The Partnership recognized
      unrealized depreciation of $0.4 million for the year ended December 31, 2004,
      which included the change in unrealized appreciation previously recorded of
      $0.1
      million related to the sale of Repligen shares during the year ended December
      31, 2004.





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




7




**(Item
      7 Continued** )





**Critical
      Accounting Policies**





The
      General Partner makes judgments in valuing its investments in product
      development projects. (See Note 5 of the “Notes to Financial Statements”
included in this filing on Form 10-K.) The General Partner’s judgment involves
      estimating the prospect of the projects producing a commercially viable product.
      These estimates are based on the General Partner’s experience in evaluating
      similar investments, publicly
      available information from the sponsor companies of the projects and other
      sources the General Partner considers reliable. Based on these estimates, as
      of
      December 31, 2005, the Partnership is carrying its investment, a limited
      partnership interest in CCP, at zero. As of December, 31, 2006, the interest
      in
      CCP had been sold.





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





The
      Partnership’s non-cash assets subject to market risk consist of 24,270 shares of
      GENZ and 85,300 shares of Repligen. The Partnership acquired these shares in
      connection with its investments in projects. The Partnership holds these shares
      until cash is needed for the payment of Partnership expenses or to make cash
      distributions to the Partners.





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





The
      table
      below summarizes the Partnership’s equity price risks as of December 31, 2006
      and 2005 and shows the effects of a hypothetical 30% increase and a 30% decrease
      in market prices as of those dates. The selected hypothetical change does not
      reflect what could be considered the best or worst case scenarios. Indeed,
      results could be far worse due to the nature of the equity markets.





Market
                Value
            
            Hypothetical
              Price
                Change
            
            Estimated
              Market
                Value After Hypothetical
              Change
                in Price
            
            Estimated
              Partners’
                Capital
              After
                Hypothetical
              Change
                inPriceAs
                of December 31, 2006
            
            $
            1,734,266
            
            
            30%
                increase
              30%
                decrease
            
            $
              $
            2,254,546
              1,213,986
            
            $
              $
            2,283,533
              1,242,973As
                of December 31, 2005
            
            $
            2,320,067
            
            
            30%
                increase
              30%
                decrease
            
            $
              $
            3,016,087
              1,624,047
            
            $
              $
            2,941,071
              1,549,031




8




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




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




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


Statements
      of Financial Condition (Page F-5)


Statements
      of Operations (Page F-6)


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


Statements
      of Cash Flows (Page F-7)


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




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




None.





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




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




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


9




**PART
      III**




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




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




Pursuant
      to the Management Contract, the General Partner is responsible for the
      management and administrative services necessary for the operation of the
      Partnership. The
      following table sets forth certain information with respect to the persons
      who
      are directors and executive officers of the General Partner as of December
      31,
      2006:




**Name**
            
            **Age**
            
            **Position
                and Date Appointed****Directors**Michael
                Schweitzer
            
            43
            
            Director
                since November 2006Rosemarie
                Albergo
            
            49
            
            Director
                since December 2003**Executive
                Officers**Clifford
                Watttley
            
            57
            
            President
                since October 3, 2006Rosemarie
                Albergo
            
            49
            
            Assistant
                Treasurer since December 2003Tambra
                King
            
            45
            
            Secretary
                since November 2006




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


10




**(Item
      10 Continued)**




**Directors**




**Michael
      Schweitzer** joined
      UBS Financial Services Inc. (“UBS FS”). in August 2003 as Managing Director and
      Co-Head of Private Wealth Management. In September 2005, he was promoted to
      Chief Operating Officer, Products and Services - North America. In September
      2006, he was named Deputy Head of Products and Services and Head of P&S
      Consulting in addition to his current role as COO. Prior to joing UBS, he spent
      15 years at Merrill Lynch and Co. where he held a variety of positions including
      Financial Advisor, Producing Manager, District Sales manager and Branch Manager.
      Additionally, he has held positions as National Sales Manager of Private Client,
      Head of Trust and Insurance Sales, and National Director, Private Weath
      Management.




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




**Executive
      Officers**




**Clifford
      Wattley,** President, is a Director in Alternative Investments US of UBS FS having joined
      Paine Webber Group Inc., a predecessor firm, in 1986. He also was employed
      previously by Paine Webber, Jackson & Curtis from 1979 to 1980. From 1986 to
      1992, Mr. Wattley participated in PaineWebber’s Principal Transactions Group.
      Since 1992, Mr. Wattley has been a member of the Alternative Investments US
      where his responsibilities have included the management of a number of
      partnerships in various asset classes and private equity feeder funds. He holds
      a Bachelor of Science degree in engineering from Columbia University and a
      Masters in Business Administration from Harvard University.




**Rosemarie
      Albergo** ,
      Assistant Treasurer, see directors above.




**Tambra
      King** ,
      Secretary, has served as Secretary of PWDC since November 2006 and as Director
      and Secretary of UBS FS an affiliate of the Company, since July 2006. Prior
      to
      her association with UBS FS, Ms. King served as Director of Legal Administration
      and Assistant Secretary of Triarc Companies, Inc. from April 2004 until July
      2006. Prior thereto, Ms. King was Secretary of Centre Insurance Company from
      November 2000 until April 2004 and served in various positions with Trace
      International Holdings, Inc., most recently as Vice President and
      Secretary.




**Code
      of Ethics**




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




11




**Item11.**
            **Executive
                Compensation**




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




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




There
      are
      no investors known to the Partnership to be beneficial owners at March 1, 2007
      of more than five percent of the Registrant’s Units. No member of management of
      PWDC had any beneficial interest in the Registrant’s Units.




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




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




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




**Audit
      Fees**




Fees
      for
      audit services totaled $68,000 for the years ended December 31, 2006 and
      2005,  including
      fees associated with the annual audit and the review of the Partnership’s
      quarterly reports on Form 10-Q.




**Tax
      Fees**




Fees
      for
      tax services, including tax compliance and tax advice, totaled $13,000 and
      $9,500 for the years ended December 31, 2006 and 2005,
      respectively.




**Audit-Related
      and All Other Fees**




No
      fees
      were paid to the principal accountant for audit-related or other services for
      the years ended December 31, 2006 and 2005.




12




**PART
      IV**




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




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




**Exhibits**




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





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





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





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




**Financial
      Statements**




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




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


Statements
      of Financial Condition (Page F-5)


Statements
      of Operations (Page F-6)


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


Statements
      of Cash Flows (Page F-7)


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


13


**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
      2007.


**PAINEWEBBER
                R&D PARTNERS III, L.P.**
              (General
                Partner)By:
            PaineWebber
                Development Corporation
              (General Partner)By:Clifford
                Wattley
              President
              (Principal
                Executive Officer)


By:Rosemarie
                    Albergo
                  Assistant
                    Treasurer
                  (Principal
                    Financial and Accounting
                    Officer)


14


**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
      2007.


**PAINEWEBBER
                  R&D PARTNERS III, L.P.**By:
              PaineWebber
                Development Corporation
                (General Partner)By:
              /s/
                Clifford WattleyClifford
                  Wattley
                President
                (Principal
                  Executive Officer)
 By:
                /s/
                  Rosemarie AlbergoRosemarie
                      Albergo
                    Assistant
                      Treasurer
                    (Principal
                      Financial and Accounting
                      Officer)




15


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


**(a
      Delaware Limited Partnership)**




**Index
      to Financial Statements**




Description
              
              PageIndex
                  to Financial Statements
              
              F-1Selected
                  Financial Data
              
              F-2Quarterly
                  Financial Information (Unaudited)
              
              F-3Report
                  of Independent Registered Public Accounting Firm
              
              F-4Statements
                  of Financial Condition, at December 31, 2006 and 2005
              
              F-5Statements
                  of Operations, for the years ended December 31, 2006, 2005 and
                  2004
              
              F-6Statements
                  of Changes in Partners’ Capital (Deficit), for the years ended December
                  31, 2006, 2005 and 2004
              
              F-6Statements
                  of Cash Flows, for the years ended December 31, 2006, 2005 and
                  2004
              
              F-7Notes
                  to Financial Statements
              
              F-8
                  to F-12




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




F-1


**PAINEWEBBER
        R&D PARTNERS III, L.P.**
 **(a
        Delaware Limited Partnership)**
  **Selected
        Financial Data**
  At
                  and for the years ended December 31,
              
              2006
              
              2005
              
              2004
              
              2003
              
              2002Operating
                  Results:Revenues
              
              $
              (239,597
              )
              $
              403,189
              
              $
              (249,105
              )
              $
              858,752
              
              $
              (2,703,179
              )Net
                  income (loss)
              
              $
              (481,798
              )
              $
              257,374
              
              $
              (451,876
              )
              $
              614,931
              
              $
              (2,866,290
              )Net
                  income (loss) per partnership interest (A):Limited
                  partners
              
              $
              (9.54
              )
              $
              5.10
              
              $
              (8.95
              )
              $
              12.18
              
              $
              (56.75
              )General
                  partner
              
              $
              (4,817.98
              )
              $
              2,573.74
              
              $
              (4,518.76
              )
              $
              6,149.31
              
              $
              (28,622.90
              )Financial
                  Condition:Total
                  assets
              
              $
              1,872,992
              
              $
              2,333,114
              
              $
              2,082,760
              
              $
              2,533,265
              
              $
              1,907,451Partners'
                  capital
              
              $
              1,763,253
              
              $
              2,245,051
              
              $
              1,987,677
              
              $
              2,439,553
              
              $
              1,824,622Distributions
                  to partners:Cash
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -




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




F-2


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


**Quarterly
        Financial Information (Unaudited)**
  Net
                  Income (Loss)Net
                  income
              
              Per
                  Partnership Unit (A)Revenues
              
              (Loss)
              
              Limited
                  Partners
              
              General
                  PartnerCalendar
                  20064th
                  Quarter
              
              $
              (63,761
              )
              $
              (132,169
              )
              $
              (2.62
              )
              $
              (1,321.69
              )3rd
                  Quarter
              
              
              203,914
              
              
              165,955
              
              
              3.29
              
              
              1,659.552nd
                  Quarter
              
              
              (246,130
              )
              
              (327,336
              )
              
              (6.48
              )
              
              (3,273.36
              )1st
                  Quarter
              
              
              (133,620
              )
              
              (188,248
              )
              
              (3.73
              )
              
              (1,882.48
              )Calendar
                  20054th
                  Quarter
              
              $
              94,583
              
              $
              56,750
              
              $
              1.12
              
              $
              567.503rd
                  Quarter
              
              
              425,669
              
              
              381,109
              
              
              7.55
              
              
              3,811.092nd
                  Quarter
              
              
              136,355
              
              
              103,028
              
              
              2.04
              
              
              1,030.281st
                  Quarter
              
              
              (253,418
              )
              
              (283,513
              )
              
              (5.61
              )
              
              (2,835.13
              )Calendar
                  20044th
                  Quarter
              
              $
              295,376
              
              $
              252,437
              
              $
              5.00
              
              $
              2,524.373rd
                  Quarter
              
              
              43,212
              
              
              (19,187
              )
              
              (0.38
              )
              
              (191.87
              )2nd
                  Quarter
              
              
              (139,432
              )
              
              (187,183
              )
              
              (3.71
              )
              
              (1,871.83
              )1st
                  Quarter
              
              
              (448,261
              )
              
              (497,943
              )
              
              (9.86
              )
              
              (4,979.43
              )




F-3










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





We
      have
      audited the accompanying statements of financial condition of PaineWebber
      R&D Partners III, L.P. (the “Partnership”) as of December 31, 2006 and 2005,
      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, 2006. These financial statements are the responsibility of the
      Partnership’s management. Our responsibility is to express an opinion on these
      financial statements based on our audits.





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





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of the Partnership at December 31,
      2006 and 2005, and the results of its operations and its cash flows for each
      of
      the three years in the period ended December 31, 2006, in conformity with U.S.
      generally accepted accounting principles.






/s/
      Ernst
& Young LLP




New
      York,
      New York


March
      28,
      2007




F-4


**PAINEWEBBER
        R&D PARTNERS III, L.P.**
 **(a
        Delaware Limited Partnership)**
  **Statements
        of Financial Condition**
  December
                  31,
              
              December
                  31,2006
              
              2005Asset:Marketable
                  securities, at market value
              
              $
              1,739,992
              
              $
              2,333,114Other
                  receivable
              
              
              133,000
              
              
              -Total
                  assets
              
              $
              1,872,992
              
              $
              2,333,114Liabilities
                  and partners' capital:Accrued
                  liabilities
              
              $
              109,739
              
              $
              88,063Partners'
                  capital
              
              
              1,763,253
              
              
              2,245,051Total
                  liabilities and partners' capital
              
              $
              1,872,992
              
              $
              2,333,114


See
        notes
        to financial statements.


F-5
 
  **PAINEWEBBER
          R&D PARTNERS III, L.P.** **(a
            Delaware Limited Partnership)**
  **Statements
            of Operations**
  For
                    the years ended December 31,
                
                2006
                
                2005
                
                2004Revenues:Interest
                    income
                
                $
                345
                
                $
                770
                
                $
                76Realized
                    gain on sale of investment
                
                
                133,000
                
                
                -
                
                
                -Realized
                    gain (loss) on sale of marketable securities
                
                
                41,260
                
                
                (60,735
                )
                
                (78,022
                )Unrealized
                    (depreciation) appreciation ofmarketable
                    securities
                
                
                (414,202
                )
                
                463,154
                
                
                (171,159
                )(239,597
                )
                
                403,189
                
                
                (249,105
                )Expenses:General
                    and administrative costs
                
                
                242,201
                
                
                145,815
                
                
                202,771Net
                    income (loss)
                
                $
                (481,798
                )
                $
                257,374
                
                $
                (451,876
                )Net
                    income (loss) per partnership unit:Limited
                    partners (based on 50,000 units)
                
                $
                (9.54
                )
                $
                5.10
                
                $
                (8.95
                )General
                    partner
                
                $
                (4,817.98
                )
                $
                2,573.74
                
                $
                (4,518.76
                )
 **Statements
            of Changes in Partners' Capital (Deficit)**
 Limited
                
                GeneralFor
                    the years ended December 31, 2006, 2005 and 2004
                
                Partners
                
                Partner
                
                TotalBalance
                    at January 1, 2004
                
                $
                3,969,722
                
                $
                (1,530,169
                )
                $
                2,439,553Net
                    loss
                
                
                (447,357
                )
                
                (4,519
                )
                
                (451,876
                )Balance
                    at December 31, 2004
                
                
                3,522,365
                
                
                (1,534,688
                )
                
                1,987,677Net
                    income
                
                
                254,800
                
                
                2,574
                
                
                257,374Balance
                    at December 31, 2005
                
                
                3,777,165
                
                
                (1,532,114
                )
                
                2,245,051Net
                    loss
                
                
                (476,980
                )
                
                (4,818
                )
                
                (481,798
                )Balance
                    at December 31, 2006
                
                $
                3,300,185
                
                $
                (1,536,932
                )
                $
                1,763,253
  See
        notes
        to financial statements.
  F-6
 **PAINEWEBBER
          R&D PARTNERS III, L.P.**
 **(a
          Delaware Limited Partnership)**
  **Statements
            of Cash Flows**
 For
                    the years ended December 31,
                
                2005
                
                2004
                
                2003Cash
                    flows from operating activities:Net
                    income (loss)
                
                $
                (481,798
                )
                $
                257,374
                
                $
                (451,876
                )Adjustments
                    to reconcile net income (loss) tocash
                    provided by operating activities:Unrealized
                    depreciation (appreciation)of
                    marketable securities
                
                
                414,202
                
                
                (463,154
                )
                
                171,159Decrease
                    (increase) in operating assets:Marketable
                    securities
                
                
                178,920
                
                
                212,800
                
                
                279,346Other
                    receivable
                
                
                (133,000
                )
                
                -
                
                
                -Increase
                    (decrease) in operating liabilities:Accrued
                    liabilities
                
                
                21,676
                
                
                (7,020
                )
                
                5,601Due
                    to bank
                
                
                -
                
                
                -
                
                
                (4,230
                )Cash
                    provided by operating activities
                
                
                -
                
                
                -
                
                
                -Decrease
                    in cash
                
                
                -
                
                
                -
                
                
                -Cash
                    at beginning of period
                
                
                -
                
                
                -
                
                
                -Cash
                    at end of period
                
                $
                -
                
                $
                -
                
                $
                -
 Supplemental
          disclosure of cash flow information:
  The
          Partnership paid no cash for interest or taxes during the years ended December
          31, 2006, 2005 and 2004.
  See
          notes
          to financial statements.
 F-7


**PAINEWEBBER
                  R&D PARTNERS III, L.P.**
                **(a
                  Delaware Limited Partnership)****NOTES
                  TO FINANCIAL STATEMENTS**
                **December
                  31, 2006**




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





PaineWebber
      R&D Partners III, L.P. (the “Partnership”) is a Delaware limited partnership
      of which Paine Webber Development Corporation (“PWDC” or the “General Partner”),
      an indirect, wholly-owned subsidiary of UBS Americas Inc. (“UBS Americas”) which
      is a wholly-owned subsidiary of UBS AG, is the general partner and manager
      of
      the Partnership. The Partnership will terminate on December 15, 2015, unless
      its
      term is extended or reduced by the General Partner. In addition, the
      Partnership’s Agreement of Limited Partnership (the “Agreement”) provides that
      the Partnership will terminate upon the occurrence of certain events, which
      include the sale, authorized by an affirmative vote of a majority-in-interest,
      of all of the Partnership’s assets (Note 7).





The
      principal objective of the Partnership was 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 were expected to address significant market
      opportunities. The Partnership was engaged in diverse product development
      projects (the “Projects”) including product development contracts, participation
      in other partnerships and investments in securities of Sponsor Companies.




F-8




**PAINEWEBBER
                  R&D PARTNERS III, L.P.**
                **(a
                  Delaware Limited Partnership)****NOTES
                  TO FINANCIAL STATEMENTS**
                **December
                  31, 2006**





**(Note
      1 Continued)**





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





**Limited
                Partners**
            
            **General
                Partner**I.
            
            Until
              the value of the aggregate distributions for each limited partnership
              unit
              (“Unit”) equals $1,000 plus simple interest on such amount accrued at 5%
              per annum (“Contribution Payout”). Contribution Payout as of December 31,
              2006 is $1,775 per Unit
            
            
            99
            %
            
            1
            %II.
            
            After
              Contribution Payout and until the value of the aggregate distributions
              for
              each Unit equals $5,000 (“Final Payout”)
            
            
            80
            %
            
            20
            %III.
            
            After
              Final Payout
            
            
            75
            %
            
            25
            %




During
      the year ended December 31, 2000, the Partnership made a cash distribution
      which
      resulted in aggregate distributions per Unit to reach Contribution Payout.
      As a
      result, the General Partner will be allocated 20% of future cash distributions
      until Final Payout (except for distributions made in connection with the
      dissolution of the Partnership). No cash or security distributions have been
      remitted by the Partnership since this time. As of December 31, 2006, 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. The
      Agreement provides that upon termination of the Partnership, the Partnership’s
      assets will be distributed to all Partners (after satisfying claims of
      creditors) pro rata in accordance with their respective capital account balances
      on the date of termination.




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, 2006, the
      cumulative profits of the Partnership were $784 per Unit.





Pursuant
      to the terms of the Agreement, upon termination of the Partnership, the General
      Partner is required to pay to the Partnership an amount in cash equal to the
      debit balance in the General Partner’s capital account. Such amount then becomes
      part of the assets of the Partnership that will be available for distribution
      to
      the Partners, after satisfying claims of creditors. As of December 31, 2006,
      the
      debit balance in the General Partner’s capital account was $1,536,932. In 1995,
      the General Partner was named as a defendant in a class action lawsuit relating,
      among other things, to the sale of the Partnership’s limited partnership
      interests. In connection with the settlement of that lawsuit, in July 2003,
      the
      General Partner deposited in escrow with counsel for the plaintiffs in the
      lawsuit the amount of $1,497,992. Under the terms of that settlement, the
      escrowed funds may only be used to fund the negative balance in the General
      Partner’s capital account upon the Partnership’s termination (Note 7).




F-9


**PAINEWEBBER
                    R&D PARTNERS III, L.P.**
                  **(a
                    Delaware Limited Partnership)****NOTES
                    TO FINANCIAL STATEMENTS**
                  **December
                    31, 2006**


**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.




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




The
      Partnership held the following marketable securities at:





**December
                31, 2006**
            
            **December
                31, 2005****Carrying
                Value**
            
            **Cost**
            
            **Carrying
                Value**
            
            **Cost**Money
                market fund
            
            $
            5,726
            
            $
            5,726
            
            $
            13,047
            
            $
            13,047Genzyme
                Corporation (24,270 and 25,375 common shares as of December 31, 2006
                and
                2005, respectively)
            
            
            1,494,561
            
            
            602,080
            
            
            1,796,057
            
            
            629,493Repligen
                Corporation (85,300 and 131,000 common shares as of December 31,
                2006 and
                2005, respectively)
            
            
            239,705
            
            
            269,150
            
            
            524,010
            
            
            413,337$
            1,739,992
            
            $
            876,956
            
            $
            2,333,114
            
            $
            1,055,877




During
      the year ended December 31, 2006, the Partnership sold 1,105 shares of its
      investment in Genzyme Corporation (“GENZ”) for average proceeds of $64.27 per
      share. The cost basis of the shares was $24.81 per share resulting in the
      recognition of a gain from the sale of $43,601. The market value of the shares
      as of December 31, 2006, was $61.58 per share as compared to a carrying value
      of
      $70.78 per share as of December 31, 2005. The Partnership recognized unrealized
      depreciation on its remaining investment of 24,270 shares in the amount of
      $274,083 which includes the amount of $50,800 for the change in unrealized
      appreciation previously recorded on the shares sold during 2006. During the
      year
      ended December 31, 2005, the Partnership sold 690 shares of its investment
      in
      GENZ for average proceeds of $73.19 per share. The cost basis of the shares
      was
      $24.81 per share resulting in the recognition of a gain from the sale of
      $33,382. At December 31, 2005 and 2004, the Partnership recorded its investment
      of




F-10


**PAINEWEBBER
                    R&D PARTNERS III, L.P.**
                  **(a
                    Delaware Limited Partnership)****NOTES
                    TO FINANCIAL STATEMENTS**
                  **December
                    31, 2006**
 **(Note
        3 Continued)**





25,375
      and 26,065 shares, respectively, at a market value of $70.78 per share and
      $58.04 per share, respectively. The Partnership recognized unrealized
      appreciation for the years ended December 31, 2005 and 2004 of $299,565 and
      $228,851, respectively. Unrealized appreciation of $299,565 for the year ended
      December 31, 2005 is net of $22,951 for the change in unrealized appreciation
      previously recorded on the shares sold during 2005.





During
      the years ended December 31, 2006, 2005 and 2004, the Partnership sold 45,700
      shares (average price of $3.10 per share), 61,300 shares (average price of
      $1.62
      per share) and 93,400 shares (average price of $2.32 per share), respectively,
      of Repligen Corporation (“Repligen”) as compared to a cost basis of $3.155 per
      share. The Partnership recognized realized gain (loss) from the sales for the
      years ended December 31, 2006, 2005 and 2004 of $(2,341), $(94,117) and
      ($78,022), respectively. The market value per share of Repligen was $2.81 per
      share, $4.00 per share, and $2.88 per share, at December 31, 2006, 2005, and
      2004, respectively The Partnership recognized unrealized appreciation
      (depreciation) of $(140,119), $163,589, and $(400,010), for the years ended
      December 31, 2006, 2005 and 2004, respectively. Unrealized appreciation
      (depreciation) for these years, includes the change in unrealized appreciation
      (depreciation) previously recorded of $(38,611), $16,890 and $113,483,
      respectively, related to the sale of Repligen shares.





On
      March
      3, 2003, the Board of Directors of Repligen adopted a shareholder rights plan
      to
      help protect investors against potential hostile takeover attempts. Under the
      plan a dividend was declared of one purchase right for each outstanding share
      of
      common stock held as of March 17, 2003. (The Partnership continued to own
      285,700 Repligen shares as of that date). The rights are not immediately
      exercisable and will be “triggered” upon such time that a purchaser acquires 15%
      or more of Repligen’s outstanding common stock. The rights entitle the holder to
      purchase $100 worth of Repligen common stock at a purchase price of $50.00.
      As
      of December 31, 2006 and 2005, the Partnership has recorded these rights at
      a
      zero value.





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




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




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





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





Pursuant
      to the terms of the Partnership Agreement, at the time of the Partnership’s
      dissolution, the General Partner is required to restore its deficit capital
      account, if any, by remitting cash equal to such amount to the Partnership
      (Note
      7).





F-11
 **PAINEWEBBER
                      R&D PARTNERS III, L.P.**
                    **(a
                      Delaware Limited Partnership)****NOTES
                      TO FINANCIAL STATEMENTS**
                    **December
                      31, 2006**
  **5.**  **Product
          Development Projects**




As
      of
      December 31, 2005, the Partnership had an interest in one remaining Project:
      a
      $6.0 million investment in CCP, a $45.0 million limited partnership formed
      to
      fund the development, clinical testing, manufacturing and marketing of
      MyotrophinTM for use in the treatment of amyotrophic lateral sclerosis and
      certain other peripheral neuropathies. As of December 31, 2005, the Partnership
      carried this illiquid investment at zero. On March 21, 2006, the Partnership
      engaged Robert A. Stanger & Co., Inc. (“Stanger”) to solicit purchasers for
      the Partnership’s investment in CCP at a fee of $45,000. Stanger had identified
      and contacted what it believed to be the most likely purchasers of the
      Partnership’s interest in CCP. There was no interest expressed by those
      contacted by Stanger. Pursuant to an Offer to Purchase by Cephalon, Inc., on
      December 15, 2006, the Partnership sold its interest in CCP for a purchase
      price
      of $1,000 per CCP limited partnership interest. As a result, the Partnership
      will receive total proceeds of $133,000 and recognized a gain of this
      amount for the year ended December 31, 2006.





**6.
      Income Taxes**





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





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





On
      February 15, 2007, the Partnership filed with the Securities and Exchange
      Commission a definitive Schedule 14A which included a Consent Solicitation
      Statement, dated February 16, 2007, in which the General Partner sought the
      consent of the Partnership’s Limited Partners to a proposal to sell all of the
      assets of the Partnership which, if approved, would result in a final
      liquidating distribution and termination of the Partnership. The solicitation
      expired on March 28, 2007 and the proposal was approved by the required
      majority-in-interest of the limited partnership interests. As a result, the
      Partnership is required to sell its remaining assets, including its marketable
      securities, in open market transactions at prevailing prices, prior to April
      15,
      2007 The Partnership expects to make its final liquidating distribution to
      its
      Limited Partners on or about April 30, 2007.





By
      order
      dated February 14, 2007, the court administering the funds that were escrowed
      for funding the negative balance in the General Partner’s capital account
      approved their release. On March 21, 2007, these funds, in the amount of
      $1,497,002, were applied to partially fund the negative balance in the General
      Partner’s capital account.




F-12