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, 2001
                                       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, 2001, 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, 2001, 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") .....................................     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. No cash or security distributions
were remitted by the Partnership during the year ended December 31, 2001. 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.

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, 2001, the cumulative profits of the Partnership were $843 per Unit.

OTHER

         At December 31, 2001, 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, 2001, there were 4,619 Limited Partners.

         The Partnership distributes to the Partners, when available, the net
proceeds from royalty distributions, net proceeds from dispositions of portfolio
securities and any other cash in excess of amounts that are necessary for the
operation of the Partnership's business. During the year ended December 31,
2001, the Partnership made no distributions to the Partners. 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 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).


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 $5.7 million at December 31, 2000, decreased to
$4.7 million at December 31, 2001, resulting from the Partnership's recognition
of a net loss of $1.0 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 $5.7 million at December 31, 2000 to $4.8 million at December 31, 2001. The
change of $0.9 million resulted primarily from decreases in the market values of
marketable securities held as of these dates. The balance of the liquid assets
at December 31, 2001, 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, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31,
2000:

         Net income (loss) for the years ended December 31, 2001 and 2000 was
$(1.0) million and $10.6 million, respectively. The unfavorable change of $11.6
million resulted from a decrease in revenues of this amount.

         Net revenues for the year ended December 31, 2001 were $(0.8) million
as compared to $10.7 million for this same period in 2000. The decrease was due
primarily to an unfavorable change in unrealized appreciation of marketable
securities of $1.8 million and a decrease in unrealized gain on sale of
marketable securities of $9.5 million. Unrealized (depreciation) appreciation
for the years ended December 31, 2001 and 2000 were $(0.8) million and $1.0
million, respectively. At December 31, 2001,

<PAGE>

(ITEM 7 CONTINUED)

the Partnership's investment in 0.461 million shares of Genzyme Molecular
Oncology ("GMO") had a market value of $3.7 million ($8.00 per share). As of
December 31, 2000, the market value of the GMO shares was $4.2 million ($9.1875
per share) resulting in the recognition of unrealized depreciation of $0.5
million for the year ended December 31, 2001. The market value of the
Partnership's investment in Repligen Corporation ("Repligen") of 0.286 million
shares decreased from $1.0 million ($3.375 per share) at December 31, 2000 to
$0.7 million ($2.43 per share) resulting in unrealized depreciation of $0.3
million for the year ended December 31, 2001. 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 resulting in the recognition of unrealized appreciation of $1.0 million
for the year ended December 31, 2000. Also, for the year ended December 31,
2000, the Partnership recognized gains from sales of marketable securities of
$9.5 million. The Partnership sold 0.252 million shares of 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 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.

         There were no material variances in expenses for the year ended
December 31, 2001 as compared to this same period in 2000.

         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
$2.1 million. Realized gain on sale of marketable securities for the year ended
December 31, 2000 was $9.5 million (See year ended December 31, 2001 compared to
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.

<PAGE>

(ITEM 7 CONTINUED)

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


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. 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, 2001:


NAME                                 AGE             POSITION AND DATE APPOINTED
----                                 ---             ---------------------------
DIRECTORS
     Robert J. Chersi                 40             Director since March 2001
     Jerome T. Fadden (1)             44             Director since March 2001
     Stephen R. Dyer                  42             Director since April 1999

EXECUTIVE OFFICERS
     Stephen R. Dyer                  42             President since March 2001
     Rosemarie Albergo                44             Treasurer since March 2001
     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)  Effective March 2002, Jerome Fadden resigned his position as director.





<PAGE>

(ITEM 10 CONTINUED)

DIRECTORS

         ROBERT J. CHERSI is the Executive Vice President, Chief Financial
Officer, Treasurer and Controller of PWI. He served most recently (prior to the
UBS AG merger) as Senior Vice President and Controller of PWI. Mr. Chersi joined
PaineWebber in 1995 following the Kidder, Peabody & Co. Incorporated ("Kidder")
acquisition. Previous to his employment with Kidder, Mr. Chersi worked for the
accounting firm KPMG Peat Marwick from 1983-1988 serving banking and brokerage
industry clients. Mr. Chersi is a Certified Public Accountant and earned a
Bachelor of Business Administration in Accounting from Pace University where he
graduated summa cum laude in 1983.

         JEROME T. FADDEN was Chief Financial Officer or PWG from 1999 to 2001.
Prior to joing PWG, Mr. Fadden was Chief Financial Officer of Equus Reinsurance
Company. He received his Bachelor of Arts degree from Stanford University and a
Masters of Business Administration from Harvard University.

         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

         STEPHEN R. DYER, President, see "Directors" above.

         ROSEMARIE ALBERGO is a First Vice President of PWI. Prior to joining
PWI in 1983, Mr. Albergo was employed at KPMG Peat Marwick. She received her
Bachelor of Business Administration from Pace University and is a Certified
Public Accountant.

         GERALDINE L. 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, 2002 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 1st day of April
2002.

         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 1st day
         of April 2002.


         /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





* 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, 2001 and 2000                                    F-5

Statements of Operations,
    for the years ended December 31, 2001, 2000 and 1999             F-6

Statements of Changes in Partners' Capital (Deficit),
    for the years ended December 31, 2001, 2000 and 1999             F-6

Statements of Cash Flows,
    for the years ended December 31, 2001, 2000 and 1999             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>

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

<TABLE>
<CAPTION>

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

Years ended December 31,                   2001               2000              1999                1998               1997

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

   Revenues                            $     (798,940)  $    10,710,670      $   4,926,324      $   (1,331,137)     $    6,351,971
   Net income (loss)                   $     (966,353)  $    10,543,808      $   4,762,147      $   (1,500,762)     $    5,930,581

Net income (loss) per partnership interest (A):

   Limited partners                    $       (19.13)  $        208.77      $       94.29      $       (29.72)     $       117.43
   General partner                     $    (9,663.53)  $    105,438.08      $   47,621.47      $   (15,007.62)     $    59,305.81


Financial Condition:

   Total assets                        $    4,783,593   $     5,743,455      $   6,866,129      $    9,169,050      $   10,675,272
   Partners' capital                   $    4,690,912   $     5,657,265      $   6,786,285      $    9,094,845      $   10,595,607

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

------------------------------------------------------------------------------------------------------------------------------------
</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)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
                                                                          Net Income (Loss)
                                           Net Income                  Per Partnership Unit (A)
                                                              -----------------------------------------
                          Revenues           (Loss)           Limited Partners          General Partner
----------------------------------------------------------------------------------------------------------------
<S>                      <C>               <C>                <C>                       <C>
 Calendar 2001

 4th Quarter             $   257,966       $   220,169        $   4.37                  $  2,201.69

 3rd Quarter              (2,801,907)       (2,845,859)         (56.35)                  (28,458.59)

 2nd Quarter               2,313,340         2,269,709           44.94                    22,697.09

 1st Quarter                (568,339)         (610,372)         (12.09)                   (6,103.72)

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

 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

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

(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, 2001 and 2000, 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, 2001.
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, 2001 and 2000, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.



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

New York, New York
March 15, 2002

                                       F-4

<PAGE>

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

STATEMENTS OF FINANCIAL CONDITION

                                                      December 31,  December 31,
                                                             2001          2000
--------------------------------------------------------------------------------
Asset:

      Marketable securities, at market value          $ 4,783,593   $ 5,743,455
                                                      ===========   ===========


Liabilities and partners' capital:

      Accrued liabilities                             $    92,681   $    86,190

      Partners' capital                                 4,690,912     5,657,265

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

Total liabilities and partners' capital               $ 4,783,593   $ 5,743,455
                                                      ===========   ===========


--------------------------------------------------------------------------------
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,                                     2001                 2000                   1999
----------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                  <C>                   <C>
Revenues:
      Interest income                                     $        18,593      $       211,215       $        149,437
      Income from product development projects                          -               23,785                      -
      Unrealized  (depreciation) appreciation of
       marketable securities and investments                     (817,533)           1,009,868              3,079,020
      Net realized gain on sale of marketable
        securities and investments                                      -            9,465,802              1,697,867
                                                            --------------       --------------        ---------------
                                                                 (798,940)          10,710,670              4,926,324
                                                            --------------       --------------        ---------------

Expenses:
      Expenditures under product development projects                   -                    -                  2,385
      General and administrative costs                            167,413              166,862                161,792
                                                            --------------       --------------        ---------------
                                                                  167,413              166,862                164,177
                                                            --------------       --------------        ---------------

Net income (loss)                                         $      (966,353)     $    10,543,808       $      4,762,147
                                                            ==============       ==============        ===============

Net income (loss) per partnership unit:
      Limited partners (based on 50,000 units)            $        (19.13)     $        208.77       $          94.29
      General partner                                     $     (9,663.53)     $    105,438.08       $      47,621.47

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

<TABLE>
<CAPTION>

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
                                                               Limited              General
For the years ended December 31, 2001, 2000 and 1999          Partners              Partner                Total
----------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                  <C>                   <C>
Balance at January 1, 1999                                $     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
Net loss                                                         (956,690)              (9,663)              (966,353)
                                                            --------------       --------------        ---------------

Balance at December 31, 2001                              $     6,198,567      $    (1,507,655)      $      4,690,912
                                                            ==============       ==============        ===============

----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.

                                       F-6

<PAGE>

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

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

For the years ended December 31,                                     2001                 2000                   1999
----------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                  <C>                   <C>
Cash flows from operating activities:
Net income (loss)                                         $      (966,353)     $    10,543,808       $      4,762,147
Adjustments to reconcile net income (loss)  to
  cash provided by operating activities:
  Unrealized depreciation (appreciation)
   of marketable securities and investments                       817,533           (1,009,868)            (3,079,020)

Decrease  in operating assets:
  Marketable securities                                           142,329            2,113,143              5,379,556
  Advances to product development projects                              -               19,399                  2,385
  Royalty income receivable                                             -                    -                      -

Increase  in operating liabilities:
  Accrued liabilities                                               6,491                6,346                  5,639
                                                            --------------       --------------        ---------------
Cash provided by  operating activities                                 (0)          11,672,828              7,070,707
                                                            --------------       --------------        ---------------

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

Decrease in cash                                                       (0)                   -                      -

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

Cash at end of period                                     $            (0)     $             -       $              -
                                                            ==============       ==============        ===============

----------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the years ended
December 31, 2001, 2000 and 1999.
----------------------------------------------------------------------------------------------------------------------
</TABLE>

See notes to financial statements.

                                       F-7

<PAGE>

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

                          NOTES TO FINANCIAL STATEMENTS


1.       ORGANIZATION AND BUSINESS

         PaineWebber R&D Partners III, L.P. (the "Partnership") is a Delaware
limited partnership that commenced operations on June 3, 1991. Paine Webber
Development Corporation ("PWDC" or the "General Partner"), an indirect,
wholly-owned subsidiary of 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 1%
              amount accrued at 5% per annum ("Contribution
              Payout") .....................................    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. No cash or security distributions
were remitted by the Partnership during the year ended December 31, 2001. 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.

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, 2001, the cumulative profits of the Partnership were $843 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. 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.

3.       MARKETABLE SECURITIES

         The Partnership held the following marketable securities at:

<TABLE>
<CAPTION>
                                        DECEMBER 31, 2001                    DECEMBER 31, 2000
                                      ----------------------               --------------------
                                       CARRYING                             CARRYING
                                        VALUE           COST                 VALUE         COST
                                        -----           ----                 -----         ----
<S>                                    <C>              <C>                  <C>           <C>
Money market fund                      $   400,615      $   400,615          $  542,944    $  542,944

Genzyme Molecular Oncology
   (461,091 common shares)               3,688,728          646,609           4,236,274       646,609

Repligen Corporation
   (285,700 common shares)                 694,250          901,433             964,237       901,433
                                       -----------      -----------          ----------    ----------
                                       $ 4,783,593      $ 1,948,657          $5,743,455    $2,090,986
                                       ===========      ===========          ==========    ==========
</TABLE>


         At December 31, 2001, the Partnership recorded its investment of
461,091 shares of Genzyme Molecular Oncology ("GMO") at a market value of $8.00
per share as compared to a market value as of December 31, 2000 of $9.1875 per
share. Accordingly, the Partnership recognized unrealized depreciation of
$547,546 for the year ended December 31, 2001. During the year ended December
31, 2000, the Partnership sold 252,000 shares of 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, thus, recognized a gain
from the sale of $7,204,599. The Partnership recorded its remaining investment
of 461,091 shares at a market value of $9.1875 per share as of December 31, 2000
as compared to a market value of $7.00 per share at December 31, 1999. For the
year ended December 31, 2000 the Partnership recognized unrealized appreciation
of $1,008,637 for the year then ended. The market value of GMO as of December
31, 1998 was $3.25 per share. For the year ended December 31, 1999 the
Partnership recognized unrealized appreciation on its investment of 713,091
shares of $2,674,092.

         The Partnership's investment in Repligen Corporation ("Repligen") had a
market value of $2.43 per share at December 31, 2001. The market value as of
December 31, 2000 was $3.375 per share. The Partnership recognized unrealized
depreciation of $269,987 for the year ended December 31, 2001. At December 31,
1999 the Partnership owned warrants to purchase 133,000 and 252,700 shares of
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

                                      F-10

<PAGE>

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

                          NOTES TO FINANCIAL STATEMENTS


(NOTE 3 CONTINUED)

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 Partnership owned a warrant to purchase 7,293 shares of Alkermes,
Inc. ("Alkermes") at an exercise price of $5.00 per share. At December 31, 1999,
the market value of Alkermes was $49.125 per share. As of this date, the
Partnership recorded the warrant at its intrinsic value of $321,804 and
recognized unrealized appreciation of this amount for the year then ended.
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. ("Mederex') 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.

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 PaineWebber Inc. ("PWI").

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

         Pursuant to the terms of the Partnership Agreement, the General Partner
is required to restore its deficit capital account, if any, by remitting cash
equal to such amount to 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 Cereport(TM)
(formerly known as RMP-7) 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

                                      F-11

<PAGE>

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

                          NOTES TO FINANCIAL STATEMENTS


(NOTE 5 CONTINUED)

marketing of Myotrophin(TM) for use in the treatment of amyotrophic lateral
sclerosis and certain other peripheral neuropathies. As of December 31, 2001 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 received
warrants to purchase shares of common stock of certain of the Sponsor Companies.
As of December 31, 2001, 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 share
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.                            2001 ANNUAL REPORT
--------------------------------------------------------------------------------


To Our Limited Partners:

PaineWebber R&D Partners III, L.P. (the "Partnership" or "R&D Partners III") was
formed in 1991 to engage primarily in product development projects with
technology and biotechnology companies. As of December 31, 2001, the Partnership
has two remaining development investments: Alkermes Clinical Partners, L.P. and
Cephalon Clinical Partners, L.P. The general partners of both partnerships
continue to report that their products are under observation and they are unable
to make any public announcements until information from their clinical trials
can be fully reviewed. It is uncertain when the results of such trials will be
completed or if the outcome will result in the sponsor companies exercising
their options to purchase back the partnership interests. Depending upon the
outcome of such trials, the Partnership may explore options as to proceed
towards its termination.

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, 2001. The
last distribution was made in June 2000. Future distributions will depend upon
the outcome of the program investments and the liquidation of securities held by
the Partnership after payment of Partnership expenses. In addition to potential
returns from the product development programs and equity investments, investors
have 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 $11,555 at peak, per $10,000 investment in R&D
Partners III.

The Partnership continues to hold 461,091 shares of Genzyme Molecular Oncology
("GZMO") and 285,700 shares of Repligen Corporation ("RGEN"). As of December 31,
2001, the closing price per GZMO share was $8.00 and the price per RGEN share
was $2.43. The Partnership intends to liquidate such positions subject to market
conditions and will distribute excess cash to the partners.

The following sections contain information only on those product development
programs and investments that are currently active and their format has been
revised to reduce production expenses. 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 Partnership, its General Partner, 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.

Included is the 2002 Customer Privacy Policy for the Partnership. Please note
that the Partnership does not disclose personal client information to
unaffiliated third parties in

<PAGE>

such a manner that would require an "opt-out" provision.

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

Sincerely,




Robin Stanley
Vice President
PaineWebber Development






                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: (1) ProLease(R) and
Medisorb(R) injectable sustained-release systems; (2) RingCap(R) and Dose
Sipping oral delivery technologies; (3) AIR(TM) pulmonary delivery systems and;
(4) Cereport(R) (formerly known as RMP-7(TM)) blood brain barrier permeabilizer.
In addition, the company manufactures and supplies a wide range of standard and
custom-developed pharmaceutical-grade, bioabsorbable PLG polymers.

PROGRAM
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(TM) (formerly known as RMP-7). 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 clinical development of Cereport. In return,
ALZA received the option to acquire exclusive worldwide commercialization rights
to Cereport. During 2001, ALZA was acquired by Johnson & Johnson and is now a
wholly owned subsidiary of Johnson & Johnson.

<PAGE>

Alkermes reports that during 2001, two separate Phase II studies of Cereport and
carboplatin in pediatric patients with primary brain tumors continue to be
conducted by the Pediatric Branch of the National Cancer Institute. Alkermes has
presented a final report to ALZA for two Phase II clinical trials that used
Cereport in combination with carboplatin for the treatment of brain tumors. ALZA
and Johnson & Johnson are still considering these final reports and their
interest in continuing development of Cereport. If ALZA and Johnson & Johnson
decide not to continue the development of Cereport, Alkermes reports that they
will consider whether to develop Cereport on their own or seek another partner.
Alkermes reports that they are unable to make any public announcements at this
time while their clinical trials are still under review.

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 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 held warrant to purchase 7,293 shares at
an exercise price of $5.00 per share which it exercised in March 2000. The
Partnership sold the underlying shares for an average net sales price of $188.20
per share and distributed net proceeds in June 2000.


                                 CEPHALON, INC.

COMPANY
Cephalon discovers and develops pharmaceutical products for the treatment of
neurological and sleep disorders, cancer and pain. 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.

The status of the U.S. regulatory approval of the Myotrophin Injection
application for the treatment of ALS continues to remain uncertain. As
previously reported, in May 1998, the FDA issued a letter stating that the New
Drug Application was "potentially approvable," under certain conditions.
Cephalon does not believe those conditions can be

<PAGE>

met without conducting an additional Phase III clinical study, and Cephalon said
they have no plans to conduct such a study at this time. However, they have had
discussions with certain physicians who are seeking to obtain governmental and
non-governmental funding to be used to conduct such a study, although nothing
has been determined at this point in time.

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.


                        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 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 29, 2001 was $8.00.

GZMO is dedicated to creating the next generation of cancer treatments. Rather
than the antiquated techniques of the past, GZMO envisions therapies that build
on a genetic understanding of cancer to enhance the immune system's
cancer-fighting abilities, starve tumors by cutting off their blood supply,
correct cancer cell defects, and selectively attack tumors. 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.


                              REPLIGEN CORPORATION
               (MOVED FROM PRODUCT PORTFOLIO TO EQUITY INVEST NOW)

<PAGE>

Repligen Corporation 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.

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 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.

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. In 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 will be liquidated subject to market conditions. As of December 31, 2001,
the market value of Repligen was $3.375 per share.