<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                                   FORM 10-K
 
(Mark One)
 
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 
For the fiscal year ended December 31, 1996
 
                                       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 0-20081
 
                PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)
 
California                                            77-0129484
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(State or other jurisdiction                        (I.R.S. Employer
of incorporation or organization)                  Identification No.)
 
440 Mission Court, Suite 250, Fremont, California              94539
--------------------------------------------------------------------------------
(Address of principal executive offices)                     (Zip Code)
 
Registrant's telephone number, including area code: (510) 656-1855
 
Securities registered pursuant to Section 12(b) of the Act:
                                               None
--------------------------------------------------------------------------------
 
Securities registered pursuant to Section 12(g) of the Act:
                                         Depositary Units
--------------------------------------------------------------------------------
                                         (Title of class)
 
   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 CK  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 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.[CK]
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
   Registrant's Annual Report to Unitholders for the year ended December 31,
1996 is incorporated by reference into Parts I, II and IV of this Annual Report
on Form 10-K.
 
   Agreement of Limited Partnership, included as part of the Registration
Statement on Form S-1 (File No. 33-6091) filed with the Securities and Exchange
Commission on June 3, 1986 pursuant to Rule 424(b) of the Securities Act of 1933
and amended May 31, 1990, is incorporated by reference into Part IV of this
Annual Report on Form 10-K.
 
                                Index to exhibits can be found on pages 8 and 9.
 <PAGE>
<PAGE>
 
                      CAUTIONARY STATEMENT FOR PURPOSES OF
                       THE ``SAFE HARBOR'' PROVISIONS OF
              THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
 
   When used in this Annual Report on Form 10-K, the words ``Believes,''
``Anticipates,'' ``Expects'' and similar expressions are intended to identify
forward-looking statements. Statements looking forward in time are included in
this Annual Report on Form 10-K pursuant to the ``Safe Harbor'' provision of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially, including, but not limited to, those set forth in ``Management's
Discussion and Analysis of Financial Condition and Results of Operations.''
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Registrant undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
 
                                       1
 <PAGE>
<PAGE>
 
                PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
                            (a limited partnership)
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
PART I                                                                                         PAGE
<S>        <C>                                                                                <C>
Item  1    Business.........................................................................      3
Item  2    Properties.......................................................................      4
Item  3    Legal Proceedings................................................................      4
Item  4    Submission of Matters to a Vote of Unitholders...................................      4
 
PART II
Item  5    Market for the Registrant's Units and Related Unitholder Matters.................      4
Item  6    Selected Financial Data..........................................................      5
Item  7    Management's Discussion and Analysis of Financial Condition and Results of
             Operations.....................................................................      5
Item  8    Financial Statements and Supplementary Data......................................      5
Item  9    Changes in and Disagreements with Accountants on Accounting and Financial
             Disclosure.....................................................................      5
 
PART III
Item 10    Directors and Executive Officers of the Registrant...............................      5
Item 11    Executive Compensation...........................................................      7
Item 12    Security Ownership of Certain Beneficial Owners and Management...................      7
Item 13    Certain Relationships and Related Transactions...................................      7
 
PART IV
Item 14    Exhibits, Financial Statement Schedules and Reports on Form 8-K
           Financial Statements and Financial Statement Schedules...........................      8
           Exhibits.........................................................................      8
           Reports on Form 8-K..............................................................      9
SIGNATURES..................................................................................     10
</TABLE>
 
                                       2
 <PAGE>
<PAGE>
 
                                     PART I
 
Item 1. Business
 
   PruTech Research and Development Partnership III (the ``Registrant''), a
California limited partnership, was formed on June 2, 1986 and will terminate on
December 31, 2006 unless terminated sooner under the provisions of the Agreement
of Limited Partnership (the ``Partnership Agreement''). The Registrant was
formed to seek cash flow from the research and development of new technologies
with potential commercial applications with proceeds raised from the initial
sale of 40,934 depositary units (``Units''). The General Partner also
contributed an amount equal to 10% of the gross proceeds raised by the sale of
Units. The Registrant's fiscal year for book and tax purposes ends on December
31.
 
   The Registrant entered into total commitments of $30.1 million for ten
research and development projects in both publicly and privately held companies
all of which have been fully funded. The Registrant also made equity investments
in some of these companies. As of December 31, 1996, the Registrant held equity
investments and/or royalty rights, which had value at December 31, 1996 or were
active during the year then ended, relating to four companies. For more
information regarding the Registrant's operations, see Item 7 Management's
Discussion and Analysis of Financial Condition and Results of Operations.
 
   The Registrant is engaged solely in the business of research and development;
therefore, presentation of industry segment information is not applicable.
 
   For the years ended December 31, 1996, 1995 and 1994, revenue from the
following portfolio company investments exceeded 15% of the Registrant's total
revenue:
 
<TABLE>
<CAPTION>
                                                      1996     1995     1994
                                                      ----     ----     ----
<S>                                                   <C>      <C>      <C>
Forest Laboratories, Inc.                              66%      63%      87%
Creative BioMolecules, Inc.                            29       --       --
Interleaf, Inc.                                        --       32       --
</TABLE>
 
General Partner
 
   The general partner of the Registrant is R&D Funding Corp (the ``General
Partner''), an affiliate of Prudential Securities Incorporated (``PSI''). Both
the General Partner and PSI are wholly-owned subsidiaries of Prudential
Securities Group Inc. In its capacity as General Partner, R&D Funding Corp was
responsible for locating, evaluating, negotiating and structuring the
Registrant's research and development projects and continues to monitor these
projects. R&D Funding Corp is also responsible for the management of and
provides the administrative services necessary for the operation of the
Registrant. The assignor limited partner is Prudential-Bache Investor Services
Inc., an affiliate of the General Partner, who has assigned substantially all
the rights attributable to its limited partnership interest to investors.
 
Competition
 
   The companies in which the Registrant holds equity investments and royalty
rights faced substantial competition in the markets for their products and
technologies. There are no assurances that the Registrant's investments will not
decline in value due to the development by others of technologically superior
products.
 
Employees
 
   The Registrant has no employees. Management and administrative services for
the Registrant are performed by the General Partner and its affiliates pursuant
to the Partnership Agreement. See Notes B and G to the financial statements in
the Registrant's annual report to limited partners for the year ended December
31, 1996 (``Registrant's 1996 Annual Report'') which is filed as an exhibit
hereto.
 
Investment Portfolio Summary
 
   For a description of the companies in which the Registrant's investments or
royalty rights were active during 1996, see page 2 of the Registrant's 1996
Annual Report which is filed as an exhibit hereto.
 
                                       3
 <PAGE>
<PAGE>
 
Item 2. Properties
 
   The Registrant does not own or lease any property.
 
Item 3. Legal Proceedings
 
   This information is incorporated by reference to Note H to the financial
statements in the Registrant's 1996 Annual Report which is filed as an exhibit
hereto.
 
Item 4. Submission of Matters to a Vote of Unitholders
 
   None
 
                                    PART II
 
Item 5. Market for the Registrant's Units and Related Unitholder Matters
 
   As of March 3, 1997, there were 3,050 holders of record owning 40,934 Units.
A significant secondary market for the Units has not developed and it is not
expected that one will develop in the future. There are also certain
restrictions set forth in Article 8 of the Partnership Agreement limiting the
ability of the Unitholders to transfer Units. Consequently, holders of Units may
not be able to liquidate their investments in the event of an emergency or for
any other reason.
 
   The following per Unit cash distributions were paid to Unitholders during the
following calendar quarters:
 
<TABLE>
<CAPTION>
Quarter ended    1996       1995
-------------   ------     ------
<S>             <C>        <C>
March 31        $80.00     $26.00
June 30             --         --
September 30        --      63.00
December 31         --      85.00
</TABLE>
 
   There are no material restrictions upon the Registrant's present or future
ability to make distributions in accordance with the provisions of the
Partnership Agreement. The Registrant paid a distribution of approximately
$3,639,000 during 1996 of which approximately $3,275,000 ($80 per unit) was paid
to the limited partners and the remainder to the General Partner. The source for
the 1996 distribution was the January 1996 sale of the Registrant's remaining
75,000 shares of Forest Laboratories, Inc. common stock for proceeds of
approximately $3,600,000. The amount to be distributed by the Registrant in
future quarters will be based on the extent to which the market value of its
investments can be realized, and to a lesser extent, from the revenue stream
from royalties and interest income. It is not expected that the Registrant's
eventual total distributions will equal the Unitholder's initial investments.
 
                                       4
 <PAGE>
<PAGE>
 
Item 6. Selected Financial Data
 
   The following table presents selected financial data of the Registrant. This
data should be read in conjunction with the financial statements of the
Registrant and the notes thereto on pages 3 through 12 of the Registrant's 1996
Annual Report which is filed as an exhibit hereto.
 
<TABLE>
<CAPTION>
                                                   Year ended December 31,
                           ------------------------------------------------------------------------
                               1996           1995           1994           1993           1992
                           ------------   ------------   ------------   ------------   ------------
<S>                        <C>            <C>            <C>            <C>            <C>
Royalty income             $   216,665    $        --    $    50,468    $    96,798    $   434,431
                           ------------   ------------   ------------   ------------   ------------
                           ------------   ------------   ------------   ------------   ------------
Gain on sale of
  investments in equity
  securities               $ 5,194,202    $ 8,998,197    $ 2,364,352    $   772,027    $        --
                           ------------   ------------   ------------   ------------   ------------
                           ------------   ------------   ------------   ------------   ------------
Termination of royalty
  rights                   $        --    $ 2,241,783             --             --             --
                           ------------   ------------   ------------   ------------   ------------
                           ------------   ------------   ------------   ------------   ------------
Total revenues             $ 5,448,886    $11,311,651    $ 2,706,567    $ 1,019,176    $   632,254
                           ------------   ------------   ------------   ------------   ------------
                           ------------   ------------   ------------   ------------   ------------
Write-off of investments
  in equity securities     $        --    $        --    $   500,000    $   505,904    $        --
                           ------------   ------------   ------------   ------------   ------------
                           ------------   ------------   ------------   ------------   ------------
Net income (loss)          $ 4,534,518    $10,308,841    $   805,584    $  (616,780 )  $  (379,435 )
                           ------------   ------------   ------------   ------------   ------------
                           ------------   ------------   ------------   ------------   ------------
Net income (loss) per
  Unit                     $     99.70    $    226.66    $     17.71    $    (13.56 )  $     (8.34 )
                           ------------   ------------   ------------   ------------   ------------
                           ------------   ------------   ------------   ------------   ------------
Notes payable              $        --    $        --    $ 1,622,223    $ 3,206,223    $   --
                           ------------   ------------   ------------   ------------   ------------
                           ------------   ------------   ------------   ------------   ------------
Total assets (1)           $15,664,366    $19,879,840    $19,448,580    $35,635,145    $ 6,709,841
                           ------------   ------------   ------------   ------------   ------------
                           ------------   ------------   ------------   ------------   ------------
Total limited partner
  distributions            $ 3,274,720    $ 7,122,516    $   347,939    $   --         $ 4,093,400
                           ------------   ------------   ------------   ------------   ------------
                           ------------   ------------   ------------   ------------   ------------
Limited partner
  distributions per Unit   $     80.00    $    174.00    $      8.50    $   --         $    100.00
                           ------------   ------------   ------------   ------------   ------------
                           ------------   ------------   ------------   ------------   ------------
---------------
(1) Includes unrealized gains on investments in equity securities of $6,135,742, $11,254,503,
$10,750,699 and $26,110,075 in 1996, 1995, 1994 and 1993, respectively.
</TABLE>
 
Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations
 
   This information is incorporated by reference to pages 13 and 14 of the
Registrant's 1996 Annual Report which is filed as an exhibit hereto.
 
Item 8. Financial Statements and Supplementary Data
 
   The financial statements are incorporated by reference to pages 3 through 12
of the Registrant's 1996 Annual Report which is filed as an exhibit hereto.
 
Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure
 
   Reference is made to the Registrant's Current Report on Form 8-K dated June
25, 1996, as filed with the Securities and Exchange Commission on June 28, 1996
regarding the change in the Registrant's certifying accountant from Deloitte &
Touche LLP to Price Waterhouse LLP.
 
                                    PART III
 
Item 10. Directors and Executive Officers of the Registrant
 
   There are no directors or executive officers of the Registrant. The
Registrant is managed by the General Partner.
 
                                       5
 <PAGE>
<PAGE>
 
   The General Partner's directors and executive officers, and any persons
holding more than ten percent of the Registrant's Units (``Ten Percent Owners'')
are required to report their initial ownership of such Units and any subsequent
changes in that ownership to the Securities and Exchange Commission on Forms 3,
4 and 5. Such executive officers, directors and Ten Percent Owners are required
by Securities and Exchange Commission regulations to furnish the Registrant with
copies of all Forms 3, 4 or 5 they file. All of these requirements were
satisfied on a timely basis. In making these disclosures, the Registrant has
relied solely on written representations of the General Partner's directors and
executive officers or copies of the reports they have filed with the Securities
and Exchange Commission during and with respect to its most recent fiscal year.
 
   The directors and executive officers of R&D Funding Corp and their positions
with regard to managing the Registrant are as follows:
 
  Name                          Position
Thomas F. Lynch, III       Chief Executive Officer, Chairman of the Board of
                             Directors and Director
Michael S. Hasley          President
Barbara J. Brooks          Vice President--Finance and Chief Financial Officer
Steven Carlino             Vice President and Chief Accounting Officer
Frank W. Giordano          Director
Nathalie P. Maio           Director
 
   THOMAS F. LYNCH, III, age 38, is the Chief Executive Officer, Chairman of the
Board of Directors and a Director of R&D Funding Corp. He is a Senior Vice
President of PSI. Mr. Lynch also serves in various capacities for other
affiliated companies. Mr. Lynch joined PSI in November 1989.
 
   MICHAEL S. HASLEY, age 42, is the President of R&D Funding Corp. He is also a
Senior Vice President of PSI. Mr. Hasley joined R&D Funding Corp and PSI in
October 1986.
 
   BARBARA J. BROOKS, age 48, is the Vice President-Finance and Chief Financial
Officer of R&D Funding Corp. She is a Senior Vice President of PSI. Ms. Brooks
also serves in various capacities for other affiliated companies. She has held
several positions within PSI since 1983. Ms. Brooks is a certified public
accountant.
 
   STEVEN CARLINO, age 33, is a Vice President of R&D Funding Corp. He is a
First Vice President of PSI. Mr. Carlino also serves in various capacities for
other affiliated companies. Prior to joining PSI in October 1992, he was with
Ernst & Young for six years. Mr. Carlino is a certified public accountant.
 
   FRANK W. GIORDANO, age 54, is a Director of R&D Funding Corp. He is a Senior
Vice President of PSI and an Executive Vice President and General Counsel of
Prudential Mutual Fund Management, Inc., an affiliate of PSI. Mr. Giordano also
serves in various capacities for other affiliated companies. He has been with
PSI since July 1967.
 
   NATHALIE P. MAIO, age 46, is a Director of R&D Funding Corp. She is a Senior
Vice President and Deputy General Counsel of PSI and supervises non-litigation
legal work for PSI. She joined PSI's Law Department in 1983; presently, she also
serves in various capacities for other affiliated companies.
 
   During July 1996, Michael S. Hasley replaced Russell L. Allen as President of
R&D Funding Corp and Russell L. Allen and Barbara J. Brooks resigned as
Directors.
 
   There are no family relationships among any of the foregoing directors or
executive officers. All of the foregoing directors and executive officers have
indefinite terms.
 
Item 11. Executive Compensation
 
   The Registrant does not pay or accrue any fees, salaries or any other form of
compensation to directors and officers of the General Partner for their
services. Certain officers and directors of the General Partner
                                       6
 <PAGE>
<PAGE>
receive compensation from affiliates of the General Partner, not from the
Registrant, for services performed for various affiliated entities, which may
include services performed for the Registrant; however, the General Partner
believes that any compensation attributable to services performed for the
Registrant is immaterial. See Item 13 Certain Relationships and Related
Transactions for information regarding compensation to the General Partner.
 
Item 12. Security Ownership of Certain Beneficial Owners and Management
 
   As of March 3, 1997, no director or executive officer of the General Partner
owns directly or beneficially any interest in the voting securities of the
General Partner.
 
   As of March 3, 1997, no director or executive officer of the General Partner
owns directly or beneficially any of the Units issued by the Registrant.
 
   As of March 3, 1997, no Unitholder beneficially owns more than five percent
(5%) of the Units issued by the Registrant.
 
Item 13. Certain Relationships and Related Transactions
 
   The Registrant has and will continue to have certain relationships with the
General Partner and its affiliates. There have been no direct financial
transactions between the Registrant and the directors or officers of the General
Partner.
 
   Reference is made to Notes B and G to the financial statements in the
Registrant's 1996 Annual Report which is filed as an exhibit hereto, which
identify the related parties and discuss the services provided by these parties
and the amounts paid or payable for their services.
 
                                       7
<PAGE>
                                    PART IV
<TABLE>
<CAPTION>
                                                                                               Page
                                                                                              Number
                                                                                             in Annual
                                                                                              Report
<S>  <C>  <C>                                                                               <C>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)    1. Financial Statements and Reports of Independent Accountants--Incorporated by
          reference to the Registrant's 1996 Annual Report included as an exhibit hereto
          Reports of Independent Accountants:
          Report of Independent Accountants as of December 31, 1996 and for the year then
          ended                                                                                  3
          Independent Auditors' Report as of December 31, 1995 and for the two years then
          ended                                                                                 3A
          Financial Statements:
          Statements of Financial Condition--December 31, 1996 and 1995                          4
          Statements of Operations--Three years ended December 31, 1996                          5
          Statements of Changes in Partners' Capital--Three years ended December 31, 1996        5
          Statements of Cash Flows--Three years ended December 31, 1996                          6
          Notes to Financial Statements                                                          8
       2. Financial Statement Schedules
          All schedules have been omitted because they are not applicable or the required
          information is included in the financial statements or the notes thereto.
       3. Exhibits
          Description:
          Form of Agreement for Services (Incorporated by reference to Exhibit 2.1
          included with Registrant's Form S-1 Registration Statement (No. 33-6091) filed
          on June 3, 1986)
          PruTech Research and Development Partnership III Agreement of Limited
          Partnership (Incorporated by reference to Exhibit 3.1 included with
          Registrant's Form S-1 Registration Statement (No. 33-6091) filed on June 3,
          1986)
          Escrow Agreement (Incorporated by reference to Exhibit 10.1 included with
          Registrant's Form S-1 Registration Statement (No. 33-6091) filed on June 3,
          1986)
          First Amendment to the Agreement of Limited Partnership of PruTech Research and
          Development Partnership III (Incorporated by reference to Exhibit 3 included
          with Registrant's Annual Report on Form 10-K for the year ended December 31,
          1991)
          Registrant's 1996 Annual Report (with the exception of the information and data
          incorporated by reference in Items 3, 7 and 8 of this Annual Report on Form
          10-K, no other information or data appearing in the Registrant's 1996 Annual
          Report is to be deemed filed as part of this report) (filed herewith)
          Letter dated June 28, 1996 from Deloitte & Touche LLP to the Securities and
          Exchange Commission regarding change in certifying accountant (incorporated by
          reference to Exhibit 16.1 to the Registrant's Current Report on Form 8-K dated
          June 25, 1996)
          Financial Data Schedule (filed herewith)
</TABLE>
 
                                       8
 <PAGE>
<PAGE>
<TABLE>
<S>  <C>  <C>                                                                               <C>
(b)  Reports on Form 8-K--
     No reports on Form 8-K were filed during the last quarter of the period covered by
     this report; however, reports on Form 8-K dated January 7, 1997 and February 12,
     1997 were filed with the Securities and Exchange Commission on January 21, 1997 and
     February 27, 1997, respectively. Both Reports on Form 8-K relate to Item 2 regarding
     the sale of 430,298 and 226,500 shares of Creative BioMolecules, Inc. common stock.
</TABLE>
 
                                       9
<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.
 
PruTech Research and Development Partnership III
 
By: R&D Funding Corp
    A Delaware corporation, General Partner
     By: /s/ Steven Carlino                       Date: March 27, 1997
     ----------------------------------------
     Steven Carlino
     Vice President and Chief 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 (with respect to the General Partner) and on
the dates indicated.
 
By: R&D Funding Corp
    A Delaware corporation, General Partner
     By: /s/ Thomas F. Lynch, III                 Date: March 27, 1997
     ----------------------------------------
     Thomas F. Lynch, III
     Chief Executive Officer, Chairman of the
     Board of Directors and Director

     By: /s/ Michael S. Hasley                    Date: March 27, 1997
     ----------------------------------------
     Michael S. Hasley
     President

     By: /s/ Barbara J. Brooks                    Date: March 27, 1997
     ----------------------------------------
     Barbara J. Brooks
     Vice President--Finance and Chief
     Financial Officer

     By: /s/ Steven Carlino                       Date: March 27, 1997
     ----------------------------------------
     Steven Carlino
     Vice President

     By /s/ Frank W. Giordano                     Date: March 27, 1997
     ----------------------------------------
     Frank W. Giordano
     Director

     By /s/ Nathalie P. Maio                      Date: March 27, 1997
     ----------------------------------------
     Nathalie P. Maio
     Director
 
                                       10