<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                                   FORM 10-Q
 
(Mark One)
 
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 
For the quarterly period ended September 30, 1998
 
/ / 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
--------------------------------------------------------------------------------
(State or other jurisdiction of       (I.R.S. Employer Identification No.)
 incorporation or organization)
 
One Seaport Plaza, 28th Floor, New York, NY                10292
--------------------------------------------------------------------------------
(Address of principal executive offices)                 (Zip Code)
 
Registrant's telephone number, including area code (212) 214-3500
 
                                      N/A
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
 
   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 __

<PAGE>
                         Part I. FINANCIAL INFORMATION
                          ITEM 1. FINANCIAL STATEMENTS
                PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
                            (a limited partnership)
                       STATEMENTS OF FINANCIAL CONDITION
                                  (unaudited)
<TABLE>
<CAPTION>
                                                                      September 30,     December 31,
                                                                          1998              1997
<S>                                                                   <C>               <C>
----------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents                                              $ 1,218,094       $3,668,595
Investments in equity securities                                            73,452          552,790
                                                                      -------------     ------------
Total assets                                                           $ 1,291,546       $4,221,385
                                                                      -------------     ------------
                                                                      -------------     ------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accrued expenses and other liabilities                                 $    76,866       $   84,357
Accrued management fee                                                      62,500           62,500
                                                                      -------------     ------------
Total liabilities                                                          139,366          146,857
                                                                      -------------     ------------
Contingencies
Partners' capital
Unitholders (40,934 units issued and outstanding)                        1,036,002        3,405,966
General partner                                                            122,850          386,179
Accumulated other comprehensive (loss) income                               (6,672)         282,383
                                                                      -------------     ------------
Total partners' capital                                                  1,152,180        4,074,528
                                                                      -------------     ------------
Total liabilities and partners' capital                                $ 1,291,546       $4,221,385
                                                                      -------------     ------------
                                                                      -------------     ------------
----------------------------------------------------------------------------------------------------
                  The accompanying notes are an integral part of these statements.
</TABLE>
                                       2
<PAGE>
                PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
                            (a limited partnership)
                            STATEMENTS OF OPERATIONS
                                  (unaudited)
 
<TABLE>
<CAPTION>
                                                    Nine months ended          Three months ended
                                                      September 30,               September 30,
                                                 -----------------------     -----------------------
                                                   1998          1997          1998          1997
<S>                                              <C>          <C>            <C>          <C>
----------------------------------------------------------------------------------------------------
REVENUES
Gain on sale of investments in equity
  securities                                     $246,504     $7,090,925     $     --     $1,404,674
Interest income                                   100,815         89,720       16,391         33,921
                                                 --------     ----------     --------     ----------
                                                  347,319      7,180,645       16,391      1,438,595
                                                 --------     ----------     --------     ----------
EXPENSES
Management fee                                    187,500        471,840       62,500         62,500
General and administrative                         64,179         94,449       20,744         41,799
Write-down of investments in equity
  securities                                           --        295,000           --             --
                                                 --------     ----------     --------     ----------
                                                  251,679        861,289       83,244        104,299
                                                 --------     ----------     --------     ----------
Net income (loss)                                $ 95,640     $6,319,356     $(66,853)    $1,334,296
                                                 --------     ----------     --------     ----------
                                                 --------     ----------     --------     ----------
ALLOCATION OF NET INCOME (LOSS)
Unitholders                                      $ 86,076     $5,687,420     $(60,168)    $1,200,866
                                                 --------     ----------     --------     ----------
                                                 --------     ----------     --------     ----------
General partner                                  $  9,564     $  631,936     $ (6,685)    $  133,430
                                                 --------     ----------     --------     ----------
                                                 --------     ----------     --------     ----------
Net income (loss) per unit                       $   2.10     $   138.94     $  (1.47)    $    29.34
                                                 --------     ----------     --------     ----------
                                                 --------     ----------     --------     ----------
----------------------------------------------------------------------------------------------------
</TABLE>

                   STATEMENT OF CHANGES IN PARTNERS' CAPITAL
                                  (unaudited)
<TABLE>
<CAPTION>
                                                                        ACCUMULATED
                                                        GENERAL     OTHER COMPREHENSIVE
                                        UNITHOLDERS     PARTNER        INCOME (LOSS)         TOTAL
<S>                                     <C>            <C>          <C>                    <C>
-----------------------------------------------------------------------------------------------------
Partners' capital--December 31, 1997    $3,405,966     $ 386,179         $ 282,383         $4,074,528
Comprehensive loss:
  Net income                                86,076         9,564                               95,640
  Net unrealized losses on
  investments in equity securities                                        (289,055)          (289,055)
                                                                                           ----------
  Comprehensive loss                                                                         (193,415)
                                                                                           ----------
Distribution                            (2,456,040 )    (272,893)                          (2,728,933)
                                        -----------    ---------    -------------------    ----------
Partners' capital--September 30, 1998   $1,036,002     $ 122,850         $  (6,672)        $1,152,180
                                        -----------    ---------    -------------------    ----------
                                        -----------    ---------    -------------------    ----------
-----------------------------------------------------------------------------------------------------
                  The accompanying notes are an integral part of these statements.
</TABLE>
                                       3
<PAGE>
                PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
                            (a limited partnership)
                            STATEMENTS OF CASH FLOWS
                                  (unaudited)
<TABLE>
<CAPTION>
                                                                             Nine months ended
                                                                               September 30,
                                                                        ----------------------------
<S>                                                                     <C>             <C>
                                                                           1998             1997
----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest income received                                                $   100,815     $     89,720
Management fee paid                                                        (187,500)        (614,010)
General and administrative expenses paid                                    (71,670)         (94,977)
                                                                        -----------     ------------
Net cash used in operating activities                                      (158,355)        (619,267)
                                                                        -----------     ------------
 
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of investments in equity securities                  436,787       13,321,537
Purchase of investments in equity securities                                     --          (58,650)
                                                                        -----------     ------------
Net cash provided by investing activities                                   436,787       13,262,887
                                                                        -----------     ------------
 
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions                                                            (2,728,933)     (12,507,611)
                                                                        -----------     ------------
Net (decrease) increase in cash and cash equivalents                     (2,450,501)         136,009
Cash and cash equivalents at beginning of period                          3,668,595        2,342,441
                                                                        -----------     ------------
Cash and cash equivalents at end of period                              $ 1,218,094     $  2,478,450
                                                                        -----------     ------------
                                                                        -----------     ------------
RECONCILIATION OF NET INCOME TO NET CASH
USED IN OPERATING ACTIVITIES
Net income                                                              $    95,640     $  6,319,356
                                                                        -----------     ------------
Adjustments to reconcile net income to net cash used in operating
  activities:
Gain on sale of investments in equity securities                           (246,504)      (7,090,925)
Changes in accrued expenses and other liabilities                            (7,491)            (528)
Changes in accrued management fee                                                --         (142,170)
Write-down of investments in equity securities                                   --          295,000
                                                                        -----------     ------------
Total adjustments                                                          (253,995)      (6,938,623)
                                                                        -----------     ------------
Net cash used in operating activities                                   $  (158,355)    $   (619,267)
                                                                        -----------     ------------
                                                                        -----------     ------------
----------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
1997
  At March 31, 1997, the General Partner concluded that an impairment in value that was not
temporary had occurred for the Partnership's equity investment in Somatix Therapy Corporation. As a
result, the value of the Partnership's 295,000 shares of common stock was written down by $295,000.
  On June 2, 1997, Cell Genesys Corporation acquired Somatix Therapy Corporation. As a result, the
Partnership received 111,265 shares of Cell Genesys Corporation common stock or 0.385 shares for
each of its 289,000 shares of Somatix Therapy Corporation common stock.
----------------------------------------------------------------------------------------------------
                  The accompanying notes are an integral part of these statements.
</TABLE>
                                       4
<PAGE>
                PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
                            (a limited partnership)
                         NOTES TO FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998
                                  (unaudited)
 
A. General
 
   These financial statements have been prepared without audit. In the opinion
of management, the financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the financial
position of PruTech Research and Development Partnership III (the 'Partnership')
as of September 30, 1998, the results of its operations for the nine and three
months ended September 30, 1998 and 1997 and its cash flow for the nine months
ended September 30, 1998 and 1997. However, the operating results for the
interim periods may not be indicative of the results expected for the full year.
 
   Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Partnership's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1997.
 
   Effective January 1, 1998, the Partnership adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 130, 'Reporting
Comprehensive Income.' This Statement establishes standards for reporting and
display of comprehensive income and its components within financial statements.
Comprehensive income includes net income as well as certain revenues, expenses,
gains and losses that are excluded from net income under generally accepted
accounting principles ('other comprehensive income'). During the nine months
ended September 30, 1998, the Partnership's only source of other comprehensive
income is an unrealized holding loss, net of a reclassification adjustment, on
its investments in marketable equity securities, which is included in the
statement of changes in partners' capital and is more fully described in Note C.
The adoption of SFAS No. 130 has had no impact on earnings or total partners'
capital.
 
B. Royalties
 
   At September 30, 1998 and December 31, 1997, the Partnership retains certain
royalty rights with Forest Laboratories, Inc. ('Forest') and Creative
BioMolecules, Inc. whose carrying values for financial reporting purposes are
zero. The royalty rights with Forest relate to Synapton, a drug developed by
Forest for the treatment of Alzheimer's disease. Forest filed a new drug
application with the Food and Drug Administration, seeking approval of Synapton,
on November 18, 1997. The Partnership's royalty rights with Forest and Creative
BioMolecules, Inc. will expire in December 1999.
 
C. Investments
 
   Investments in marketable equity securities available-for-sale include the
following:
 
<TABLE>
<CAPTION>
                                   September 30, 1998                                        December 31, 1997
                 ------------------------------------------------------    ------------------------------------------------------
                                       Gross unrealized     Carrying                              Gross unrealized     Carrying
                 Shares   Cost basis         loss             value        Shares    Cost basis        gains            value
<S>              <C>      <C>          <C>                <C>              <C>       <C>          <C>                <C>
-----------------------------------------------------------------------    -----------------------------------------------------
Creative
  BioMolecules,
  Inc.-Common
  Stock          24,484    $ 80,124        $ (6,672)        $  73,452       24,484    $ 80,124        $100,446         $180,570
Kopin
  Corporation-
  Common Stock       --          --              --                --       13,310      99,556         124,212          223,768
Cell Genesys
  Corporation-
  Common Stock       --          --              --                --       17,465      90,727          57,725          148,452
                          ----------   ----------------   -------------              ----------   ----------------   ------------
                           $ 80,124        $ (6,672)        $  73,452                 $270,407        $282,383         $552,790
                          ----------   ----------------   -------------              ----------   ----------------   ------------
                          ----------   ----------------   -------------              ----------   ----------------   ------------
</TABLE>
 
   If upon the sale of the Partnership's investments, the gross unrealized
gain/loss were to be realized, such gain/loss would be allocated 90% to the
Unitholders and 10% to R&D Funding Corp (the 'General Partner'); however, there
is no assurance that the Partnership would receive such amount in the event of
the sale of its remaining equity position.
 
                                       5
<PAGE>
   During the second quarter of 1998, the Partnership sold 13,310 shares of
Kopin Corporation common stock and 17,465 shares of Cell Genesys Corporation
common stock for proceeds of approximately $286,000 and $151,000 resulting in
gains of approximately $186,000 and $60,000, respectively. These sales
liquidated the Partnerships' remaining holdings of Kopin Corporation common
stock and Cell Genesys Corporation common stock.
 
   The Partnership's net unrealized losses on investments in equity securities
of $289,055 for the nine months ended September 30, 1998 are comprised as
follows:
 
Unrealized holding losses                                 $ (42,551)
Less: reclassification adjustment for realized gains
included in net income                                     (246,504)
                                                          ---------
Net unrealized losses on investments in equity
securities                                                $(289,055)
                                                          ---------
                                                          ---------
 
D. Related Parties
 
   The General Partner and its affiliates perform certain services for the
Partnership (for which they are reimbursed through the management fee) which
include, but are not limited to: accounting and financial management; registrar,
transfer and assignment functions; asset management; investor communications and
other administrative services. The Partnership also reimburses an affiliate of
the General Partner for printing services. The management fee and printing costs
were:
 
<TABLE>
<CAPTION>
                              Nine months ended      Three months ended
                                September 30,           September 30,
                            ---------------------    -------------------
                              1998         1997       1998        1997
<S>                         <C>          <C>         <C>         <C>
------------------------------------------------------------------------
Management fee              $187,500     $471,840    $62,500     $62,500
Printing                       6,741        9,735      1,861       3,150
                            --------     --------    -------     -------
                            $194,241     $481,575    $64,361     $65,650
                            --------     --------    -------     -------
                            --------     --------    -------     -------
</TABLE>
 
   Printing costs payable to an affiliate of the General Partner (which are
included in accrued expenses and other liabilities) as of September 30, 1998 and
December 31, 1997 were $4,779 and $7,788, respectively.
 
   Prudential Securities Incorporated ('PSI'), an affiliate of the General
Partner, owned 724 units in the Partnership at September 30, 1998.
 
   The Partnership maintains an account with the Prudential Institutional
Liquidity Portfolio Fund, an affiliate of the General Partner, for investment of
its available cash in short-term instruments pursuant to the guidelines
established by the Partnership Agreement.
 
   The Partnership engaged in research and development co-investment projects
with PruTech Research and Development Partnership which was dissolved and
liquidated in December 1996, PruTech Research and Development Partnership II and
PruTech Project Development Partnership (collectively, the 'PruTech R&D
Partnerships'), for which R&D Funding Corp serves as the general partner. The
allocation of the co-investment projects' profits or losses among the PruTech
R&D Partnerships is consistent with the costs incurred to fund the research and
development projects.
 
E. Contingencies
 
   On April 15, 1994, a multiparty petition captioned Mack et al. v. Prudential
Securities Incorporated et al. (Cause No. 94-17695) was filed in the 80th
Judicial District Court of Harris County, Texas, purportedly on behalf of
investors in the Partnership against the Partnership, the General Partner, PSI,
The Prudential Insurance Company of America and a number of other defendants.
The petition alleges common law fraud and fraud in the inducement and negligent
misrepresentation in connection with the offering of the Partnership; negligence
and breach of fiduciary duty in connection with the operation of the
Partnership; civil conspiracy; and violations of the federal Securities Act of
1933 (sections 11 and 12) and of the Texas Securities and Deceptive Trade
Practices statutes. The suit seeks, among other things, compensatory and
punitive damages, costs and attorneys' fees.
 
                                       6
<PAGE>
   The General Partner, PSI and the Partnership believe they have meritorious
defenses to the complaint and are vigorously defending themselves in this
action. The claims of most plaintiffs have been settled or dismissed. It is
currently expected that the remaining claims will be resolved shortly. The
Partnership has not contributed to any settlement or paid any costs of the
litigation, nor is it anticipated that it will.
 
                                       7
<PAGE>
                PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
                            (a limited partnership)
      ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
Liquidity and Capital Resources
 
   As of September 30, 1998, the Partnership had approximately $1,218,000 of
cash and cash equivalents, which is a decrease of approximately $2,451,000 as
compared to December 31, 1997. The decrease in cash and cash equivalents was
primarily due to distributions made in excess of proceeds from the sales of
certain investments in equity securities as further discussed below.
 
   As of September 30, 1998, the Partnership had approximately $80,000 invested
in the common stock of Creative BioMolecules, Inc. ('Creative') with an
aggregate market value of approximately $73,000. This investment is a
speculative and high risk equity investment. Additionally, the realization of
the market value of Creative common stock is further impacted by market volume
capacity.
 
   The Partnership's royalty positions with Forest and Creative did not generate
income for the Partnership during the nine months ended September 30, 1998 and
1997.
 
   The amount to be distributed by the Partnership in future quarters will be
based on the extent to which the market value of its investment can be realized
and from the revenue stream from royalties and interest income. It is not
expected that the Partnership's eventual total distributions will equal the
Unitholders initial investments.
 
   During May 1998, the Partnership made a $2,728,933 distribution. Unitholders
received 90% of the total or $2,456,040 ($60 per unit) on this distribution and
the General Partner received the 10% remainder.
 
   During the second quarter of 1998, the Partnership sold its remaining 13,310
shares of Kopin Corporation common stock for approximately $286,000 and its
remaining 17,465 shares of Cell Genesys Corporation common stock for
approximately $151,000.
 
Results of Operations
 
   The Partnership's net income decreased by approximately $6,224,000 for the
nine months ended September 30, 1998 as compared to the same period in 1997.
Additionally, the Partnership had a net loss of $67,000 for the three months
ended September 30, 1998 as compared to net income of $1,334,000 for the same
period in 1997. These variances were primarily due to larger gains on the sale
of investments in equity securities recorded in 1997 versus 1998, offset, in
part, by a first quarter 1997 write-down of the Partnership's equity investment
in Somatix Therapy Corporation and higher management fees in 1997 versus 1998 as
discussed below.
 
   During the nine months ended September 30, 1998, gains totalling
approximately $247,000 were recorded on the sale of common stock of Kopin
Corporation and Cell Genesys Corporation as discussed in Liquidity and Capital
Resources above as compared to gains of approximately $7,091,000 recorded on
1997 sales of 461,798 shares of Creative common stock, 492,217 shares of Kopin
Corporation common stock, 211,000 shares of Somatix Therapy Corporation common
stock, and 72,100 shares of Cell Genesys Corporation common stock.
 
   Interest income increased by approximately $11,000 during the nine months
ended September 30, 1998, but decreased by approximately $18,000 during the
three months ended September 30, 1998 as compared to the same periods in 1997.
During the 1998 and 1997 periods, Partnership funds invested in short-term
instruments varied with the timing of sales of investments in equity securities
and distributions made to Unitholders causing the fluctuations in interest
income during the respective periods.
 
   Management fees decreased by approximately $284,000 during the nine months
ended September 30, 1998 as compared to the corresponding period in 1997.
Effective July 1, 1997, the General Partner reduced its management fee to the
greater of (a) $250,000 annually or (b) ten percent of the aggregate amount
received from the Partnership's royalty position in a treatment for Alzheimer's
disease with Forest after July 1, 1997 until the dissolution and liquidation of
the Partnership, not to exceed the aggregate management fee payable under the
terms of the Agreement of Limited Partnership, as amended ($818,680 per annum.)
 
                                       8
<PAGE>
   General and administrative expenses decreased by approximately $30,000 and
$21,000 for the nine and three months ended September 30, 1998 as compared to
the same periods in 1997. These decreases reflect lower costs incurred in
monitoring the Partnership's investments. Additionally, professional and other
costs were incurred during 1997 in evaluating the orderly liquidation of the
Partnership.
 
   At March 31, 1997, the General Partner concluded that an impairment in value
that was not temporary had occurred for the Partnership's equity investment in
Somatix Therapy Corporation. As a result, the value of the Partnership's common
stock was written down by $295,000.
 
                                       9
<PAGE>
                           PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings--This information is incorporated by reference to Note
        E to the financial statements filed herewith in Item 1 of Part I of the
        Registrant's Quarterly Report.
 
Item 2. Changes in Securities--None
 
Item 3. Defaults Upon Senior Securities--None
 
Item 4. Submission of Matters to a Vote of Security Holders--None
 
Item 5. Other Information--None
 
Item 6. Exhibits and Reports on Form 8-K
 
        (a) Exhibits--
 
            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, File 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
            filed March 28, 1992)
 
            Financial Data Schedule (filed herewith)
 
        (b) Reports on Form 8-K--
 
            No reports on Form 8-K were filed during the quarter.
 
                                       10
<PAGE>
                                   SIGNATURES
 
   Pursuant to the requirements 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/ Brian J. Martin                      Date: November 13, 1998
     ----------------------------------------
     Brian J. Martin
     President, Chief Executive Officer,
     Chairman of the Board of Directors and
     Director for the Registrant
 
By: R&D Funding Corp
    A Delaware corporation, General Partner
 
     By: /s/ Steven Carlino                       Date: November 13, 1998
     ----------------------------------------
     Steven Carlino
     Vice President and Chief Accounting
     Officer for the Registrant
 
                                       11