<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 March 31, 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
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(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>
                                                                        March 31,       December 31,
                                                                          1998              1997
<S>                                                                   <C>               <C>
----------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents                                              $ 3,612,262       $3,668,595
Investments in equity securities                                           552,281          552,790
                                                                      -------------     ------------
Total assets                                                           $ 4,164,543       $4,221,385
                                                                      -------------     ------------
                                                                      -------------     ------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accrued expenses and other liabilities                                 $    71,594       $   84,357
Accrued management fee                                                      62,500           62,500
                                                                      -------------     ------------
Total liabilities                                                          134,094          146,857
                                                                      -------------     ------------
Contingencies
Partners' capital
Unitholders (40,934 units issued and outstanding)                        3,366,753        3,405,966
General partner                                                            381,822          386,179
Accumulated other comprehensive income                                     281,874          282,383
                                                                      -------------     ------------
Total partners' capital                                                  4,030,449        4,074,528
                                                                      -------------     ------------
Total liabilities and partners' capital                                $ 4,164,543       $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>
                                                                                Three months ended
                                                                                    March 31,
                                                                             ------------------------
                                                                               1998           1997
<S>                                            <C>            <C>            <C>           <C>
-----------------------------------------------------------------------------------------------------
REVENUES
Interest and other income                                                    $  45,161     $   15,857
Gain on sale of investments in equity
  securities                                                                        --      4,478,268
                                                                             ---------     ----------
                                                                                45,161      4,494,125
                                                                             ---------     ----------
EXPENSES
Management fee                                                                  62,500        204,670
General and administrative                                                      26,231         27,151
Write-down of investments in equity
  securities                                                                        --        295,000
                                                                             ---------     ----------
                                                                                88,731        526,821
                                                                             ---------     ----------
Net income (loss)                                                            $ (43,570)    $3,967,304
                                                                             ---------     ----------
                                                                             ---------     ----------
ALLOCATION OF NET INCOME (LOSS)
Unitholders                                                                  $ (39,213)    $3,570,574
                                                                             ---------     ----------
                                                                             ---------     ----------
General partner                                                              $  (4,357)    $  396,730
                                                                             ---------     ----------
                                                                             ---------     ----------
Net income (loss) per unit                                                   $    (.96)    $    87.23
                                                                             ---------     ----------
                                                                             ---------     ----------
-----------------------------------------------------------------------------------------------------
</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 loss                                (39,213 )     (4,357)                             (43,570)
  Unrealized losses on investments
  in equity securities                                                      (509)              (509)
                                                                                         ----------
  Comprehensive loss                                                                        (44,079)
                                       -----------    --------    -------------------    ----------
Partners' capital--March 31, 1998      $3,366,753     $381,822         $ 281,874         $4,030,449
                                       -----------    --------    -------------------    ----------
                                       -----------    --------    -------------------    ----------
---------------------------------------------------------------------------------------------------
                 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>
                                                                             Three months ended
                                                                                 March 31,
                                                                         --------------------------
<S>                                                                      <C>            <C>
                                                                            1998           1997
---------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and other income received                                       $   45,161     $    15,857
Management fee paid                                                         (62,500)       (204,670)
General and administrative expenses paid                                    (38,994)        (18,754)
                                                                         ----------     -----------
Net cash used in operating activities                                       (56,333)       (207,567)
                                                                         ----------     -----------
 
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of investments in equity securities                       --       7,834,811
Purchase of investments in equity securities                                     --         (58,650)
                                                                         ----------     -----------
Net cash provided by investing activities                                        --       7,776,161
                                                                         ----------     -----------
 
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions                                                                    --      (7,959,389)
                                                                         ----------     -----------
Net decrease in cash and cash equivalents                                   (56,333)       (390,795)
Cash and cash equivalents at beginning of period                          3,668,595       2,342,441
                                                                         ----------     -----------
Cash and cash equivalents at end of period                               $3,612,262     $ 1,951,646
                                                                         ----------     -----------
                                                                         ----------     -----------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
USED IN OPERATING ACTIVITIES
Net income (loss)                                                        $  (43,570)    $ 3,967,304
                                                                         ----------     -----------
Adjustments to reconcile net income (loss) to net cash used in
  operating activities:
Changes in accrued expenses and other liabilities                           (12,763)          8,397
Gain on sale of investments in equity securities                                 --      (4,478,268)
Write-down of investments in equity securities                                   --         295,000
                                                                         ----------     -----------
Total adjustments                                                           (12,763)     (4,174,871)
                                                                         ----------     -----------
Net cash used in operating activities                                    $  (56,333)    $  (207,567)
                                                                         ----------     -----------
                                                                         ----------     -----------
---------------------------------------------------------------------------------------------------
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.
---------------------------------------------------------------------------------------------------
                 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
                                 MARCH 31, 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 March 31, 1998 and the results of its operations and its cash flows for
the three months ended March 31, 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.
 
   Certain balances from the prior year have been reclassified to conform with
the current financial statement presentation.
 
   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 three months
ended March 31, 1998, the Partnership's only source of other comprehensive
income is an unrealized holding loss on its investments in marketable equity
securities which is included in the statement of changes in partners' capital.
The adoption of SFAS No. 130 has had no impact on earnings or total partners'
capital.
 
B. Royalties
 
   At March 31, 1998 and December 31, 1997, the Partnership retains certain
royalty rights with Forest Laboratories, Inc. and Creative BioMolecules, Inc.
whose carrying values for financial reporting purposes are zero. The royalty
rights with Forest Laboratories, Inc. ('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>
                                     March 31, 1998                                          December 31, 1997
                 ------------------------------------------------------    ------------------------------------------------------
                                       Gross unrealized     Carrying                              Gross unrealized     Carrying
                 Shares   Cost basis        gains             value        Shares    Cost basis        gains            value
<S>              <C>      <C>          <C>                <C>              <C>       <C>          <C>                <C>
-----------------------------------------------------------------------    -------------------------------------------
Creative
  BioMolecules,
  Inc.-Common
  Stock          24,484    $ 80,124        $121,869         $ 201,993       24,484    $ 80,124        $100,446         $180,570
Kopin
  Corporation-
  Common Stock   13,310      99,556         135,026           234,582       13,310      99,556         124,212          223,768
Cell Genesys
  Corporation-
  Common Stock   17,465      90,727          24,979           115,706       17,465      90,727          57,725          148,452
                          ----------   ----------------   -------------              ----------   ----------------   ------------
                           $270,407        $281,874         $ 552,281                 $270,407        $282,383         $552,790
                          ----------   ----------------   -------------              ----------   ----------------   ------------
                          ----------   ----------------   -------------              ----------   ----------------   ------------
</TABLE>
                                       5
<PAGE>

   The gross unrealized gains would be allocated 90% to the Unitholders and 10%
to R&D Funding Corp (the 'General Partner') if realized at March 31, 1998;
however, there is no assurance that the Partnership would receive these amounts
in the event of the sale of its position in these securities.
 
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>
                                                     Three months ended
                                                         March 31,
                                                    --------------------
                                                     1998         1997
<S>                         <C>         <C>         <C>         <C>
------------------------------------------------------------------------
Management fee                                      $62,500     $204,670
Printing                                              3,182        2,833
                                                    -------     --------
                                                    $65,682     $207,503
                                                    -------     --------
                                                    -------     --------
</TABLE>
 
   Printing costs payable to an affiliate of the General Partner (which are
included in accrued expenses and other liabilities) as of March 31, 1998 and
December 31, 1997 were $8,710 and $7,788, respectively.
 
   Prudential Securities Incorporated ('PSI'), an affiliate of the General
Partner, owned 724 units in the Partnership at March 31, 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.
 
   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.
 
                                       6
<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 March 31, 1998, the Partnership had approximately $3,612,000 of cash
and cash equivalents which is a decrease of approximately $56,000 as compared to
December 31, 1997. The decrease in cash and cash equivalents was primarily due
to the payment of management fees and general and administrative expenses
offset, in part, by interest received on the Partnership's cash and cash
equivalents.
 
   As of March 31, 1998, the Partnership had approximately $270,000 invested in
equity securities with an aggregate market value which exceeded its cost.
Certain of these investments are in development stage companies which are more
speculative and higher in risk than other equity investments. Additionally, the
realization of this market value is further impacted by market volume capacity.
 
   The Partnership's royalty positions with Forest Laboratories, Inc. ('Forest')
and Creative BioMolecules, Inc. did not generate income for the Partnership
during the three months ended March 31, 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 investments 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.
 
Results of Operations
 
   The Partnership recognized a net loss of approximately $44,000 for the three
months ended March 31, 1998 as compared to net income of approximately
$3,967,000 during the same period in 1997. This fluctuation of approximately
$4,011,000 was primarily due to gains recognized during the first quarter of
1997 on the sale of investments in equity securities (no sales of investments in
equity securities were made in the comparable period in 1998) offset, in part,
by higher management fees during the first quarter of 1997 versus 1998 and a
1997 write-down of an investment in an equity security as discussed below.
 
   Interest and other income increased by approximately $29,000 during the three
months ended March 31, 1998 as compared to the corresponding period in 1997. The
increase reflects a higher level of Partnership investments in short-term
instruments during the first quarter of 1998 than in the comparable 1997 period.
During the 1997 period, Partnership funds varied with the timing of sales of
investments in equity securities and distributions made to Unitholders.
 
   During the first quarter of 1998, there were no sales of investments in
equity securities. During the first quarter of 1997, gains totalling
approximately $4,478,000 were recorded on the sale of common stock of Creative
BioMolecules, Inc., Kopin Corporation and Somatix Therapy Corporation.
 
   Management fees decreased by approximately $142,000 during the three months
ended March 31, 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.)
 
   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.
 
                                       7
<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.
 
                                       8
<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: May 14, 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: May 14, 1998
     ----------------------------------------
     Steven Carlino
     Vice President and Chief Accounting
     Officer for the Registrant
 
                                       9