<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 June 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
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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>
                                                                        June 30,        December 31,
                                                                          1998              1997
<S>                                                                   <C>               <C>
----------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents                                              $ 1,282,700       $3,668,595
Investments in equity securities                                           117,830          552,790
                                                                      -------------     ------------
Total assets                                                           $ 1,400,530       $4,221,385
                                                                      -------------     ------------
                                                                      -------------     ------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accrued expenses and other liabilities                                 $    74,619       $   84,357
Accrued management fee                                                      62,500           62,500
                                                                      -------------     ------------
Total liabilities                                                          137,119          146,857
                                                                      -------------     ------------
Contingencies
Partners' capital
Unitholders (40,934 units issued and outstanding)                        1,096,170        3,405,966
General partner                                                            129,535          386,179
Accumulated other comprehensive income                                      37,706          282,383
                                                                      -------------     ------------
Total partners' capital                                                  1,263,411        4,074,528
                                                                      -------------     ------------
Total liabilities and partners' capital                                $ 1,400,530       $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>
                                                    Six months ended           Three months ended
                                                        June 30,                    June 30,
                                                 -----------------------     -----------------------
                                                   1998          1997          1998          1997
<S>                                              <C>          <C>            <C>          <C>
----------------------------------------------------------------------------------------------------
REVENUES
Gain on sale of investments in equity
  securities                                     $246,504     $5,686,251     $246,504     $1,207,983
Interest income                                    84,424         55,799       39,263         39,942
                                                 --------     ----------     --------     ----------
                                                  330,928      5,742,050      285,767      1,247,925
                                                 --------     ----------     --------     ----------
EXPENSES
Management fee                                    125,000        409,340       62,500        204,670
General and administrative                         43,435         52,650       17,204         25,499
Write-down of investments in equity
  securities                                        --           295,000        --                --
                                                 --------     ----------     --------     ----------
                                                  168,435        756,990       79,704        230,169
                                                 --------     ----------     --------     ----------
Net income                                       $162,493     $4,985,060     $206,063     $1,017,756
                                                 --------     ----------     --------     ----------
                                                 --------     ----------     --------     ----------
ALLOCATION OF NET INCOME
Unitholders                                      $146,244     $4,486,554     $185,457     $  915,980
                                                 --------     ----------     --------     ----------
                                                 --------     ----------     --------     ----------
General partner                                  $ 16,249     $  498,506     $ 20,606     $  101,776
                                                 --------     ----------     --------     ----------
                                                 --------     ----------     --------     ----------
Net income per unit                              $   3.57     $   109.60     $   4.53     $    22.38
                                                 --------     ----------     --------     ----------
                                                 --------     ----------     --------     ----------
----------------------------------------------------------------------------------------------------
</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                             146,244        16,249                              162,493
  Net unrealized losses on invest-
  ments in equity securities                                            (244,677)          (244,677)
                                                                                         ----------
  Comprehensive loss                                                                        (82,184)
                                                                                         ----------
Distribution                          (2,456,040 )    (272,893)                          (2,728,933)
                                      -----------    ---------    -------------------    ----------
Partners' capital--June 30, 1998      $1,096,170     $ 129,535         $  37,706         $1,263,411
                                      -----------    ---------    -------------------    ----------
                                      -----------    ---------    -------------------    ----------
---------------------------------------------------------------------------------------------------
                 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>
                                                                              Six months ended
                                                                                  June 30,
                                                                         ---------------------------
<S>                                                                      <C>             <C>
                                                                            1998            1997
----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest income received                                                 $    84,424     $    55,799
Management fee paid                                                         (125,000)       (409,340)
General and administrative expenses paid                                     (53,173)        (88,359)
                                                                         -----------     -----------
Net cash used in operating activities                                        (93,749)       (441,900)
                                                                         -----------     -----------
 
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of investments in equity securities                   436,787      10,694,971
Purchase of investments in equity securities                                 --              (58,650)
                                                                         -----------     -----------
Net cash provided by investing activities                                    436,787      10,636,321
                                                                         -----------     -----------
 
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions                                                             (2,728,933)     (7,959,389)
                                                                         -----------     -----------
Net decrease in cash and cash equivalents                                 (2,385,895)      2,235,032
Cash and cash equivalents at beginning of period                           3,668,595       2,342,441
                                                                         -----------     -----------
Cash and cash equivalents at end of period                               $ 1,282,700     $ 4,577,473
                                                                         -----------     -----------
                                                                         -----------     -----------
RECONCILIATION OF NET INCOME TO NET CASH
USED IN OPERATING ACTIVITIES
Net income                                                               $   162,493     $ 4,985,060
                                                                         -----------     -----------
Adjustments to reconcile net income to net cash used in operating
  activities:
Gain on sale of investments in equity securities                            (246,504)     (5,686,251)
Changes in accrued expenses and other liabilities                             (9,738)        (35,709)
Write-down of investments in equity securities                               --              295,000
                                                                         -----------     -----------
Total adjustments                                                           (256,242)     (5,426,960)
                                                                         -----------     -----------
Net cash used in operating activities                                    $   (93,749)    $  (441,900)
                                                                         -----------     -----------
                                                                         -----------     -----------
----------------------------------------------------------------------------------------------------
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
                                 JUNE 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 June 30, 1998, the results of its operations for the six and three months
ended June 30, 1998 and 1997 and its cash flow for the six months ended June 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.
 
   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 six months
ended June 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 June 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>
                                     June 30, 1998                                           December 31, 1997
                 ------------------------------------------------------    ------------------------------------------------------
                                       Gross unrealized     Carrying                              Gross unrealized     Carrying
                 Shares   Cost basis         gain             value        Shares    Cost basis        gains            value
<S>              <C>      <C>          <C>                <C>              <C>       <C>          <C>                <C>
-----------------------------------------------------------------------    -------------------------------------------
Creative
  BioMolecules,
  Inc.-Common
  Stock          24,484    $ 80,124        $ 37,706         $ 117,830       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        $ 37,706         $ 117,830                 $270,407        $282,383         $552,790
                          ----------   ----------------   -------------              ----------   ----------------   ------------
                          ----------   ----------------   -------------              ----------   ----------------   ------------
</TABLE>
 
   If upon the sale of the Partnership's investments, the gross unrealized gain
were to be realized, such gain would be allocated 90% to the Unitholders and 10%
to R&D Funding Corp (the 'General Partner');
 
                                       5
<PAGE>
however, there is no assurance that the Partnership would receive such amount in
the event of the sale of its remaining equity position.
 
   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 $244,677 for the six months ended June 30, 1998 are comprised as follows:
 
Unrealized holding gains                                  $   1,827
Less: reclassification adjustment for realized gains
included in net income                                     (246,504)
                                                          ---------
Net unrealized losses on investments in equity
securities                                                $(244,677)
                                                          ---------
                                                          ---------
 
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>
                              Six months ended        Three months ended
                                  June 30,                 June 30,
                            ---------------------    --------------------
                              1998         1997       1998         1997
<S>                         <C>          <C>         <C>         <C>
-------------------------------------------------------------------------
Management fee              $125,000     $409,340    $62,500     $204,670
Printing                       4,880        6,585      1,698        3,752
                            --------     --------    -------     --------
                            $129,880     $415,925    $64,198     $208,422
                            --------     --------    -------     --------
                            --------     --------    -------     --------
</TABLE>
 
   Printing costs payable to an affiliate of the General Partner (which are
included in accrued expenses and other liabilities) as of June 30, 1998 and
December 31, 1997 were $4,749 and $7,788, respectively.
 
   Prudential Securities Incorporated ('PSI'), an affiliate of the General
Partner, owned 724 units in the Partnership at June 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
 
                                       6
<PAGE>
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.
 
                                       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 June 30, 1998, the Partnership had approximately $1,283,000 of cash and
cash equivalents, which is a decrease of approximately $2,386,000 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 June 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 $118,000. 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 six months ended June 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 $4,823,000 and
$812,000 for the six and three months ended June 30, 1998 as compared to the
same periods in 1997. These decreases 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 six months ended June 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 $5,686,000 recorded on 1997 sales of 441,898
shares of Creative common stock, 392,463 shares of Kopin Corporation common
stock and 211,000 shares of Somatix Therapy Corporation common stock.
 
   Interest income increased by approximately $29,000 during the six months
ended June 30, 1998, but decreased by approximately $1,000 during the three
months ended June 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 and $142,000 during the
six and three months ended June 30, 1998 as compared to the corresponding
periods 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.)
 
   General and administrative expenses decreased by approximately $9,000 and
$8,000 for the six and three months ended June 30, 1998 as compared to the same
periods in 1997. These decreases reflect lower costs incurred in monitoring the
Partnership's investments.
 
                                       8
<PAGE>
   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>
<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: August 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: August 14, 1998
     ----------------------------------------
     Steven Carlino
     Vice President and Chief Accounting 
     Officer for the Registrant
 
                                       11