<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, 1997
 
/ / 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              (I.R.S. Employer Identification No.)
of incorporation or organization)
 
440 Mission Court, Suite 250, Fremont, California                94539
--------------------------------------------------------------------------------
(Address of principal executive offices)                      (Zip Code)
 
Registrant's telephone number, including area code (510) 656-1855
 
                                      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,
                                                                          1997              1996
<S>                                                                   <C>               <C>
----------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents                                              $ 4,577,473      $ 2,342,441
Investments in equity securities                                         3,338,296       13,321,925
                                                                      -------------     ------------
Total assets                                                           $ 7,915,769      $15,664,366
                                                                      -------------     ------------
                                                                      -------------     ------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accrued management fee                                                 $   204,670      $   204,670
Accrued expenses and other liabilities                                      44,729           80,438
                                                                      -------------     ------------
Total liabilities                                                          249,399          285,108
                                                                      -------------     ------------
Contingencies
Partners' capital
Unitholders (40,934 units issued and outstanding)                        5,635,304        8,312,200
General partner                                                            633,883          931,316
Unrealized gain on investments in equity securities                      1,397,183        6,135,742
                                                                      -------------     ------------
Total partners' capital                                                  7,666,370       15,379,258
                                                                      -------------     ------------
Total liabilities and partners' capital                                $ 7,915,769      $15,664,366
                                                                      -------------     ------------
                                                                      -------------     ------------
----------------------------------------------------------------------------------------------------
                  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,
                                              -------------------------     -------------------------
                                                 1997           1996           1997           1996
<S>                                           <C>            <C>            <C>            <C>
-----------------------------------------------------------------------------------------------------
REVENUES
Gain on sale of investments in equity
  securities                                  $5,686,251     $3,621,513     $1,207,983     $       --
Interest and other income                         55,799         26,981         39,942         10,728
Royalty income                                        --        216,665             --        216,665
                                              ----------     ----------     ----------     ----------
                                               5,742,050      3,865,159      1,247,925        227,393
                                              ----------     ----------     ----------     ----------
EXPENSES
Management fee                                   409,340        409,340        204,670        204,670
Write-down of investments in equity
  securities                                     295,000             --             --             --
General and administrative                        52,650         50,951         25,499         20,820
                                              ----------     ----------     ----------     ----------
                                                 756,990        460,291        230,169        225,490
                                              ----------     ----------     ----------     ----------
Net income                                    $4,985,060     $3,404,868     $1,017,756     $    1,903
                                              ----------     ----------     ----------     ----------
                                              ----------     ----------     ----------     ----------
ALLOCATION OF NET INCOME
Unitholders                                   $4,486,554     $3,064,381     $  915,980     $    1,713
                                              ----------     ----------     ----------     ----------
                                              ----------     ----------     ----------     ----------
General partner                               $  498,506     $  340,487     $  101,776     $      190
                                              ----------     ----------     ----------     ----------
                                              ----------     ----------     ----------     ----------
Net income per unit                           $   109.60     $    74.86     $    22.38     $      .04
                                              ----------     ----------     ----------     ----------
                                              ----------     ----------     ----------     ----------
-----------------------------------------------------------------------------------------------------
</TABLE>
 
                   STATEMENT OF CHANGES IN PARTNERS' CAPITAL
                                  (unaudited)
<TABLE>
<CAPTION>
                                                                          UNREALIZED
                                                             GENERAL        GAIN ON
                                            UNITHOLDERS      PARTNER      INVESTMENTS        TOTAL
<S>                                         <C>             <C>           <C>             <C>
-----------------------------------------------------------------------------------------------------
Partners' capital--December 31, 1996        $8,312,200      $ 931,316     $6,135,742      $15,379,258
Net income                                   4,486,554        498,506             --        4,985,060
Distribution                                (7,163,450 )     (795,939)            --       (7,959,389)
Change in unrealized gain on investments
  in equity securities                              --             --     (4,738,559 )     (4,738,559)
                                            -----------     ---------     -----------     -----------
Partners' capital--June 30, 1997            $5,635,304      $ 633,883     $1,397,183      $ 7,666,370
                                            -----------     ---------     -----------     -----------
                                            -----------     ---------     -----------     -----------
-----------------------------------------------------------------------------------------------------
                   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>
                                                                            1997            1996
----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and other income received                                       $    55,799     $    26,981
Management fee paid                                                         (409,340)       (409,340)
General and administrative expenses paid                                     (88,359)        (55,951)
Royalty income received                                                           --         216,665
Cash received for other asset                                                     --         216,669
                                                                         -----------     -----------
Net cash used in operating activities                                       (441,900)         (4,976)
                                                                         -----------     -----------
 
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of investments in equity securities                10,694,971       3,660,056
Purchase of investments in equity securities                                 (58,650)             --
                                                                         -----------     -----------
Net cash provided by investing activities                                 10,636,321       3,660,056
                                                                         -----------     -----------
 
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions                                                             (7,959,389)     (3,638,578)
                                                                         -----------     -----------
Net increase in cash and cash equivalents                                  2,235,032          16,502
Cash and cash equivalents at beginning of period                           2,342,441         480,692
                                                                         -----------     -----------
Cash and cash equivalents at end of period                               $ 4,577,473     $   497,194
                                                                         -----------     -----------
                                                                         -----------     -----------
RECONCILIATION OF NET INCOME TO NET CASH
USED IN OPERATING ACTIVITIES
Net income                                                               $ 4,985,060     $ 3,404,868
                                                                         -----------     -----------
Adjustments to reconcile net income to net cash used in operating
  activities:
Gain on sale of investments in equity securities                          (5,686,251)     (3,621,513)
Write-down of investments in equity securities                               295,000              --
Changes in:
   Accrued expenses and other liabilities                                    (35,709)         (5,000)
   Other asset                                                                    --         216,669
                                                                         -----------     -----------
Total adjustments                                                         (5,426,960)     (3,409,844)
                                                                         -----------     -----------
Net cash used in operating activities                                    $  (441,900)    $    (4,976)
                                                                         -----------     -----------
                                                                         -----------     -----------
----------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
1997
   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, 1997
                                  (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, 1997, the results of its operations for the six and three months
ended June 30, 1997 and 1996 and its cash flows for the six months ended June
30, 1997 and 1996. 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, 1996.
 
   Certain balances for prior periods have been reclassified to conform with
current financial statement presentation.
 
B. Investments
 
   Investments in marketable equity securities available-for-sale include the
following:
 
<TABLE>
<CAPTION>
                                     June 30, 1997                                           December 31, 1996
                -------------------------------------------------------    ------------------------------------------------------
                                       Gross unrealized     Carrying                              Gross unrealized     Carrying
                Shares    Cost basis     gains/(loss)         value        Shares    Cost basis        gains            value
<S>             <C>       <C>          <C>                <C>              <C>       <C>          <C>                <C>
-----------------------------------------------------------------------    ---------------------------------------------
Creative
 BioMolecules,
  Inc.-Common
  Stock          74,384   $  279,488      $  245,849       $   525,337     509,382   $1,666,928     $  3,617,910     $  5,284,838
Kopin
  Corporation-
  Common Stock  144,870    1,083,625       1,179,963         2,263,588     537,333    4,019,255        2,361,582        6,380,837
Cell Genesys
  Corporation-
  Common Stock  111,265      578,000         (28,629)          549,371          --           --               --               --
Somatix
  Therapy
  Corporation-
  Common Stock       --           --              --                --     500,000    1,500,000          156,250        1,656,250
                          ----------   ----------------   -------------              ----------   ----------------   ------------
                          $1,941,113      $1,397,183       $ 3,338,296               $7,186,183     $  6,135,742     $ 13,321,925
                          ----------   ----------------   -------------              ----------   ----------------   ------------
                          ----------   ----------------   -------------              ----------   ----------------   ------------
</TABLE>
 
   The gross unrealized gains would be allocated 90% to the Unitholders and 10%
to R&D Funding Corp (the 'General Partner') if realized at June 30, 1997;
however, there is no assurance that the Partnership would receive these amounts
in the event of the sale of its position in these securities.
 
   During the first quarter of 1997, the Partnership sold 441,898 shares of
Creative BioMolecules, Inc. common stock with a cost basis of $1,446,000
resulting in a gain of $3,573,000, and the Partnership exercised its option to
purchase 6,900 shares of Creative BioMolecules, Inc. common stock at an exercise
price of $8.50 per share for a total cost of $59,000. Also, during the first
quarter of 1997, the Partnership sold 173,189 shares of Kopin Corporation common
stock with a cost basis of $1,295,000 resulting in a gain of $1,002,000, and
205,000 shares of Somatix Therapy Corporation common stock with a cost basis of
$615,000 resulting in a loss of $98,000.
 
   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.
 
   During the second quarter of 1997, the Partnership sold 219,274 shares of
Kopin Corporation common stock with a cost basis of $1,640,000 resulting in a
gain of $1,208,000, and 6,000 shares of Somatix Therapy Corporation common stock
with a cost basis of $12,000 resulting in no gain or loss to the Partnership.
 
                                       5
<PAGE>
   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.
 
   Subsequent to June 30, 1997, the Partnership sold 43,855 and 23,400 shares of
Kopin Corporation common stock and Cell Genesis Corporation common stock,
respectively, as more fully discussed in
Note E.
 
C. 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,
                            ---------------------    ---------------------
                              1997         1996        1997         1996
<S>                         <C>          <C>         <C>          <C>
--------------------------------------------------------------------------
Management fee              $409,340     $409,340    $204,670     $204,670
Printing                       6,585        5,925       3,752           --
                            --------     --------    --------     --------
                            $415,925     $415,265    $208,422     $204,670
                            --------     --------    --------     --------
                            --------     --------    --------     --------
</TABLE>
 
   Printing costs payable to an affiliate of the General Partner (which are
included in accrued expenses and other liabilities) as of June 30, 1997 and
December 31, 1996 were $5,585 and $4,943, respectively.
 
   Prudential Securities Incorporated, an affiliate of the General Partner,
owned 724 units in the Partnership at June 30, 1997.
 
   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 has engaged in research and development co-investment
projects with PruTech Research and Development Partnership, 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.
 
D. 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,
Prudential Securities Incorporated, 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 units; 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 ultimate outcome of this litigation as well as the impact on the
Partnership cannot presently be determined.
 
   The General Partner, Prudential Securities Incorporated and the Partnership
believe they have meritorious defenses to the complaint and intend to vigorously
defend themselves in this action.
 
E. Subsequent Events
 
   Between July 10, 1997 and August 8, 1997, the Partnership sold 43,855 and
23,400 shares of Kopin Corporation common stock and Cell Genesys Corporation
common stock for approximately $720,000 and $142,000, respectively. These sales
resulted in gains of approximately $392,000 and $20,000, respectively.
 
   During August 1997, the Partnership made a $4,548,222 distribution, of which
$4,093,400 ($100 per unit) was paid to the limited partners, and the remainder
to the General Partner.
 
                                       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 June 30, 1997, the Partnership had approximately $4,577,000 of cash and
cash equivalents which is an increase of approximately $2,235,000 as compared to
December 31, 1996. The increase in cash and cash equivalents was primarily due
to proceeds from the sales of certain investments in equity securities as
further discussed below reduced by the payment of distributions and the fourth
quarter 1996 and first quarter 1997 management fee.
 
   As of June 30, 1997, the Partnership had approximately $1.9 million 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 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,
to a lesser extent, 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. The Partnership's royalty positions
with Forest Laboratories, Inc. and Creative BioMolecules, Inc. did not generate
royalty income for the Partnership during the six months ended June 30, 1997 and
1996.
 
   During the first quarter of 1997, the Partnership sold 441,898 shares of
Creative BioMolecules, Inc. common stock for $5,019,000, and the Partnership
exercised its option to purchase 6,900 shares of Creative BioMolecules, Inc.
common stock at an exercise price of $8.50 per share for a total cost of
$59,000. Also, during the first quarter of 1997, the Partnership sold 173,189
shares of Kopin Corporation common stock for $2,297,000, and 205,000 shares of
Somatix Therapy Corporation common stock for $517,000.
 
   In February and March of 1997, the Partnership made distributions of
$4,548,222 and $3,411,167, respectively. Unitholders received a total of
$4,093,400 ($100 per unit) and $3,070,050 ($75 per unit) on these distributions,
respectively, and the General Partner received the remainder.
 
   During the second quarter of 1997, the Partnership sold 219,274 shares of
Kopin Corporation common stock for $2,848,000, and 6,000 shares of Somatix
Therapy Corporation common stock for $12,000.
 
   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.
 
   Between July 10, 1997 and August 8, 1997, the Partnership sold 43,855 and
23,400 shares of Kopin Corporation common stock and Cell Genesys Corporation
common stock for approximately $720,000 and $142,000, respectively.
 
   During August 1997, the Partnership made a $4,548,222 distribution, of which
$4,093,400 ($100 per unit) was paid to the limited partners, and the remainder
to the General Partner.
 
Results of Operations
 
   The Partnership's net income increased by approximately $1,580,000 and
$1,016,000 for the six and three months ended June 30, 1997 as compared to the
same periods in 1996. These increases were primarily due to larger gains on the
sale of investments in equity securities recorded in 1997 versus 1996, offset,
in part, by a 1997 write-down of the Partnership's equity investment in Somatix
Therapy Corporation and 1996 royalty income from Kopin Corporation as discussed
below.
 
   During the six months ended June 30, 1997, gains totalling approximately
$5,686,000 were recorded on the sale of common stock of Creative BioMolecules,
Inc., Kopin Corporation and Somatix Therapy Corporation as discussed in
Liquidity and Capital Resources above as compared to a gain of approximately
$3,622,000 on the sale of 75,000 shares of Forest Laboratories, Inc. common
stock and 4,334 shares of Kopin Corporation common stock during the first
quarter of 1996.
 
                                       7
<PAGE>
   Interest and other income increased by $29,000 for both the six and three
month periods ended June 30, 1997 as compared to the same periods in 1996 due to
higher amounts invested in short-term instruments funded from 1997 sales of
securities.
 
   During the second quarter of 1996, the Partnership recorded $216,665 of
royalty income as part of an agreement in which the Partnership agreed to
transfer to Kopin Corporation its rights to certain technologies and royalties.
As a result of the above, the Partnership holds no technology or royalty
positions with Kopin Corporation and therefore, no further royalties will be
received by the Partnership from Kopin Corporation.
 
   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.
 
                                       8
<PAGE>
                           PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings--This information is incorporated by reference to Note
        D 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--None
 
                                       9
<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/ Michael S. Hasley                    Date: August 14, 1997
     ----------------------------------------
     Michael S. Hasley
     President for the Registrant
 
By: R&D Funding Corp
    A Delaware corporation, General Partner
 
     By: /s/ Steven Carlino                       Date: August 14, 1997
     ----------------------------------------
     Steven Carlino
     Vice President and Chief Accounting
     Officer for the Registrant
 
                                       10