<PAGE>
                                 UNITED STATES
                       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, 1999
 
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
 
For the transition period from _______________________ to ______________________
 
Commission file number 0-20081
 
                PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
--------------------------------------------------------------------------------
             (Exact name of Registrant as specified in its charter)
 
California                                      77-0129484
--------------------------------------------------------------------------------
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)
 
One Seaport Plaza, 28th Floor, New York, NY     10292
--------------------------------------------------------------------------------
(Address of principal executive offices)        (Zip Code)
 
Registrant's telephone number, including area code (212) 214-3500
 
                                      N/A
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
 
   Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _CK_  No __

<PAGE>
                         Part I. FINANCIAL INFORMATION
                          ITEM 1. FINANCIAL STATEMENTS
                PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
                            (a limited partnership)
                       STATEMENTS OF FINANCIAL CONDITION
                                  (unaudited)
<TABLE>
<CAPTION>
                                                                        March 31,      December 31,
                                                                           1999            1998
<S>                                                                     <C>            <C>
---------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents                                               $1,119,007      $1,157,931
Investments in equity securities                                            34,688          73,760
                                                                        ----------     ------------
Total assets                                                            $1,153,695      $1,231,691
                                                                        ----------     ------------
                                                                        ----------     ------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accrued expenses and other liabilities                                  $   68,545      $   57,698
Accrued management fee                                                      31,250          62,500
                                                                        ----------     ------------
Total liabilities                                                           99,795         120,198
                                                                        ----------     ------------
Contingencies
Partners' capital
Unitholders (40,934 units issued and outstanding)                          954,505         985,900
General partner                                                            113,795         117,283
Accumulated other comprehensive (loss) income                              (14,400)          8,310
                                                                        ----------     ------------
Total partners' capital                                                  1,053,900       1,111,493
                                                                        ----------     ------------
Total liabilities and partners' capital                                 $1,153,695      $1,231,691
                                                                        ----------     ------------
                                                                        ----------     ------------
---------------------------------------------------------------------------------------------------
                 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,
                                                                              ---------------------
                                                                                1999         1998
<S>                                                                           <C>          <C>
---------------------------------------------------------------------------------------------------
REVENUES
Interest income                                                               $ 11,856     $ 45,161
Gain on sale of investments in equity
  securities                                                                       507           --
                                                                              --------     --------
                                                                                12,363       45,161
                                                                              --------     --------
EXPENSES
Management fee                                                                  31,250       62,500
General and administrative                                                      15,996       26,231
                                                                              --------     --------
                                                                                47,246       88,731
                                                                              --------     --------
Net loss                                                                      $(34,883)    $(43,570)
                                                                              --------     --------
                                                                              --------     --------
ALLOCATION OF NET LOSS
Unitholders                                                                   $(31,395)    $(39,213)
                                                                              --------     --------
                                                                              --------     --------
General partner                                                               $ (3,488)    $ (4,357)
                                                                              --------     --------
                                                                              --------     --------
Net loss per unit                                                             $   (.77)    $   (.96)
                                                                              --------     --------
                                                                              --------     --------
---------------------------------------------------------------------------------------------------
</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, 1998      $ 985,900     $117,283         $   8,310         $1,111,493
Comprehensive loss:
  Net loss                                  (31,395)      (3,488)                             (34,883)
  Net unrealized losses on investments
  in equity securities                                                     (22,710)           (22,710)
                                                                                           ----------
  Comprehensive loss                                                                          (57,593)
                                         -----------    --------    -------------------    ----------
Partners' capital--March 31, 1999         $ 954,505     $113,795         $ (14,400)        $1,053,900
                                         -----------    --------    -------------------    ----------
                                         -----------    --------    -------------------    ----------
-----------------------------------------------------------------------------------------------------
                  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>
                                                                             1999           1998
---------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest income received                                                  $   11,856     $   45,161
Management fee paid                                                          (62,500)       (62,500)
General and administrative expenses paid                                      (5,149)       (38,994)
                                                                          ----------     ----------
Net cash used in operating activities                                        (55,793)       (56,333)
                                                                          ----------     ----------
 
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of investments in equity securities                    16,869             --
                                                                          ----------     ----------
Net decrease in cash and cash equivalents                                    (38,924)       (56,333)
Cash and cash equivalents at beginning of period                           1,157,931      3,668,595
                                                                          ----------     ----------
Cash and cash equivalents at end of period                                $1,119,007     $3,612,262
                                                                          ----------     ----------
                                                                          ----------     ----------
RECONCILIATION OF NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES
Net loss                                                                  $  (34,883)    $  (43,570)
                                                                          ----------     ----------
Adjustments to reconcile net loss to net cash used in operating
  activities:
Gain on sale of investments in equity securities                                (507)            --
Changes in accrued expenses and other liabilities                             10,847        (12,763)
Changes in accrued management fee                                            (31,250)            --
                                                                          ----------     ----------
Total adjustments                                                            (20,910)       (12,763)
                                                                          ----------     ----------
Net cash used in operating activities                                     $  (55,793)    $  (56,333)
                                                                          ----------     ----------
                                                                          ----------     ----------
---------------------------------------------------------------------------------------------------
                 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, 1999
                                  (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, 1999 and the results of its operations and its cash flows for
the three months ended March 31, 1999 and 1998. 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, 1998.
 
   At March 31, 1999, the Partnership has an investment in the common stock of
Creative BioMolecules, Inc. (OTC-CBMI) and royalty positions with Forest
Laboratories, Inc. ('Forest') and Creative BioMolecules, Inc., that will expire
in December 1999. The Partnership's royalty position with Creative BioMolecules,
Inc. is believed to have little to no value and the equity position's value is
readily realizable. The Partnership's royalty position in Synapton, a drug
developed by Forest for the treatment of Alzheimer's disease, is illiquid, and
any estimate of its value is subject to significant uncertainty due to a number
of factors including, among other things, (i) whether the Food and Drug
Administration (the 'FDA') will approve Synapton for sale, which would require
that the FDA reverse its non-approval position issued in November 1998, (ii) the
difficulty, in light of the fact that FDA approval is yet to be obtained, in
manufacturing and distributing the product prior to the expiration of the
Partnership's royalty position and (iii) market acceptance of the product. Due
to the nature of the Forest royalty, the general partner is not able at this
time to predict with any degree of certainty, the value, if any, of the royalty
position. Forest has advised the Partnership that it is evaluating 
the potential need to engage in additional research to respond to the FDA. 
Forest is not optimistic that Synapton will be approved by the FDA, if at 
all, before the expiration in December of the Partnership's royalty 
period. The Partnership will continue to monitor this situation. If it 
determines that the royalty interest in Synapton does not warrant the 
continuing operation of the Partnership through the end of the royalty 
period, the general partner will liquidate and distribute any remaining 
assets (reduced by a reserve to satisfy any liabilities of the Partnership) 
and dissolve the Partnership. In the event that the general partner 
determines that continuing operations through the expiration date of 
the Synapton royalty position may be in the best interest of the Partnership,
the general partner will proceed to dissolve the Partnership as soon as 
practicable thereafter.
 
B. Royalties
 
   At March 31, 1999 and December 31, 1998, the Partnership retains certain
royalty rights with Forest and Creative BioMolecules, Inc. whose carrying values
for financial reporting purposes are zero. The royalty rights with Forest relate
to Synapton. Forest filed a new drug application with the Food and Drug
Administration, seeking approval of Synapton, on November 18, 1997. On November
18, 1998, Forest announced that it was evaluating and would be preparing a
response to a non-approvable letter received from the FDA on its new drug
application for Synapton. The Partnership's royalty rights with Forest and 
Creative BioMolecules, Inc. will expire in December 1999. (Refer to Note 
A for further discussion.)
 
                                       5
<PAGE>
C. Investments
 
   Investments in marketable equity securities available-for-sale include the
following:
 
<TABLE>
<CAPTION>
                                      March 31, 1999                                          December 31, 1998
                  ------------------------------------------------------    -----------------------------------------------------
                                        Gross unrealized     Carrying                             Gross unrealized     Carrying
                  Shares   Cost basis         loss             value        Shares   Cost basis         gain            value
<S>               <C>      <C>          <C>                <C>              <C>      <C>          <C>                <C>
------------------------------------------------------------------------    ------------------------------------------
Creative
  BioMolecules,
  Inc.-Common
  Stock           15,000    $ 49,088        $(14,400)         $34,688       20,000    $ 65,450         $8,310          $ 73,760
                           ----------       --------       -------------             ----------       -------        ------------
                           ----------       --------       -------------             ----------       -------        ------------
</TABLE>
 
   If upon the sale of the Partnership's remaining equity investment, the gross
unrealized loss were to be realized, such loss would be allocated 90% to the
Unitholders and 10% to R&D Funding Corp (the 'General Partner'); however, there
is no assurance that the Partnership would receive such amount in the event of
the sale of its remaining equity position.
 
   During the first quarter of 1999, the Partnership sold 5,000 shares of
Creative BioMolecules, Inc. common stock for proceeds of approximately $17,000
resulting in a gain of approximately $500.
 
   The Partnership's net unrealized losses on investments in equity securities
of $22,710 for the three months ended March 31, 1999 are comprised as follows:
 
Unrealized holding losses                                 $(22,203)
Less: reclassification adjustment for realized gain
included in net income                                        (507)
                                                          --------
Net unrealized losses on investments in equity
securities                                                $(22,710)
                                                          --------
                                                          --------
 
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,
                                                       -------------------
                                                        1999        1998
                          <S>                          <C>         <C>
                          ------------------------------------------------
                          Management fee               $31,250     $62,500
                          Printing                       2,172       1,861
                                                       -------     -------
                                                       $33,422     $64,361
                                                       -------     -------
                                                       -------     -------
</TABLE>
 
   During the first quarter of 1999, the General Partner agreed to reduce its
management fee to $31,250 (which equals 50% of the $62,500 quarterly rate that
had been incurred each quarter from July 1997 through December 31, 1998).
 
   Printing costs payable to an affiliate of the General Partner (which are
included in accrued expenses and other liabilities) as of March 31, 1999 and
December 31, 1998 were $5,228 and $5,025, respectively.
 
   Prudential Securities Incorporated ('PSI'), an affiliate of the General
Partner, owned 724 units in the Partnership at March 31, 1999.
 
   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
which was dissolved and liquidated in December 1998 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.
 
                                       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
 
   At March 31, 1999, the Partnership has an investment in the common stock of
Creative BioMolecules, Inc. ('Creative') (OTC-CMBI) and royalty positions with
Forest Laboratories, Inc. ('Forest') and Creative that will expire in December
1999. The Partnership's royalty position with Creative is believed to have
little to no value and the equity position's value (approximately $35,000 at
March 31, 1999) is readily realizable. The Partnership's royalty position in
Synapton, a drug developed by Forest for the treatment of Alzheimer's disease,
is illiquid, and any estimate of its value is subject to significant uncertainty
due to a number of factors including, among other things, (i) whether the Food
and Drug Administration (the 'FDA') will approve Synapton for sale, which would
require that the FDA reverse its non-approval position issued in November 1998,
(ii) the difficulty, in light of the fact that FDA approval is yet to be
obtained, in manufacturing and distributing the product prior to the expiration
of the Partnership's royalty position and (iii) market acceptance of the
product. Due to the nature of the Forest royalty, the General Partner is not
able at this time to predict with any degree of certainty, the value, if any, of
the royalty position. Forest has advised the Partnership that it is evaluating 
the potential need to engage in additional research to respond to the FDA. 
Forest is not optimistic that Synapton will be approved by the FDA, if at 
all, before the expiration in December of the Partnership's royalty 
period. The Partnership will continue to monitor this situation. If it 
determines that the royalty interest in Synapton does not warrant the 
continuing operation of the Partnership through the end of the royalty 
period, the General Partner will liquidate and distribute any remaining 
assets (reduced by a reserve to satisfy any liabilities of the 
Partnership) and dissolve the Partnership. In the event that the 
General Partner determines that continuing operations through the 
expiration date of the Synapton royalty position may be in the best interest
of the Partnership, the General Partner will proceed to dissolve the 
Partnership as soon as practicable thereafter.
 
   As of March 31, 1999, the Partnership had approximately $1,119,000 of cash
and cash equivalents, which is a decrease of approximately $39,000 as compared
to December 31, 1998. The decrease in cash and cash equivalents was primarily
due to the payment of management fees, offset by proceeds from the sale of 5,000
shares of Creative common stock for approximately $17,000.
 
   The amount to be distributed by the Partnership in future quarters will be
based on the extent to which the market value of its remaining investment in
Creative common stock can be realized and from the revenue stream from
royalties, if any, 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 net losses of approximately $35,000 and $44,000
for the three months ended March 31, 1999 and 1998, respectively. The reduction
in overall net loss during 1999 primarily relates to lower management fees and
general and administrative expenses in the 1999 period versus 1998, offset by
higher levels of 1998 interest income.
 
   During the three months ended March 31, 1999, gains totalling $507 were
recorded on the sale of Creative common stock as discussed in Liquidity and
Capital Resources above. No sales of investments in equity securities were made
during the 1998 comparable period.
 
   Interest income decreased by approximately $33,000 during the three months
ended March 31, 1999 as compared to the same period in 1998. During the 1999
period less funds were invested in short-term instruments principally as a
result of the distribution to Unitholders made in 1998.
 
   During the first quarter of 1999, the General Partner agreed to reduce its
management fee to $31,250 (which equals 50% of the $62,500 quarterly rate that
had been incurred each quarter from July 1997 through December 31, 1998).
 
   General and administrative expenses decreased by approximately $10,000 for
the three months ended March 31, 1999 as compared to the same period in 1998.
These decreases primarily reflect lower costs incurred in monitoring the
Partnership's remaining investments.
 
                                       7
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
   Information regarding quantitative and qualitative disclosures about market
risk is not required pursuant to Item 305(e) of Regulation S-K.
 
                                       8
<PAGE>
                           PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings--There are no material legal proceedings pending by or
        against the Registrant or the General Partner.
 
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.
 
                                       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/ Brian J. Martin                      Date: May 14, 1999
     ----------------------------------------
     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, 1999
     ----------------------------------------
     Steven Carlino
     Vice President and Chief Accounting
     Officer for the Registrant
 
                                       10