SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 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
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)

One Seaport Plaza, 28th Floor, New York, NY 10292
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (212) 214-3500

Securities registered pursuant to Section 12(b) of the Act:

None
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Securities registered pursuant to Section 12(g) of the Act:

Depositary Units
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(Title of class)

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 _

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[CK]

DOCUMENTS INCORPORATED BY REFERENCE

Registrant's Annual Report to Unitholders for the year ended December 31,
1997 is incorporated by reference into Parts I, II and IV of this Annual Report
on Form 10-K.

Agreement of Limited Partnership, included as part of the Registration
Statement on Form S-1 (File No. 33-6091) filed with the Securities and Exchange
Commission on June 3, 1986 pursuant to Rule 424(b) of the Securities Act of 1933
and amended May 31, 1990, is incorporated by reference into Part IV of this
Annual Report on Form 10-K.

Index to exhibits can be found on page 7.

PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
(a limited partnership)
TABLE OF CONTENTS

PART I PAGE

Item 1 Business......................................................................... 2
Item 2 Properties....................................................................... 3
Item 3 Legal Proceedings................................................................ 3
Item 4 Submission of Matters to a Vote of Unitholders................................... 3

PART II
Item 5 Market for the Registrant's Units and Related Unitholder Matters................. 3
Item 6 Selected Financial Data.......................................................... 4
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 4
Item 8 Financial Statements and Supplementary Data...................................... 4
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..................................................................... 4
PART III
Item 10 Directors and Executive Officers of the Registrant............................... 4
Item 11 Executive Compensation........................................................... 5
Item 12 Security Ownership of Certain Beneficial Owners and Management................... 6
Item 13 Certain Relationships and Related Transactions................................... 6

PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.................. 7
Financial Statements and Financial Statement Schedules........................... 7
Exhibits......................................................................... 7
Reports on Form 8-K.............................................................. 7
SIGNATURES.................................................................................. 8

PART I

Item 1. Business

PruTech Research and Development Partnership III (the 'Registrant'), a
California limited partnership, was formed on June 2, 1986 and will terminate on
December 31, 2006 unless terminated sooner under the provisions of the Agreement
of Limited Partnership, as amended (the 'Partnership Agreement'). The Registrant
was formed to seek cash flow from the research and development of new
technologies with potential commercial applications with proceeds raised from
the initial sale of 40,934 depositary units ('Units'). The Registrant's general
partner also contributed an amount equal to ten percent of the gross proceeds
raised by the sale of Units. The Registrant's fiscal year for book and tax
purposes ends on December 31.

The Registrant entered into total commitments of $30.1 million for ten
research and development projects in both publicly and privately held companies
all of which have been fully funded. The Registrant also made equity investments
in some of these companies. As of December 31, 1997, the Registrant held equity
investments and/or royalty rights, which the general partner believes had value
at December 31, 1997, relating to four companies. For more information regarding
the Registrant's operations, see Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations.

The Registrant's general partner was paid an annual management fee equal to
two percent of the unitholders' original capital contributions through June 30,
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 Registrant's royalty position in a treatment for Alzheimer's
disease with Forest Laboratories, Inc. after July 1, 1997 until the dissolution
and liquidation of the Registrant, not to exceed the aggregate management fee
payable under the terms of the Partnership Agreement ($818,680 per annum).

The Registrant is engaged solely in the business of research and development;
therefore, presentation of industry segment information is not applicable.

For the years ended December 31, 1997, 1996 and 1995, revenue from the
following portfolio company investments exceeded fifteen percent of the
Registrant's total revenue:

1997 1996 1995
---- ---- ----

Kopin Corporation 49% --% --%
Creative BioMolecules, Inc. 48 29 --
Forest Laboratories, Inc. -- 66 63
Interleaf, Inc. -- -- 32

General Partner

The general partner of the Registrant is R&D Funding Corp (the 'General
Partner'), an affiliate of Prudential Securities Incorporated ('PSI'). Both the
General Partner and PSI are wholly owned subsidiaries of Prudential Securities
Group Inc. In its capacity as General Partner, R&D Funding Corp was responsible
for locating, evaluating, negotiating and structuring the Registrant's research
and development projects and continues to monitor these projects. R&D Funding
Corp is also responsible for the management of and provides the administrative
services necessary for the operation of the Registrant. The assignor limited
partner is Prudential-Bache Investor Services Inc., an affiliate of the General
Partner, who has assigned substantially all the rights attributable to its
limited partnership interest to investors.

Competition

The companies and products in which the Registrant holds equity investments
and/or royalty rights face substantial competition in the markets for their
products and technologies. There are no assurances that the Registrant's
investments will not decline in value due to the development by others of
technologically superior products or for other competitive reasons.

Employees

The Registrant has no employees. Management and administrative services for
the Registrant are performed by the General Partner and its affiliates pursuant
to the Partnership Agreement. See Notes B and F to the financial statements in
the Registrant's annual report to limited partners for the year ended December
31, 1997 ('Registrant's 1997 Annual Report') which is filed as an exhibit
hereto.

Investment Portfolio Summary

For a description of the companies in which the Registrant's investments or
royalty rights were active during 1997, see page 2 of the Registrant's 1997
Annual Report which is filed as an exhibit hereto.

Item 2. Properties

The Registrant does not own or lease any property.

Item 3. Legal Proceedings

This information is incorporated by reference to Note G to the financial
statements in the Registrant's 1997 Annual Report which is filed as an exhibit
hereto.

Item 4. Submission of Matters to a Vote of Unitholders

None

PART II

Item 5. Market for the Registrant's Units and Related Unitholder Matters

As of March 5, 1998, there were 3,033 holders of record owning 40,934 Units.
A significant secondary market for the Units has not developed and it is not
expected that one will develop in the future. There are also certain
restrictions set forth in Article 8 of the Partnership Agreement limiting the
ability of the Unitholders to transfer Units. Consequently, holders of Units may
not be able to liquidate their investments in the event of an emergency or for
any other reason.

The following per Unit cash distributions were paid to Unitholders during the
following calendar quarters:

Quarter ended 1997 1996
- ------------- ------- ------

March 31 $175.00 $80.00
June 30 -- --
September 30 100.00 --
December 31 -- --

There are no material restrictions upon the Registrant's present or future
ability to make distributions in accordance with the provisions of the
Partnership Agreement. During 1997, the Registrant paid distributions of
$4,548,222, $3,411,167 and $4,548,222 of which $4,093,400 ($100 per unit),
$3,070,050 ($75 per unit) and $4,093,400 ($100 per unit), respectively, were
paid to the Unitholders and the remainder to the General Partner. The sources of
the distributions were proceeds from the sale of a portion of the Registrant's
equity holdings in Creative BioMolecules, Inc., Kopin Corporation and Somatix
Therapy Corporation/Cell Genesys Corporation. (Cell Genesys Corporation acquired
Somatix Therapy Corporation in June 1997.) The Registrant paid a distribution of
$3,638,578 during 1996 of which $3,274,720 ($80 per unit) was paid to the
Unitholders and the remainder to the General Partner. The source for the 1996
distribution was the January 1996 sale of the Registrant's remaining 75,000
shares of Forest Laboratories, Inc. common stock for proceeds of approximately
$3,600,000. The amount to be distributed by the Registrant in future quarters
will be based on the extent to which the market value of its investments can be
realized and from the revenue stream from royalties as well as interest income.
It is not expected that the Registrant's eventual total distributions will equal
the Unitholder's initial investments.

Item 6. Selected Financial Data

The following table presents selected financial data of the Registrant. This
data should be read in conjunction with the financial statements of the
Registrant and the notes thereto on pages 3 through 12 of the Registrant's 1997
Annual Report which is filed as an exhibit hereto.

Year ended December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------

Royalty income $ -- $ 216,665 $ -- $ 50,468 $ 96,798
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Gain on sale of
investments in equity
securities $ 7,888,065 $ 5,194,202 $ 8,998,197 $ 2,364,352 $ 772,027
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Termination of royalty
rights $ -- $ -- $ 2,241,783 -- --
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Total revenues $ 8,023,958 $ 5,448,886 $11,311,651 $ 2,706,567 $ 1,019,176
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Write-off of investments
in equity securities $ 295,000 $ -- $ -- $ 500,000 $ 505,904
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 7,056,240 $ 4,534,518 $10,308,841 $ 805,584 $ (616,780)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net income (loss) per
Unit $ 155.14 $ 99.70 $ 226.66 $ 17.71 $ (13.56)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Notes payable $ -- $ -- $ -- $ 1,622,223 $ 3,206,223
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Total assets $ 4,221,385 $15,664,366 $19,879,840 $19,448,580 $35,635,145
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Total limited partner
distributions $11,256,850 $ 3,274,720 $ 7,122,516 $ 347,939 $ --
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Limited partner
distributions per Unit $ 275.00 $ 80.00 $ 174.00 $ 8.50 $ --
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

This information is incorporated by reference to pages 13 and 14 of the
Registrant's 1997 Annual Report which is filed as an exhibit hereto.

Item 8. Financial Statements and Supplementary Data

The financial statements are incorporated by reference to pages 3 through 12
of the Registrant's 1997 Annual Report which is filed as an exhibit hereto.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

Reference is made to the Registrant's Current Report on Form 8-K dated June
25, 1996, as filed with the Securities and Exchange Commission on June 28, 1996
regarding the change in the Registrant's certifying accountant from Deloitte &
Touche LLP to Price Waterhouse LLP.

PART III

Item 10. Directors and Executive Officers of the Registrant

There are no directors or executive officers of the Registrant. The
Registrant is managed by the General Partner.

The General Partner's directors and executive officers, and any persons
holding more than 10% of the Registrant's Units ('Ten Percent Owners') are
required to report their initial ownership of such Units and any

subsequent changes in that ownership to the Securities and Exchange Commission
on Forms 3, 4 and 5. Such executive officers, directors and Ten Percent Owners
are required by Securities and Exchange Commission regulations to furnish the
Registrant with copies of all Forms 3, 4 or 5 they file. All of these
requirements were satisfied on a timely basis. In making these disclosures, the
Registrant has relied solely on written representations of the General Partner's
directors and executive officers or copies of the reports they have filed with
the Securities and Exchange Commission during and with respect to its most
recent fiscal year.

The directors and executive officers of R&D Funding Corp and their positions
with regard to managing the Registrant are as follows:

Name Position

Brian J. Martin President, Chief Executive Officer, Chairman of the
Board of Directors and Director
Barbara J. Brooks Vice President--Finance and Chief Financial Officer
Steven Carlino Vice President and Chief Accounting Officer
Frank W. Giordano Director
Nathalie P. Maio Director

BRIAN J. MARTIN, age 47, is the President, Chief Executive Officer, Chairman of
the Board of Directors and a Director of R&D Funding Corp. He is a Senior Vice
President of PSI. Mr. Martin also serves in various capacities for other
affiliated companies. Mr. Martin joined PSI in 1980. Mr. Martin is a member of
the Pennsylvania Bar.

BARBARA J. BROOKS, age 49, is the Vice President-Finance and Chief Financial
Officer of R&D Funding Corp. She is a Senior Vice President of PSI. Ms. Brooks
also serves in various capacities for other affiliated companies. She has held
several positions within PSI since 1983. Ms. Brooks is a certified public
accountant.

STEVEN CARLINO, age 34, is a Vice President of R&D Funding Corp. He is a First
Vice President of PSI. Mr. Carlino also serves in various capacities for other
affiliated companies. Prior to joining PSI in October 1992, he was with Ernst &
Young for six years. Mr. Carlino is a certified public accountant.

FRANK W. GIORDANO, age 55, is a Director of R&D Funding Corp. He is a Senior
Vice President of PSI and an Executive Vice President and General Counsel of
Prudential Mutual Fund Management, LLC, an affiliate of PSI. Mr. Giordano also
serves in various capacities for other affiliated companies. He has been with
PSI since July 1967.

NATHALIE P. MAIO, age 47, is a Director of R&D Funding Corp. She is a Senior
Vice President and Deputy General Counsel of PSI and supervises nonlitigation
legal work for PSI. She joined PSI's Law Department in 1983; presently, she also
serves in various capacities for other affiliated companies.

Effective May 2, 1997, Brian J. Martin replaced Thomas F. Lynch III as Chief
Executive Officer, Chairman of the Board of Directors and as a Director of R&D
Funding Corp. Additionally, Mr. Martin replaced Michael S. Hasley as President
of R&D Funding Corp effective January 30, 1998.

There are no family relationships among any of the foregoing directors or
executive officers. All of the foregoing directors and executive officers have
indefinite terms.

Item 11. Executive Compensation

The Registrant does not pay or accrue any fees, salaries or any other form of
compensation to directors and officers of the General Partner for their
services. Certain officers and directors of the General Partner receive
compensation from affiliates of the General Partner, not from the Registrant,
for services performed for various affiliated entities, which may include
services performed for the Registrant; however, the General Partner believes
that any compensation attributable to services performed for the Registrant is
immaterial. See Item 13 Certain Relationships and Related Transactions for
information regarding compensation to the General Partner.

Item 12. Security Ownership of Certain Beneficial Owners and Management

As of March 5, 1998, no director or executive officer of the General Partner
owns directly or beneficially any interest in the voting securities of the
General Partner.

As of March 5, 1998, no director or executive officer of the General Partner
owns directly or beneficially any of the Units issued by the Registrant.

As of March 5, 1998, no Unitholder beneficially owns more than five percent
of the Units issued by the Registrant.

Item 13. Certain Relationships and Related Transactions

The Registrant has and will continue to have certain relationships with the
General Partner and its affiliates. There have been no direct financial
transactions between the Registrant and the directors or officers of the General
Partner.

Reference is made to Notes B and F to the financial statements in the
Registrant's 1997 Annual Report which is filed as an exhibit hereto, which
identify the related parties and discuss the services provided by these parties
and the amounts paid or payable for their services.

PART IV

Page
Number
in Annual
Report

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements and Report of Independent Accountants--incorporated by
reference to the Registrant's 1997 Annual Report included as an exhibit hereto
Reports of Independent Accountants:
Report of Independent Accountants at December 31, 1997 and 1996 and for the
years then ended 3
Independent Auditors' Report for the year ended December 31, 1995 3A
Financial Statements:
Statements of Financial Condition--December 31, 1997 and 1996 4
Statements of Operations--Three years ended December 31, 1997 5
Statements of Changes in Partners' Capital--Three years ended December 31, 1997 5
Statements of Cash Flows--Three years ended December 31, 1997 6
Notes to Financial Statements 8
2. Financial Statement Schedules

All schedules have been omitted because they are not applicable or the required
information is included in the financial statements or the notes thereto.
3. Exhibits
Description:
Form of Agreement for Services (incorporated by reference to Exhibit 2.1
included with Registrant's Form S-1 Registration Statement (No. 33-6091) filed
on June 3, 1986)
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 (No. 33-6091) filed on June 3,
1986)
Escrow Agreement (incorporated by reference to Exhibit 10.1 included with
Registrant's Form S-1 Registration Statement (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 for the year ended December 31,
1991)
Registrant's 1997 Annual Report (with the exception of the information and data
incorporated by reference in Items 3, 7 and 8 of this Annual Report on Form
10-K, no other information or data appearing in the Registrant's 1997 Annual
Report is to be deemed filed as part of this report) (filed herewith)
Letter dated June 28, 1996 from Deloitte & Touche LLP to the Securities and
Exchange Commission regarding change in certifying accountant (incorporated by
reference to Exhibit 16.1 to the Registrant's Current Report on Form 8-K dated
June 25, 1996)
Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K--
None

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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/ Steven Carlino Date: March 30, 1998
----------------------------------------
Steven Carlino
Vice President and Chief Accounting
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities (with respect to the General Partner) and on
the dates indicated.

By: R&D Funding Corp
A Delaware corporation, General Partner

By: /s/ Brian J. Martin Date: March 30, 1998
----------------------------------------
Brian J. Martin
President, Chief Executive Officer,
Chairman of the Board of Directors and
Director

By: /s/ Barbara J. Brooks Date: March 30, 1998
----------------------------------------
Barbara J. Brooks
Vice President--Finance and Chief
Financial Officer

By: /s/ Steven Carlino Date: March 30, 1998
----------------------------------------
Steven Carlino
Vice President

By: /s/ Frank W. Giordano Date: March 30, 1998
----------------------------------------
Frank W. Giordano
Director

By: /s/ Nathalie P. Maio Date: March 30, 1998
----------------------------------------
Nathalie P. Maio
Director
8