UNITED STATES
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, 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
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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
- ------------------------------------------------------------------------------
(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,
1998 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 7A Quantitative and Qualitative Disclosures About Market Risk....................... 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............................... 5
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. For more information regarding the Registrant's
operations, see Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.

At December 31, 1998, the Registrant 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 Registrant's royalty position with Creative BioMolecules,
Inc. is believed to have little to no value and the equity position's value is
easily determinable and is salable. The Registrant'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 Registrant'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 recently advised the Registrant that it will be meeting
with the FDA to discuss the status of Synapton. Depending on the timing and
results of that meeting, the Registrant's general partner may determine that the
royalty interest in Synapton does not warrant the continuing operation of the
Registrant through the end of the royalty period at which point the general
partner will liquidate and distribute any remaining assets (reduced by a reserve
to satisfy any liabilities of the Registrant) and dissolve the Registrant. 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 Registrant, the general partner will proceed to dissolve the Registrant
as soon as practicable thereafter.

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 Synapton 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, 1998, 1997 and 1996, revenue from the
following portfolio company investments exceeded fifteen percent of the
Registrant's total revenue:

1998 1997 1996
---- ---- ----

Kopin Corporation 52% 49% --%
Cell Genesys Corporation 17 -- --
Creative BioMolecules, Inc. -- 48 29
Forest -- -- 66

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. 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, which 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 as further discussed in Notes B and F to the
financial statements in the Registrant's annual report to Unitholders for the
year ended December 31, 1998 ('Registrant's 1998 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 1998, see page 2 of the Registrant's 1998
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 1998 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 4, 1999, there were 3,036 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 1998 1997
- ------------- ------- -------

March 31 $ -- $175.00
June 30 60.00 --
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. The Registrant paid a distribution of $2,728,933 during
1998 of which $2,456,040 ($60 per Unit) was paid to the Unitholders and the
remainder to the General Partner. 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 for the 1998 and 1997 distributions include the 1997 sales
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
amount to be distributed by the Registrant in future quarters will be based on
the extent to which the market value of its investment in Creative BioMolecules,
Inc. can be realized and from the revenue stream from royalties, if any, 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 13 of the Registrant's 1998
Annual Report which is filed as an exhibit hereto.

Year ended December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------

Royalty income $ -- $ -- $ 216,665 $ -- $ 50,468
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Gain on sale of
investments in equity
securities $ 243,595 $ 7,888,065 $ 5,194,202 $ 8,998,197 $ 2,364,352
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Termination of royalty
rights $ -- $ -- $ -- $ 2,241,783 $ --
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Total revenues $ 359,797 $ 8,023,958 $ 5,448,886 $11,311,651 $ 2,706,567
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Write-off of investments
in equity securities $ -- $ 295,000 $ -- $ -- $ 500,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net income $ 39,971 $ 7,056,240 $ 4,534,518 $10,308,841 $ 805,584
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net income per Unit $ .88 $ 155.14 $ 99.70 $ 226.66 $ 17.71
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Notes payable $ -- $ -- $ -- $ -- $ 1,622,223
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Total assets $ 1,231,691 $ 4,221,385 $15,664,366 $19,879,840 $19,448,580
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Total limited partner
distributions $ 2,456,040 $11,256,850 $ 3,274,720 $ 7,122,516 $ 347,939
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Limited partner
distributions per Unit $ 60.00 $ 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 14 and 15 of the
Registrant's 1998 Annual Report which is filed as an exhibit hereto.

Item 7A. 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.

Item 8. Financial Statements and Supplementary Data

The financial statements are incorporated by reference to pages 3 through 13
of the Registrant's 1998 Annual Report which is filed as an exhibit hereto.

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

None

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 48, 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 50, 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 35, 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 56, is a Director of R&D Funding Corp. He is a Senior
Vice President 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 48, 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 January 30, 1998, Brian J. Martin replaced Michael S. Hasley as
President of R&D Funding Corp.

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 4, 1999, 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 4, 1999, no director or executive officer of the General Partner
owns directly or beneficially any of the Units issued by the Registrant.

As of March 4, 1999, 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 1998 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 1998 Annual Report included as an exhibit hereto
Report of Independent Accountants 3
Financial Statements:
Statements of Financial Condition--December 31, 1998 and 1997 4
Statements of Operations--Three years ended December 31, 1998 5
Statements of Changes in Partners' Capital--Three years ended December 31, 1998 5
Statements of Cash Flows--Three years ended December 31, 1998 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 1998 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 1998 Annual
Report is to be deemed filed as part of this report) (filed herewith)
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 31, 1999
----------------------------------------
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 31, 1999
----------------------------------------
Brian J. Martin
President, Chief Executive Officer,
Chairman of the Board of Directors and
Director

By: /s/ Barbara J. Brooks Date: March 31, 1999
----------------------------------------
Barbara J. Brooks
Vice President--Finance and Chief
Financial Officer

By: /s/ Steven Carlino Date: March 31, 1999
----------------------------------------
Steven Carlino
Vice President

By: /s/ Frank W. Giordano Date: March 31, 1999
----------------------------------------
Frank W. Giordano
Director

By: /s/ Nathalie P. Maio Date: March 31, 1999
----------------------------------------
Nathalie P. Maio
Director