<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549
                                 ------------
                                   FORM 10-Q

                  QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

--------------------------------------------------------------------------------

For Quarter Ended March 31, 1999                  Commission File Number 0-14052


                   NEW ENGLAND LIFE PENSION PROPERTIES III;
                       A REAL ESTATE LIMITED PARTNERSHIP
            (Exact name of registrant as specified in its charter)



             Massachusetts                               04-2847256
    (State or other jurisdiction of         (I.R.S. Employer Identification No.)
     incorporation or organization)

     225 Franklin Street, 25th Fl.
         Boston, Massachusetts                              02110
(Address of principal executive offices)                  (Zip Code)

              Registrant's telephone number, including area code:
                                (617) 261-9000



--------------------------------------------------------------------------------
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 twelve (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 [X]        No [_]
<PAGE>
 
                   NEW ENGLAND LIFE PENSION PROPERTIES III;
                       A REAL ESTATE LIMITED PARTNERSHIP

                                   FORM 10-Q

                       FOR QUARTER ENDED MARCH 31, 1999

                                    PART I

                             FINANCIAL INFORMATION
                             ---------------------
<PAGE>
 
BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                          March 31, 1999       December 31, 1998
                                          --------------       -----------------
                                            (Unaudited)            (Audited)
                                            -----------            ---------    
<S>                                        <C>                  <C>
ASSETS                    
Real estate investments:  
   Property, net                           $  6,168,142         $ 6,156,334
   Property held for                                                       
       disposition, net                               -           1,197,305
                                             ----------         -----------
                                              6,168,142           7,353,639
                                                                           
Cash and cash equivalents                     4,549,560           1,952,504
                                           ------------         -----------
                                           $ 10,717,702         $ 9,306,143
                                           ============         ===========
                                                                       
                                    
LIABILITIES AND PARTNERS' CAPITAL   
Accounts payable                           $    149,547         $    87,947
Accrued management fee                           56,248              21,939
                                            -----------         -----------
Total liabilities                               205,795             109,886
                                            -----------         -----------
                                                        
Partners' capital:                                      
     Limited partners ($231.54 per                      
     unit, respectively; 75,000 units                   
     authorized, 68,414 units issued                    
     and outstanding)                        10,498,541           9,196,048
   General partners                              13,366                 209
                                            -----------         -----------
Total partners' capital                      10,511,907           9,196,257
                                            -----------         -----------
                                                        
                                           $ 10,717,702         $ 9,306,143
                                           ============         ===========
</TABLE>
                (See accompanying notes to financial statements)


<PAGE>
 
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
                                                Quarter Ended March 31,
                                                1999                1998
                                            -----------          ----------    
<S>                                       <C>                    <C>
INVESTMENT ACTIVITY
 
Property rentals                            $   316,867          $  324,723
Property operating expenses                    (102,695)            (61,562)
Depreciation and amortization                   (67,652)            (76,097)
                                            -----------          ----------
                                                146,520             187,064
                                                                  
Joint venture earnings                                -             324,873
Amortization                                          -              (1,569)
                                            -----------          ----------
        Total real estate operations            146,520             510,368
                                                                  
Gain on sale of property                      1,509,931                   -
                                            -----------          ----------
        Total real estate activity            1,656,451             510,368
                                                                  
                                                                  
Interest on cash equivalents                                      
  and short term investments                     22,255              33,039
                                            -----------          ----------
        Total investment activity             1,678,706             543,407
                                            -----------          ----------
                                                                  
PORTFOLIO EXPENSES                                                
                                                                  
General and administrative                       84,981              56,653
Management fee                                   56,248              45,655
                                            -----------          ----------
                                                141,229             102,308
                                            -----------          ----------
Net Income                                  $ 1,537,477          $  441,099
                                            ===========          ==========
                                                                  
Net income per limited partnership                                
  unit                                      $     22.25          $     6.38
                                            ===========          ==========
                                                                  
Cash distributions per                                            
  limited partnership unit                  $      3.21          $     6.68
                                            ===========          ==========
                                                                  
Number of limited partnership                                     
  units outstanding during the period            68,414              68,414
                                            ===========          ==========
</TABLE>
                (See accompanying notes to financial statements)
<PAGE>
 
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
                                    Quarter Ended March 31,
                               1999                      1998
                       -------------------      ----------------------
                       General     Limited      General        Limited
                       Partner    Partners      Partner       Partners
                       -------    --------      -------       --------
<S>                    <C>      <C>            <C>          <C> 
Balance at beginning 
of period             $   209   $ 9,196,048    $(57,510)    $20,859,138
                 
                 
Cash distributions     (2,218)     (219,609)     (4,616)       (457,006)
                 
                 
Net income             15,375     1,522,102       4,411         436,688
                      -------   -----------    ---------    -----------
                 
                 
Balance at end 
of period             $13,366   $10,498,541    $(57,715)    $20,838,820
                      =======   ===========    =========    ===========
</TABLE> 
                (See accompanying notes to financial statements)
<PAGE>
 
SUMMARIZED STATEMENTS OF CASH FLOWS
(Unaudited)
                                                    Quarter Ended March 31,
                                                  --------------------------
                                                      1999           1998
                                                      ----           ----
<TABLE>                                                      
<CAPTION>                                                    
<S>                                               <C>             <C>
Net cash provided by operating activities         $  179,438      $  772,316
                                                  ----------      ----------
                                                              
Cash flows from investing activities:                         
        Net proceeds from sale of property         2,639,445               -
        Capital expenditures on owned property             -           1,806
        Decrease in short-term                                
                investments, net                           -         931,125
                                                  ----------      ----------
                   Net cash provided by                       
                   investing activities            2,639,445         932,931
                                                  ----------      ----------
                                                              
Cash flows from financing activity:                           
        Distributions to partners                   (221,827)       (461,622)
                                                  ----------      ----------
                                                              
                   Net increase in                            
                   cash and cash equivalents       2,597,056       1,243,625
                                                              
Cash and cash equivalents:                                    
        Beginning of period                        1,952,504       1,645,244
                                                  ----------      ----------
                                                              
        End of period                             $4,549,560      $2,888,869
                                                  ==========      ==========
</TABLE>

Non-cash transaction:

Effective January 1, 1998, the Partnership's joint venture investment in 270
Technology Park was converted to a wholly-owned property.  The carrying value of
this investment at conversion was $6,162,959.



                (See accompanying notes to financial statements)
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS (Unaudited)

     In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the Partnership's
financial position as of March 31, 1999 and December 31, 1998 and the results of
its operations, its cash flows and partners' capital  for the interim periods
ended March 31, 1999 and 1998.  These adjustments are of a normal recurring
nature.

     See notes to financial statements included in the Partnership's 1998 Annual
Report on Form 10-K for additional information relating to the Partnership's
financial statements.

NOTE 1 - ORGANIZATION AND BUSINESS
-----------------------------------

     New England Life Pension Properties III; A Real Estate Limited Partnership
(the "Partnership") is a Massachusetts limited partnership organized for the
purpose of investing primarily in newly constructed and existing income
producing real properties.  The Partnership primarily serves as an investment
for qualified pension and profit sharing plans and other entities intended to be
exempt from federal income tax.  The Partnership commenced operations in July
1985 and acquired the two investments it currently owns prior to the end of
1988. The Partnership intends to dispose of its investments within twelve years
of their acquisition, and then liquidate; however, the Managing General Partner
could extend the investment period if it is in the best interest of the limited
partners.  The Partnership has engaged AEW Real Estate Advisors, Inc. ( the
"Advisor") to provide asset management advisory services.

NOTE 2 - REAL ESTATE JOINT VENTURES
-----------------------------------

     The 270 Technology Park joint venture was restructured to a wholly-owned
property effective January 1, 1998 (See Note 3).

     On August 7, 1998  the Bayberry Apartments, in Gaithersburg, Maryland, was
sold to an institutional buyer which was unaffiliated with the Partnership. The
terms of the sale were determined by arm-length negotiation between the buyer
and the Partnership.  The gross sale price was $17,000,000.  The Partnership
received its share of the net proceeds totaling $16,985,000 and recognized a
gain of $6,391,800 ($92.49 per limited partnership unit). On August 26, 1998,
the Partnership made a capital distribution of $16,966,672 ($248 per limited
partnership unit) from the proceeds of the sale.

     The following summarized financial information is presented in the
aggregate for one joint venture:
<PAGE>
 

                             Results of Operations
                             ---------------------
<TABLE> 
<CAPTION> 
                                        Quarter ended March 31,
                                        -----------------------
                                          1999           1998
                                          ----           ----  
<S>                                     <C>            <C>
                                                
Revenue                         
   Rental income                        $              $595,656
   Other                                       -            664
                                        --------       --------
                                               -        596,320
                                        --------       --------
Expenses                        
   Operating expenses                          -        186,510
   Depreciation and amortization               -         84,937
                                        --------       --------
                                               -        271,447
                                        --------       --------
                                
   Net income                           $      -       $324,873
                                        ========       ========
</TABLE>

     Liabilities and expenses exclude amounts owed and attributable to the
Partnership on behalf of its various financing arrangements with the joint
ventures.

     Effective January 1, 1998, the 270 Technology Park joint venture was
converted to a wholly-owned property.  Accordingly, the 1998 amounts relate only
to the Bayberry joint venture.

NOTE 3 - PROPERTY
-----------------

     Effective January 1, 1998, the 270 Technology Park joint venture was
restructured and the venture partner's ownership interest was assigned 99% to
the Partnership, and 1% to an affiliate of the Partnership.  Accordingly, as of
this date, the investment is being accounted for as a wholly-owned property.
The carrying value of the joint venture investment at conversion ($6,162,959)
was allocated to land, building and improvements, and other net operating
assets.

     The building is being depreciated over 30 years, beginning January 1, 1998.

     North Cabot Industrial Park (formerly Marathon/Hayward)
     -------------------------------------------------------

     In September 1985, the Partnership acquired land in Hayward, California,
for $786,130 and leased it back to the seller.  The Partnership also made a
nonrecourse permanent mortgage loan of $2,663,870 to the ground lessee to
finance the two research and development buildings.

     On November 15, 1994, the Partnership restructured this ground
lease/mortgage loan investment into a wholly-owned property, due to the
inability of the ground lessee/mortgagor to meet its financial obligations.  The
Partnership received $85,000 in settlement of the guaranty provided by
principals of the ground lessee.  The Partnership obtained title to the
improvements on the land and to certain other operating assets in full
satisfaction of the related mortgage loan and obligations under the ground
lease, and in consideration of the assumption by the Partnership of certain
operating liabilities.  The carrying value of the ground lease/mortgage loan
<PAGE>
 
investment as of the date of restructuring was allocated to land, buildings and
net operating assets.

     The buildings and improvements (two industrial buildings in Hayward,
California) were being depreciated over 25 years beginning November 15, 1994.

     Prior to 1994, the Managing General Partner determined that the carrying
value of this investment should be reduced to its estimated fair market value.
Accordingly, the carrying value was reduced by $2,500,000.

     On March 18, 1999, the North Cabot Industrial Park investment was sold to
an unaffiliated third party (the "Buyer") for gross proceeds of $2,800,000.  The
terms of the sale were determined by arm's length negotiation between the Buyer
and the Partnership.  The Partnership received net proceeds of $2,639,445 and
recognized a gain of  $1,509,931 ($21.85 per limited partnership unit).  On
April 29, 1999, the Partnership made a capital distribution of $2,539,528
($37.12 per limited partnership unit) from the proceeds of the sale.

     The following is a summary of the Partnership's investments in property
(one at March 31, 1999, and two at December 31, 1998):
<TABLE>
<CAPTION>
                                 March 31, 1999           December 31, 1998
                                 --------------           -----------------
<S>                              <C>                      <C>
  Land                             $  215,404                 $  215,404
  Buildings and improvements        5,653,391                  5,653,391
  Accumulated depreciation                     
     and amortization                (202,990)                  (156,156)
  Net operating assets                502,337                    443,695
  Property held for disposition             -                  1,197,305
                                   ----------                 ----------
                                   $6,168,142                 $7,353,639
                                   ==========                 ==========
</TABLE>
<PAGE>
 
NOTE 4 - SUBSEQUENT EVENT
-------------------------

     Distributions of cash from operations relating to the quarter ended 
March 31, 1999 were made on April 29, 1999 in the aggregate amount of $169,998
($2.46 per limited partnership unit). In addition, a special operating
distribution was made on April 29, 1999 funded from reserve operating cash flow
totaling $398,736 ($5.77 per limited partnership unit). As discussed above, the
Partnership made a capital distribution of $2,539,528 ($37.12 per limited
partnership unit) from the proceeds of the North Cabot sale.
<PAGE>
 
Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------

Liquidity and Capital Resources
-------------------------------

     The Partnership completed its offering of units of limited partnership
interest in December 1985 and a total of 68,414 units were sold.  The
Partnership received proceeds of $61,950,285, net of selling commissions and
other offering costs, which were invested in real estate, used to pay related
acquisition costs, or retained as working capital reserves.  The Partnership
made nine real estate investments, six of which were sold prior to 1994, and one
of which was sold in each of 1998 and 1999.  As a result of the sales and
similar transactions, capital of $52,573,422 ($768.46 per limited partnership
unit) has been returned to the limited partners through March 31, 1999.

     At March 31, 1999, the Partnership had $4,549,560 in cash and cash
equivalents, of which $3,108,262 was used for cash distributions to partners on
April 29, 1999; the remainder is being retained as working capital reserves.
The source of future liquidity and cash distributions to partners will primarily
be cash generated by the Partnership's remaining real estate investment and
invested cash and cash equivalents. Distributions of cash from operations for 
the first quarter of 1999 were made at the annualized rate of 4.25% on the 
adjusted capital contribution of $231.54 per limited partnership unit. 
Distributions of cash from operations for the first quarter of 1998 were made at
the annualized rate of 5.5% on the adjusted capital contribution of $485.54 per 
limited partnership unit. The distribution rate was lower in 1999 primarily due 
to the sale of investments in 1998 and 1999 and the consequent reduction in cash
flow.

     The carrying value of real estate investments in the financial statements
at March 31, 1999 is at depreciated cost, or if the investment's carrying value
is determined not to be recoverable through expected undiscounted future cash
flows, the carrying value is reduced to estimated fair market value.  The fair
market value of such investments is further reduced by the estimated cost of
sale for properties held for sale.  Carrying value may be greater or less than
current appraised value.  At March 31, 1999, the appraised value of each real
estate investment exceeded its related carrying value; the aggregate excess was
approximately $1,032,000.  The current appraised value of real estate
investments has been determined by the Managing General Partner and is generally
based on a combination of traditional appraisal approaches performed by the
Advisor and independent appraisers.  Because of the subjectivity inherent in the
valuation process, the current appraised value may differ significantly from
that which could be realized if the real estate were actually offered for sale
in the marketplace.

Year 2000 Readiness Disclosure
------------------------------

     The Year 2000 Issue is a result of computer programs being written using
two digits rather than four to define the applicable year.  Computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000.  This could result in a system failure or
miscalculations causing 
<PAGE>
 
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business operations.

     The Partnership relies on AEW Capital Management L.P. ("AEW Capital
Management"), the parent of the Advisor, to generate financial information and
to provide other services, which are dependent on the use of computers.  The
Partnership has obtained assurances from AEW Capital Management that:

     .  AEW Capital Management has developed a Year 2000 Plan (the "Plan")
        consisting of five phases: inventory, assessment, testing,
        remediation/repair and certification.

     .  As of September 30, 1998, AEW Capital Management had completed the
        inventory and assessment phases of this Plan and had commenced the
        testing and remediation/repair of internal systems.

     .  AEW Capital Management expects to conclude the internal testing,
        remediation/repair and certifications of its Plan no later than June 30,
        1999.

     The Partnership also relies on joint venture partners and/or property
managers to supply financial and other data with respect to its real properties.
The Partnership is in the process of surveying these third party providers and
assessing their compliance with Year 2000 requirements.  To date, the
Partnership is not aware of any problems that would materially impact its
results of operations, liquidity or capital resources.  However, the Partnership
has not yet obtained written assurances that these providers would be Year 2000
compliant.

     The Partnership currently does not have a contingency plan in the event of
a particular provider or system not being Year 2000 compliant.  Such a plan will
be developed if it becomes clear that a provider (including AEW Capital
Management) is not going to achieve its scheduled compliance objectives by June
30, 1999.  The inability of one of these providers to complete its Year 2000
resolution process could materially impact the Partnership.  In addition, the
Partnership is also subject to external forces that might generally affect
industry and commerce, such as utility or transportation company Year 2000
compliance failures and related service interruptions. Given the nature of its
operations, the Partnership will not incur any costs associated with Year 2000
compliance.  All such costs are borne by AEW Capital Management and the property
managers.


Results of Operations
---------------------

     Form of Real Estate Investments

     North Cabot Industrial Park investment was a wholly-owned property.
Effective January 1, 1998, 270 Technology Park was converted to a wholly-owned
property; it was previously structured as a joint venture with a real estate
management/development firm.  Bayberry was structured as a joint venture with a
real estate management/development firm.
<PAGE>
 
     Operating Factors

     The North Cabot Industrial Park was sold on March 18, 1999, and the
Partnership recognized a gain of $1,509,931. Occupancy at North Cabot Industrial
Park was 92% at the time of the sale. At March 31, 1998, the property was fully
occupied.

     Occupancy at 270 Technology Park was 96% during the first quarter of 1999,
down from 98% at March 31, 1998.

     As previously discussed, the Bayberry Apartments was sold on August 7,
1998, and the Partnership recognized a gain of $6,391,800.  At the time of the
sale, the Bayberry Apartments was 95% leased.  At March 31, 1998 it was 97%
leased.

     Investment Results

     Interest on cash equivalents and short-term investments decreased by
approximately $11,000 between the first three months of 1998 and 1999.  The
decrease is primarily due to lower average invested balances as a result of the
sale of Bayberry Apartments in 1998 and the sale of North Cabot Industrial Park
in 1999.

     Real estate operating results were $146,520 for the first three months of
1999, and $510,368 for the comparable period of 1998. The decrease of $363,848
is primarily due to no joint venture earnings as a result of the sale of
Bayberry Apartments in August 7, 1998.

     Cash flow from operations decreased by approximately $593,000 between the
two three-month periods.  The decrease is primarily due to the decrease in
distributions from joint ventures as a result of sales and a decrease in
property working capital.

     Portfolio Expenses

     General and administrative expenses primarily consist of state taxes, real
estate appraisal, legal, accounting, printing and servicing agent fees.  These
expenses increased by approximately $28,000, or 50% between the first three
months of 1998 and 1999 primarily due to an increase in state taxes.

     The Partnership management fee is 9% of distributable cash flow from
operations after any increase or decrease in working capital reserves as
determined by the managing general partner.

     The management fee increased by approximately $10,600 between the two three
month periods primarily due to a special distribution of excess operating cash
flow in 1999.
<PAGE>
 
                   NEW ENGLAND LIFE PENSION PROPERTIES III;
                       A REAL ESTATE LIMITED PARTNERSHIP

                                   FORM 10-Q

                       FOR QUARTER ENDED MARCH 31, 1999

                                    PART II

                               OTHER INFORMATION
                              -------------------

     Items 1-5  Not Applicable

     Item 6.    Exhibits and Reports on Form 8-K

                  a.    Exhibits:  (27) Financial Data Schedule

                  b. Reports on Form 8-K:  During the quarter ended March 31,
                  1999, a Current Report on Form 8-K was filed on April 2, 1999
                  reporting on Item No. 2 (Acquisition or Disposition of Assets)
                  and Item No. 7 (Financial statements and Exhibits), relating
                  in both cases to the March 18, 1999 sale of North Cabot
                  Industrial Park.
<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.


                              NEW ENGLAND LIFE PENSION PROPERTIES III;
                              A REAL ESTATE LIMITED PARTNERSHIP
                              (Registrant)


May 5, 1999
                              /s/ J. Christopher Meyer III
                              -------------------------------
                                J. Christopher Meyer III
                                President, Chief Executive Officer and Director
                                of Managing General Partner,
                                Copley Properties Company III, Inc.



May 5, 1999
                              /s/ Karin J. Lagerlund
                              --------------------------------
                                Karin J. Lagerlund
                                Principal Financial and Accounting Officer of
                                Managing General Partner, Copley Properties
                                Company III, Inc.