<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION


                      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 September 30, 1998              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 SEPTEMBER 30, 1998

                                     PART I

                             FINANCIAL INFORMATION
                             ----------------------
<PAGE>
 
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP

BALANCE SHEETS
(Unaudited)

<TABLE> 
<CAPTION> 
                                        September 30, 1998  December 31, 1997
                                        ------------------  -----------------
<S>                                           <C>           <C>
ASSETS
                                                              
Real estate investments:                                      
   Joint ventures                              $        -       $17,184,075
   Property, net                                7,357,031         1,170,476
                                               ----------       -----------
                                                7,357,031        18,354,551
                                                              
Cash and cash equivalents                       2,554,120         1,645,244
Short-term investments                                  -           946,836
                                               ----------       -----------
                                               $9,911,151       $20,946,631
                                               ==========       ===========
                                                             
LIABILITIES AND PARTNERS' CAPITAL                            
Accounts payable                               $   86,139       $    99,348
Accrued management fee                             36,565            45,655
Deferred disposition fee                          510,000                 -
                                               ----------       -----------
Total liabilities                                 632,704           145,003
                                               ----------       -----------
                                                             
Partners' capital (deficit):                                 
   Limited partners ($237.54 and $485.54                     
     per unit, respectively; 75,000 units                    
     authorized, 68,414 units issued and                     
     outstanding)                               9,281,521        20,859,138
   General partners                                (3,074)          (57,510)
                                               ----------       -----------
Total partners' capital                         9,278,447        20,801,628
                                               ----------       -----------
                                                             
                                               $9,911,151       $20,946,631
                                               ==========       ===========
</TABLE>

           (See accompanying notes to unaudited financial statements)
<PAGE>
 
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP
 
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE> 
<CAPTION> 
                                  Three Months Ended   Nine Months Ended    Three Months Ended   Nine Months Ended
                                  September 30, 1998   September 30, 1998   September 30, 1997   September 30, 1997
                                  ------------------   ------------------   ------------------   ------------------
<S>                               <C>                  <C>                  <C>                  <C>
Investment Activity
 
Property rentals                      $  297,369           $  945,316             $ 62,650           $  199,968
Property operating expenses              (65,705)            (205,613)             (25,388)             (63,448)
Depreciation and amortization            (73,660)            (225,082)             (30,074)             (96,923)
                                      ----------           ----------             --------           ----------
                                         158,004              514,621                7,188               39,597
                                     
Joint venture earnings                    45,257              597,936              438,236            1,195,966
Amortization                                   -               (3,138)              (2,366)              (7,098)
                                      ----------           ----------             --------           ----------
  Total real estate operations           203,261            1,109,419              443,058            1,228,465
                                     
Gain on sale of Joint Venture          5,869,421            5,869,421                    -                    -
                                      ----------           ----------             --------           ----------
  Total real estate activity           6,072,682            6,978,840              443,058            1,228,465
                                     
Interest on cash equivalents         
  and short-term investments              74,588              140,698               31,467               90,296
                                      ----------           ----------             --------           ----------
  Total investment activity            6,147,270            7,119,538              474,525            1,318,761
                                      ----------           ----------             --------           ----------
Portfolio Expenses                   
                                     
General and administrative                55,018              163,306               56,124              196,320
Management fee                            36,565              127,875               45,655              136,965
                                      ----------           ----------             --------           ----------
                                          91,583              291,181              101,779              333,285
                                      ----------           ----------             --------           ----------
                                     
Net Income                            $6,055,687           $6,828,357             $372,746           $  985,476
                                      ==========           ==========             ========           ==========
                                     
Net income per limited               
  partnership unit                    $    87.63           $    98.81             $   5.39           $    14.26
                                      ==========           ==========             ========           ==========
                                     
Cash distributions per               
  limited partnership unit            $   254.68           $   268.04             $   6.68           $    20.06
                                      ==========           ==========             ========           ==========
                                     
Number of limited partnership        
  units outstanding during           
  the period                              68,414               68,414               68,414               68,414
                                      ==========           ==========             ========           ==========
</TABLE>
           (See accompanying notes to unaudited financial statements)
<PAGE>
 
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP

STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
                      Three Months Ended            Nine Months Ended             Three Months Ended          Nine Months Ended
                      September 30, 1998            September 30, 1998            September 30, 1997          September 30, 1997
                   ------------------------       ----------------------        ----------------------      ----------------------
                   General         Limited        General       Limited         General       Limited       General       Limited
                   Partners        Partners       Partners      Partners        Partners      Partners      Partners      Partners
                   --------        --------       --------      --------        --------      --------      --------      --------
<S>                <C>         <C>                <C>       <C>                 <C>        <C>              <C>        <C> 
Balance at                                                                                                
beginning of                                                                                              
period             $(59,015)   $ 20,710,069       $(57,510) $ 20,859,138        $(55,254)  $21,082,568      $(52,135)  $21,391,344

Cash
distributions        (4,616)    (17,423,678)       (13,848)  (18,337,690)         (4,616)     (457,006)      (13,862)   (1,372,385)

Net income           60,557       5,995,130         68,284     6,760,073           3,728       369,018         9,855       975,621
                   --------    ------------       --------  ------------        --------   -----------      --------   -----------
 
Balance at
end of period       $(3,074)     $9,281,521       $ (3,074) $  9,281,521        $(56,142)  $20,994,580      $(56,142)  $20,994,580
                   ========    ============       ========  ============        ========   ===========      ========   ===========

</TABLE> 
           (See accompanying notes to unaudited financial statements)
<PAGE>
 
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP

SUMMARIZED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE> 
<CAPTION> 
                                              Nine Months Ended September 30,
                                              ---------------------------------
                                                   1998            1997
                                                   ----            ----
<S>                                             <C>            <C>   
Net cash provided by operating activities       $  1,374,077   $ 1,431,152
                                                ------------   -----------
Cash flows from investing activities:
        Investment in property                       (29,788)       (4,636)
        Net proceeds sale of joint venture        16,475,000            -- 
        Deferred disposition fees                    510,000            --
        Decrease in short-term
                investments, net                     931,125       247,907
                                                ------------   -----------
                   Net cash provided by
                   investing activities           17,886,337       243,271
                                                ------------   -----------
Cash flows from financing activity:
        Distributions to partners                (18,351,538)   (1,386,247)
                                                ------------   -----------
                   Net increase in
                   cash and cash equivalents         908,876       288,176
Cash and cash equivalents:
        Beginning of period                        1,645,244     1,260,892
                                                ------------   -----------
        End of period                           $  2,554,120   $ 1,549,068
                                                ============   ===========
</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 unaudited financial statements)
<PAGE>
 
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP

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 September 30, 1998 and December 31, 1997 and the
results of its operations, its cash flows and partners' capital (deficit) for
the three and nine months ended September 30, 1998 and 1997.  These adjustments
are of a normal recurring nature.

     See notes to financial statements included in the Partnership's 1997 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
-----------------------------------

     On August 7, 1998  the Bayberry Apartments, in Gaithersburg, Maryland, was
sold to an institutional buyer which is unaffiliated with the Partnership.  The
gross sale price was $17,000,000.  The Partnership received its share of the net
proceeds totaling $16,985,000, after closing costs, and recognized a gain of
$5,869,421 ($84.93 per limited partnership unit).  A disposition fee of $510,000
was accrued but not paid to the Advisor.  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.
<PAGE>
 
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP

     The following summarized financial information is presented in the
aggregate for the Partnership joint ventures (none at September 30, 1998 and two
at December 31, 1997):
<TABLE> 
<CAPTION> 
                            ASSETS AND LIABILITIES
                            ----------------------

                                    September 30, 1998        December 31, 1997
                                    ------------------        -----------------
<S>                                <C>                       <C>
Assets

 Real property, at cost less
  accumulated depreciation
  of $5,110,304 at
  December 31, 1997                    $        -              $14,786,221
 Other assets                                   -                  639,480
                                       ----------              -----------
                                                -               15,425,701
                                             
Liabilities                                     -                  125,700
                                       ----------              -----------
                                             
Net Assets                             $        -              $15,300,001
                                       ==========              ===========

<CAPTION> 
                            RESULTS OF OPERATIONS
                            ---------------------

                                         NINE MONTHS ENDED SEPTEMBER 30,
                                         -------------------------------
                                          1998                     1997
                                          ----                     ----      
<S>                                <C>                       <C> 
Revenue                                           
  Rental income                        $1,444,843              $ 2,377,443
  Other                                     3,862                    3,563
                                       ----------              -----------
                                        1,448,705                2,381,006
                                       ----------              -----------
                                                  
Expenses                                          
  Operating expenses                      638,983                  805,920
  Depreciation and amortization           198,186                  379,120
                                       ----------              -----------
                                          837,169                1,185,040
                                       ----------              -----------
                                                  
  Net income                           $  611,536              $ 1,195,966
                                       ==========              ===========
</TABLE>

     Liabilities and expenses exclude amounts owed and attributable to the
Partnership on behalf of its various financing arrangements with the joint
ventures.
<PAGE>
 
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP


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

     The following is a summary of the Partnership's investment in property (two
at September 30, 1998, and one at December 31, 1997):
<TABLE>
<CAPTION>
 
                                September 30, 1998   December 31, 1997
                                -------------------  ------------------
<S>                             <C>                  <C>
  Land                                  $  563,176          $  347,772
  Buildings and improvements             6,691,668           1,041,839
  Accumulated depreciation
     and amortization                     (430,256)           (244,868)
  Net operating assets                     532,443              25,733
                                        ----------          ----------
                                        $7,357,031          $1,170,476
                                        ==========          ==========
</TABLE>

 
NOTE 4 - SUBSEQUENT EVENT
-------------------------

     Distributions of cash from operations relating to the quarter ended
September 30, 1998 were made on October 29, 1998 in the aggregate amount of
$369,712 ($5.35 per limited partnership unit). In addition, a special capital
distribution was also made on October 29, 1998 in the amount of $410,484 ($6.00
per limited partnership unit).  This special capital distribution was funded
from sales proceeds previously held in reserves.
<PAGE>
 
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP

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 1998. Capital of $52,162,938 ($762.46 per limited
partnership unit) has been returned to the limited partners as a result of these
sales and the reduction of cash reserves.

     On August 7, 1998  the Bayberry Apartments, in Gaithersburg, Maryland, was
sold to an institutional buyer which is unaffiliated with the Partnership. The
gross sale price was $17,000,000.  The Partnership received its share of the net
proceeds totaling $16,985,000, after closing costs and recognized a gain of
$5,869,421 ($84.93 per limited partnership unit).  A disposition fee of $510,000
was accrued but not paid to the Advisor.  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.

     At September 30, 1998, the Partnership had $2,554,120 in cash and cash
equivalents, of which $369,712 was used for operating cash distributions and
$410,484 for capital distributions to partners on October 29, 1998.  The source
of future liquidity and cash distributions to partners will primarily be cash
flow generated by the Partnership's invested cash and cash equivalents and real
estate investments and proceeds from the sale of such investments.  The adjusted
capital contribution was reduced from $485.54 to $237.54 per limited partnership
unit during the third quarter of 1998, with a distribution of the sales proceeds
from Bayberry Apartments. Distributions of cash from operations relating to the
first and second quarters of 1998 were made at an annualized rate of 5.5% on the
adjusted capital contribution. Distributions of cash from operations relating to
the third quarter of 1998 were made at an annualized rate of 5.5% on the
weighted average adjusted capital contribution which was adjusted due to the
mid-quarter sale of Bayberry Apartments.   Distributions of cash from operations
relating to the first, second and third quarters of 1997 were made at an
annualized rate of 5.5% on the adjusted capital contribution.

     The carrying value of real estate investments in the financial statements
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 September 30, 1998, the appraised
<PAGE>
 
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP

value of each real estate investment exceeded its carrying value; the aggregate
excess was approximately $2,070,000.  The current appraised value of real estate
investments has been estimated by the managing general partner and is generally
based on a correlation of traditional appraisal approaches performed by the
Partnership's Advisor and independent appraisers.  Because of the subjectivity
inherent in the valuation process, the estimated current appraised value may
differ significantly from that which could be realized if the real estate were
actually offered for sale in the marketplace.

     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 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 AEW Real Estate Advisors, Inc., 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 
     December 31, 1998.

     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.  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.
<PAGE>
 
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP

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

     Form of Real Estate Investments

     North Cabot Industrial Park is 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 is structured as a joint venture with a real estate
management/development firm.

     Operating Factors

     Occupancy at North Cabot Industrial Park increased to 92% for the quarter
ended September 30, 1998, up from 86% during the second quarter of 1998.
Previous occupancy was 100%, where it had been since September 30, 1996.

     Occupancy at 270 Technology Park was at 100% during the third quarter of
1998. For the quarter ended September 30, 1997 occupancy declined to 80% with
the lease expiration of a tenant representing 18% of the available space.

     As previously discussed, the Bayberry Apartments was sold on August 7,
1998, and the Partnership recognized a gain of $5,869,421.  At the time of the
sale, the Bayberry Apartments was 95% leased.  At September 30, 1997 it was 96%
leased.


     Investment Results

     For the three and nine months ended September 30, 1998, operating results
from real estate operations were $203,261 and $1,109,419, respectively, compared
to $443,058 and $1,228,465 for the comparable periods in 1997.  The decreases of
$239,797 and $119,046 for the comparative three and nine month periods are
primarily due to lower joint venture earnings due to the sale of Bayberry
Apartments.

     Interest on cash equivalents and short-term investments for the three and
nine months ended September 30, 1998, was $74,588 and $140,698, respectively,
compared to $31,467 and $90,296 for the same periods in 1997. The increases of
approximately $43,000 and $50,000 for the three and nine month periods
respectively, are primarily due to higher average investment balances in 1998 as
a result of the receipt of the Bayberry Apartments sales proceeds.

     The decrease in operating cash flow of approximately $57,000 between the
first nine months of 1997 and 1998 is primarily due to decreases in working
capital and a decrease in distributions from joint ventures.
<PAGE>
 
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP

Portfolio Expenses

     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.  General and administrative expenses
primarily consist of real estate appraisal, printing, legal, accounting and
investor servicing fees.

     For the three and nine months ended September 30, 1998, management fees
were $36,565 and $127,875, respectively, compared to $45,655 and $136,965 for
the comparable periods in 1997.  The decreases in management fees for the
respective three and nine month periods are due to less operational cash
available for distributions as a result of the sale of Bayberry Apartments on
August 7, 1998.

     General and administrative expenses for the three and nine months ended
September 30, 1998 were $55,018 and $163,306, respectively, compared to $56,124
and $196,320 for the same periods in 1997.  Expenses remained relatively
unchanged for the comparable three month periods while for the comparable nine
month periods expenses decreased $33,000 or 17% due to decreases in accounting
and appraisal fees.
 



 
<PAGE>
 
                    NEW ENGLAND LIFE PENSION PROPERTIES III;
                       A REAL ESTATE LIMITED PARTNERSHIP

                                   FORM 10-Q

                      FOR QUARTER ENDED SEPTEMBER 30, 1998

                                    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 September
                        30, 1998, one Current Report on Form 8-K was filed on
                        August 20, 1998 reporting on Item No. 2 (Acquisition or
                        Disposition of Assets) and Item No. 7 (Financial
                        statements and Exhibits), relating in both cases to the
                        August 7, 1998 sale of the Bayberry Apartments.
<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)


November 13, 1998
                              /s/ J. Christopher Meyer III
                              -------------------------------
                                J. Christopher Meyer III
                                President, Chief Executive Officer and Director
                                of Managing General Partner,
                                Copley Properties Company III, Inc.



November 13, 1998
                              /s/ Karin J. Lagerlund
                              --------------------------------
                                Karin J. Lagerlund
                                Principal Financial and Accounting Officer of
                                Managing General Partner, Copley Properties
                                Company III, Inc.