<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 September 30, 1997              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, 1997

                                    PART I

                             FINANCIAL INFORMATION
                            ----------------------
<PAGE>
 
BALANCE SHEETS
(Unaudited)


<TABLE>
<CAPTION>
                                       September 30, 1997    December 31, 1996
                                       ------------------    -----------------
<S>                                    <C>                   <C>
ASSETS
 
Real estate investments:
   Joint ventures                        $17,432,638           $17,762,647
   Property, net                           1,171,651             1,265,968
                                         -----------           -----------
                                          18,604,289            19,028,615
                                                     
                                                     
Cash and cash equivalents                  1,549,068             1,260,892
Short-term investments                       918,135             1,169,666
                                         -----------           -----------
                                         $21,071,492           $21,459,173
                                         ===========           ===========
                                                     
LIABILITIES AND PARTNERS' CAPITAL                    
                                                     
Accounts payable                         $    87,399           $    74,172
Accrued management fee                        45,655                45,792
                                         -----------           -----------
Total liabilities                            133,054               119,964
                                         -----------           -----------
                                                     
Partners' capital (deficit):                         
    Limited partners ($485.54 per                    
      unit; 75,000 units authorized,                 
      68,414 units issued and                        
      outstanding)                        20,994,580            21,391,344
    General partners                         (56,142)              (52,135)
                                         -----------           -----------
Total partners' capital                   20,938,438            21,339,209
                                         -----------           -----------
                                                     
                                         $21,071,492           $21,459,173
                                         ===========           ===========
</TABLE>



                (See accompanying notes to financial statements)
<PAGE>
 
STATEMENTS OF OPERATIONS
(Unaudited)
 
<TABLE> 
<CAPTION> 
                                               Quarter Ended        Nine Months Ended       Quarter Ended        Nine Months Ended
                                             September 30, 1997    September 30, 1997     September 30, 1996    September 30, 1996
                                             ------------------    ------------------     ------------------    ------------------
<S>                                          <C>                   <C>                    <C>                   <C>
INVESTMENT ACTIVITY                                                                                 
                                                                                                    
Property rentals                             $ 62,650              $  199,968             $ 50,686              $  141,294
Property operating expenses                   (25,388)                (63,448)             (22,076)                (88,190)
Depreciation and amortization                 (30,074)                (96,923)             (24,277)                (61,310)
                                             --------              ----------             --------              ----------
                                                7,188                  39,597                4,333                  (8,206)
                                                                                                           
Joint venture earnings                        438,236               1,195,966              377,008               1,196,560
Amortization                                   (2,366)                 (7,098)              (2,366)                 (7,098)
                                             --------              ----------             --------              ----------
 Total real estate operations                 443,058               1,228,465              378,975               1,181,256
                                                                               
                                                                                                           
Interest on cash equivalents                                                                               
 and short-term investments                    31,467                  90,296               44,653                 132,156
                                             --------              ----------             --------              ----------
 Total investment activity                    474,525               1,318,761              423,628               1,313,412
                                             --------              ----------             --------              ----------
                                                                                                           
Portfolio Expenses                                                                                         
                                                                                                           
General and administrative                     56,124                 196,320               59,103                 173,364
Management fee                                 45,655                 136,965               82,356                 175,033
                                             --------              ----------             --------              ----------
                                              101,779                 333,285              141,459                 348,397
                                             --------              ----------             --------              ----------
                                                                                                           
Net Income                                   $372,746              $  985,476             $282,169              $  965,015
                                             ========              ==========             ========              ==========
                                                                                                           
Net income per limited partnership                                                                      
  unit                                       $   5.39              $    14.26             $   4.08              $    13.96
                                             ========              ==========             ========              ==========
                                                                                                        
Cash distributions per                                                                                  
  limited partnership unit                   $   6.68              $    20.06             $   6.78              $    19.72
                                             ========              ==========             ========              ==========
</TABLE>
<PAGE>
 
<TABLE>
<S>                                          <C>                   <C>                    <C>                   <C>
Number of limited partnership                                                                              
  units outstanding during the period          68,414                  68,414               68,414                  68,414
                                             ========              ==========             ========              ==========
</TABLE>
                (See accompanying notes to financial statements)
<PAGE>
 
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(Unaudited)

<TABLE>
<CAPTION>
                   Quarter Ended             Nine Months Ended            Quarter Ended              Nine Months Ended
                 September 30, 1997         September 30, 1997          September 30, 1996           September 30, 1996
                --------------------       ---------------------       ---------------------        ---------------------
                 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          $(55,254)   $21,082,568    $(52,135)    $21,391,344    $(45,432)    $22,574,789     $(43,319)    $22,784,048

Cash
distributions     (4,616)      (457,006)    (13,862)     (1,372,385)     (4,684)       (463,847)     (13,625)     (1,349,124)

Net income         3,728        369,018       9,855         975,621       2,822         279,347        9,650         955,365
                --------    -----------    --------     -----------    --------     -----------     ---------    -----------

Balance at
end of period   $(56,142)   $20,994,580    $(56,142)    $20,994,580    $(47,294)    $22,390,289     $(47,294)    $22,390,289
                ========    ===========    ========     ===========    ========     ===========     =========    ===========
</TABLE> 

                (See accompanying notes to financial statements)
<PAGE>
 
SUMMARIZED STATEMENTS OF CASH FLOWS
(Unaudited)


<TABLE> 
<CAPTION> 
                                             Nine Months Ended September 30,
                                             -------------------------------
                                                 1997         1996
                                             -----------   -----------
<S>                                          <C>           <C>
Net cash provided by operating activities    $ 1,431,152   $ 1,394,121
                                             -----------   -----------
 
Cash flows from investing activities:
    Investment in property                        (4,636)      (10,394)
    Decrease in short-term
         investments, net                        247,907       956,044
                                             -----------   -----------
            Net cash provided by
            investing activities                 243,271       945,650
                                             -----------   -----------
 
Cash flows from financing activity:
    Distributions to partners                 (1,386,247)   (1,362,749)
                                             -----------   -----------
 
            Net increase in
            cash and cash equivalents            288,176       977,022
 
Cash and cash equivalents:
    Beginning of period                        1,260,892     1,399,905
                                             -----------   -----------
 
    End of period                            $ 1,549,068   $ 2,376,927
                                             ===========   ===========
</TABLE>

                (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 September 30, 1997 and December 31, 1996 and the
results of its operations, its cash flows and partners' capital (deficit) for
the interim periods ended September 30, 1997 and 1996.  These adjustments are of
a normal recurring nature.

     See notes to financial statements included in the Partnership's 1996 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 three 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 following summarized financial information is presented in the
aggregate for the two joint ventures:

                             Assets and Liabilities
                             ----------------------
<TABLE>
<CAPTION>
                                     September 30, 1997  December 31, 1996
                                     ------------------  -----------------
<S>                                  <C>                 <C>
 
Assets
 
  Real property, at cost less
     accumulated depreciation
     of $5,191,562 and $4,812,441           $14,970,390        $15,325,895
  Other assets                                  694,774            659,368
                                            -----------        -----------
                                             15,665,164         15,985,263
 
Liabilities                                     118,966            115,892
                                            -----------        -----------
 
Net Assets                                  $15,546,198        $15,869,371
                                            ===========        ===========
</TABLE>
<PAGE>
 
                             Results of Operations
<TABLE>
<CAPTION>
                                   Nine Months ended September 30,
                                   -------------------------------
                                        1997             1996
                                   ---------------  --------------
<S>                                <C>              <C>
Revenue
  Rental income                         $2,377,443      $2,402,361
  Other                                      3,563           3,433
                                        ----------      ----------
                                         2,381,006       2,405,794
                                        ----------      ----------
 
Expenses
  Operating expenses                       805,920         804,201
  Depreciation and amortization            379,120         405,033
                                        ----------      ----------
                                         1,185,040       1,209,234
                                        ----------      ----------
 
  Net income                            $1,195,966      $1,196,560
                                        ==========      ==========
</TABLE>

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

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

     The following is a summary of the Partnership's investment in one wholly-
owned property:

<TABLE>
<CAPTION>
 
                                September 30, 1997   December 31, 1996
                                -------------------  ------------------
<S>                             <C>                  <C>
 
  Land                                  $  347,772          $  347,772
  Buildings and improvements             1,036,148           1,031,512
  Accumulated depreciation
     and amortization                     (224,876)           (138,503)
  Net operating assets                      12,607              25,187
                                        ----------          ----------
                                        $1,171,651          $1,265,968
                                        ==========          ==========
</TABLE>
 
NOTE 4 - SUBSEQUENT EVENT
-------------------------

     Distributions of cash from operations relating to the quarter ended
September 30, 1997 were made on October 30, 1997 in the aggregate amount of
$461,621 ($6.68 per limited partnership unit).
<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.  As a
result of the sales, capital of $35,196,266 has been returned to the limited
partners through September 30, 1997.

     At September 30, 1997, the Partnership had $2,467,203 in cash, cash
equivalents and short-term investments, of which $461,621 was used for operating
cash distributions to partners on October 30, 1997; the remainder is being
retained as working capital reserves.  On October 24, 1996, the Partnership made
a capital distribution of $519,946 ($7.60 per limited partnership unit)
representing undistributed proceeds from the sales of various properties prior
to 1994.  The adjusted capital contribution after this distribution was $485.54
per unit.  Also on October 24, 1996, the Partnership made a special operating
cash distribution of $364,186 ($5.27 per limited partnership unit) attributable
to a discretionary reduction of previously accumulated cash reserves.  The
source of future liquidity and cash distributions to partners will primarily be
cash generated by the Partnership's investments and proceeds from the sale of
investments.  Distributions of cash from operations for the first three quarters
of 1997 and 1996 were made at the annualized rate of 5.5% on the adjusted
capital contribution.

     The carrying value of real estate investments in the financial statements
at September 30, 1997 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, 1997, the appraised value of
each real estate investment exceeded its related carrying value; the aggregate
excess was approximately $5,500,000.  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.

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

     Form of Real Estate Investments

     North Cabot Industrial Park is a wholly-owned property.  Bayberry
Apartments and 270 Technology Center are structured as joint ventures with real
estate management/development firms.
<PAGE>
 
     Operating Factors

     Occupancy at North Cabot Industrial Park remained at 100% during the third
quarter of 1997, where it has been since September 30, 1996.

     Occupancy at Bayberry Apartments remained at 96% during the third quarter,
consistent with June 30, 1997.  (Occupancy was 89% at December 31, 1996 and 90%
at September 30, 1996.)

     Occupancy at 270 Technology Park declined slightly during the third quarter
of 1997 to 80% from 82% at June 30, 1997.  A tenant representing 18% of the
space vacated upon expiration of their lease on March 31, 1997.  (Occupancy was
98% at December 31, 1996 and September 30, 1996.)

     Investment Results

     Interest on cash equivalents and short-term investments decreased by
approximately $42,000, or 32%, between the first nine months of 1996 and 1997.
This decrease is primarily due to lower invested balances as a result of
additional distributions from reserves in October 1996 which was partially
offset by higher short-term yields in 1997.

     Real estate operating results were $1,228,465 for the first nine months of
1997, and $1,181,256 for the comparable period of 1996.  At North Cabot, 1997
operations improved due to increased occupancy and lower operating expenses
attributable to tenant write-offs and legal expenses of approximately $26,000 in
1996.  These increases in operations were partially offset by increased
amortization expense, commencing in mid-1996, related to certain tenant
improvements.  Operating income also increased at Bayberry primarily due to the
increase in occupancy mentioned above. At 270 Technology Park, operating results
declined, consistent with the occupancy decrease discussed above.

     Cash from operations increased by approximately $37,000 between the two
nine-month periods.  The increase is primarily due to lower outlays for tenant
improvements at North Cabot in 1997, partially offset by the timing of
distributions from both joint ventures.

     Portfolio Expenses

     General and administrative expenses primarily consist of real estate
appraisal, legal, accounting, printing and servicing agent fees.  These expenses
increased by approximately $23,000 or 13%, between the first nine months of 1996
and 1997 primarily due to an increase in accounting fees.

     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.  Management fees decreased slightly
between the two nine-month periods consistent with the decrease in distributable
cash flow.
<PAGE>
 
                   NEW ENGLAND LIFE PENSION PROPERTIES III;
                       A REAL ESTATE LIMITED PARTNERSHIP

                                   FORM 10-Q

                     FOR QUARTER ENDED SEPTEMBER 30, 1997

                                    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:  No Current Reports on
                        Form 8-K were filed during the quarter ended
                        September 30, 1997.
<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 12, 1997
                              /s/ James J. Finnegan
                              -------------------------------
                                James J. Finnegan
                                Vice President
                                of Managing General Partner,
                                Copley Properties Company III, Inc.



November 12, 1997
                             /s/ Karin J. Lagerlund
                             --------------------------------
                               Karin J. Lagerlund
                               Principal Financial and Accounting
                               Officer of Managing General Partner,
                               Copley Properties Company III, Inc.