<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-K

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

                  For the fiscal year ended December 31, 1997
                          Commission File No. 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
     incorporation or organization)                          Identification No.)

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

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

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

          Securities registered pursuant to Section 12(g) of the Act:
                     Units of Limited Partnership Interest

                                (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  X     No  
                                  ---       ---

        Indicate by check mark if disclosure of delinquent filers pursuant to 
Item 405 of Regulation S-K (Section 229.405 of this chapter) 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. [X]

        No voting stock is held by nonaffiliates of the Registrant.

                      DOCUMENTS INCORPORATED BY REFERENCE
                      -----------------------------------
                                        
                                     None
<PAGE>
 
                                   PART I  
                                   ------
                                          
Item 1. Business.  
        --------

        New England Life Pension Properties III; A Real Estate Limited
Partnership (the "Partnership") was organized under the Uniform Limited
Partnership Act of the Commonwealth of Massachusetts on November 1, 1984, to
invest primarily in newly constructed and existing income-producing real
properties.  

        The Partnership was initially capitalized with contributions of $2,000
in the aggregate from Copley Properties Company III, Inc. (the "Managing General
Partner") and ACOP Associates Limited Partnership (the "Associate General
Partner") (collectively, the "General Partners") and $10,000 from Copley Real
Estate Advisors, Inc. (the "Initial Limited Partner"). The Partnership filed a
Registration Statement on Form S-11 (the "Registration Statement") with the
Securities and Exchange Commission on November 15, 1984, with respect to a
public offering of 50,000 units of limited partnership interest at a purchase
price of $1,000 per unit (the "Units") with an option to sell up to an
additional 25,000 Units (an aggregate of $75,000,000). The Registration
Statement was declared effective on January 25, 1985.

        The first sale of Units occurred on July 15, 1985, at which time the
Initial Limited Partner withdrew its contribution from the Partnership.
Investors were admitted to the Partnership thereafter at monthly closings; the
offering terminated and the last group of initial investors was admitted to the
Partnership on December 19, 1985. A total of 68,414 Units had been sold, a total
of 11,437 investors had been admitted as limited partners (the "Limited
Partners") and a total of $67,748,960 had been contributed to the capital of the
Partnership. The remaining 6,586 Units were de-registered on February 18, 1986.

        The Partnership has no employees. Services are performed for the
Partnership by the Managing General Partner and affiliates of the Managing
General Partner.  

        As of December 31, 1997, the Partnership had investments in the three
real property investments described below. Additionally, the Partnership sold
six other real estate investments between 1987 and 1993. The principal terms of
these sales are set forth in the following table:

<TABLE>
<CAPTION>
                                                                                             Distribution
    Investment        Month/Year of Sale    Net Sale Proceeds    Distribution/Unit/1/         Month/Year
                          
<S>                          <C>               <C>                      <C>                       <C> 
Investment Four              12/87             $15,771,830               $17.86                    1/88
Investment Five               9/88              $3,002,643               $36.00                   10/88
Investment Six                3/89             $10,943,495              $150.00                    4/89
Investment Seven              2/92              $7,724,589              $102.00                    4/92
Investment Eight/2/          12/92             $11,600,183              $170.00                    1/93
Investment Nine              12/93              $2,161,552               $31.00                    1/94
</TABLE>

        In the opinion of the Managing General Partner, the properties are
adequately covered by insurance.






------------------------
/1/In October 1996, an additional distribution of $7.60 per unit was made,
representing proceeds from several prior sales which were being held in working
capital reserves.
/2/These sale proceeds represent the proceeds received by the Partnership when
two mortgage loans made by the Partnership were paid off and the investment was
liquidated.
<PAGE>
 
        A.    Light Industrial Facility in Hayward, California ("North Cabot
              --------------------------------------------------------------
Industrial Park").  
-----------------

        The Partnership continues to own a 3.8-acre parcel of land in Hayward,
California, which it acquired in 1985 for $786,130 and leased back to the
seller. In addition, the Partnership also made a loan to the ground lessee in
the amount of $2,663,870. Two single-story research and development buildings
containing an aggregate of approximately 51,089 square feet of space are
situated on the land. These buildings were 100% leased as of December 31, 1997.

        The Partnership entered into a ground lease with the seller which had a
term of 60 years. On November 15, 1994, the Partnership obtained fee simple
title to this property because the ground lessee defaulted on its obligations.
The Partnership accepted $85,000 as a settlement which released the guarantors
from all of their obligations under the lease guaranty. This payment was applied
to past due rent under the ground lease.

        B.    Research and Development/Office Buildings in Frederick, Maryland
              ----------------------------------------------------------------
("270 Technology Park").  
-----------------------

        In August, 1987, the Partnership exercised its option to purchase for
$247,650 an 8.288-acre parcel of land in 270 Technology Park, Frederick,
Maryland. Situated on the land are three single-story research and
development/office buildings containing an aggregate of 86,169 square feet of
space. The Partnership simultaneously leased the land back to the seller for a
term of 60 years. The ground lease provided for a fixed annual rent of $26,003
plus additional rent equal to 50% of gross revenues from the rental of the
buildings in excess of a base amount. Upon exercising its option, the
Partnership also made a non-recourse mortgage loan to the ground lessee of
$5,712,350.

        On January 1, 1988, the Partnership converted this investment to a joint
venture in which it has a 50% interest. The Partnership contributed the land and
funds to retire the mortgage debt. In addition, the Partnership contributed an
additional $260,000 of capital. The Partnership is entitled to receive a 10.5%
per annum preferred return on its invested capital payable currently, and 50% of
remaining cash flow and of sale and refinancing proceeds after return of its
equity. The preferred return may accrue if sufficient cash flow is not
available. In March 1998, ownership of the joint venture was restructured
whereby the Partnership obtained full control over the business of the joint
venture. The restructuring will be effective January 1, 1998.

        As of December 31, 1997, the buildings were 98% leased.  

C.      Apartment Building in Gaithersburg, Maryland ("Bayberry Apartments").  
        --------------------------------------------------------------------
    
        On April 4, 1988, the Partnership acquired a 65% interest in Bayberry
Associates, a joint venture formed with Christopher B.A. Limited Partnership
(the "Developer"). As of December 31, 1997, the Partnership had contributed
$14,575,940 to the capital of the joint venture out of a maximum commitment of
$14,580,000, $9,327,500 of which is characterized as Senior Capital and
$5,252,500 of which is characterized as Junior Capital. The joint venture
agreement entitles the Partnership to receive a senior priority cumulative
return of 10.25% per annum on the outstanding invested Senior Capital and a
junior priority cumulative return of 10.25% per annum on the outstanding
invested Junior Capital; however, up to $230,000 of Junior Capital is entitled
to a return at the greater of 10.25% per annum or the prime rate of the Maryland
National Bank plus 2% ($225,957 of such amount was contributed as of 
December 31, 1997). When an aggregate of $982,107 of priority returns has been
paid, (i) a portion of the senior priority return of up to 1.25% per annum may
accrue if sufficient cash is not available therefor, with 9.0% per annum to be
paid currently, and (ii) the full amount of the junior priority return equal to
10.25% per annum may accrue if sufficient cash is not available therefor. The
joint venture agreement also entitles the Partnership to receive 65% of net cash
flow and of refinancing proceeds and sale proceeds following the return of the
Partnership's equity capital and accrued preferential returns.
     
        The joint venture owns approximately 7.14 acres of land in Gaithersburg,
Maryland on which it completed development of a 230-unit garden apartment
community.  As of December 31, 1997, the apartments were 93% leased.  
<PAGE>
 
Item 2. Properties.  
        ----------
      
        The following table sets forth the annual realty taxes for the
Partnership's properties and information regarding tenants who occupy 10% or
more of gross leasable area (GLA) in the Partnership's properties:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                           
                                                Estimated             Number of                                           
                                                   1997            Tenants with 10%          Name(s) of          Square Feet of     
            Property                           Realty Taxes         or More of GLA           Tenant(s)             Each Tenant      
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                     <C>            <C>                          <C>
Light Industrial Facility in Hayward, CA          $33,600                 1                 EMHI America              6,691
                                                        
R&D Buildings in Frederick, MD                    $79,964                 5                   Sac-Tec                15,000
                                                                                        Adaptive Technology           9,003
                                                                                        Abbie Business School        13,209
                                                                                                MCI                  15,591
                                                                                          Horizon Cellular           10,111
                                                                                              Telephone
                                                        
Apartment Building in Gaithersburg, MD           $207,408                 0                     N/A                    N/A 
-----------------------------------------------------------------------------------------------------------------------------------

<CAPTION> 

-----------------------------------------------------------------------------------------------------------------------------------
                                                  Annual
                                                 Contract
                                                   Rent                 Lease                Renewal          Line of Business
            Property                          Per Square Foot         Expiration             Options        of Principal Tenants
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                <C>                 <C>                 <C>
Light Industrial Facility in Hayward, CA            $5.52             June, 1998              None            Automotive Parts
                                                        
R&D Buildings in Frederick, MD                     $14.45             March, 2000       Two 3 Year Options          Defense
                                                    $9.60              May, 1999        One 6 Year Option         Technology
                                                   $10.57            August, 2001             None             Business School
                                                   $12.00           February, 1998            None            Long Distance Comm.
                                                   $11.53            October, 2001      One 3 Year Option   Cellular Communications
                                                        
                                                        
Apartment Building in Gaithersburg, MD              N/A                   N/A                  N/A                    N/A
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE> 
<PAGE>
 
        The following table sets forth for each of the last five years the gross
leasable area, occupancy rates, rental revenue, and net effective rent for the
Partnership's properties:

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------
                                         Gross Leasable    Year-End        Rental      Net Effective
              PROPERTY                        Area         Occupancy       Revenue     Rent ($/sf/yr)*
                                                                         Recognized
--------------------------------------------------------------------------------------------------------
 
Industrial Facility in Hayward, CA
----------------------------------
<S>                                           <C>            <C>          <C>              <C> 
                1993                           51,089         65%         $152,961          $4.91
                1994                           51,089         58%         $168,705          $5.37
                1995                           51,089         94%         $197,581          $5.07
                1996                           51,089        100%         $206,603          $4.51
                1997                           51,089        100%         $267,263          $5.23
 
R&D Buildings in Frederick, MD
------------------------------
                1993                           86,169         93%         $930,768          $11.61
                1994                           86,169         95%         $958,157          $11.83
                1995                           86,169         98%         $968,980          $11.56
                1996                           86,169         98%         $976,011          $11.56
                1997                           86,169         98%         $924,087          $11.95
 
Apartment Building in Gaithersburg, MD
--------------------------------------
                1993                          203,642         95%       $2,077,226          $10.74
                1994                          203,642         94%       $2,141,017          $11.13
                1995                          203,642         91%       $2,168,956          $11.48
                1996                          203,642         89%       $2,228,222          $11.86
                1997                          203,642         93%       $2,280,583          $11.95
-------------------------------------------------------------------------------------------------------
</TABLE> 
 
*Net effective rent calculation is based on average occupancy during the 
respective year.
<PAGE>
 
        Following is a schedule of lease expirations for each of the next ten
years for the Partnership's properties:

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------
                                    TENANT AGING REPORT
---------------------------------------------------------------------------------------------------
 
                Property                        # of Lease     Total      Total      Percentage of
                                               Expirations     Square     Annual      Gross Annual
                                                               Feet       Rental        Rental*

---------------------------------------------------------------------------------------------------
Light Industrial Facility in Hayward, CA
-----------------------------------------
<S>                                                 <C>       <C>         <C>             <C>
                1998                                 5        17,697      $81,779         31%
                1999                                 2         8,135      $45,816         18%
                2000                                 4        17,311      $95,004         36%
                2001                                 2         7,946      $38,544         15%
                2002                                 0             0           $0          0%
                2003                                 0             0           $0          0%
                2004                                 0             0           $0          0%
                2005                                 0             0           $0          0%
                2006                                 0             0           $0          0%
                2007                                 0             0           $0          0%
 
R&D Buildings in Frederick, MD
------------------------------
                1998                                 6        31,619     $361,401         38%
                1999                                 2        12,003     $119,681         12%
                2000                                 2        17,007     $219,486         23%
                2001                                 2        23,320     $256,195         27%
                2002                                 0             0           $0          0%
                2003                                 0             0           $0          0%
                2004                                 0             0           $0          0%
                2005                                 0             0           $0          0%
                2006                                 0             0           $0          0%
                2007                                 0             0           $0          0%
 
Apartment Building in Gaithersburg, MD
--------------------------------------
                1998                                N/A         N/A         N/A           N/A
                1999                                N/A         N/A         N/A           N/A
                2000                                N/A         N/A         N/A           N/A
                2001                                N/A         N/A         N/A           N/A
                2002                                N/A         N/A         N/A           N/A
                2003                                N/A         N/A         N/A           N/A
                2004                                N/A         N/A         N/A           N/A
                2005                                N/A         N/A         N/A           N/A
                2006                                N/A         N/A         N/A           N/A
                2007                                N/A         N/A         N/A           N/A

---------------------------------------------------------------------------------------------------
</TABLE> 
 
*Does not include expenses paid by tenants.
<PAGE>
 
        The following information sets forth for each of the Partnership's
properties the: (i) federal tax basis, (ii) rate of depreciation, (iii) method
of depreciation, (iv) life claimed and (v) accumulated depreciation, with
respect to each property or component thereof for purposes of depreciation:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                        Rate of                      Life        Accumulated
               Entity/Property                        Tax Basis       Depreciation      Method     in years      Depreciation

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

 
Light Industrial Facility in Hayward, California.
-------------------------------------------------
<S>                                                  <C>          
Buildings                                            $   846,184          2.50%           SL          40          $   66,109
Improvements                                             195,655          2.50%           SL          40              11,711
                                                     -----------                                                  ----------
Total Depreciable Assets                             $ 1,041,839                                                  $   77,820
 
 
Research and Development/Office
Buildings, Frederick, Maryland.
-------------------------------------------------
Building & Improvements                              $ 6,111,187          3.18%           SL         31.5         $1,900,886
Improvements                                             350,418          2.56%           SL          39              23,980
                                                     -----------                                                  ----------
Total Depreciable Assets                             $ 6,461,605                                                  $1,924,866
 
 
Apartment Building in Gaithersburg, Maryland.
-------------------------------------------------
Buildings                                            $ 7,123,596          3.64%           SL         27.5         $2,159,870
Land Improvements                                      1,380,115           N/A          150%DB        15             850,428
                                                     -----------                                                  ----------
Total Depreciable Assets                             $ 8,503,711                                                  $3,010,298
 
 
Total Depreciable Assets                             $16,007,155                                                  $5,012,984
                                                     ===========                                                  ==========

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

</TABLE> 
 
SL=Straight Line
DB=Declining Balance
<PAGE>
 
        Following is information regarding the competitive market conditions for
each of the Partnership's properties. This information has been gathered from
sources deemed reliable. However, the Partnership has not independently verified
the information and, as such, cannot guarantee its accuracy or completeness:

Light Industrial Facility in Hayward, California
------------------------------------------------

        The property is located in the Hayward/Union City industrial market,
east of San Francisco Bay in Alameda County. Hayward's light industrial market
has been active in 1997, and the limited supply of quality space in many
property types is causing tenants to pay higher rents for less desirable space.
Total 1997 net absorption in the Warehouse/Distribution market of 598,468 square
feet contributed to a reduced year-end vacancy rate of 3.9% for this type of
product. Asking rental rates currently range from $.32 to $.42 per square foot,
approximately 10% higher than rates from year-end 1996.

Research and Development/Office Buildings in Frederick, Maryland
----------------------------------------------------------------

        The property is located in the Frederick County office/flex and light
industrial market. The Frederick R&D/office market contains approximately 
4.9 million square feet of space with a vacancy rate of approximately 16%.
Current market rents range from $8.50 to $10.00 per square foot for R&D and
$9.50 to $12.00 per square foot for office. Due to build-to-suit activity during
1997 which reduced the number of new large tenants to fill vacated space, the
market is currently out of balance. While the office-using sector in Frederick
County is expected to remain stable over the near term, rents are expected to
remain flat through 1998.

Apartment Complex in Gaithersburg, Maryland
-------------------------------------------

        The property is located in Gaithersburg, which is in Montgomery County,
one of the most affluent counties in the region. Due in part to the strong
Federal Government presence and the improving outlook for biomedical firms, the
long-term outlook for Montgomery County remains positive. As Gaithersburg is
relatively strict regarding new development, additional multifamily construction
in the submarket is not anticipated in the near future. Conditions could improve
for the near-term if businesses continue to move up the I-270 corridor in search
of space, as Northern Virginia runs out of space for office and apartment
development.

Item 3. Legal Proceedings.  
        -----------------

        The Partnership is not a party to, nor are any of its properties subject
to, any material pending legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders.  
        ---------------------------------------------------

        No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.

                                   PART II  
                                   -------
                                          
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.  
        ---------------------------------------------------------------------

        There is no active market for the Units. Trading in the Units is
sporadic and occurs solely through private transactions.

        As of December 31, 1997, there were 10,988 holders of Units.   
<PAGE>
 
        The Partnership's Amended and Restated Agreement of Limited Partnership
dated July 15, 1985, as amended to date (the "Partnership Agreement"), requires
that any Distributable Cash (as defined therein) be distributed quarterly to the
Partners in specified proportions and priorities. There are no restrictions on
the Partnership's present or future ability to make distributions of
Distributable Cash. For the year ended December 31, 1997, cash distributions
paid in 1997 or distributed after year-end with respect to 1997 to the Limited
Partners as a group totaled $1,828,022. For the year ended December 31, 1996,
cash distributions paid in 1996 or distributed after year-end with respect to
1996 to the Limited Partners as a group totaled $2,730,403, including $519,946
($7.60 per limited partnership unit) representing undistributed proceeds from
prior sales of various properties, and operating cash distributions of $364,186
($5.27 per limited partnership unit) resulting from a discretionary reduction of
previously accumulated cash reserves. Cash distributions exceeded net income in
1997 and, therefore, resulted in a reduction of partners' capital. Regular
distributions from operations, however, were less than cash provided by
operations in 1997. Reference is made to the Partnership's Statement of
Partners' Capital (Deficit) and Statement of Cash Flows in Item 8 hereof.

Item 6. Selected Financial Data.  
        -----------------------
<TABLE>
<CAPTION>
 
                          For Year           For Year           For Year           For Year          For Year  
                           Ended              Ended              Ended              Ended             Ended  
                          or as of           or as of           or as of           or as of          or as of  
                          12/31/97           12/31/96           12/31/95           12/31/94         12/31/93(1)  
                          --------           --------           --------           --------         ----------- 

<S>                    <C>                <C>                <C>                <C>                <C> 
Revenues               $   1,942,159      $   1,961,564      $   1,912,590      $   1,760,463      $   2,128,119  
 
Net Income             $   1,310,288      $   1,313,894      $   1,287,403      $   1,360,923      $   1,218,694  
 
Net Income  
per Limited  
Partnership  
Unit                          $18.96      $       19.01      $       18.63      $       19.69      $       17.64  
 
Total Assets           $  20,946,631      $  21,459,173      $  22,871,014      $  23,284,224      $  25,413,969  

Total Cash   
Distributions   
per Limited   
Partnership  
Unit, including  
amounts  
distributed   
after year end  
with respect to  
such year              $       26.72      $       39.91      $       24.64      $       21.60      $       49.75  
                       -------------      -------------      -------------      -------------      -------------
</TABLE> 

See financial statements for description of significant transactions:  



        (1) 1993 - one sale; one provision for impaired mortgage loan.  
<PAGE>
 
Item 7.

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 the real
estate investments described in Item 1 herein, 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 December 31, 1997.

     On January 27, 1994, the Partnership made a capital distribution of $31 per
limited partnership unit from the proceeds of the Heritage Green Plaza sale in
December 1993. The adjusted capital contribution after this distribution was
$493.14 per unit. 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 is $485.54 per unit. On
October 24, 1996, the Partnership also 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 Managing
General Partner will continue to evaluate working capital reserve levels.

     At December 31, 1997, the Partnership had $2,592,080 in cash, cash
equivalents and short-term investments, of which $461,622 was used for operating
cash distributions to partners on January 29, 1998; 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
real estate and short-term investments.  Regular distributions of cash from
operations for the four quarters of 1996 and 1997 were made at the annualized
rate of 5.0% on the adjusted capital contribution.

     The carrying value of real estate investments in the financial statements
at December 31, 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 December 31, 1997, the appraised value of each real
estate investment exceeded its related carrying value; the aggregate excess was
approximately $6,600,000. 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 AEW Real Estate
Advisors, Inc. ("AEW") 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.

     The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year.  Any of the
Partnership's 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 miscaluations causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in normal business operations.  The Managing General Partner and its
affiliates are assessing the modifications or replacements of its software that
may be necessary for its computer systems to function properly with respect to
the dates in the year 2000 and thereafter.  The Managing General Partner and its
affiliates do not believe that the cost of either modifying existing software or
converting to new software will be significant or that the Year 2000 Issue will
pose significant operational problems for its computer systems.

 
<PAGE>
 
Results of Operations
---------------------

     Form of Real Estate Investments

     Effective November 15, 1994, North Cabot Industrial Park (formerly
Marathon/Hayward) was converted to a wholly-owned property; it was previously
structured as a ground lease with a mortgage loan to the ground lessee.
Bayberry Apartments and 270 Technology Center are structured as joint ventures
with real estate management/development firms.

     Operating Factors

     Occupancy at North Cabot Industrial Park was 100%, 100% and 94% at
December 31, 1997, 1996, and 1995, respectively.  Average occupancy during 1996,
however, was 91%.

     At December 31, 1997, occupancy at Bayberry Apartments was 93%, up
slightly from 89% and 91% at December 31, 1997 and 1996, respectively.  Market
conditions remain competitive; however, the overall demand for apartments in the
Gaithersburg, Maryland market is relatively stable.

     Occupancy at 270 Technology Park was 98% at December 31, 1997, 1996
and 1995, although the average occupancy in 1997 was 91% as a tenant
representing 18% of the space vacated on March 31, 1997.  The space formerly
leased by this tenant is currently being leased on a month-to-month basis until
a permanent tenant is found.

     Investment Results

     1997 Compared to 1996

     Interest on cash equivalents and short-term investments decreased $43,000,
or 26% due to lower invested balances as a result of additional distributions
from reserves in October 1996. This decrease was partially offset by higher
short-term yields in 1997.

     Real estate operating results were $1,608,252 and $1,594,354 in 1997
and 1996, respectively.  At North Cabot Industrial Park, 1997 operations
improved due to increased occupancy as well as a slight reduction in operating
costs.  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 Apartments primarily
due to the increase in occupancy, in addition to lower depreciation in 1997.
These effects were partially offset by an increase in real estate taxes in 1997.
At 270 Technology Park, operating results declined, consistent with the
occupancy decrease discussed above.  Additionally, approximately $56,000 of
tenant improvements related to the vacated tenant mentioned above was written
off during 1997.

     Cash from operations increased by approximately $360,000 between 1996
and 1997.  The increase is primarily due to increased distributions from 270
Technology Park.  In addition, the Partnership received increased cash flow from
North Cabot Industrial Park in 1997 as a result of the increase in occupancy
mentioned above.
<PAGE>
 
     1996 Compared to 1995

     Interest on cash equivalents and short-term investments decreased
$34,000 or 17% due to lower short-term interest rates, as well as lower average
invested balances.

     Total real estate operations were $1,594,354 in 1996 compared to $1,500,132
in 1995. The increase was primarily due to an improvement in net operating
income at Bayberry Apartments largely due to increased rental rates. At North
Cabot, overall operating results increased slightly; property operating expenses
decreased due to a decrease in property taxes and the write-off of a tenant
receivable in 1995; and amortization expense increased in 1996 due to recent
tenant improvements.

     Operating cash flow decreased approximately $290,000 or 15% between
1995 and 1996.  This decrease, despite the increase in net income, is primarily
due to the timing of distributions from both 270 Technology Park ($152,000) and
Bayberry ($52,000).  In addition, there was a significant increase in property
working capital.

 
     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.

     1997 Compared to 1996

     The Partnership management fee decreased due to the decrease in
distributable cash flow.  General and administrative expenses increased by
$12,000 or 5% between the respective years primarily due to increased investor
servicing fees and accounting fees.

     1996 Compared to 1995

     The Partnership management fee increased due to an increase in
distributable cash flow, primarily stemming from the discretionary reduction in
working capital reserves. General and administrative expenses decreased by
$18,000 or 8% primarily due to decreased legal fees.


Inflation

     By their nature, real estate investments tend not to be adversely
affected by inflation.  Inflation may result in appreciation in the value of the
Partnership's real estate investments over time, if rental rates and replacement
costs increase.  Declines in real property values during the period of
Partnership operations, due to market and economic conditions, have overshadowed
the overall positive effect inflation may have on the value of the Partnership's
investments.
<PAGE>
 
Item 8.  Financial Statements and Supplementary Data.  
         -------------------------------------------

         See the Financial Statements of the Partnership included as a part of
this Annual Report on Form 10-K.

Item 9.  Changes in and Disagreements with Accountants on Accounting and
         -----------------------------------------------------------------
Financial Disclosure.  
--------------------
    
         The Partnership has had no disagreements with its accountants on
any matters of accounting principles or practices or financial statement
disclosure.   

                                  PART III  
                                  --------
                                          
Item 10. Directors and Executive Officers of the Registrant.  
         --------------------------------------------------

         (a) and (b) Identification of Directors and Executive Officers.      
                     --------------------------------------------------


         The following table sets forth the names of the directors and
executive officers of the Managing General Partner and the age and position held
by each of them as of December 31, 1997.  

<TABLE>
<CAPTION>
 
Name                         Position(s) with the Managing General Partner                    Age  
----                         ---------------------------------------------                    ---
<S>                         <C>                                                              <C>
 
Wesley M. Gardiner, Jr.      President, Chief Executive Officer and Director                  39  
Pamela J. Herbst             Vice President and Director                                      42  
J. Grant Monahon             Vice President and Director                                      52  
James J. Finnegan            Vice President                                                   37  
Karin J. Lagerlund           Treasurer and Principal Financial and Accounting Officer         33  
</TABLE>

         (c)  Identification of Certain Significant Employees.  
              -----------------------------------------------
 
              None.  
 
         (d)  Family Relationships.  
              --------------------

              None.  

         (e)  Business Experience.  
              -------------------

              The Managing General Partner was incorporated in Massachusetts on
November 1, 1984. The background and experience of the executive officers and
directors of the Managing General Partner are as follows:  

         Wesley M. Gardiner, Jr. joined AEW Real Estate Advisors, Inc. ("AEW") ,
formerly known as Copley Real Estate Advisors, Inc., in 1990 and has been a Vice
President at AEW since January, 1994. AEW is a subsidiary of AEW Capital
Management, L.P. ("AEW Capital Management").  From 1982 to 1990, he was employed
by Metric Realty, a nationally-known real estate investment advisor and
syndication firm, as a portfolio manager responsible for several public and
private limited partnerships.  His career at AEW has included asset management
responsibility for the company's Georgia and Texas holdings.  Presently, Mr.
Gardiner has overall responsibility for all the partnerships advised by AEW
<PAGE>
 
whose securities are registered under the Securities and Exchange Act of 1934.
He received a B.A. in Economics from the University of California at San
Diego.  

         Pamela J. Herbst directs AEW Capital Management's Portfolio Advisory
Services, with oversight responsibility for  the asset and portfolio management
areas.  Ms. Herbst is a member of  AEW Capital Management's Investment Policy
Group and Management Committee.  She came to AEW Capital Management in December
1996 as a result of the firm's merger with Copley Real Estate Advisors, Inc.,
where she held various senior level positions in asset and portfolio management,
acquisitions, and corporate operations since 1982.  Ms. Herbst is a graduate of
the University of Massachusetts (B.A.) and Boston University (M.B.A.).  

         J. Grant Monahon is AEW Capital Management's General Counsel and a
member of the firm's Management Committee and Investment Policy Group. He has
over 25 years of experience in real estate law and investments. Prior to joining
AEW Capital Management in 1987, Mr. Monahon was a partner with a major Boston
law firm. As the head of that firm's real estate finance department, he
represented a wide variety of institutional clients, both domestic and
international, in complex equity and debt transactions. He is the former
Chairman of the General Counsel section of the National Association of Real
Estate Investment Managers. Mr. Monahon is a graduate of Dartmouth College
(B.A.) and Georgetown University Law Center (J.D.).

         James J. Finnegan is the Assistant General Counsel of AEW Capital
Management.  Mr. Finnegan served as Vice President and Assistant General Counsel
of Aldrich, Eastman & Waltch, L.P., a predecessor to AEW Capital Management.
Mr. Finnegan has over ten years of experience in real estate law, including
seven years of experience in private practice with major New York City and
Boston law firms.  Mr. Finnegan also serves as AEW's securities and regulatory
compliance officer.  Mr. Finnegan is a graduate of the University of Vermont
(B.A.) and Fordham University School of Law (J.D.).  

         Karin J. Lagerlund directs the Advisory Services Portfolio Accounting
Group at AEW Capital Management, overseeing portfolio accounting, performance
measurement and client financial reporting for AEW's private equity investment
portfolios.  Ms. Lagerlund is a Certified Public Accountant and has over ten
years experience in real estate consulting and accounting.  Prior to joining AEW
Capital Management in 1994, she was an Audit Manager at EY/Kenneth Leventhal
LLP.  Ms. Lagerlund is a graduate of  Washington State University (B.A.).  

(f)      Involvement in Certain Legal Proceedings.  
         ----------------------------------------

         None.  


Item 11. Executive Compensation.  
         ----------------------
    
         Under the Partnership Agreement, the General Partners and their
affiliates are entitled to receive various fees, commissions, cash
distributions, allocations of taxable income or loss and expense reimbursements
from the Partnership. See Note 1, Note 2 and Note 6 of Notes to Financial
Statements.

         The following table sets forth the amounts of the fees and cash
distributions and reimbursements for out-of-pocket expenses which the
Partnership paid to or accrued for the account of the General Partners and their
affiliates for the year ended December 31, 1997.  Cash distributions to General
Partners include amounts distributed after year end with respect to 1997.  
<PAGE>
 
                                                                    Amount of
                                                                   Compensation
                                                                      and
Receiving Entity                      Type of Compensation        Reimbursement
----------------                      --------------------        -------------

AEW Real Estate Advisors, Inc.        Management Fees and
                                      Reimbursement of Expenses    $  195,620

General Partners                      Share of Distributable Cash      18,464
 
New England Securities Corporation    Servicing Fees and               18,315
                                      Reimbursement of Expenses    ----------
 
                                      TOTAL                        $  232,399
                                                                   ==========

         For the year ended December 31, 1997, the Partnership allocated $12,444
of taxable income to the General Partners. See Note 1 of Notes to Financial
Statements for additional information about transactions between the Partnership
and the General Partners and their affiliates.

Item 12. Security Ownership of Certain Beneficial Owners and Management.  
         --------------------------------------------------------------

   (a) Security Ownership of Certain Beneficial Owners  
       -----------------------------------------------

          No person or group is known by the Partnership to be the beneficial
owner of more than 5% of the outstanding Units at December 31, 1997. Under the
Partnership Agreement, the voting rights of the Limited Partners are limited
and, in some circumstances, are subject to the prior receipt of certain opinions
of counsel or judicial decisions.

         Except as expressly provided in the Partnership Agreement, the right to
manage the business of the Partnership is vested exclusively in the Managing
General Partner.

   (b) Security Ownership of Management.  
       --------------------------------

         An affiliate of the Managing General Partner of the Partnership owned
810 Units as of December 31, 1997.

  (c)  Changes in Control.  
       ------------------
    
         There exists no arrangement known to the Partnership the operation of
which may at a subsequent date result in a change in control of the Partnership.

Item 13.  Certain Relationships and Related Transactions.  
          ----------------------------------------------

         The Partnership has no relationships or transactions to report other
than as reported in Item 11, above.
<PAGE>
 
                                   PART IV  
                                   -------

Item 14.  Exhibits, Financial Statements, and Reports on Form 8-K.  
          -------------------------------------------------------

         (a) The following documents are filed as part of this report:  

                 (1) Financial Statements--The Financial Statements listed on
the accompanying Index to Financial Statements and Schedule, Financial
Statements Index No. 2 and Financial Statements Index No. 3 are filed as part of
this Annual Report.

                 (2) Financial Statement Schedule--The Financial Statement
Schedule listed on the accompanying Index to Financial Statements and Schedule
is filed as part of this Annual Report.

                 (3) Exhibits--The Exhibits listed in the accompanying Exhibit
Index are filed as a part of this Annual Report and incorporated in this Annual
Report as set forth in said Index.   

         (b) Reports on Form 8-K. During the last quarter of the year ended
December 31, 1997, the Partnership filed no Current Report on Form 8-K.
<PAGE>
 
                  New England Life Pension Properties III;  

                      A Real Estate Limited Partnership  



                            Financial Statements  


                                * * * * * * *  



                              December 31, 1997  
                                          
                                          
<PAGE>
 
                   NEW ENGLAND LIFE PENSION PROPERTIES III;
                       A REAL ESTATE LIMITED PARTNERSHIP

                  INDEX TO FINANCIAL STATEMENTS AND SCHEDULE




Report of Independent Accountants

Financial Statements:

   Balance Sheets - December 31, 1997 and 1996

     Statements of Operations - Years ended December 31, 1997, 1996 and 1995

     Statement of Partners' Capital (Deficit) - Years ended December 31, 1997,
     1996 and 1995

     Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995

     Notes to Financial Statements

Financial Statement Schedule:

     Schedule III - Real Estate and Accumulated Depreciation at December 31,
     1997, 1996 and 1995
<PAGE>
 
                       Report of Independent Accountants
                       ---------------------------------


To the Partners

New England Life Pension Properties III;
A Real Estate Limited Partnership

In our opinion, based on our audits and the reports of other auditors for the
years ended December 31, 1997, 1996 and 1995, the financial statements listed in
the accompanying index present fairly, in all material respects, the financial
position of New England Life Pension Properties III; A Real Estate Limited
Partnership (the "Partnership") at December 31, 1997 and 1996, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of Copley
Properties Company III, Inc., the Managing General Partner of the Partnership;
our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of the Partnership's
joint ventures for the years ended December 31, 1996 and 1995, which results of
operations are recorded using the equity method of accounting in the
Partnership's financial statements and for which equity in joint venture income
aggregated $1,587,249 and $1,499,646 for the years ended December 31, 1996 and
1995, respectively. Those statements were audited by other auditors whose
reports thereon have been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for the equity in joint venture
income for the years ended December 31, 1996 and 1995, is based solely on the
reports of the other auditors. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by the Managing General Partner, and evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors for the years ended December 31, 1997, 1996 and 1995 provide a
reasonable basis for the opinion expressed above.


/s/ Price Waterhouse LLP
--------------------------
Boston, Massachusetts
March 16, 1998
<PAGE>
 
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP
 
BALANCE SHEETS
                                                         December 31,
                                               --------------------------------
 
                                                   1997                1996
                                               ------------        ------------
 
Assets
 
Real estate investments:
  Joint ventures                               $ 17,184,075        $ 17,762,647
  Property, net                                   1,170,476           1,265,968
                                               ------------        ------------
                                                 18,354,551          19,028,615
 
 
 
Cash and cash equivalents                         1,645,244           1,260,892
Short-term investments                              946,836           1,169,666
                                               ------------        ------------
 
                                               $ 20,946,631        $ 21,459,173
                                               ============        ============
 

Liabilities and Partners' Capital

Accounts payable                               $     99,348        $     74,172
Accrued management fee                               45,655              45,792
                                               ------------        ------------
Total liabilities                                   145,003             119,964
                                               ------------        ------------
 
 
Partners' capital (deficit):
  Limited partners ($485.54 per unit;
    75,000 units authorized, 68,414
    units issued and outstanding)                20,859,138          21,391,344
  General partners                                  (57,510)            (52,135)
                                               ------------        ------------
Total partners' capital                          20,801,628          21,339,209
                                               ------------        ------------
 
                                               $ 20,946,631        $ 21,459,173
                                               ============        ============
 

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

STATEMENTS OF OPERATIONS
                                             Year ended December 31,
                                       ------------------------------------

                                          1997         1996         1995
                                       ----------   ----------   ----------
 
Investment Activity
 
Property rentals                       $  267,791   $  208,142   $  213,127
Property operating expenses               (79,665)     (96,953)    (147,938)
Depreciation and amortization            (121,979)     (94,620)     (55,239)
                                       ----------   ----------   ----------
                                           66,147       16,569        9,950
 
Joint venture earnings                  1,551,569    1,587,249    1,499,646
Amortization                               (9,464)      (9,464)      (9,464)
                                       ----------   ----------   ----------
 
   Total real estate operations         1,608,252    1,594,354    1,500,132
 
Interest on cash equivalents
 and short-term investments               122,799      166,173      199,817
                                       ----------   ----------   ----------
 
   Total investment activity            1,731,051    1,760,527    1,699,949
                                       ----------   ----------   ----------
 
Portfolio Expenses
 
General and administrative                238,143      225,808      244,142
Management fee                            182,620      220,825      168,404
                                       ----------   ----------   ----------
                                          420,763      446,633      412,546
                                       ----------   ----------   ----------
 
Net Income                             $1,310,288   $1,313,894   $1,287,403
                                       ==========   ==========   ==========
 
Net income per limited
 partnership unit                      $    18.96   $    19.01   $    18.63
                                       ==========   ==========   ==========
 
Cash distributions per limited
 partnership unit                      $    26.74   $    39.37   $    24.64
                                       ==========   ==========   ==========
 
Number of limited partnership units
 outstanding during the year               68,414       68,414       68,414
                                       ==========   ==========   ==========
 


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

STATEMENT OF PARTNERS' CAPITAL (DEFICIT)

<TABLE> 
<CAPTION>  

                                                 Year ended December 31,
                        ------------------------------------------------------------------------
                                 1997                     1996                     1995
                              ----------               ----------               ---------- 
 
                         General       Limited    General       Limited    General       Limited
                        Partners      Partners   Partners      Partners   Partners      Partners
                        --------      --------   --------      --------   --------      --------
<S>                     <C>        <C>           <C>           <C>        <C>           <C>  
Balance at beginning
  of year               $(52,135)  $21,391,344   $(43,319)  $22,784,048   $(39,166)  $23,195,240
 
Cash distributions       (18,478)   (1,829,391)   (21,955)   (2,693,459)   (17,027)   (1,685,721)
 
Net income                13,103     1,297,185     13,139     1,300,755     12,874     1,274,529
                        --------   -----------   --------   -----------   --------   -----------
 
Balance at end
   of year              $(57,510)  $20,859,138   $(52,135)  $21,391,344   $(43,319)  $22,784,048
                        ========   ===========   ========   ===========   ========   ===========
</TABLE>



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

STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

 
                                                                     Year ended December 31,         
                                                             --------------------------------------- 
                                                                                                     
                                                                1997           1996          1995    
                                                             -----------   -----------   ----------- 
<S>                                                          <C>           <C>           <C>         
Cash flows from operating activities:                                                                
 Net income                                                  $ 1,310,288   $ 1,313,894   $ 1,287,403 
  Adjustments to reconcile net income to net 
   cash provided by operating activities:                                                                                      
     Depreciation and amortization                               131,443       104,084        64,703 
     Equity in joint venture net income                       (1,551,569)   (1,587,249)   (1,499,646)
     Cash distributions from joint ventures                    2,120,676     1,931,140     2,048,743 
     Decrease (increase) in investment income                  
      receivable                                                   1,278        16,268       (17,006)
     Increase in deferred leasing costs                          (14,794)      (21,954)      (21,691)
     Decrease (increase) in property                                                                  
      working capital                                             (1,365)      (84,741)       86,898 
     Increase (decrease) in liabilities                           25,039       (10,321)        2,135 
                                                             -----------   -----------   ----------- 
       Net cash provided by operating activities               2,020,996     1,661,121     1,951,539 
                                                             -----------   -----------   ----------- 
                                                                                                     
Cash flows from investing activities:                                                                
 Capital expenditures on owned property                          (10,327)      (10,394)     (174,934)
 Decrease (increase) in short-term                                                                   
  investments, net                                               221,552       925,674    (1,097,788)
                                                             -----------   -----------   ----------- 
       Net cash provided by (used in) investing                                                                                     
       activities                                                211,225       915,280    (1,272,722)
                                                             -----------   -----------   ----------- 
                                                                                                     
Cash flows from financing activity:                                                                  
 Distributions to partners                                    (1,847,869)   (2,715,414)   (1,702,748)
                                                             -----------   -----------   ----------- 
       Net cash used in financing activity                    (1,847,869)   (2,715,414)   (1,702,748)
                                                                                                     
 Net increase (decrease) in cash                                                                     
  and cash equivalents                                           384,352      (139,013)   (1,023,931) 
 

Cash and cash equivalents:
 Beginning of year                                             1,260,892     1,399,905     2,423,836
                                                             -----------   -----------   ----------- 

 End of year                                                 $ 1,645,244   $ 1,260,892   $ 1,399,905
                                                             ===========   ===========   ===========
</TABLE> 


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

NOTES TO FINANCIAL STATEMENTS

Note 1 - Organization and Business
----------------------------------

  General
  -------

  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.  It 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.  It
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 Managing General Partner of the Partnership is Copley Properties Company
III, Inc., a wholly-owned subsidiary of AEW Real Estate Advisors, Inc. ("AEW"),
formerly known as Copley Real Estate Advisors, Inc. ("Copley").  The associate
general partner is ACOP Associates Limited Partnership, a Massachusetts limited
partnership.  Subject to the Managing General Partner's overall authority, the
business of the Partnership is managed by AEW pursuant to an advisory contract.

  On December 10, 1996, Copley's parent, New England Investment Companies,
Limited Partnership ("NEIC"), a publicly traded master limited partnership,
acquired certain assets subject to then existing liabilities from Aldrich,
Eastman & Waltch, Inc. and its affiliates and principals (collectively, "the AEW
Operations").  Simultaneously, a new entity, AEW Capital Management, L.P. was
formed, into which NEIC contributed its interest in Copley and its affiliates.
As a result, the AEW Operations were combined with Copley to form the business
operations of AEW Capital Management, L.P.  At year end 1997, NEIC completed a
restructuring plan under which it contributed all of its operations to a newly
formed private partnership, NEIC Operating Partnership, L.P., in exchange for a
general partnership interest in the newly formed entity.  As such, at December
31, 1997, AEW Capital Management, L.P. is wholly owned by NEIC Operating
Partnership, L.P.  AEW is a subsidiary of AEW Capital Management, L.P.

  Prior to August 30, 1996, New England Mutual Life Insurance Company ("The New
England") was NEIC's principal unit holder and owner of all the outstanding
stock of NEIC's general partner.  On August 30, 1996, The New England merged
with and into Metropolitan Life Insurance Company ("Met Life").  Met Life is the
surviving entity and, therefore, through a wholly-owned subsidiary, became the
owner of the units of partnership interest previously owned by The New England
and of the stock of NEIC's general partner.

              At December 31, 1997 and 1996, an affiliate of the Managing
General Partner owned 810 and 768 units of limited partnership interest,
respectively, which were repurchased from certain qualified plans within
specified annual limitations provided for in the Partnership Agreement.  

  Management
  ----------

  AEW, as advisor, is entitled to receive stipulated fees from the Partnership
in consideration of services performed in connection with the management of the
Partnership and the acquisition and disposition of Partnership investments in
real property.  Partnership management fees are 9% of distributable cash flow
from operations, as defined, before deducting such fees.  AEW is also reimbursed
for expenses incurred in connection with administering the Partnership ($13,000
in 1997, $12,000 in 1996, and $13,368 in 1995).  Acquisition fees paid were
based on 2% of the gross proceeds from the offering.  Disposition fees are
limited to the lesser of 3% of the selling price of the property, or 50% of the
standard real estate commission customarily charged by an independent real
estate broker. Payments of disposition fees are subject to the prior receipt by
the limited partners of their capital contributions plus a stipulated return
thereon.
<PAGE>
 
  New England Securities Corporation, an indirect subsidiary of Met Life, is
engaged by the Partnership to act as its unit holder servicing agent.  Fees and
out-of-pocket expenses for such services totaled $18,315, $17,501 and $15,682 in
1997, 1996 and 1995, respectively.


Note 2 - Summary of Significant Accounting Policies
---------------------------------------------------

  Accounting Estimates
  --------------------

  The preparation of financial statements in conformity with generally accepted
accounting principles requires the Managing General Partner to make estimates
affecting the reported amounts of assets and liabilities, and of revenues and
expenses.  In the Partnership's business, certain estimates require an
assessment of factors not within management's control, such as the ability of
tenants to perform under long-term leases and the ability of the properties to
sustain their occupancies in changing markets.  Actual results, therefore, could
differ from those estimates.

  Real Estate Joint Ventures
  --------------------------

  Investments in joint ventures, which are in substance real estate investments,
are stated at cost plus (minus) equity in undistributed joint venture income
(losses).  Allocations of joint venture income (losses) were made to the
Partnership's venture partners as long as they had substantial economic equity
in the project.  Economic equity is measured by the excess of the appraised
value of the property over the Partnership's total cash investment plus accrued
preferential returns thereon.  Currently, the Partnership records an amount
equal to 100% of the operating results of the property, after the elimination of
all inter-entity transactions.  Joint ventures are consolidated with the
accounts of the Partnership if, and when, the venture partner no longer shares
in the control of the business.

  Property
  --------

  Property includes land and buildings and improvements, which are stated at
cost less accumulated depreciation, and other operating net assets
(liabilities).  The Partnership's initial carrying value of a property
previously subject to a ground lease/mortgage loan arrangement equals the
Partnership's carrying value of the predecessor investment on the conversion
date.

  Capitalized Costs, Depreciation and Amortization
  ------------------------------------------------

  Maintenance and repair costs are expensed as incurred; significant
improvements and renewals are capitalized.  Depreciation is computed using the
straight-line method based on estimated useful lives of the buildings and
improvements.

  Acquisition fees have been capitalized as part of the cost of real estate
investments.  Amounts not related to land are being amortized using the
straight-line method over the estimated useful lives of the underlying real
property.

  Leases are accounted for as operating leases.  Leasing commissions are
amortized over the terms of the respective leases.  Rental income is being
recognized on a straight-line basis over the respective lease terms.

  Realizability of Real Estate Investments
  ----------------------------------------

  The Partnership considers a real estate investment, other than a mortgage
loan, to be impaired when it determines the carrying value of the investment is
not recoverable through expected undiscounted cash flows generated from the
operations and disposal of the property.  The impairment loss is based on the
excess of the investments' carrying value over its estimated fair market value.
For investments being held for sale, the impairment loss also includes estimated
costs of sale.  Property held for sale is not depreciated during the holding
period.  Prior to the adoption of Statement of Financial Accounting Standards
No. 121 effective January 1, 1995, the impairment loss was measured based on the
excess of the investment's carrying value over its net realizable value.
<PAGE>
 
  The carrying value of an investment may be greater or less than its current
appraised value.  At December 31, 1997 and 1996, the appraised value of each of
the Partnership's investments exceeded its related carrying value; the aggregate
excess was approximately $6,600,000 and $6,100,000, respectively.  The current
appraised value of real estate investments has been estimated by the Managing
General Partner and is generally based on a combination of traditional appraisal
approaches performed by AEW 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.


     Cash Equivalents and Short-Term Investments
     -------------------------------------------

     Cash equivalents are stated at cost, plus accrued interest.  The
Partnership considers all highly liquid debt instruments purchased with a
maturity of ninety days or less to be cash equivalents; otherwise, they are
classified as short-term investments.

     The Partnership has the positive intent and ability to hold all short-term
investments to maturity; therefore, short-term investments are carried at cost,
plus accrued interest, which approximates market value.  At December 31, 1997
and 1996, all investments are in commercial paper with less than one month and
three months, respectively, remaining to maturity.
 
     Deferred Disposition Fees
     -------------------------

     According to the terms of the advisory contract, AEW is entitled to
disposition fees related to sales of real estate investments. Payment of these
fees, however, is contingent upon the limited partners' first receiving their
capital, plus stipulated returns thereon. Since inception, the Partnership sold
several investments and had accrued disposition fees of $1,116,984 through
September 30, 1992. In light of the then current value of the Partnership's
remaining investments and the expectations for improvement over the
Partnership's investment horizon, the Managing General Partner determined in
1992 that the likelihood of payment of these fees was remote. Accordingly, the
previously accrued liability was reduced to zero.

     Income Taxes
     ------------

     A partnership is not liable for income taxes and, therefore, no provision
for income taxes is made in the financial statements of the Partnership.  A
proportionate share of the Partnership's income is reportable on each partner's
tax return.

     Per Unit Computations
     ---------------------

     Per unit computations are based on the number of units of limited
partnership interest outstanding during the year.  The actual per unit amount
will vary by partner depending on the date of admission to, or withdrawal from,
the Partnership.

     Effective January 1, 1998, the Partnership adopted FAS 128 "Earnings per
Share," which simplifies the standards of reporting earnings per share (EPS)
previously found in APB Opinion No. 15. It provides guidance on the computation
and disclosure of basic and diluted EPS and requires restatement of prior
periods for comparative purposes. The adoption of FAS 128 did not have a
material impact on the Partnership's financial statements.

     Reclassifications
     -----------------

     Certain prior year amounts have been reclassified to conform to the current
year's presentation.
<PAGE>
 
Note 3 - Real Estate Joint Ventures
-----------------------------------

     The Partnership has invested in two real estate joint ventures, each of
which is organized as a general partnership with a real estate
management/development firm.  It made capital contributions to the ventures,
which are subject to preferential cash distributions at a specified rate and to
priority distributions with respect to sale or refinancing proceeds.  The joint
venture agreements provide for the funding of cash flow deficits by the venture
partners in proportion to ownership interests, and for the dilution of ownership
share in the event a venture partner does not contribute proportionately.

     The respective real estate management/development firms are responsible for
day-to-day development and operating activities, although overall authority and
responsibility for the businesses is shared by the venturers.  The real estate
management/development firm, or its affiliates, also provides various services
to the respective joint venture for a fee.

     270 Technology Park
     -------------------

     Effective January 1, 1988, one of the Partnership's ground lease/mortgage
loan investments was converted to a 50% ownership interest in a joint venture
with an affiliate of Manekin Corporation.  The venture owns and operates three
research and development/office buildings in Frederick, Maryland.  The
Partnership was credited with a capital contribution of $5,960,000, an amount
equal to the cost of the land plus the then outstanding principal on the
mortgage loan.  In addition, during 1988, the Partnership contributed cash of
$260,000.  The preferential return rate on the capital contributed is 10.50% per
annum.  In March 1998, ownership of the joint venture was restructured whereby
the Partnership obtained full control over the business of the joint venture.
The restructuring will be effective January 1, 1998.

     Future aggregate minimum rents due to the venture under noncancellable
operating leases are: $710,292 in 1998; $528,045 in 1999; $315,774 in 2000; and
$199,350 in 2001.

     Bayberry Apartments
     -------------------

     On April 4, 1988, the Partnership entered into a joint venture with an
affiliate of Bozzuto and Associates to construct and operate a garden apartment
community in Gaithersburg, Maryland.  The Partnership has a 65% ownership
interest and committed to a maximum capital contribution of $14,350,000, and a
maximum deficit contribution (characterized as junior capital) of $230,000.  The
preferential return rate is 10.25% per annum on the capital contributed and the
greater of the prime rate plus 2% or 10.25% on the deficit contribution.  At
December 31, 1997 and 1996, the Partnership had contributed $14,349,983 of its
capital commitment, plus $225,957 as a prorata deficit contribution.  Sixty-five
percent of the Partnership's capital contribution is characterized as "senior"
capital.  If senior capital is prepaid, the Partnership is entitled to a special
distribution intended to preserve the preferential return yield on senior
capital through the ninth anniversary of the venture.  No senior capital was
prepaid as of December 31, 1997.
<PAGE>
 
Summarized Financial Information
--------------------------------

     The following summarized financial information is presented in the
aggregate for the joint ventures:

                            Assets and Liabilities
                            ----------------------
<TABLE>
<CAPTION>
 
                                               December 31,
                                         ------------------------
                                            1997         1996
                                         -----------  -----------
<S>                                      <C>          <C>
Assets
 
  Real property, net of accumulated
      depreciation of $5,110,304 and
      $4,812,441, respectively           $14,786,221  $15,325,895
  Other assets                               639,480      659,368
                                         -----------  -----------
                                          15,425,701   15,985,263
 
Liabilities                                  125,700      115,892
                                         -----------  -----------

Net assets                               $15,300,001  $15,869,371
                                         ===========  ===========
</TABLE> 


                             Results of Operations
                             ---------------------
<TABLE>
<CAPTION>
 
 
                                        Year ended December 31,
                                  -----------------------------------
                                     1997        1996        1995
                                  ----------  ----------  -----------
<S>                               <C>         <C>         <C>
Revenue
 
 Rental income                    $3,204,670  $3,204,233   $3,137,936
 Other income                         36,252       7,637        7,501
                                  ----------  ----------   ----------
                                   3,240,922   3,211,870    3,145,437
                                  ----------  ----------   ----------
 
Expenses
 
 Operating expenses                1,126,065   1,085,295    1,070,570
 Depreciation and amortization       563,288     539,326      575,221
                                  ----------  ----------   ----------
                                   1,689,353   1,624,621    1,645,791
                                  ----------  ----------   ----------
 
Net income                        $1,551,569  $1,587,249   $1,499,646
                                  ==========  ==========   ==========
 
</TABLE>
     Liabilities and expenses exclude amounts owed and attributable to the
Partnership on behalf of its various financing arrangements with the joint
ventures.
<PAGE>
 
Note 4 - Property
-----------------

  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/mortgagee 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 investment as of the date of restructuring was
allocated to land, buildings and net operating assets.

 The following is summary of the Partnership's investment in property:
<TABLE>
<CAPTION>
 
 
                                                        December 31,
                                                  ------------------------
                                                     1997         1996
                                                  -----------  -----------
<S>                                               <C>          <C>
     Land                                         $  347,772   $  347,772
     Buildings and improvements                    1,041,839    1,031,512
     Accumulated depreciation and amortization      (244,868)    (138,503)
     Net operating assets                             25,733       25,187
                                                  ----------   ----------
                                                  $1,170,476   $1,265,968
                                                  ==========   ==========
</TABLE>

  The buildings are being depreciated over a 25-year period. The minimum future
rentals under non-cancelable operating leases are: $220,521 in 1998; $188,026 in
1999, $126,705 in 2000; and $19,666 in 2001.

  Prior to 1994, the Managing General Partner determined that the carrying value
of the North Cabot Industrial Park investment should be reduced to estimated
fair market value. Accordingly, the carrying value was reduced by $2,500,000.
<PAGE>
 
Note 5 - Income Taxes
---------------------

     The Partnership's income (loss) for federal income tax purposes differs
from that reported in the accompanying statement of operations as follows:
<TABLE>
<CAPTION>
 
                                         Year ended December 31,
                                  -------------------------------------
                                     1997         1996         1995
                                  -----------  -----------  -----------
<S>                               <C>          <C>          <C>
Net income per financial
 statements                       $1,310,288   $1,313,894   $1,287,403
Timing differences:
 Joint venture earnings             (154,870)    (224,467)     (94,384)
 Depreciation and amortization        85,777       58,395       28,223
 Property sales and operations             -            -       (3,313)
 Expenses                              3,188        3,188        3,188
                                  ----------   ----------   ----------
 
Taxable income                    $1,244,383   $1,151,010   $1,221,117
                                  ==========   ==========   ==========
 
</TABLE>
Note 6 - Partners' Capital
--------------------------

  Allocation of net income (losses) from operations and distributions of
distributable cash from operations, as defined, are in the ratio of 99% to the
limited partners and 1% to the general partners.  Cash distributions are made
quarterly.


  Net sale proceeds and financing proceeds are allocated first to limited
partners to the extent of their contributed capital plus a stipulated return
thereon, as defined, second to pay disposition fees, and then 85% to the limited
partners and 15% to the general partners. As a result of returns of capital from
sale transactions, the adjusted capital contribution per limited partnership
unit was reduced from $1,000 to $982.14 during 1987, to $946.14 during 1988, to
$796.14 during 1989, to $694.14 during 1992, to $524.14 during 1993, to $493.14
during 1994, and to $485.54 during 1996. The capital distribution in 1996 of
$519,946 represented previously undistributed proceeds from sales of various
properties. No capital distributions have been made to the general partners.
Income from sales will be allocated in proportion to the distribution of related
proceeds, provided that the general partners are allocated at least 1%. Income
or losses from sales, if there are no residual proceeds after the repayment of
the related debt, will be allocated 99% to the limited partners and 1% to the
general partners.
Note 7 - Subsequent Event
-------------------------

  Distributions of cash from operations relating to the quarter ended December
31, 1997 were made on January 29, 1998 in the aggregate amount of $461,622
($6.68 per limited partnership unit).
<PAGE>
 
                     NEW ENGLAND LIFE PENSION PROPERTIES III
                        A REAL ESTATE LIMITED PARTNERSHIP

                                  SCHEDULE III
                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1997

<TABLE> 
<CAPTION> 

                                                         Initial Cost to                          Costs Capitalized
                                                         the Partnership                       Subsequent to Acquisition
                                                ---------------------------------     --------------------------------------------

                                                            Buildings &    Other       Carrying         Additions
Description                                       Land      Improvements   (Net)         Costs       (Dispositions)        Other
-----------                                     --------   -------------- -------     ----------     --------------      ---------
<S>                                             <C>        <C>            <C>         <C>            <C>                 <C> 
An R & D building (51,089 sq.ft)
on 3.8 acres of land in                         $347,772              $0       $0             $0         $1,041,839        $25,733
Hayward, California (See Note A)
                                               ---------       ---------   ------      ---------        -----------       --------

      Total Wholly-Owned                        $347,772              $0       $0             $0         $1,041,839        $25,733
                                               =========       =========   ======      =========        ===========       ========

50% Interest in 270 Technology
Park.  Owner of three R & D
buildings (86,169 square feet)                 ----------------------------------  See  Note  B  ---------------------------------
situated on 8.3 acres of land
in Frederick, Maryland.


60% Interest in Bayberry Associates.
Owner of nine apartment buildings
(230 units) situated on 17.1 acres             ----------------------------------  See  Note  B   --------------------------------
of land in Gaithersburg, Maryland.



      Total Joint Ventures


           Total Real Estate

<CAPTION> 

                                                                                Gross amount at which
                                                                              Carried at Close of Period
                                                ------------------------------------------------------------------------------------

                                                                                      Investment
                                                            Buildings &               Valuation
Description                                       Land      Improvements   Other      Allowances      Dispositions         Total
-----------                                     --------   -------------- -------     ----------     --------------      ---------
<S>                                             <C>        <C>            <C>         <C>            <C>                <C> 
An R & D building (51,089 sq.ft)
on 3.8 acres of land in                         $347,772      $1,041,839  $25,733             $0                 $0     $1,415,344
Hayward, California (See Note A)
                                               ---------     -----------  -------      ---------        -----------    -----------

      Total Wholly-Owned                        $347,772      $1,041,839  $25,733             $0                 $0     $1,415,344
                                               =========     ===========  =======      =========        ===========    ===========

50% Interest in 270 Technology
Park.  Owner of three R & D
buildings (86,169 square feet)                                                                                          $6,162,959
situated on 8.3 acres of land
in Frederick, Maryland.


60% Interest in Bayberry Associates.
Owner of nine apartment buildings
(230 units) situated on 17.1 acres                                                                                     $11,021,116
of land in Gaithersburg, Maryland.


                                                                                                                       -----------
      Total Joint Ventures                                                                                             $17,184,075
                                                                                                   
                                                                                                                       -----------
           Total Real Estate                                                                                           $18,599,419
                                                                                                                       ===========
<CAPTION> 

                                                  Accumulated
                                                  Depreciation             Date of               Date            Depreciable
Description                                      & Amortization          Construction          Acquired             Life
-----------                                      --------------          ------------          --------             ----
<S>                                              <C>                     <C>                 <C>                 <C> 
An R & D building (51,089 sq.ft)
on 3.8 acres of land in                               ($244,868)           Completed            3/20/89           25 Years
Hayward, California (See Note A)                                                             (Converted to
                                                                                              Wholly-Owned
                                                                                              on 11/15/94)
                                                     ----------
      Total Wholly-Owned                              ($244,868)
                                                     ==========


50% Interest in 270 Technology
Park.  Owner of three R & D
buildings (86,169 square feet)                              N/A            Completed            8/29/87           30/15 Yrs
situated on 8.3 acres of land                                                                (Converted to
in Frederick, Maryland.                                                                      Joint Venture
                                                                                               on 1/1/88)

60% Interest in Bayberry Associates.
Owner of nine apartment buildings
(230 units) situated on 17.1 acres                          N/A            Completed             4/4/88           30/15 Yrs
of land in Gaithersburg, Maryland.


      Total Joint Ventures

                                                     ----------
           Total Real Estate                          ($244,868)
                                                     ==========

</TABLE> 
<PAGE>
 
                     NEW ENGLAND LIFE PENSION PROPERTIES III

                             NOTE A TO SCHEDULE III

<TABLE>
<CAPTION>

  Reconciliation of Real                               1995           1995                                       
       Estate Owned                     COST        INVESTMENT    INCREASE IN     1995 DECREASE        COST      
                                       AS OF            IN          DEFERRED       IN PROPERTY      BALANCE AT   
        DESCRIPTION                   12/31/94       PROPERTY    LEASING COSTS   WORKING CAPITAL     12/31/95    
        -----------                   --------       --------    -------------   ---------------    -----------  
<S>                                 <C>           <C>            <C>             <C>                <C> 
North Cabot Industrial Park          $1,191,813      $174,934         $21,691           ($86,898)   $1,301,540   
                                    ===========   ===========     ===========         ===========  ===========   

<CAPTION> 

                                                       1996           1996                                       
                                        COST        INVESTMENT    INCREASE IN     1996 INCREASE        COST      
                                       AS OF            IN          DEFERRED       IN PROPERTY      BALANCE AT   
                                      12/31/95       PROPERTY    LEASING COSTS   WORKING CAPITAL     12/31/96    
                                      --------       --------    -------------   ---------------    -----------  
<S>                                 <C>           <C>            <C>             <C>               <C> 
North Cabot Industrial Park          $1,301,540       $10,394         $21,954            $70,583    $1,404,471   
                                    ===========   ===========     ===========         ===========  ===========   

<CAPTION> 

                                                       1997           1997                                       
                                        COST        INVESTMENT    INCREASE IN     1997 INCREASE        COST      
                                       AS OF            IN          DEFERRED       IN PROPERTY      BALANCE AT   
                                      12/31/96       PROPERTY    LEASING COSTS   WORKING CAPITAL     12/31/97    
                                      --------       --------    -------------   ---------------    -----------  
<S>                                 <C>           <C>            <C>             <C>                <C> 
North Cabot Industrial Park          $1,404,471       $10,327         $14,794           ($14,248)   $1,415,344   
                                    ===========   ===========     ===========         ===========  ===========   
                                                                                                                 
<CAPTION>

  Reconciliation of Real             ACCUMULATED          1995            ACCUMULATED
       Estate Owned                 AMORTIZATION &   AMORTIZATION &     AMORTIZATION &    12/31/95
                                     DEPRECIATION     DEPRECIATION       DEPRECIATION     PROPERTY
        DESCRIPTION                 AS OF 12/31/94      EXPENSE         AS OF 12/31/95      NET
        -----------                 --------------   --------------     --------------    --------
<S>                                 <C>              <C>                <C>              <C> 
North Cabot Industrial Park               $2,802          $55,239            $58,041     $1,243,499
                                     ===========      ===========        ===========     ===========

<CAPTION> 

                                     ACCUMULATED          1996            ACCUMULATED
                                    AMORTIZATION &   AMORTIZATION &     AMORTIZATION &    12/31/96
                                     DEPRECIATION     DEPRECIATION       DEPRECIATION     PROPERTY
                                    AS OF 12/31/95      EXPENSE         AS OF 12/31/96      NET
                                    --------------   --------------     --------------    --------
<S>                                 <C>              <C>                <C>              <C> 
North Cabot Industrial Park              $58,041          $80,462           $138,503     $1,265,968
                                     ===========      ===========        ===========     ===========

<CAPTION> 

                                     ACCUMULATED          1997            ACCUMULATED
                                    AMORTIZATION &   AMORTIZATION &     AMORTIZATION &    12/31/97
                                     DEPRECIATION     DEPRECIATION       DEPRECIATION     PROPERTY
                                    AS OF 12/31/96      EXPENSE         AS OF 12/31/97      NET
                                    --------------   --------------     --------------    --------
<S>                                 <C>              <C>                <C>              <C> 
North Cabot Industrial Park             $138,503         $106,365           $244,868     $1,170,476
                                     ===========      ===========        ===========     ===========

</TABLE>
<PAGE>
 
                     NEW ENGLAND LIFE PENSION PROPERTIES III

                             NOTE B TO SCHEDULE III

<TABLE>
<CAPTION>

                                                                                                           1995
                                                                                        1995 CASH     AMORTIZATION
                                        BALANCE            1995                          RECEIVED           OF           BALANCE
                          PERCENT OF     AS OF          INVESTMENT   1995 EQUITY IN        FROM        ACQUISITION        AS OF
      DESCRIPTION         OWNERSHIP    12/31/94        IN PROPERTY    INCOME (LOSS)   JOINT VENTURES       FEES          12/31/95
      -----------         ---------   -----------      -----------   --------------   --------------  -------------    -----------
<S>                       <C>         <C>              <C>           <C>              <C>             <C>               <C>       
  270 Technology Park        50%        $6,405,336              $0          $624,021     ($698,676)        ($3,188)     $6,327,493

  Bayberry Associates        65%        12,269,227               0           875,625    (1,350,067)         (6,276)     11,788,509

                                      ------------    ------------      ------------   ------------    ------------   ------------  
                                       $18,674,563              $0        $1,499,646   ($2,048,743)        ($9,464)    $18,116,002
                                      ============    ============      ============   ============    ============   ============  

<CAPTION> 

                                                                                                           1996
                                                                                        1996 CASH      AMORTIZATION
                                        BALANCE            1996                          RECEIVED           OF           BALANCE
                          PERCENT OF     AS OF          INVESTMENT   1996 EQUITY IN        FROM        ACQUISITION        AS OF
                          OWNERSHIP    12/31/95        IN PROPERTY    INCOME (LOSS)   JOINT VENTURES       FEES          12/31/96
                          ---------   -----------      -----------   --------------   --------------  -------------      --------
  <S>                     <C>         <C>              <C>           <C>              <C>             <C>               <C> 
  270 Technology Park        50%        $6,327,493              $0          $619,367     ($541,400)        ($3,188)     $6,402,272

  Bayberry Associates        65%        11,788,509               0           967,882    (1,389,740)         (6,276)     11,360,375

                                      ------------    ------------      ------------   ------------    ------------   ------------  
                                       $18,116,002              $0        $1,587,249   ($1,931,140)        ($9,464)    $17,762,647
                                      ============    ============      ============   ============    ============   ============  

<CAPTION> 

                                                                                                           1997
                                                                                        1997 CASH      AMORTIZATION
                                        BALANCE            1997                          RECEIVED           OF           BALANCE
                          PERCENT OF     AS OF          INVESTMENT   1997 EQUITY IN        FROM        ACQUISITION        AS OF
                          OWNERSHIP    12/31/96        IN PROPERTY    INCOME (LOSS)   JOINT VENTURES       FEES          12/31/97
                          ---------   -----------      -----------   --------------   --------------  -------------      --------
  <S>                     <C>         <C>              <C>           <C>              <C>             <C>               <C> 
  270 Technology Park        50%        $6,402,272              $0          $531,484     ($767,609)        ($3,188)     $6,162,959

  Bayberry Associates        65%        11,360,375               0         1,020,085    (1,353,067)         (6,277)     11,021,116

                                      ------------    ------------      ------------   ------------    ------------   ------------  
                                       $17,762,647              $0        $1,551,569   ($2,120,676)        ($9,465)    $17,184,075
                                      ============    ============      ============   ============    ============   ============  

</TABLE>
<PAGE>
 
                             FINANCIAL STATEMENTS
                                  INDEX NO. 2

             Independent Auditor's Report and Financial Statements

                            of MORF Associates III

             (referred to elsewhere herein as 270 Technology Park)



 


Independent Auditor's Report of Wolpoff and Company, LLP

Balance Sheet - December 31, 1997 and 1996

Statement of Income - For the Years ended
 December 31, 1997, 1996 and 1995

Statement of Partners' Capital - For the Years ended
 December 31, 1997, 1996 and 1995

Statement of Cash Flows - For the Years ended
 December 31, 1997, 1996 and 1995
 
Notes to Financial Statements
<PAGE>
 
                               MORF ASSOCIATES III
                        (A MARYLAND GENERAL PARTNERSHIP)

                                FINANCIAL REPORT

                                DECEMBER 31, 1997
<PAGE>
 
                               MORF ASSOCIATES III
                        (A MARYLAND GENERAL PARTNERSHIP)

                                    CONTENTS

                                DECEMBER 31, 1997


INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENTS                       1


FINANCIAL STATEMENTS

    Balance Sheet                                                          2

    Statement of Income                                                    3

    Statement of Partners' Capital                                         4

    Statement of Cash Flows                                                5

    Notes to Financial Statements                                        6 - 8


INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTARY INFORMATION                  9


SUPPLEMENTARY INFORMATION

    Schedule of Partners' Capital                                         10

    Schedule of Changes in Partners' Capital - Income Tax Basis           11
<PAGE>
 
              [LETTERHEAD OF WOLPOFF & COMPANY, LLP APPEARS HERE]


To the Partners
MORF Associates III
    (A Maryland General Partnership)
Columbia, Maryland


             INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENTS


We have audited the balance sheet of MORF Associates III (A Maryland General
Partnership) as of December 31, 1997 and 1996, and the related statements of
income, partners' capital, and cash flows for each of the three years ended
December 31, 1997, 1996, and 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MORF Associates III (A Maryland
General Partnership) as of December 31, 1997 and 1996, and the results of its
operations and cash flows for each of the three years ended December 31, 1997,
1996, and 1995, in conformity with generally accepted accounting principles.


                                         /s/ Wolpoff & Company, LLP
                                                     
                                         WOLPOFF & COMPANY, LLP


Baltimore, Maryland
January 8, 1998
<PAGE>
 
                               MORF ASSOCIATES III
                               -------------------
                        (A MARYLAND GENERAL PARTNERSHIP)
                        --------------------------------

                                  BALANCE SHEET
                                  -------------

                                    ASSETS
                                    ------
<TABLE> 
<CAPTION> 
                                                                                December 31,
                                                                        ---------------------------

                                                                            1997            1996
                                                                        -----------     -----------
<S>                                                                    <C>             <C> 
PROPERTY, AT COST - Note 1
  Buildings and Improvements                                            $ 6,461,425     $ 6,505,771
  Land                                                                      247,652         247,652
  Deferred Leasing Costs                                                    150,685         348,150
                                                                        -----------     -----------
                                                                          6,859,762       7,101,573
  Less Accumulated Depreciation and Amortization                          1,321,539       1,364,270
                                                                        -----------     -----------

      PROPERTY, NET                                                       5,538,223       5,737,303
                                                                        -----------     -----------

OTHER ASSETS
  Cash and Cash Equivalents - Note 1                                        104,265         166,474
                                                                        -----------     -----------

  Receivable From Tenants                                                    79,133          90,782
  Deferred Rent Receivable - Note 1                                         119,406         144,262
  Less Allowance for Doubtful Accounts                                      (14,000)        (50,000)
                                                                        -----------     -----------
                                                                            184,539         185,044
                                                                        -----------     -----------

  Prepaid Expenses                                                           40,598          11,944
                                                                        -----------     -----------

      TOTAL OTHER ASSETS                                                    329,402         363,462
                                                                        -----------     -----------

                                                                        $ 5,867,625     $ 6,100,765
                                                                        ===========     ===========

                        LIABILITIES AND PARTNERS' CAPITAL
                        ---------------------------------

LIABILITIES
  Accounts Payable and Accrued Expenses                                 $    10,419     $     8,022
  Tenant Security Deposits                                                   44,205          43,617
                                                                        -----------     -----------

      TOTAL LIABILITIES                                                      54,624          51,639

PARTNERS' CAPITAL - Note 2                                                5,813,001       6,049,126
                                                                        -----------     -----------

                                                                        $ 5,867,625     $ 6,100,765
                                                                        ===========     ===========
</TABLE> 
---------------

The notes to financial statements are an integral part of this statement.

                                      -2-

<PAGE>
 
                              MORF ASSOCIATES III
                              -------------------
                       (A MARYLAND GENERAL PARTNERSHIP)
                       --------------------------------

                              STATEMENT OF INCOME
                              -------------------

<TABLE> 
<CAPTION> 

                                                                     Year Ended December 31,
                                                            ---------------------------------------

                                                               1997           1996           1995
                                                            ---------      ---------      ---------
<S>                                                         <C>            <C>            <C> 
REVENUE
  Gross Rent Potential - Notes 1 and 5                      $ 921,387      $ 884,222      $ 876,371
  Less Vacancies                                               96,279         42,955         22,445
                                                           -----------    -----------    -----------
    Net Rental Income                                         825,108        841,267        853,926
  Expense Reimbursements From Tenants                          98,979        134,744        115,054
  Other Income                                                 31,752          3,489          2,592
                                                           -----------    -----------    -----------

      TOTAL REVENUE                                           955,839        979,500        971,572
                                                           -----------    -----------    -----------

OPERATING EXPENSES
  Property Taxes                                               75,769         64,048         70,700
  Building and Grounds Maintenance                             45,579         48,679         32,535
  Utilities                                                    15,444         21,120         12,049
  Management Fees - Note 3                                     27,096         29,445         25,718
  General and Administrative                                   17,758          9,779         10,161
  Insurance                                                     4,925          5,560          5,796
  Bad Debt Expense                                             15,090         17,268         25,000
                                                           -----------    -----------    -----------

      TOTAL OPERATING EXPENSES                                201,661        195,899        181,959
                                                           -----------    -----------    -----------

NET OPERATING INCOME                                          754,178        783,601        789,613
                                                           -----------    -----------    -----------

ADJUSTMENTS TO ARRIVE AT NET INCOME
  Depreciation and Amortization                              (166,844)      (164,234)      (165,592)
  Abandonment of Tenant Improvements - Note 1                 (55,850)           -0-            -0-
                                                           -----------    -----------    -----------
                                                             (222,694)      (164,234)      (165,592)
                                                           -----------    -----------    -----------


NET INCOME - Note 4                                         $ 531,484      $ 619,367      $ 624,021
                                                           ===========    ===========    ===========

</TABLE> 

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

The notes to financial statements are an integral part of this statement.

                                      -3-
<PAGE>
 

                              MORF ASSOCIATES III
                              -------------------
                       (A MARYLAND GENERAL PARTNERSHIP)
                       --------------------------------

                        STATEMENT OF PARTNERS' CAPITAL
                        ------------------------------

<TABLE> 
<CAPTION> 
                                                   Year Ended December 31,
                                   --------------------------------------------------

                                       1997              1996               1995
                                   --------------    --------------    --------------
<S>                                <C>               <C>               <C> 
CAPITAL CONTRIBUTIONS                $ 6,220,001       $ 6,220,001       $ 6,220,001

CAPITAL PLACEMENT FEE - Note 1           (50,515)          (50,515)          (50,515)
                                   --------------    --------------    --------------
                                       6,169,486         6,169,486         6,169,486
                                   --------------    --------------    --------------

ACCUMULATED INCOME
     Prior Years                       5,483,632         4,864,265         4,240,244
     Current Year                        531,484           619,367           624,021
                                   --------------    --------------    --------------
                                       6,015,116         5,483,632         4,864,265
                                   --------------    --------------    --------------

DISTRIBUTIONS - Note 2
     Prior Years                      (5,603,992)       (5,062,591)       (4,363,915)
     Current Year                       (767,609)         (541,401)         (698,676)
                                   --------------    --------------    --------------
                                      (6,371,601)       (5,603,992)       (5,062,591)
                                   --------------    --------------    --------------

TOTAL PARTNERS' CAPITAL              $ 5,813,001       $ 6,049,126       $ 5,971,160
                                   ==============    ==============    ==============
</TABLE> 


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

The notes to financial statements are an integral part of this statement.


                                      -4-

<PAGE>
 
                               MORF ASSOCIATES III
                               -------------------
                        (A MARYLAND GENERAL PARTNERSHIP)
                        --------------------------------

                            STATEMENT OF CASH FLOWS
                            -----------------------

<TABLE> 
<CAPTION> 
                                                              Year Ended December 31,
                                                       -------------------------------------
                                                          1997          1996         1995
                                                       ---------     ---------     ---------
<S>                                                    <C>           <C>           <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net Income                                           $ 531,484     $ 619,367     $ 624,021
                                                       ---------     ---------     ---------
  Adjustments to Reconcile Net Income to
   Net Cash Provided by Operating Activities:
    Depreciation and Amortization                        166,844       164,234       165,592
    Abandonment of Tenant Improvements                    55,850           -0-           -0-
    Change in Tenant Receivables, Net of Allowance           506        16,366       (74,654)
    Change in Prepaid Expenses                           (28,654)       (9,631)        1,542
    Change in Accounts Payable and Accrued Expenses        2,397         6,171        (7,600)
                                                       ---------     ---------     ---------
     Total Adjustments                                   196,943       177,140        84,880
                                                       ---------     ---------     ---------

      Net Cash Provided by Operating Activities          728,427       796,507       708,901
                                                       ---------     ---------     ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Increase in Tenant Security Deposits                       588         2,726        10,430
  Additions to Property                                  (21,441)      (76,617)      (79,117)
  Leasing Commissions                                     (2,174)      (35,066)      (41,300)
                                                       ---------     ---------     ---------

      Net Cash Used by Investing Activities              (23,027)     (108,957)     (109,987)
                                                       ---------     ---------     ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Distributions to Partners                             (767,609)     (541,401)     (698,676)
                                                       ---------     ---------     ---------
NET INCREASE (DECREASE)
  IN CASH AND CASH EQUIVALENTS                           (62,209)      146,149       (99,762)

CASH AND CASH EQUIVALENTS, BEGINNING                     166,474        20,325       120,087
                                                       ---------     ---------     ---------

CASH AND CASH EQUIVALENTS, ENDING                      $ 104,265     $ 166,474     $  20,325
                                                       =========     =========     =========
</TABLE> 

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

The notes to financial statements are an integral part of this statement.

                                     - 5 -

<PAGE>
 
                               MORF ASSOCIATES III
                               -------------------
                        (A MARYLAND GENERAL PARTNERSHIP)
                        --------------------------------

                          NOTES TO FINANCIAL STATEMENTS
                          -----------------------------

                                DECEMBER 31, 1997
                                -----------------


Note 1  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

            Organization
            ------------
            MORF Associates III (A Maryland General Partnership) (the
            Partnership) was formed on January 1, 1988, under the Maryland
            Uniform Partnership Act. The land and buildings were conveyed to the
            Partnership by M.O.R.F. III Associates Limited Partnership, a
            general partner. The buildings were in service and partially leased
            on the date conveyed.

            Cash and Cash Equivalents
            -------------------------
            The Partnership considers all highly liquid debt instruments
            purchased with a maturity of 3 months or less to be cash
            equivalents.

            The majority of the Partnership's cash is held in financial
            institutions with insurance provided by the Federal Deposit
            Insurance Corporation (FDIC) up to $100,000. Periodically during the
            year, the balance may have exceeded the FDIC limitation.

            Rental Income
            -------------
            Rental income for the major leases is being recognized on a 
            straight-line basis over the terms of the leases. The excess of 
            the rental income recognized over the amount stipulated in the lease
            is shown as deferred rent receivable.

            Property
            --------
            The Partnership owns and operates 3 office buildings in Frederick,
            Maryland, containing approximately 86,300 square feet of leasable
            area.

            In 1996, the Partnership adopted Statement of Financial Accounting
            Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
            Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No.
            121 requires that real estate assets be evaluated for impairment if
            impairment indicators are present. An impairment write-down to fair
            value would occur only if the estimated undiscounted cash flows from
            the asset were less than the carrying amount of the asset. At
            December 31, 1997, the Partnership does not hold any assets that
            meet the impairment criteria of SFAS No. 121.

            All property is recorded at cost. Information regarding the
            buildings is as follows:

                                                       Occupancy at
                                         ---------------------------------------
                  Square
   Building        Feet        Tenants     12/31/97      12/31/96      12/31/95
--------------- -----------  ----------- -----------   -----------   -----------

      C           45,800       Multiple        100%          100%          100% 
      D           11,700       Multiple         86%           86%           88% 
      E           28,800       Multiple        100%          100%          100% 
                ---------                -----------   -----------   -----------

                  86,300                        98%           98%           98%
                =========                ===========   ===========   ===========

                                      -6-
<PAGE>
 
                               MORF ASSOCIATES III
                               -------------------
                        (A MARYLAND GENERAL PARTNERSHIP)
                        --------------------------------

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                    -----------------------------------------

                                DECEMBER 31, 1997
                                -----------------


Note 1 - During 1997, tenant improvements completed in prior years were
(Cont.)  demolished in order to build out the space for the new tenant. The 
         loss on abandonment of tenant improvements is calculated as follows:


               Acquired Value                             $ 65,787
               Accumulated Depreciation                     (9,937)
                                                        -----------
               
               Abandonment of Tenant Improvements         $ 55,850
                                                        ===========
          
         Depreciation
         ------------
         Building costs and tenant improvements are being depreciated using the
         straight-line method over the estimated useful lives of 50 years.

         Amortization
         ------------
         Deferred leasing costs are being amortized over the lease periods.

         Income Taxes
         ------------
         Partnerships, as such, are not subject to income taxes. The partners
         are required to report their respective share of partnership income or
         loss and other tax items on their respective income tax returns.

         Capital Placement Costs
         -----------------------
         Costs incurred for arranging the Partnership's equity have been treated
         as a reduction of partners' capital.

         Use of Estimates
         ----------------
         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect certain reported amounts and disclosures.

Note 2  -  PARTNERS' CAPITAL

         Capital Investment
         ------------------
         New England Life Pension Properties III (NELPP III) has invested equity
         of $6,220,000 in the Partnership. NELPP III is entitled to a cumulative
         priority return of 10.5% compounded monthly on its investment.

         During 1997, 1996, and 1995, NELPP III was paid $767,609, $541,401, and
         $698,676, respectively, under this agreement. As of December 31, 1997,
         1996, and 1995, unpaid priority returns amounted to $682,372, $732,013,
         and $560,857, respectively.

Note 3  -  RELATED PARTY TRANSACTIONS

         Management Fees
         ---------------
         The Partnership has entered into an agreement with Manekin Corporation,
         an affiliated entity, to act as management agent for the property. The
         management agreement provides for fees equal to 3% of rent and tenant
         expense billings.

                                      -7-
<PAGE>
 
                               MORF ASSOCIATES III
                               -------------------
                        (A MARYLAND GENERAL PARTNERSHIP)
                        --------------------------------

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                    -----------------------------------------

                                DECEMBER 31, 1997
                                -----------------


Note 3 - Leasing Commissions
         -------------------
(Cont.)  Leasing commissions of $2,174 and $35,961 were paid to Manekin
         Corporation during 1997 and 1995. No leasing commissions were paid to
         Manekin Corporation during 1996.

Note 4 - TAX ACCOUNTING

         Tax accounting differs from financial accounting as follows:

<TABLE> 
<CAPTION> 

                                               Current           Prior                       
                                                 Year            Years           Total       
                                             -------------   -------------   -------------  
         <S>                                 <C>             <C>             <C>  
         Financial Statement Income             $ 531,484      $5,483,632      $6,015,116   
         Additional Depreciation                  (69,586)       (623,009)       (692,595)  
         Deferred Rental                                                                    
          Income Not Subject to Tax                24,856        (144,262)       (119,406)  
         Prepaid Property Taxes                   (29,310)         (9,631)        (38,941)  
         Allowance for Doubtful Accounts          (36,000)         41,500           5,500   
                                             -------------   -------------   -------------  
                                                                                            
         Taxable Income                         $ 421,444      $4,748,230      $5,169,674   
                                             =============   =============   =============  

</TABLE> 

Note 5 - LEASES

         The following is a schedule of future minimum lease payments to be
         received under noncancelable operating leases at December 31, 1997:


           Year Ending December 31, 1998          $ 710,292
                                    1999            528,045
                                    2000            315,774
                                    2001            199,350
                                                ------------

                                                 $1,753,461
                                                ============
                                      -8-
<PAGE>
 
To the Partners
MORF Associates III
 (A Maryland General Partnership)
Columbia, Maryland


           INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTARY INFORMATION
           ---------------------------------------------------------


Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplementary
information contained on pages 10 and 11 is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has not been subjected to the auditing procedures applied in the
audits of the basic financial statements, and accordingly, we express no opinion
on it.


                                               /s/ Wolpoff & Company, LLP

                                               WOLPOFF & COMPANY, LLP



Baltimore, Maryland
January 8, 1998





                                      -9-
<PAGE>
 

                              MORF ASSOCIATES III
                              -------------------
                       (A MARYLAND GENERAL PARTNERSHIP)
                       --------------------------------

                          SCHEDULE OF PARTNERS' CAPITAL
                          -----------------------------

                          YEAR ENDED DECEMBER 31, 1997
                          ----------------------------

<TABLE> 
<CAPTION> 
                                                             M.O.R.F. III
                                          New England         Associates
                                          Life Pension         Limited
                                         Properties III       Partnership          Total
                                      -------------------  ------------------  --------------
<S>                                   <C>                  <C>                 <C> 
OWNERSHIP PERCENTAGE                           50%                 50%              100%
                                         ==============      ==============    ==============

CAPITAL CONTRIBUTIONS                      $ 6,220,000        $          1       $ 6,220,001

CAPITAL PLACEMENT FEE                          (50,515)                 -0-          (50,515)
                                         --------------      --------------    --------------
                                             6,169,485                   1         6,169,486
                                         --------------      --------------    --------------

ACCUMULATED INCOME
  Prior Years                                5,348,632             135,000         5,483,632
  Current Year                                 531,484                  -0-          531,484
                                         --------------      --------------    --------------
                                             5,880,116             135,000         6,015,116
                                         --------------      --------------    --------------
DISTRIBUTIONS - Note 2
  Prior Years                               (5,468,992)           (135,000)       (5,603,992)
  Current Year                                (767,609)                 -0-         (767,609)
                                         --------------      --------------    --------------
                                            (6,236,601)           (135,000)       (6,371,601)
                                         --------------      --------------    --------------

TOTAL PARTNERS' CAPITAL                    $ 5,813,000        $          1       $ 5,813,001
                                         ==============      ==============    ==============
</TABLE> 

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

See Independent Auditor's Report on Supplementary Information.


                                     -10-

<PAGE>
 
                              MORF ASSOCIATES III
                              -------------------
                       (A MARYLAND GENERAL PARTNERSHIP)
                       --------------------------------

          SCHEDULE OF CHANGES IN PARTNERS' CAPITAL - INCOME TAX BASIS
          -----------------------------------------------------------

                         YEAR ENDED DECEMBER 31, 1997
                         ----------------------------

<TABLE> 
<CAPTION> 

                                                             M.O.R.F. III
                                         New England          Associates
                                         Life Pension          Limited
                                        Properties III        Partnership           Total
                                     -------------------   ------------------   --------------
<S>                                  <C>                   <C>                  <C> 
OWNERSHIP PERCENTAGE                          50%                  50%               100%
                                        ==============       ==============     ==============

CAPITAL CONTRIBUTIONS                    $  6,220,000         $          1       $ 6,220,001

CAPITAL PLACEMENT FEE                         (50,515)                  -0-          (50,515)
                                        --------------       --------------     --------------
                                            6,169,485                    1         6,169,486
                                        --------------       --------------     --------------

ACCUMULATED INCOME
  Prior Years                               4,613,230              135,000         4,748,230
  Current Year                                421,444                   -0-          421,444
                                        --------------       --------------     --------------
                                            5,034,674              135,000         5,169,674
                                        --------------       --------------     --------------
DISTRIBUTIONS - Note 2
  Prior Years                              (5,468,992)            (135,000)       (5,603,992)
  Current Year                               (767,609)                  -0-         (767,609)
                                        --------------       --------------     --------------
                                           (6,236,601)            (135,000)       (6,371,601)
                                        --------------       --------------     --------------

TOTAL PARTNERS' CAPITAL                  $  4,967,558         $          1       $ 4,967,559
                                        ==============       ==============     ==============

</TABLE> 

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

See Independent Auditor's Report on Supplementary Information.

                                     -11-
<PAGE>
 
                             FINANCIAL STATEMENTS
                                  INDEX NO. 3

             Independent Auditor's Report and Financial Statements

                            of Bayberry Associates



 


Independent Auditor Report of Reznick Fedder and Silverman

Balance Sheets - December 31, 1997 and 1996

Statements of Operations - For the Years ended
 December 31, 1997, 1996 and 1995

Statements of Partners' Equity - For the Years ended
 December 31, 1997, 1996 and 1995

Statements of Cash Flows - For the Years ended
 December 31, 1997, 1996 and 1995
 
Notes to Financial Statements
<PAGE>
 
                            FINANCIAL STATEMENTS AND
                          INDEPENDENT AUDITORS' REPORT

                              BAYBERRY ASSOCIATES

                           DECEMBER 31, 1997 AND 1996
<PAGE>
 
                              Bayberry Associates

                               TABLE OF CONTENTS


                                                                            PAGE

INDEPENDENT AUDITORS' REPORT                                                   3


FINANCIAL STATEMENTS


     BALANCE SHEETS                                                            4


     STATEMENTS OF OPERATIONS                                                  5
                                                                               
                                                                               
     STATEMENTS OF PARTNERS' EQUITY                                            6
                                                                               
                                                                               
     STATEMENTS OF CASH FLOWS                                                  7


     NOTES TO FINANCIAL STATEMENTS                                             8
<PAGE>
 
            [LETTERHEAD OF REZNICK FEDDER & SILVERMAN APPEARS HERE]


                          INDEPENDENT AUDITORS' REPORT



To the Partners
Bayberry Associates

     We have audited the accompanying balance sheets of Bayberry Associates as
of December 31, 1997 and 1996, and the related statements of operations,
partners' equity and cash flows for each of the three years in the period ended
December 31, 1997.  These financial statements are the responsibility of the
Partnership's management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bayberry Associates as of
December 31, 1997 and 1996, and the results of its operations, changes in
partners' equity and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.

                                     /s/ Reznick Fedder & Silverman

Baltimore, Maryland
January 20, 1998

                                      -3-
<PAGE>
 
                              Bayberry Associates

                                BALANCE SHEETS

                          December 31, 1997 and 1996


                                                 1997            1996
                                            -------------   ------------
                   ASSETS
 
INVESTMENT IN REAL ESTATE
   Land                                    $    3,754,558  $   3,754,558
   Building and improvements                    8,503,711      8,503,711
   Personal property                              778,494        778,494
                                            -------------   ------------
 
                                               13,036,763     13,036,763
   Less accumulated depreciation                3,788,765      3,448,171
                                            -------------   ------------
 
                                                9,247,998      9,588,592
 
OTHER ASSETS
   Cash                                           149,528        140,538
   Tenants' security deposits                      27,006         28,362
   Tenants' accounts receivable                    21,306          7,453
   Prepaid expenses                               112,238        119,553
                                            -------------   ------------
 
                                           $    9,558,076  $   9,884,498
                                            =============   ============
 
          LIABILITIES AND PARTNERS' EQUITY
 
LIABILITIES
   Accounts payable and accrued expenses   $       22,936  $      17,749
   Deferred rental income                          12,304         12,959
   Accrued preferred return                     2,846,924      2,479,619
   Accrued guaranteed payments                  1,532,960      1,335,179
   Tenants' security deposits payable              27,006         27,425
   Due to affiliates                                8,830          6,120
                                            -------------   ------------
 
                                                4,450,960      3,879,051
 
PARTNERS' EQUITY                                5,107,116      6,005,447
                                            -------------   ------------ 

                                           $    9,558,076  $   9,884,498
                                            =============   ============

                       See notes to financial statements

                                      -4-
<PAGE>
 
                              Bayberry Associates

                           STATEMENTS OF OPERATIONS

                 Years ended December 31, 1997, 1996 and 1995


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

Revenue
  Rent                            $ 2,221,106     $ 2,168,867     $ 2,118,199
  Other lease related income           59,477          59,355          50,757
  Interest                              4,500           4,148           4,909
                                   ----------      ----------      ----------
                                    2,285,083       2,232,370       2,173,865
                                   ----------      ----------      ----------
                                  
Expenses
  Furnished apartment expense          14,080          17,384          23,253
  Advertising and promotion            45,076          52,631          58,534
  Salaries                            218,230         203,722         208,734
  Administrative                       54,985          49,218          47,552
  Management fee                       79,485          77,525          75,271
  Maintenance                         169,586         158,702         143,328
  Utilities                            53,926          72,901          67,098
  Real estate taxes                   213,150         190,670         196,901
  Insurance                            18,084          20,338          20,551
  Dues and fees                        57,802          46,305          47,389
  Depreciation                        340,594         375,092         409,629
  Guaranteed payments                 671,616         651,048         632,894
                                   ----------      ----------      ----------
 
                                    1,936,614       1,915,536       1,931,134
                                   ----------      ----------      ----------
 
       EXCESS OF REVENUE
         OVER EXPENSES            $   348,469     $   316,834     $   242,731
                                   ==========      ==========      ==========

                       See notes to financial statements

                                      -5-
<PAGE>
 

                              Bayberry Associates

                        STATEMENTS OF PARTNER'S EQUITY

                 Years ended December 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>
                                                           Christopher
                                                             Bozzuto        New England
                                                             Limited       Life Pension
                                                           Partnership    Properties III        Total
                                                           -----------   ----------------    ------------
<S>                                                        <C>           <C>                 <C> 
Partners' equity (deficit), December 31, 1994              $ (345,536)   $      8,175,881    $  7,830,345
 
Distributions                                                 (15,527)         (1,159,847)     (1,175,374)
 
Excess of revenue over expenses                                15,527             227,204         242,731
                                                           ----------    ----------------    ------------

Partners' equity (deficit), December 31, 1995                (345,536)          7,243,238       6,897,702
 
Distributions                                                 (24,136)         (1,184,953)     (1,209,089)
 
Excess of revenue over expenses                                24,136             292,698         316,834
                                                           ----------    ----------------    ------------ 

Partners' equity (deficit), December 31, 1996                (345,536)          6,350,983       6,005,447
 
Distributions                                                 (26,730)         (1,220,070)     (1,246,800)
 
Excess of revenue over expenses                                26,730             321,739         348,469
                                                           ----------    ----------------    ------------ 

Partners' equity (deficit), December 31, 1997              $ (345,536)   $      5,452,652    $  5,107,116
                                                           ==========    ================    ============
</TABLE>

                       See notes to financial statements

                                      -6-
<PAGE>
 

                              Bayberry Associates

                           STATEMENTS OF CASH FLOWS

                 Years ended December 31, 1997, 1996 and 1995


 
<TABLE> 
<CAPTION> 

                                                               1997           1996            1995
                                                           ----------     -----------     -----------
<S>                                                        <C>            <C>             <C>     
Cash flow from operating activities
 Excess of revenue over expenses                           $  348,469     $   316,834     $   242,731
 Adjustments to reconcile excess of revenue over
 expenses to net cash provided by operating 
 activities
  Depreciation                                                340,594         375,092         409,629
  Changes in assets and liabilities
  (Increase) decrease in tenants' accounts receivable         (13,853)            (42)            202        
  Decrease (increase) in prepaid expenses                       7,315         (13,882)          5,938        
  Increase (decrease) in accounts payable                       5,187         (36,066)         45,335        
  (Decrease) increase in deferred rental income                  (655)       (103,044)         22,256        
  Increase in accrued guaranteed payments                     197,781         192,524         170,171        
  Increase (decrease) in due to affiliate                       2,710         (25,211)         14,127        
  Net security deposits received (paid)                           937            (373)           (565)       
                                                           ----------     -----------     -----------

     Net cash provided by operating activities                888,485         705,832         909,824        
                                                           ----------     -----------     -----------

Cash flows from investing activities                                                                      
 Purchase of fixed assets                                           -               -         (19,755)       
                                                           ----------     -----------     -----------

    Net cash used in investing activities                           -               -         (19,755)       
                                                           ----------     -----------     -----------
Cash flows from financing activities                                                                      
  Distributions to general partner                           (879,495)       (851,543)       (859,344)       
                                                           ----------     -----------     -----------

      Net cash used in financing activities                  (879,495)       (851,543)       (859,344)        
                                                           ----------     -----------     ----------- 

      NET INCREASE (DECREASE) IN CASH                           8,990        (145,711)         30,725
 
Cash, beginning                                               140,538         286,249         255,524
                                                           ----------     -----------     ----------- 

Cash, ending                                               $  149,528     $   140,538     $   286,249
                                                           ==========     ===========     =========== 

Supplemental disclosure of cash flow information
 Cash paid during the year for guaranteed payments         $  473,835     $   458,524     $   462,724 
                                                           ==========     ===========     ===========
</TABLE>

                       See notes to financial statements

                                      -7-
<PAGE>
 
                              Bayberry Associates

                         NOTES TO FINANCIAL STATEMENTS

                       December 31, 1997, 1996 and 1995

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
         POLICIES

     Bayberry Associates (the Partnership) was formed as a general partnership
     under the laws of the State of Maryland on April 4, 1988, for the purpose
     of constructing, owning and operating a rental housing project. The project
     consists of 230 units located in Montgomery County, Maryland, and is
     operating as Bayberry Apartments. All leases between the Partnership and
     tenants of the property are operating leases.

     Use of Estimates
     ----------------

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amounts of revenue and expenses
     during the reporting period. Actual results could differ from those
     estimates.

     Investment in Real Estate
     -------------------------

     Investment in real estate is carried at cost. Management does not believe
     that there are any current facts or circumstances that would indicate
     impairment of the rental property in accordance with Statement of Financial
     Accounting Standards ("SFAS") No. 121. Depreciation is provided for in
     amounts sufficient to relate the cost of depreciable assets to operations
     over their estimated service lives using accelerated methods.

     Rental Income
     -------------

     Rental income is recognized as rentals become due. Rental payments received
     in advance are deferred until earned.

     Income Taxes
     ------------

     No provision or benefit for income taxes has been included in these
     financial statements since taxable income or loss passes through to, and is
     reportable by, the partners individually.


                                      -8-
<PAGE>
 
                              Bayberry Associates

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED

                       December 31, 1997, 1996 and 1995

NOTE B - RELATED PARTY TRANSACTIONS

     Management Fee
     --------------

     The Partnership is required to pay a management fee to Bozzuto Management
     Company, an affiliate of Christopher Bozzuto Limited Partnership, a general
     partner, in an amount equal to 3.5% of gross receipts collected. Management
     fees of $79,485, $77,525, and $75,271 were expensed in 1997, 1996 and 1995,
     respectively. At December 31, 1997, $8,830 remains unpaid, while $6,120 was
     unpaid as of December 31, 1996.

     Expenses Incurred and Reimbursed to Affiliates
     ----------------------------------------------

     The Partnership reimburses payroll and other costs incurred by Bozzuto &
     Associates, Inc. and Subsidiaries, affiliates of Christopher Bozzuto
     Limited Partnership, a general partner, for various administrative and
     operating costs relating to the project.  During 1997, 1996 and 1995,
     $236,313, $224,059, and $229,285 were incurred, respectively.  At December
     31, 1997 and December 31, 1996, those amounts were paid in full.


NOTE C - PARTNERS' EQUITY

     The acquisition and development of the project was funded by capital
     contributions from New England Life Pension Properties III (NELP), a
     general partner, in the cumulative amount of $14,350,000, which consisted
     of senior and junior capital of $9,327,500 and $5,022,500, respectively.
     The Partnership agreement provides for both a "Senior and Junior Priority
     Return," on the outstanding capital, on a monthly basis, which is
     calculated at the rate of 10.25% per annum on the outstanding capital. The
     Priority Returns are payable monthly from Operating Cash Flow as defined in
     the Partnership agreement, however, (a) to the extent the full amount of
     the Senior Priority Return cannot be made from such sources on a monthly
     basis, an amount thereof equal to a 10.25% per annum cumulative return on
     the Senior Invested Capital may accrue, and such accruals shall bear
     interest at the rate of 10.25% per annum compounded monthly and (b) to the
     extent the full amount of the Junior Priority Return cannot be made from
     such sources on a monthly basis, the amount of the Junior Priority Return
     may accrue and such accruals shall bear interest at the rate of 10.25% per
     annum compounded monthly. To the extent the Senior Priority Return is
     required to be paid currently (and may not be accrued), it will be funded,
     if necessary, out of the proceeds of Deficit Contributions and Default
     Capital Contributions. These Deficit Contributions and Default Capital
     Contributions accrue a return



                                      -9-
<PAGE>
 
                              Bayberry Associates

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED


NOTE C - PARTNERS' EQUITY (Continued)

     (Deficit Preferred Return) equal to the greater of NationsBank's prime rate
     plus 2% (10.50% at December 31, 1997) or 10.25% per annum.  As of December
     31, 1997 and 1996, NELP and Christopher Bozzuto Limited Partnership had
     made deficit capital contributions in the amounts of $225,956 and $122,500,
     respectively.

     At December 31, 1997 and 1996, the accrued Junior Priority Return
     (including accrued interest of $1,372,467 and $988,654, respectively) due
     totaled $4,011,869 and $3,510,514. The Senior Priority Return was paid in
     full on an annual basis.  The accrued Deficit Preferred Return payable to
     NELP and Christopher Bozzuto Limited Partnership at December 31, 1997, was
     $215,034 and $152,981, respectively, and at December 31, 1996, was 178,033
     and $126,251, respectively.


NOTE D - RECONCILIATION OF FINANCIAL STATEMENTS TO TAX RETURN

     The following is a reconciliation of the excess of revenue over expenses
     and partners' equity per the financial statements to the tax basis excess
     of revenue over expenses and partners' equity for the years ended December
     31, 1997, 1996 and 1995.

<TABLE>
<CAPTION>
                                                     1997              1996              1995
                                                 ------------      ------------      ------------
<S>                                              <C>               <C>               <C>    
Excess of revenue over expenses   
 (financial statement basis)                     $    348,469      $    316,834      $    242,731 
Deferred rental income                                   (655)         (103,044)           22,257
Real estate tax deduction under IRS                     
  Code Section 461                                      5,965           (14,787)            6,775 
                                                 ------------     -------------      ------------

    Tax basis                                    $    353,779     $     199,003      $    271,763
                                                 ============     =============      ============

Partners' equity (financial statement basis)     $  5,107,116     $   6,005,447      $  6,897,702 
Deferred rental income                                 12,304            12,959           116,003
Real estate tax deduction under IRS Code                
  Section 461                                        (103,871)         (109,836)          (95,049) 
                                                 ------------     -------------      ------------ 

    Tax basis                                    $  5,015,549     $   5,908,570      $  6,918,656
                                                 ============     =============      ============
</TABLE>

                                     -10-
<PAGE>
 
                                  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.

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



Date:  March 26, 1998              By:   /s/ Wesley M. Gardiner, Jr.
                                         ----------------------------
                                         Wesley M. Gardiner, Jr.
                                         President of the
                                         Managing General Partner



          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 and on the dates indicated.

     Signature                    Title                              Date
     ---------                    -----                              ----


                                   President, Chief
                                   Executive Officer and
 /s/ Wesley M. Gardiner, Jr.       Director                     March 26, 1998
-----------------------------                                      
     Wesley M. Gardiner, Jr.

 
                                   Vice President and
 /s/ Pamela J. Herbst              Director                     March 26, 1998
-----------------------------                                      
     Pamela J. Herbst


                                   Vice President and
 /s/ J. Grant Monahon              Director                     March 26, 1998
-----------------------------                                      
     J. Grant Monahon



/s/ James J. Finnegan              Vice President               March 26, 1998
-----------------------------                                      
    James J. Finnegan



                                   
/s/ Karin J. Lagerlund             Treasurer and Principal 
-----------------------------      Financial and Accounting
    Karin J. Lagerlund             Officer                      March 26, 1998
<PAGE>
 
                                EXHIBIT INDEX  
                                -------------
<TABLE> 
<CAPTION> 
Exhibit                                                                                   Page
Number                                  Exhibit                                          Number  
-------                                 -------                                          ------
<S>           <C>                                                                        <C> 
4.            Amended and Restated Agreement of Limited Partnership of New England
              Life Pension Properties III; A Real Estate Limited Partnership (filed as   
              Exhibit 28A to Form 8-K dated July 15, 1985, as filed with the   
              Commission on July 16, 1985).                                                *  

10A.          Form of Escrow Deposit Agreement among the Registrant, NEL   
              Equity Services Corporation and The Bank of Boston (filed as Exhibit   
              10A to the Registrant's Registration Statement on Form S-11, file no.   
              2-94351 (the "Registration Statement").                                      *  

10B.          Form of Advisory Contract between the Registrant and Copley Real   
              Estate Advisors, Inc. (filed as Exhibit 10B to the Registration Statement).  *  

10C.          Letter dated June 27, 1985 from Copley Real Estate Advisors, Inc.  
              on behalf of the Registrant to Norris, Beggs & Simpson, the Developer.       *  

10D.          Lease dated August 29, 1985 by and between the Registrant and NBS   
              No. VI, a California Limited Partnership.                                    *  

10E.          Memorandum of Ground Lease dated as of August 29, 1985 by and   
              between the Registrant and NBS No. VI,  a California Limited Partnership.    *  

10F.          Promissory Note dated August 29, 1985 in the principal amount of   
              $2,663,870 from NBS No. VI to the Registrant.                                *  

10G.          Deed of Trust and Security Agreement dated as of August 29, 1985  
              among NBS No. VI, as Grantor, Santa Clara Land Title Company,   
              as Trustee, and the Registrant, as Beneficiary.                              *  

10H.          Loan Agreement dated August 29, 1985 in the amount of $2,663,870   
              between NBS No. VI and the Registrant.                                       *  

10I.          Ground Lease dated as of November 1, 1985 by and between the  
              Registrant, as Landlord and Vance Charles Mape and Vance   
              Charles Mape III, as Tenant.                                                 *  

10J.          Construction Loan Agreement dated November 11, 1985 between   
              Vance Charles Mape and Vance Charles Mape III, and the Registrant.           *  

10K.          Promissory Note dated November 11, 1985 between Vance Charles  
              Mape and Vance Charles Mape III and the Registrant.                          *  
</TABLE> 

*Previously filed and incorporated herein by reference.  
<PAGE>
 
                                EXHIBIT INDEX  
                                -------------

<TABLE> 
<CAPTION> 
Exhibit                                                                                   Page
Number                                  Exhibit                                          Number  
-------                                 -------                                          ------
<S>           <C>                                                                        <C> 
10L.          Deed of Trust, Assignment of Rents and Security Agreement dated  
              November 11, 1985 by  Vance Charles Mape and Vance Charles   
              Mape III,  Trustor, to Ticor Title Insurance Company, Trustee, for  
              the Registrant, Beneficiary.                                                 *  

10M.          Joint Venture Agreement dated as of January 31, 1986 by and between   
              the Registrant and Santa Fe Springs Corporate Center Partnership.            *  

10N.          Promissory Note dated December 30, 1985 in the principal amount of   
              $4,750,000 by Heritage Green Associates, a Colorado general partnership   
              to the Registrant.                                                           *  

10O.          Deed of Trust and Security Agreement dated December 30, 1985, made   
              by Heritage Green Associates for the benefit of the Registrant.              *  

10P.          Ground Lease dated December 30, 1985, between the Registrant,   
              Landlord, and Heritage Green Associates, Tenant.                             *  

10Q.          First Amended and Restated Limited Partnership Agreement and First   
              Amended and Restated Certificate of Reston Two - Oxford Limited   
              Partnership, dated February 1, 1986.                                         *  

10R.          Loan Agreement dated March 19, 1986 by and between Reston Two -   
              Oxford Limited Partnership and the Registrant.                               *  

10S.          Combination Promissory Note in the amount of $9,000,000, dated   
              March 19, 1986 given by Reston Two - Oxford Limited Partnership to
              the Registrant.                                                              *  

10T.          Credit Line Deed of Trust and Security Agreement dated March 19, 1986
              given by Reston Two - Oxford Limited Partnership to William J. Dorn and   
              William L. Stauffer, Jr., Trustees.                                          *  

10U.          Second Promissory Note in the amount of $1,500,000 dated March 19, 1986   
              given by Reston Two - Oxford Limited Partnership to The Registrant.          *  
</TABLE> 


*Previously filed and incorporated herein by reference.   
<PAGE>
 
                                EXHIBIT INDEX  
                                -------------
<TABLE> 
<CAPTION> 
Exhibit                                                                                   Page
Number                                  Exhibit                                          Number  
-------                                 -------                                          ------
<S>           <C>                                                                        <C> 
10V.          Second Credit Line Deed of Trust and Security Agreement dated   
              March 19, 1986 given by Reston Two - Oxford Limited Partnership to
              William J. Dorn and William L. Stauffer, Jr., Trustees.                      *  

10W.          Webb-Brown Collier Associates Joint Venture Agreement dated May 23, 1984.    *  

10X.          Ground Lease between the Registrant, as Landlord and Webb-Brown   
              Collier Associates, dated July 24, 1986.                                     *  

10Y.          Promissory Note dated July 24, 1986 in the amount of $13,009,000 from
              Webb-Brown Collier Associates to the Registrant.                             *  

10Z.          Mortgage and Security Agreement, dated as of July 24, 1986, by and   
              between Webb-Brown Collier Associates, as Borrower, and the Registrant,   
              as Lender, in the amount of $13,009,000.                                     *  

10AA.         General Partnership Agreement of Bayberry Associates dated as of April
              4, 1988 between Christopher Bozzuto Limited Partnership and the   
              Registrant.                                                                  *  

10BB.         Termination of Lease Agreement dated August 1988 involving New England
              Life Pension Properties III and Volpey Way Properties.                       *  

10CC.         Purchase and Sale Agreement and Escrow Instructions dated July 28, 1988   
              by and among the Registrant and Volpey Way Properties (Sellers) and   
              Rlajm Land Co., Inc. (Buyer).                                                *  

10DD.         MORF Associates III General Partnership Agreement dated as of January 1,  
              1988 between M.O.R.F. III Associates Limited Partnership and the 
              Registrant.                                                                  *  

10EE.         First Amendment to Promissory Note dated as of May 1, 1987 by NBS No.
              VI in favor of the Registrant.                                               *  

10FF.         First Amendment to Ground Lease dated as of May 1, 1987 between   
              the Registrant ("Landlord") and NBS No. VI ("Tenant").                       *  

10GG.         Termination of Lease by and between New England Life Pension   
              Properties III; A Real Estate Limited Partnership ("Landlord") and
              Webb Brown Collier Associates ("Tenant").                                    *  
</TABLE> 

*Previously filed and incorporated herein by reference.   
<PAGE>
 
                                EXHIBIT INDEX  
                                -------------
<TABLE> 
<CAPTION> 
Exhibit                                                                                   Page
Number                                  Exhibit                                          Number  
-------                                 -------                                          ------
<S>           <C>                                                                        <C> 
10HH.         Promissory Note in the principal amount of $469,154 dated January 31,
              1989 by Stan Brown Associates, Inc. in favor of Webb-Brown Collier
              Associates.                                                                  *  

10II.         Agreement by and between the Registrant and Heritage Green Associates
              dated as of January 1,1989.                                                  *  

10JJ.         Bill of Sale dated as of January 1, 1989 by and between Heritage Green
              Associates and the Registrant.                                               *  

10KK.         Termination of Ground Lease dated as of January 1, 1989 by and between
              Heritage Green Associates and the Registrant.                                *  

10LL.         Assignment and Assumption Agreement (Contracts) dated as of January 1,
              1989 by and between Heritage Green Associates and the Registrant.            *  

10MM.         Assignment and Assumption Agreement (Leases and Easements) dated as   
              of January 1, 1989 by and between Heritage Green Associates and the   
              Registrant.                                                                  *  

10NN.         Assignment and Assumption Agreement (Trade Names) dated as of January
              1, 1989 by and between Heritage Green Associates and the Registrant.         *  

10OO.         Modification Agreement dated as of January 31, 1990 by and between   
              Reston Two-Oxford Limited Partnership and the Registrant.                    *  

10PP.         Modification Agreement dated as of January 31, 1990 by and between   
              Reston Two-Oxford Limited Partnership and the Registrant.                    *  

10QQ.         Agreement of Sale made as of December 20, 1991, by and among the   
              Registrant, as successor-in-interest to Webb-Brown Metro One Associates  
              and Metro Parkway Investment Limited Partnership and Josias & Goren, P.A.,   
              as escrow agent.                                                             *  

10RR.         First Amendment to Agreement of Sale made as of February 20, 1992, by
              and among the Registrant, as successor-in-interest to Webb-Brown Metro   
              One Associates and Metro Parkway Investment Limited Partnership and   
              Josias & Goren, P.A., as escrow agent.                                       *  

10SS.         Warranty Deed dated February 20, 1992, between the Registrant and   
              Metro Parkway Investment Limited Partnership.                                *  
</TABLE> 

*Previously filed and incorporated herein by reference.   
<PAGE>
 
                                EXHIBIT INDEX  
                                -------------
<TABLE> 
<CAPTION> 
Exhibit                                                                                   Page
Number                                  Exhibit                                          Number  
-------                                 -------                                          ------
<S>           <C>                                                                        <C> 
10TT.         Agreement of Sale made as of December 20, 1991, by and among                 *  
              the Registrant, as successor-in- interest to Webb-Brown Metro One
              Associates and Metro Parkway Investment Limited Partnership and   
              Josias & Goren, P.A. as escrow agent.  

10UU.         Warranty Deed dated February 13, 1992, between the Registrant and            *  
              Metro Parkway Investment Limited Partnership.  

10VV.         Purchase and Sale Agreement effective November 3, 1993, by and   
              between the Registrant and Peter L. Rhulen as amended by the First
              Amendment to Purchase and Sale Agreement effective November   
              26, 1993 and a letter dated December 2, 1993.                                *  

10WW.         Assignment of Purchase Agreement dated November 9, 1993, by   
              Peter L. Rhulen to Heritage Green L. L. C.                                   *  

10XX.         Special Warranty Deed effective December 17, 1993, by and between   
              Registrant and Heritage Green, L. L. C.                                      *  

10YY.         Leasehold Assignment, Transfer and Release Agreement dated as  
              of August 15, 1994 by and between the Registrant and NBS No. VI.             *  

10ZZ.         Assignment of Ground Lease and Transfer of Property in Lieu of Foreclosure  
              dated as of August 25, 1994 by and between the Registrant and NBS No. VI.    *  

10AAA.        Assignment of Subleases dated as of August 23, 1994 by and between the  
              Registrant and NBS No. VI.                                                   *  

27.           Financial Data Schedule    
</TABLE> 

*Previously filed and incorporated herein by reference.