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


                                   FORM 10-Q

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

                 ---------------------------------------------
       For Quarter Ended March 31, 1999  Commission File Number 0-17809


                       COPLEY REALTY INCOME PARTNERS 3;
                             A LIMITED PARTNERSHIP
            (Exact name of registrant as specified in its charter)


     Massachusetts                                     04-3005973
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)

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

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


-------------------------------------------------------------------------
Former name, former address and former fiscal year if changed since last report


  Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

                                   Yes  X    No
                                        
<PAGE>
 
                       COPLEY REALTY INCOME PARTNERS 3;
                             A LIMITED PARTNERSHIP

                                   FORM 10-Q


                       FOR QUARTER ENDED MARCH 31, 1999


                                    PART I

                             FINANCIAL INFORMATION
                                        
<PAGE>
 
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

BALANCE SHEETS

<TABLE>
<CAPTION>
                                     March 31, 1999   December 31, 1998
                                       (Unaudited)        (Audited)
                                     ---------------  ------------------
<S>                                  <C>              <C>
Assets                        
                              
Real estate investments:      
  Joint venture                         $ 4,887,063   $ 4,819,346
  Property, net                           7,020,623     7,023,843
                                        -----------   -----------
                                         11,907,686    11,843,189
                                                      
Cash and cash equivalents                 1,963,599     2,163,411
                                        -----------   -----------
                                                      
                                        $13,871,285   $14,006,600
                                        ===========   ===========

Liabilities and Partners' Capital
 
Accounts payable                        $    36,015   $    52,798
Accrued management fee                       27,613        35,897
Deferred disposition fee                     29,250        29,250
                                        -----------   -----------
  Total liabilities                          92,878       117,945
                                        -----------   -----------
 
Partners' capital (deficit):
 
  Limited partners ($800 per
     unit; 100,000 units authorized,
     27,641 units issued and
     outstanding)                        13,827,675    13,936,821
  General partners                          (49,268)      (48,166)
                                        -----------   -----------
Total partners' capital (deficit)        13,778,407    13,888,655
                                        -----------   -----------
 
                                        $13,871,285   $14,006,600
                                        ===========   ===========
</TABLE>

           (See accompanying notes to unaudited financial statements)
<PAGE>
 
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

STATEMENTS OF OPERATIONS (Unaudited)

<TABLE>
<CAPTION>
                                              Quarter Ended March 31,
                                           ---------------------------
                                               1999            1998
                                           ------------     ----------   
<S>                                        <C>              <C>
Investment Activity                                    
                                                       
Property rentals                            $  265,674       $ 246,785
Property operating expenses                     (7,035)        (25,041)
Depreciation and amortization                  (78,492)        (78,953)
                                           -----------      ----------
                                               180,147         142,791
                                                       
Joint venture earnings                          96,921          85,096
                                           -----------      ----------
 Total real estate operations                  277,068         227,887
                                                       
Interest on cash equivalents                           
 and short-term investments                     22,154          28,110
                                           -----------      ----------
                                                       
 Total investment activity                     299,222         255,997
                                           -----------      ----------
                                                       
Portfolio Expenses                                     
                                                       
Management fee                                  27,614          35,897
General and administrative                      18,894          25,312
                                           -----------      ----------
                                                46,508          61,209
                                           -----------      ----------
                                                       
Net Income                                  $  252,714       $ 194,788
                                           ===========      ==========
                                                       
Net income per limited partnership                     
 unit                                       $     9.05       $    6.98
                                           ===========      ==========
                                                       
Cash distributions per limited                         
 partnership unit                           $    13.00       $   14.00
                                           ===========      ==========
                                                       
Number of limited partnership units                    
 outstanding during the period                  27,641          27,641
                                           ===========      ==========
</TABLE>                                                       

                (See accompanying notes to financial statements)
<PAGE>
 
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(Unaudited)

<TABLE>
<CAPTION>
                                    Quarter Ended March 31,
                                 1999                      1998
                        -----------------------   -----------------------
                         General      Limited      General      Limited
                        Partners     Partners     Partners     Partners
                        ---------   -----------   ---------   -----------
<S>                     <C>         <C>           <C>         <C>  
Balance at beginning
   of period             $(48,166)  $13,936,821    $(41,362)  $14,610,376
 
Cash distributions         (3,629)     (359,333)     (3,909)     (386,974)
 
Net income                  2,527       250,187       1,948       192,840
                         --------   -----------   ---------   -----------
 
Balance at end of
period                   $(49,268)  $13,827,675    $(43,323)  $14,416,242
                         ========   ===========   =========   ===========
</TABLE>

           (See accompanying notes to unaudited financial statements)
<PAGE>
 
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

SUMMARIZED STATEMENTS OF CASH FLOWS
(Unaudited)

<TABLE>
<CAPTION>
                                              Three Months Ended March 31,
                                             ------------------------------
                                                  1999            1998
                                             --------------   ------------
<S>                                          <C>             <C>
Net cash provided by operating activities     $    163,150     $   284,420
                                             -------------    ------------
 
Cash flows from investing activities:
 
  Decrease in short-term
     investments, net                                    -         196,364
                                             -------------    ------------
     Net cash provided by
       investing activities                              -         196,364
                                             -------------    ------------
 
Cash flows from financing activity:
  Distributions to partners                       (362,962)       (390,883)
                                             -------------    ------------
 
Net increase (decrease) in
  cash and cash equivalents                       (199,812)         89,901
 
Cash and cash equivalents:
  Beginning of period                            2,163,411       2,101,633
                                             -------------    ------------
 
  End of period                               $  1,963,599     $ 2,191,534
                                             =============    ============
</TABLE>

           (See accompanying notes to unaudited financial statements)
<PAGE>
 
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS (Unaudited)


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

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

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

   Copley Realty Income Partners 3; A Limited Partnership (the "Partnership") is
a Massachusetts limited partnership organized for the purpose of investing
primarily in newly-constructed and existing income-producing real properties.
The Partnership commenced operations in October 1988, and acquired the two real
estate investments it currently owns prior to the end of 1989.  The Partnership
intended to dispose of its investments within nine years of their acquisition,
and then liquidate; however, the managing general partner has extended the
investment period into 1999, having determined it to be in the best interest of
the limited partners.  The Partnership has engaged AEW Real Estate Advisors,
Inc. (the "Advisor") to provide asset management advisory services.

NOTE 2 - PROPERTY
-----------------

   The following is a summary of the Partnership's investment in the Brea West
property:

<TABLE>
<CAPTION>
                                 March 31, 1999   December 31, 1998
                                 ---------------  ------------------
<S>                              <C>              <C>
Land                              $   2,991,854    $      2,991,854
Building and improvements             5,978,755           5,978,755
Accumulated depreciation             (2,309,130)         (2,239,389)
Deferred costs, net                     345,372             352,489
Other ne assets (liabilities)            13,772             (59,866)
                                 --------------   -----------------
Net carrying value                $   7,020,623    $      7,023,843
                                 ==============   =================
</TABLE>
<PAGE>
 
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

NOTE 3 - REAL ESTATE JOINT VENTURES
-----------------------------------

  The following summarized financial information is presented aggregate for the
Shasta Way joint venture:

<TABLE>
<CAPTION>
                                         Assets and Liabilities
                                         ----------------------
                                   March 31, 1999  December 31, 1998
                                   --------------  -----------------
<S>                                <C>             <C> 
Assets
 Real property, at cost less
  accumulated depreciation of
  $1,125,823 and $1,084,004          $7,104,376         $7,146,195
 Other                                  125,502            153,318
                                     ----------         ----------
                                      7,229,878          7,299,513
 
Liabilities                              88,813             70,400
                                     ----------         ----------
Net assets                           $7,141,065         $7,229,113
                                     ==========         ==========

<CAPTION> 
                                       Results of Operations
                                       --------------------- 

                                     Three Months Ended March 31,
                                       1999                1998
                                      ------              ------  
<S>                                  <C>                <C>
Revenue                                          
  Rental income                      $   341,626        $  301,755
  Other                                      978                 -
                                     -----------        ----------
                                         342,604           301,755
                                     -----------        ----------
                                                 
Expenses                                         
  Depreciation and amortization          115,195           115,196
  Operating expenses                      59,871            39,410
                                     -----------        ----------
                                         175,066           154,606
                                     -----------        ----------
                                                 
Net income                           $   167,538        $  147,149
                                     ===========        ==========
</TABLE>

  Liabilities and expenses exclude amounts owed and attributable to the
Partnership and its affiliate on behalf of their various financing arrangements
with the joint venture.
<PAGE>
 
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARNTERSHIP

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

  Distributions of cash from operations relating to the quarter ended March 31,
1999 were made on April 29, 1999 in the amount of $279,202 ($10.00 per limited
partnership unit).
<PAGE>
 
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------

Liquidity and Capital Resources

  The Partnership completed its offering of units of limited partnership
interest in June 1989 and a total of 27,641 units were sold.  The Partnership
received proceeds of $24,458,317, net of selling commissions and other offering
costs, which have been used for investment in real estate and to pay related
acquisition costs, or are being retained as working capital reserves.

  In connection with the July 1997 sale of the South Bay property, the
Partnership made a capital distribution of $5,528,200 ($200 per limited
partnership unit) in July 1997.  This distribution reduced the adjusted capital
contribution to $800 per unit.

  At March 31, 1999, the Partnership had $1,963,599 in cash and cash
equivalents, of which $279,202 was used for cash distributions to partners on
April 29, 1999; the remainder is being retained for working capital reserves.
The source of future liquidity and cash distributions to partners will be cash
generated by the Partnership's real estate and invested cash and cash
equivalents.  Based on the adjusted capital contribution of $800 per unit,
distributions of cash from operations relating to the first quarter of 1999 were
made at the annualized rate of 5.0% while distributions of cash from operations
relating to the first quarter of 1998 were made at the annualized rate of 6.5%.
The distribution rate was lower in 1999 primarily due to a lease commission paid
out in January, 1999, at Shasta Way.

  The carrying value of real estate investments in the financial statements at
March 31, 1999 is at depreciated cost, or if the investment's carrying value is
determined not to be recoverable through expected undiscounted future cash
flows, the carrying value is reduced to estimated fair market value.  The fair
market value of such investments is further reduced by the estimated costs of
sale for properties held for sale.  Carrying value may be greater or less than
current appraised value.  At March 31, 1999, the aggregate appraised value of
the Partnership's investments was approximately $4,100,000 greater than their
aggregate carrying value.  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 the Advisor
and the 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.
<PAGE>
 
COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

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

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

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

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

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

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

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

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

  Form of Real Estate Investments

  The Brea West investment is a wholly-owned property. The Shasta Way investment
had been structured as a joint venture with a real estate management/development
firm and an affiliate of the Partnership. As of January 1, 1996, the ownership
was restructured, and the management/development firm's interest was assigned to
the Partnership and its affiliate in proportion to their respective ownership
interests. The Partnership's ownership percentage increased to 58%.

  Operating Factors

  The Brea West and the Shasta Way properties are both 100% leased to single
tenants. A new 11-year lease was signed with the tenant at Brea West which
commenced on September 1, 1997 at a rental rate which was slightly lower than
the previous rate. The initial lease term at Shasta Way expired on December 31,
1998. In February 1998, the tenant exercised its renewal option for a 5-year
term which commenced on January 1, 1999.

  Investment Results

  For the three-month periods ended March 31, 1999 and 1998, real estate
operating results were $277,068 and $227,887, respectively. The increase between
the two periods stems primarily from an increase to the rental rate at Shasta
Way as well as a 1998 real estate tax abatement at Brea West affecting the 1999
operating statement.

  Cash flow from operations decreased by approximately $121,000 between the
three-month periods ended March 31, 1999 and 1998. The difference is
attributable to the lease commission paid out at Shasta Way in January, 1999.

  Interest earned on cash equivalents and short-term investments decreased
approximately $6,000 between the three month periods of 1999 and 1998. This was
due to lower balances held at the fund level.

  Portfolio Expenses

  General and administrative expenses primarily consist of real estate
appraisal, legal, printing, accounting and servicing agent fees. These expenses
decreased approximately $6,000 between the three month periods of 1998 and 1999,
primarily due to a decrease in accounting fees and appraisal fees.

  The Partnership management fee is 9% of distributable cash flow from
operations after any increase or decrease in working capital reserves as
determined by the managing general partner. Management fees decreased by $8,000
between the comparable three month periods of 1999 and 1998 due to the decrease
in distributable cash flow relating to the aforementioned lease commission paid
out at Shasta Way.
<PAGE>
 
                       COPLEY REALTY INCOME PARTNERS 3;

                             A LIMITED PARTNERSHIP

                                   FORM 10-Q
                                        
                       FOR QUARTER ENDED MARCH 31, 1999

                                    PART II
                                        
                               OTHER INFORMATION



Items 1-5  Not Applicable

Item 6.    Exhibits and Reports on Form 8-K

           a.  Exhibits:   (27) Financial Data Schedule

           b.  Reports on Form 8-K:  No current reports on Form 8-K were filed
               during the quarter ended March 31, 1999.
<PAGE>
 
                                  SIGNATURES
                                  ----------

  Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                             COPLEY REALTY INCOME PARTNERS 3; A LIMITED
                             PARTNERSHIP
                             (Registrant)


May 13, 1999
                              /s/ J. Christopher Meyer, III
                              -------------------------------
                                J. Christopher Meyer, III
                                President, Chief Executive Officer and
                                Director of Managing General Partner,
                                Third Income Corp.



May 13, 1999
                              /s/ Karin J. Lagerlund
                              --------------------------------
                                Karin J. Lagerlund
                                Treasurer and Principal Financial and
                                Accounting Officer of Managing General
                                Partner, Third Income Corp.