<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 June 30, 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 JUNE 30, 1999


                                    PART I

                             FINANCIAL INFORMATION

<PAGE>

COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

<TABLE>
<CAPTION>
BALANCE SHEETS
                                        June 30, 1999   December 31, 1998
                                         (Unaudited)        (Audited)
                                        -------------   -----------------
<S>                                     <C>             <C>
Assets

Real estate investments:
  Joint venture                         $   4,805,466        $  4,819,346
  Property, net                                     -           7,023,843
                                        -------------        ------------
                                            4,805,466          11,843,189

Cash and cash equivalents                  10,421,528           2,163,411
                                        -------------        ------------

                                        $  15,226,994        $ 14,006,600
                                        =============        ============


Liabilities and Partners' Capital

Accounts payable                        $      33,171        $     52,798
Accrued management fee                         27,614              35,897
Deferred disposition fee                      285,150              29,250
                                        -------------        ------------
  Total liabilities                           345,935             117,945
                                        -------------        ------------

Partners' capital (deficit):

  Limited partners ($800 per
     unit; 100,000 units
     authorized, 27,641 units issued
     and outstanding)                      14,919,300          13,936,821
  General partners                            (38,241)            (48,166)
                                        -------------        ------------
Total partners' capital                    14,881,059          13,888,655
                                        -------------        ------------

                                        $  15,226,994        $ 14,006,600
                                        =============        ============
</TABLE>



          (See accompanying notes to unaudited financial statements)
<PAGE>

COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS (Unaudited)


                                       Three Months Ended       Six Months Ended     Three Months Ended    Six Months Ended
                                          June 30, 1999          June 30, 1999          June 30, 1998       June 30, 1998
                                          -------------          -------------          -------------       -------------
<S>                                    <C>                      <C>                  <C>                   <C>
INVESTMENT ACTIVITY

Property rentals                          $     213,792          $     479,466          $     246,764       $     493,549
Property operating expenses                     (49,355)               (56,390)               (27,432)            (52,473)
Depreciation and amortization                    (1,634)               (80,126)               (78,952)           (157,905)
                                          -------------          -------------          -------------       -------------
                                                162,803                342,950                140,380             283,171

Joint venture earnings                          128,131                225,052                 98,124             183,220
                                          -------------          -------------          -------------       -------------

  Total real estate operations                  290,934                568,002                238,504             466,391

Gain on sale of property                      1,118,340              1,118,340                      -                   -
                                          -------------          -------------          -------------       -------------
  Total real estate activity                  1,409,274              1,686,342                238,504             466,391


Interest on cash equivalents
  and short term investments                     22,718                 44,872                 27,705              55,815
                                          -------------          -------------          -------------       -------------
     Total investment activity                1,431,992              1,731,214                266,209             522,206
                                          -------------          -------------          -------------       -------------
PORTFOLIO EXPENSES

Management fee                                   27,614                 55,227                 35,898              71,795
General and administrative                       22,524                 41,419                 21,617              46,929
                                          -------------          --------------         -------------       -------------
                                                 50,138                 96,646                 57,515             118,724
                                          -------------          --------------         -------------       -------------
Net Income                                $   1,381,854          $   1,634,568          $     208,694       $     403,482
                                          =============          ==============         =============       =============
 </TABLE>
<PAGE>

COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP


<TABLE>
<S>                                      <C>      <C>      <C>      <C>
Net income per
  limited partnership unit               $ 49.49  $ 58.54  $  7.47  $ 14.45
                                         =======  =======  =======  =======

Cash distributions per
  limited partnership unit               $ 10.00  $ 23.00  $ 13.00  $ 27.00
                                         =======  =======  =======  =======

Number of limited partnership
  units outstanding during the period     27,641   27,641   27,641   27,641
                                         =======  =======  =======  =======
</TABLE>
          (See accompanying notes to unaudited financial statements)
<PAGE>

COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
                     Three Months Ended            Six Months Ended           Three Months Ended           Six Months Ended
                       June 30, 1999                 June 30, 1999               June 30, 1998               June 30, 1998
                     ------------------           ------------------          ------------------           ----------------

                   General     Limited           General     Limited          General     Limited         General   Limited
                   Partners    Partners          Partners    Partners         Partners    Partners        Partners  Partners
                   --------    --------          --------    --------         --------    --------        --------  --------
<S>                <C>         <C>               <C>         <C>              <C>         <C>             <C>       <C>
Balance at
beginning of
period             $(49,268)   $13,827,675       $(48,166)   $13,936,821      $(43,323)   $14,416,242     $(41,362)  $14,610,376

Cash
distributions        (2,792)      (276,410)        (6,421)      (635,743)       (3,629)      (359,333)      (7,538)     (746,307)

Net income           13,819      1,368,035         16,346      1,618,222         2,087        206,607        4,035       399,447
                   --------    -----------       --------    -----------      --------    -----------     --------   -----------
Balance at
end of period      $(38,241)   $14,919,300       $(38,241)   $14,919,300      $(44,865)   $14,263,516     $(44,865)  $14,263,516
                   ========    ===========       ========    ===========      ========    ===========     ========   ===========
</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>
                                              Six Months Ended June 30,
                                             ---------------------------
                                                 1999           1998
                                             -------------  ------------
<S>                                          <C>            <C>

Net cash provided by operating activities     $   519,190    $  665,183
                                              -----------    ----------

Cash flows from investing activity:
  Net proceeds from sale of property            8,125,191             -
  Disposition fee accrued for Brea sale           255,900             -
     Decrease in short-term
     investments, net                                   -       196,364
                                              -----------    ----------

Net cash provided by investing activities       8,381,091       196,364
                                              -----------    ----------

Cash flows from financing activity:
  Distributions to partners                      (642,164)     (753,845)
                                              -----------    ----------

Net increase in cash
  and cash equivalents                          8,258,117       107,702

Cash and cash equivalents:
  Beginning of period                           2,163,411     2,101,633
                                              -----------    ----------

  End of period                               $10,421,528    $2,209,335
                                              ===========    ==========
</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 June 30, 1999 and December 31, 1998 and the results of
its operations, its cash flows and partners' capital (deficit) for the three and
six month periods ended June 30, 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
-----------------

     On June 25, 1999, the Brea West building was sold for a gross sale price of
$8,530,000. The buyer had been employed by the Partnership as the property
manager for this property at the time of the sale. The partnership received net
proceeds of $8,381,091 after closing costs, and recognized a gain of $1,118,340
($40.05 per limited partnership unit) on the sale. On July 29, 1999 the
Partnership made a capital distribution of $8,126,454 ($294.00 per limited
partnership unit) from the proceeds of the sale. At the time of sale, a
disposition fee of $255,900 was accrued but not paid to the Advisor.

<TABLE>
<CAPTION>
                             June 30, 1999    December 31, 1998
                             -------------    -----------------
<S>                          <C>              <C>
Land                         $           -    $       2,991,854
Building and improvements                -            5,978,755
Accumulated depreciation                 -           (2,239,389)
Deferred costs, net                      -              352,489
Other net liabilities                    -              (59,866)
                             -------------    -----------------
Net carrying value           $           -    $       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 in the
aggregate for the Shasta Way joint venture:

<TABLE>
<CAPTION>
                                       Assets and Liabilities
                                       ----------------------

                                  June 30, 1999  December 31, 1998
                                  -------------  -----------------
<S>                               <C>            <C>
Assets
 Real property, at cost less
  accumulated depreciation of
  $1,167,642 and $1,084,00
  respectively                       $7,062,557     $7,146,195
 Other                                  165,868        153,318
                                     ----------     ----------
                                      7,228,425      7,299,513

Liabilities                              60,899         70,400
                                     ----------     ----------
Net assets                           $7,167,526     $7,229,113
                                     ==========     ==========
</TABLE>


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

                                     Six Months Ended June 30,
                                        1999           1998
                                     ----------     ----------
<S>                                  <C>            <C>
Revenue
 Rental income                       $  722,483     $  630,823
 Other income                             2,110              -
                                     ----------     ----------
                                        724,593        630,823
                                     ----------     ----------

Expenses
 Operating expenses                     105,318         83,670
 Depreciation and amortization          230,390        230,392
                                     ----------     ----------
                                        335,708        314,062
                                     ----------     ----------

Net income                           $  388,885     $  316,761
                                     ==========     ==========
</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.  In mid July, 1999, a Purchase and Sale Agreement was
executed by the joint venture to sell the Shasta Way investment.  Although there
can be no assurance that this sale will occur, it is expected to be concluded
during the third quarter of 1999.
<PAGE>

COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

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

     Distributions of cash from operations relating to the quarter ended June
30, 1999 were made on July 29, 1999 in the aggregate amount of $279,202 ($10.00
per limited partnership unit).

     Additionally, on July 29, 1999, the partnership made a capital distribution
of $8,126,454 ($294.00 per limited partnership unit) from the net sale proceeds
of Brea West.
<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.

     On July 24, 1997, the Partnership made a capital distribution of $5,528,200
($200 per limited partnership unit) from the sale of the South Bay property.
This distribution reduced the adjusted capital contribution to $800 per unit.

     At June 30, 1999, the Partnership had $10,421,528 in cash and cash
equivalents, of which $279,202 was used for cash distributions to partners on
July 29, 1999. In addition, $8,126,454 was used for a capital distribution to
limited partners due to the sale of Brea West. The remainder is being retained
primarily as a reserve in the event of any claims for breach of representations
or warranties in connection with the sale of Brea West on June 25, 1999, and 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 two
quarters of 1999 were made at the annualized rate of 5.0% while distributions of
cash from operations relating to the first two quarters of 1998 were made at the
annualized rate of 6.5%. The decrease in the 1999 distribution rate is due to
lower projected cash flow from the Brea West investment which was sold on June
25, 1999, and Shasta Way as a result of an anticipated 1999 sale.

     The carrying value of real estate investments in the financial statements
at June 30, 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 June 30, 1999, the aggregate appraised value of the
Partnership's remaining investment was approximately $2,600,000 greater than its
aggregate carrying value. The current appraised value of the real estate
investment 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 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 concluded the internal testing,
          remediation/repair and certifications of its Plan in June 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 is developing a contingency plan in the event of a
particular provider or system not being Year 2000 compliant. 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>

COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

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

    Operating Factors

    As previously discussed, Brea West was sold on June 25, 1999. At the time
of the sale, the property was 100% leased by a single tenant.

    Shasta Way is 100% occupied by a single tenant under a lease that expires
on December 31, 2003.

    Investment Results

    Real estate operations were $290,934 and $568,002 for the three and six-
month periods ended June 30, 1999, respectively, compared to $238,504 and
$466,391 for the comparable periods ended June 30, 1998. The increases of
$52,430 and $101,611 are the result of a rental increase effective June 30, 1998
in joint venture earnings. Additionally, the omission of depreciation and
amortization, due to the executed Purchase and Sale Agreement at Brea West,
contributed to the increase of real estate operations.

     Cash flow from operations through June 30, 1999 decreased by approximately
$146,000 compared with the same period in 1998. The difference is attributable
to the leasing commission of $115,349 paid out at Shasta Way in January of 1999
in addition to the timing of a distribution from Brea West that increased the
property's working capital.

     Interest on cash and cash equivalents decreased by approximately $5,000 and
$11,000 between the three and six month periods ended June 30, 1999, compared
with the same period in 1998. The decrease is primarily due to lower investment
balances and lower yields in 1999.

     Portfolio Expenses

     General and administrative expenses primarily consist of real estate
appraisal, legal, printing, accounting and servicing agent fees. These expenses
decreased by $5,510 between the comparable six month periods ending June 30,
1999 and 1998. The decrease is primarily due to appraisal fees not being
incurred in 1999 because of the anticipated sale of the investments, and lower
accounting fees.

     The Partnership management fee is 9% of distributable cash flow from
operations after any increase or decrease in working capital reserves as
determined by the managing general partner. Management fees decreased by $8,285
and $16,568, respectively, between the comparable three and six month periods
ending June 30, 1999 and 1998. The decrease is a result of lower cash
distribution rates.
<PAGE>

                       COPLEY REALTY INCOME PARTNERS 3;
                             A LIMITED PARTNERSHIP

                                   FORM 10-Q

                        FOR QUARTER ENDED JUNE 30, 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 June 30, 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)


August 13, 1999
                             /s/ Alison Husid Cutler
                             -------------------------------
                                Alison Husid Cutler
                                President, Chief Executive Officer and Director
                                of Managing General Partner,
                                Third Income Corp.



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