<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, 1998  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, 1998


                                     PART I

                             FINANCIAL INFORMATION
                                        
<PAGE>
 
BALANCE SHEETS
(Unaudited)

<TABLE> 
<CAPTION> 

                                           March 31, 1998     December 31, 1997
                                         -----------------   ------------------
<S>                                      <C>                 <C>               
Assets                                                                         
                                                                               
Real estate investments:                                                       
 Joint venture                             $  4,998,439        $  5,071,717    
 Property, net                                7,277,833           7,314,926    
                                           ------------        ------------    
                                             12,276,272          12,386,643    
                                                                               
Cash and cash equivalents                     2,191,534           2,101,633    
Short-term investments                                -             198,992    
                                           ------------        ------------    
                                                                               
                                           $ 14,467,806        $ 14,687,268    
                                           ============        ============    
</TABLE>


<TABLE> 
<CAPTION> 

Liabilities and Partners' Capital
 
<S>                                        <C>                 <C>
Accounts payable                           $     29,740        $     50,345
Accrued management fee                           35,897              38,659
Deferred disposition fee                         29,250              29,250
                                            -----------        ------------
  Total liabilities                              94,887             118,254
                                            -----------        ------------
                                                                           
Partners' capital (deficit):                                               
                                                                           
  Limited partners ($800 per                                               
     unit; 100,000 units                                                   
     authorized, 27,641 units issued                                       
     and outstanding)                        14,416,242          14,610,376
  General partners                              (43,323)            (41,362)
                                            -----------        ------------ 
Total partners' capital                      14,372,919          14,569,014 
                                            -----------        ------------ 
                                                                            
                                            $14,467,806        $ 14,687,268 
                                            ===========        ============ 
</TABLE>                                                                    



               (See accompanying notes to financial statements)
<PAGE>
 
STATEMENTS OF OPERATIONS (Unaudited)


<TABLE>
<CAPTION>
 
 
                                                   Quarter Ended March 31,
                                                   ------------------------
                                                   1998               1997
                                                -----------        -----------
<S>                                      <C>                        <C>
Investment Activity
 
Property rentals                                $ 246,785          $  365,383
Property operating expenses                       (25,041)            (53,749)
Depreciation and amortization                     (78,953)           (108,661)
                                                ---------          ----------
                                                  142,791             202,973
                                                                 
Joint venture earnings                             85,096              81,235
                                                ---------          ----------
 Total real estate operations                     227,887             284,208
                                                                 
Interest on cash equivalents                                     
 and short-term investments                        28,110              27,784
                                                ---------          ----------
                                                                 
 Total investment activity                        255,997             311,992
                                                ---------          ----------
                                                                 
Portfolio Expenses                                               
                                                                 
Management fee                                     35,897              44,872
General and administrative                         25,312              34,690
                                                ---------          ----------
                                                   61,209              79,562
                                                ---------          ----------
                                                                 
Net Income                                      $ 194,788          $  232,430
                                                =========          ==========
                                                                 
                                                                 
                                                                 
                                                                 
Net income per limited partnership                               
 unit                                           $    6.98          $     8.32
                                                =========          ==========
                                                                 
Cash distributions per limited                                   
 partnership unit                               $   14.00          $    15.00
                                                =========          ==========
                                                                 
Number of limited partnership units                              
 outstanding during the period                     27,641              27,641
                                                =========          ==========
</TABLE>

               (See accompanying notes to financial statements)
<PAGE>
 
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
(Unaudited)


<TABLE>
<CAPTION>
 
                                        Quarter Ended March 31,
                                    1998                       1997
                          ------------------------    -----------------------
 
                           General       Limited      General       Limited
                          Partners      Partners      Partners     Partners
                          ---------    -----------    --------    -----------
<S>                       <C>          <C>            <C>         <C> 
Balance at beginning
   of period               $(41,362)   $14,610,376    $(46,978)   $19,582,641
 
Cash distributions           (3,909)      (386,974)     (4,188)      (414,615)
 
Net income                    1,948        192,840       2,324        230,106
                           --------    -----------    --------    -----------
 
Balance at end of
period                     $(43,323)   $14,416,242    $(48,842)   $19,398,132
                           ========    ===========    ========    ===========
</TABLE>



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


<TABLE>
<CAPTION>
 
 
                                                Quarter Ended March 31,
                                               -------------------------
                                                  1998          1997
                                              ------------  ------------
<S>                                            <C>          <C>
 
Net cash provided by operating activities     $   284,420   $   525,767
                                              -----------   -----------
 
Cash flows from investing activities:
  Decrease in short-term
     investments, net                             196,364       127,716
                                              -----------   -----------
Cash flows from financing activity:
  Distributions to partners                      (390,883)     (418,803)
                                              -----------   -----------
 
Net increase in cash
  and cash equivalents                             89,901       234,680
 
Cash and cash equivalents:
  Beginning of period                           2,101,633     1,798,785
                                              -----------   -----------
 
  End of period                               $ 2,191,534   $ 2,033,465
                                              ===========   ===========
</TABLE>


               (See accompanying notes to financial statements)
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS (Unaudited)


   In the opinion of management, the accompanying unaudited financial statements
contain all adjustments necessary to present fairly the Partnership's financial
position as of March 31, 1998 and December 31, 1997 and the results of its
operations, its cash flows and partners' capital (deficit) for the interim
periods ended March 31, 1998 and 1997.  These adjustments are of a normal
recurring nature.

   See notes to financial statements included in the Partnership's 1997 Annual
Report on Form 10-K for additional information relating to the Partnership's
financial statements.


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

   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
intends to dispose of its investments within six to nine years of their
acquisition, and then liquidate.  The Partnership has engaged AEW Real Estate
Advisors, Inc. ("AEW") to provide asset management advisory services.


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

   On July 22, 1997, the South Bay property was sold to the sole tenant which
exercised the purchase option under its lease for gross consideration of
$5,850,000.  The Partnership received net proceeds of $5,715,415, after closing
costs, and recognized a gain of $1,490,313 ($53.38 per limited partnership unit)
on the sale.  A disposition fee of $29,250 was accrued but not paid to AEW.  On
July 24, 1997, the Partnership made a capital distribution of $5,528,200 ($200
per limited partnership unit) from the proceeds of the sale.
<PAGE>
 
   The following is a summary of the Partnership's investment in the Brea West
property:

<TABLE>
<CAPTION>
 
 
                               March 31, 1998    December 31, 1997
                               ---------------   ------------------
<S>                            <C>               <C>
 
Land                             $  2,991,854         $  2,991,854
Building and improvements           5,978,755            5,978,755
Accumulated depreciation           (2,030,166)          (1,960,425)
Deferred costs, net                   367,891              375,329
Other net liabilities                 (30,501)             (70,587)
                                 ------------         ------------
Net carrying value               $  7,277,833         $  7,314,926
                                 ============         ============
</TABLE>



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
                                         ----------------------
 
                                   MARCH 31, 1998   DECEMBER 31, 1997
                                   --------------   -----------------
<S>                                <C>              <C>
Assets
 Real property, at cost less
  accumulated depreciation of
  $2,238,041 and $2,132,388           $ 7,460,342         $ 7,565,996
 Other                                    152,490             165,813
                                      -----------         -----------
                                        7,612,832           7,731,809
 
Liabilities                                84,926              81,052
                                      -----------         -----------
Net assets                            $ 7,527,906         $ 7,650,757
                                      ===========         ===========
</TABLE>
<PAGE>
 
<TABLE>
<CAPTION>
 
                                           RESULTS OF OPERATIONS
                                           ---------------------
 
                                          QUARTER ENDED MARCH 31,
                                              1998         1997   
                                           ---------    --------- 
<S>                                        <C>          <C> 
Revenue                                                           
 Rental income                             $ 301,755    $ 297,232 
 Other income                                      -        2,086 
                                           ---------    --------- 
                                             301,755      299,318 
                                           ---------    --------- 
                                                                  
Expenses                                                          
 Operating expenses                           39,410       43,630 
 Depreciation and amortization               115,196      115,196 
                                           ---------    --------- 
                                             154,606      158,826 
                                           ---------    --------- 
                                                                  
Net income                                 $ 147,149    $ 140,492 
                                           =========    =========  
</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.


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

     Distributions of cash from operations relating to the quarter ended March
31, 1998 were made on April 29, 1998 in the aggregate amount of $362,963 ($13.00
per limited partnership unit).
<PAGE>
 
Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------

Liquidity and Capital Resources

  The Partnership completed its offering of units of limited partnership
interest in 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 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, 1998, the Partnership had $2,191,534 in cash and cash
equivalents, of which $362,963 was used for cash distributions to partners on
April 29, 1998; 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.  Distributions of cash from operations relating to the first
quarter of 1997 and 1998 were made at the annualized rate of 6.5%.  The first
quarter 1997 distribution was based on a capital contribution of $1,000 per
unit.  The first quarter 1998 distribution was based on the adjusted capital
contribution of $800 per unit.

  The carrying value of real estate investments in the financial statements at
March 31, 1998 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, 1998, the aggregate appraised value of
the Partnership's investments was approximately $2,900,000 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 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>
 
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 Shasta Way joint venture 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 slightly lower rental rate. The lease at
Shasta Way expires on December 31, 1998.

  Investment Results

  Exclusive of $71,834 of operating income from South Bay in 1997, real estate
operations increased $15,513 for the first three months of 1998 as compared to
the comparable period of 1997.  The improvement is primarily due to the timing
of tenant reimbursement income at Brea West.  Amortization expense also
decreased between the two periods as certain tenant concessions and lease
commissions were written off in 1997, concurrent with the signing of the new 
lease discussed above.

  Cash provided by operations decreased by approximately $241,000 between the
three-month periods ended March 31, 1997 and 1998.  The decline is attributable
to the decrease in operating results as a result of the sale of South Bay, as
well as the timing of distributions from Shasta Way.

  Interest earned on cash equivalents and short-term investments for the first
quarter of 1997 and 1998 were relatively unchanged as lower average invested
balances were offset by higher short-term yields.

  Portfolio Expenses

  General and administrative expenses primarily consist of real estate
appraisal, legal, printing, accounting and servicing agent fees.  These expenses
decreased approximately $9,000, or 27% between the first three months of 1997
and 1998, primarily due to decreases in accounting 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 between
the two three-month periods due to the decrease in distributable cash
flow.
<PAGE>
 
                       COPLEY REALTY INCOME PARTNERS 3;

                             A LIMITED PARTNERSHIP

                                   FORM 10-Q
                                        
                       FOR QUARTER ENDED MARCH 31, 1998

                                    PART II
                                        
                               OTHER INFORMATION



Items 1-5 Not Applicable

Item 6.   Exhibits and Reports on Form 8-K

          a.  Exhibits:   (27) Financial Data Schedule

          b.   Reports on Form 8-K. On January 16, 1998, the Partnership filed
               one current report on Form 8-K/A reporting on Item No. 2
               (Acquisition or Disposition of Assets) and Item No. 7 (Financial
               Statements and Exhibits), disclosing the sale of the South Bay
               property on July 22, 1997.
<PAGE>
 
                                   SIGNATURES
                                   ----------



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



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


May 15, 1998
                              /s/ Wesley M. Gardiner, Jr.
                              -------------------------------
                                Wesley M. Gardiner, Jr.
                                President, Chief Executive Officer and Director
                                of Managing General Partner,
                                Third Income Corp.



May 15, 1998
                             /s/ Karin J. Lagerlund
                             --------------------------------
                               Karin J. Lagerlund
                               Treasurer and Principal Financial and Accounting
                               Officer of Managing General Partner, Third Income
                               Corp.