<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, 1997        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, 1997


                                    PART I

                             FINANCIAL INFORMATION
                                        
<PAGE>
 
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
                                     June 30, 1997  December 31, 1996
                                     -------------  -----------------
<S>                                  <C>            <C> 
Assets                               
                                     
Real estate investments:             
 Joint ventures                        $ 5,262,515      $ 5,531,652
 Property, net                          11,570,708       11,789,227
                                       -----------      -----------
                                        16,833,223       17,320,879
                                                        
Cash and cash equivalents                2,022,444        1,798,785
Short-term investments                     393,380          503,111
                                       -----------      -----------
                                                        
                                       $19,249,047      $19,622,775
                                       ===========      ===========


Liabilities and Partners' Capital


Accounts payable                       $    45,804      $    45,692
Accrued management fee                      44,872           41,420
                                       -----------      -----------
 Total liabilities                          90,676           87,112
                                       -----------      -----------
 
Partners' capital (deficit):
 
 Limited partners ($1,000 per unit;
   100,000 units authorized, 27,641
   units issued and outstanding)        19,209,122       19,582,641
 General partners                          (50,751)         (46,978)
                                       -----------      -----------
Total partners' capital                 19,158,371       19,535,663
                                       -----------      -----------
 
                                       $19,249,047      $19,622,775
                                       ===========      ===========
</TABLE>



                (See accompanying notes to financial statements)
<PAGE>
 
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
 
 
                                         Quarter Ended     Six Months Ended      Quarter Ended     Six Months Ended 
                                         June 30, 1997       June 30, 1997       June 30, 1996       June 30, 1996
                                         -------------     ----------------      -------------     ---------------- 
<S>                                      <C>               <C>                   <C>               <C>
Investment Activity            
                               
Property rentals                         $     407,529       $      772,912      $     383,031       $      770,764
Property operating expenses                    (65,576)            (119,325)           (46,078)            (116,941)
Depreciation and amortization                 (108,660)            (217,321)          (109,953)            (211,092)
                                          ------------        -------------       ------------        -------------  
                                               233,293              436,266            227,000              442,731
                               
Joint venture earnings                          71,936              153,171             71,925              169,379
                                          ------------        -------------       ------------        -------------  
                               
   Total real estate operations                305,229              589,437            298,925              612,110
                               
Interest on cash equivalents   
   and short-term investments                   29,548               57,332             26,470               52,048
                                          ------------        -------------       ------------        -------------  
                               
   Total investment activity                   334,777              646,769            325,395              664,158
                                          ------------        -------------       ------------        -------------  
                               
Portfolio Expenses             
                               
Management fee                                  44,871               89,743             41,420               82,840
General and administrative                      27,122               61,812             27,738               53,704
                                          ------------        -------------       ------------        -------------  
                                                71,993              151,555             69,158              136,544
                                          ------------        -------------       ------------        -------------  
                               
Net Income                               $     262,784       $      495,214      $     256,237       $      527,614
                                          ============        =============       ============        =============    
 
Net income per limited partnership
   unit                                  $        9.41       $        17.74      $        9.18       $        18.90
                                          ============        =============       ============        =============    
</TABLE> 
<PAGE>
 
<TABLE>
<CAPTION>
 
 
                                         Quarter Ended     Six Months Ended      Quarter Ended     Six Months Ended 
                                         June 30, 1997       June 30, 1997       June 30, 1996       June 30, 1996
                                         -------------     ----------------      -------------     ---------------- 
<S>                                      <C>               <C>                   <C>               <C>
Cash distributions per limited
   partnership unit                      $       16.25       $        31.25      $       15.00       $        30.00
                                          ============        =============       ============        =============    
 
Number of limited partnership units
   outstanding during the period                27,641               27,641             27,641               27,641
                                          ============        =============       ============        =============    
</TABLE>
                (See accompanying notes to financial statements)
<PAGE>
 
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
                               Quarter Ended            Six Months Ended             Quarter Ended             Six Months Ended
                               June 30, 1997              June 30, 1997              June 30, 1996               June 30, 1996
                        ------------------------    ------------------------    ------------------------   ------------------------

                        General        Limited      General        Limited       General       Limited      General       Limited
                        Partners      Partners      Partners      Partners      Partners      Partners      Partners     Partners
                        --------     -----------    --------     -----------    ---------    -----------    --------    -----------
<S>                     <C>          <C>            <C>          <C>            <C>          <C>            <C>         <C>     
Balance at beginning                                                                                                  
    of period          $ (48,842)   $ 19,398,132   $ (46,978)   $ 19,582,641   $  (42,283)  $ 20,047,445   $ (40,809)  $ 20,193,397
                                                                                                                      
Cash distributions        (4,537)       (449,166)     (8,725)       (863,781)      (4,188)      (414,615)     (8,376)      (829,230)

                                                                                                                      
Net income                 2,628         260,156       4,952         490,262        2,562        253,675       5,276        522,338
                        --------     -----------    --------     -----------    ---------    -----------    --------    -----------
                                                                                                                      
Balance at end of                                                                                                     
period                 $ (50,751)   $ 19,209,122   $ (50,751)   $ 19,209,122   $  (43,909)  $ 19,886,505   $ (43,909)  $ 19,886,505
                        ========     ===========    ========     ===========    =========    ===========    ========    ===========
                                                
</TABLE>



                (See accompanying notes to financial statements)
<PAGE>
 
SUMMARIZED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
 
 
                                             Six Months Ended June 30,
                                             -------------------------
 
                                                 1997           1996
                                               --------       --------
<S>                                          <C>            <C>  
Net cash provided by operating activities    $  991,633     $  921,857
                                              ---------      --------- 
                                                         
Cash flows from investing activities:                    
   Investment in property                           ---        (52,796)
   Decrease in short-term                                
      investments, net                          104,532        206,996
                                              ---------      --------- 
      Net cash provided by                               
         investing activities                   104,532        154,200
                                                         
Cash flows from financing activity:                      
   Distributions to partners                   (872,506)      (837,606)
                                              ---------      --------- 
                                                         
Net increase in                                          
   cash and cash equivalents                    223,659        238,451
                                                         
Cash and cash equivalents:                               
   Beginning of period                        1,798,785      1,695,180
                                              ---------      --------- 
                                                         
   End of period                             $2,022,444     $1,933,631
                                              =========      =========
</TABLE>


Non-cash transaction:

Effective January 1, 1996, the Partnership's joint venture investment in South
Bay/CRIP 3 Associates was converted to a wholly-owned property. The carrying
value of this investment at conversion was $4,180,704.



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

      See notes to financial statements included in the Partnership's 1996
Annual Report on Form 10-K for additional information relating to the
Partnership's financial statements.


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

      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. It
commenced operations in October 1988, and acquired the three real estate
investments it currently owns prior to the end of 1989. It intends to dispose of
its investments within nine years of their acquisition, and then liquidate.


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

      Effective January 1, 1996, the South Bay/CRIP 3 Associates joint venture
was restructured and the venture partner's ownership interest was assigned 99%
to the Partnership, and 1% to an affiliate of the Partnership. Accordingly, as
of this date, the investment is being accounted for as a wholly-owned property.
The carrying value of the joint venture investment at conversion ($4,180,704)
was allocated to land, building and improvements, and other net operating
assets.

      The following is a summary of the Partnership's two investments in 
wholly-owned property:
<TABLE>
<CAPTION>
 
 
                                    June 30, 1997       December 31, 1996
                                    --------------      ------------------
<S>                                  <C>                <C>
Land                               $   5,771,144        $     5,771,144
Building and improvements              9,601,263              9,601,263
Accumulated depreciation              (1,939,185)            (1,758,213)
Investment valuation allowance        (2,400,000)            (2,400,000)
Deferred costs, net                      403,177                445,638
Other net assets                         134,309                129,395
                                     -----------            -----------
Net carrying value                 $  11,570,708        $    11,789,227
                                     ===========            ===========
</TABLE>

      The net carrying value at June 30, 1997 was comprised of Brea West and
South Bay at $7,398,696 and $4,172,012, respectively.
<PAGE>
 
NOTE 3 - REAL ESTATE JOINT VENTURES
-----------------------------------

  The following summarized financial information relates to the Shasta Way joint
venture:
<TABLE>
<CAPTION>
 
                                        Assets and Liabilities
                                        ----------------------
 
                                  June 30, 1997  December 31, 1996
                                ---------------  -----------------
<S>                               <C>            <C>
Assets
 Real property, at cost less
  accumulated depreciation of
  $1,921,079 and $1,709,771          $7,777,304         $7,988,613
 Other                                  263,083            515,758
                                     ----------         ----------
                                      8,040,387          8,504,371
 
Liabilities                              67,650             74,585
                                     ----------         ----------
Net assets                           $7,972,737         $8,429,786
                                     ==========         ==========
 
<CAPTION> 
 
                                         Results of Operations
                                         ---------------------

                                       Six Months Ended June 30,
                                        1997               1996
                                     ----------         ----------
<S>                                  <C>                <C>
Revenue
 Rental income                       $  592,768         $  619,401
 Other                                    2,286                994
                                     ----------         ----------
                                        595,054            620,395
                                     ----------         ----------
 
Expenses
 Depreciation and amortization          230,392            230,129
 Operating expenses                      99,710             97,370
                                     ----------         ----------
                                        330,102            327,499
                                     ----------         ----------
 Net income                          $  264,952         $  292,896
                                     ==========         ==========
</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>
 
NOTE 4 - SUBSEQUENT EVENTS
--------------------------

      Distributions of cash from operations relating to the quarter ended June
30, 1997 were made on July 24, 1997 in the amount of $453,703 ($16.25 per
limited partnership unit).

      On July 22, 1997, the Partnership sold the South Bay property for cash in
an amount which exceeded the carrying value of the investment. This transaction
will be accounted for in the third quarter of 1997.
<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.

      At June 30, 1997, the Partnership had $2,415,824 in cash, cash
equivalents, and short-term investments, of which $453,703 was used for cash
distributions to partners on July 24, 1997; 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 short-
term investments. Distributions of cash from operations relating to the first
two quarters of 1996 were made at the annualized rate of 6.0% on a capital
contribution of $1,000 per unit. The annualized distribution rate for the first
two quarters of 1997 was 6.5%. The increase in the distribution rate is the
result of increased cash flow from Shasta Way.

      The carrying value of real estate investments in the financial statements
at June 30, 1997 is at depreciated cost, or if the investment's carrying value
is determined not to be recoverable through expected undiscounted future cash
flows, the carrying value is reduced to estimated fair market value. The fair
market value of such investments is further reduced by the estimated costs of
sale for properties held for sale. Carrying value may be greater or less than
current appraised value. At June 30, 1997, the aggregate appraised value of the
Partnership's investments was approximately $3,100,000 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 by the Partnership's
advisor and independent appraisers. Because of the subjectivity inherent in the
valuation process, the current appraised value may differ significantly from
that which could be realized if the real estate were actually offered for sale
in the marketplace.

Results of Operations

      Form of Real Estate Investments

      The Brea West and South Bay investments are wholly-owned properties. The
South Bay investment was structured as a joint venture with a real estate
management/development firm. Effective January 1, 1996, however, the venture was
restructured and the venture partner's ownership interest was assigned to the
Partnership and to an affiliate of the Partnership. Accordingly, as of that
date, this investment has been accounted for as 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%.
<PAGE>
 
      Operating Factors

      The South Bay property is 100% leased to a single tenant through
September, 2001. During 1994, the managing general partner determined that the
Partnership will likely not recover the carrying value of this investment over
the projected holding period. Accordingly, the carrying value was reduced to
estimated net realizable value, with a charge to operations of $2,400,000.

      On July 22, 1997, the tenant at South Bay exercised the option under its
lease and purchased the building for a price which exceeded the Partnership's
carrying value. This transaction will be accounted for in the third quarter of
1997.

      The Brea West and the Shasta Way properties are also 100% leased to single
tenants under long-term leases.

      Investment Results

      Interest earned on cash equivalents and short-term investments for the
first two quarters of 1997 increased by approximately $5,000, or 10%, as
compared to the same period in 1996 primarily due to higher short-term yields.

      Total real estate operations decreased by approximately $23,000, or 4%,
for the first six months of 1997 as compared to the comparable period of 1996,
primarily due to lower income as a result of non-recurring prior-year expense
reimbursement settlements at Shasta Way.

      Net income decreased by approximately $32,000 between the first six months
of 1996 and 1997, while cash provided by operations increased by approximately
$70,000. The difference is primarily due to the timing of cash distributions
from Shasta Way.

      Portfolio Expenses

      General and administrative expenses primarily consist of real estate
appraisal, legal, printing, accounting and servicing agent fees. These expenses
increased approximately $8,000, or 15% between the first six months of 1996 and
1997, primarily due to an increase in accounting fees, partially offset by a
decrease in 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 increased between
the two six-month periods due to the increase in distributable cash flow.
<PAGE>
 
                       COPLEY REALTY INCOME PARTNERS 3;
                             A LIMITED PARTNERSHIP

                                   FORM 10-Q

                        FOR QUARTER ENDED JUNE 30, 1997

                                    PART II

                               OTHER INFORMATION



Item 6.   Exhibits and Reports on Form 8-K

          a.   Exhibits:   None.

          b.   Reports on Form 8-K:  No Current Reports on Form 8-K were filed
               during the quarter ended June 30, 1997.
<PAGE>
 
                                  SIGNATURES
                                  ----------



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



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


August 12, 1997
                              /s/ James J. Finnegan
                              -------------------------------
                                James J. Finnegan
                                Managing Director and General Counsel
                                of Managing General Partner,
                                Third Income Corp.



August 12, 1997
                              /s/ Karin J. Lagerlund
                              --------------------------------
                                Karin J. Lagerlund
                                Principal Financial and Accounting
                                Officer of Managing General Partner,
                                Third Income Corp.