<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 September 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 SEPTEMBER 30, 1999


                                    PART I

                             FINANCIAL INFORMATION

                                       2
<PAGE>

COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

BALANCE SHEETS

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

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

Cash and cash equivalents                     2,325,325            2,163,411
                                             ----------          -----------

                                             $2,325,325          $14,006,600
                                             ==========          ===========

Liabilities and Partners' Capital

Accounts payable                             $   47,342          $    52,798
Accrued management fee                           68,923               35,897
Deferred disposition fee                              -               29,250
                                             ----------          -----------
  Total liabilities                             116,265              117,945
                                             ----------          -----------

Partners' capital (deficit):

  Limited partners ($242 and $800 per
     unit, respectively; 100,000 units
     authorized, 27,641 units issued
     and outstanding)                         2,219,785           13,936,821
  General partners                              (10,725)             (48,166)
                                             ----------          -----------
Total partners' capital                       2,209,060           13,888,655
                                             ----------          -----------

                                             $2,325,325          $14,006,600
                                             ==========          ===========
</TABLE>

           (See accompanying notes to unaudited financial statements)

                                       3
<PAGE>

COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

STATEMENTS OF OPERATIONS (Unaudited)

<TABLE>
<CAPTION>
                                        Three Months Ended   Nine Months Ended   Three Months Ended    Nine Months Ended
                                        September 30, 1999  September 30, 1999   September 30, 1998   September 30, 1998
                                        ------------------  -------------------  -------------------  -------------------
<S>                                     <C>                 <C>                  <C>                  <C>
Investment Activity

Property rentals                                $        -          $  479,466             $247,318            $ 740,867
Property operating expenses                              -             (56,390)             (25,951)             (78,424)
Depreciation and amortization                            -             (80,126)             (78,813)            (236,718)
                                                ----------          ----------             --------            ---------
                                                         -             342,950              142,554              425,725

Joint venture earnings                              59,240             284,292               91,379              274,599
                                                ----------          ----------             --------            ---------
  Total real estate operations                      59,240             627,242              233,933              700,324

Gain on sale of property                                 -           1,118,340                    -                    -
Gain on sale of joint venture                    2,710,344           2,710,344                    -                    -
                                                ----------          ----------             --------            ---------
  Total real estate activity                     2,769,584           4,455,926              233,933              700,324

Interest on cash equivalents
  and short-term investments                        64,185             109,057               28,224               84,039
Reversal of accrued disposition fees               285,150             285,150                    -                    -
                                                ----------          ----------             --------            ---------
  Total investment activity                      3,118,919           4,850,133              262,157              784,363
                                                ----------          ----------             --------            ---------

Portfolio Expenses

Management fee                                      68,923             124,150               35,897              107,692
General and administrative                          19,115              60,534               20,239               67,168
                                                ----------          ----------             --------            ---------
                                                    88,038             184,684               56,136              174,860
                                                ----------          ----------             --------            ---------

Net Income                                      $3,030,881          $4,665,449             $206,021            $ 609,503
                                                ==========          ==========             ========            =========
</TABLE>

                                       4
<PAGE>

COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

<TABLE>
<S>                                        <C>              <C>             <C>              <C>
Net income per limited partnership
  unit                                     $  108.56        $  167.10       $   7.38         $   21.83
                                           =========        =========       ========         =========

Cash distributions per limited
  partnership unit                         $  568.00        $  591.00       $  13.00         $   40.00
                                           =========        =========       ========         =========

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)

                                       5
<PAGE>

COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(Unaudited)

<TABLE>
<CAPTION>
                           Three Months Ended        Nine Months Ended        Three Months Ended        Nine Months Ended
                           September 30, 1999        September 30, 1999       September 30, 1998       September 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              $(38,241)  $ 14,919,300   $(48,166)  $ 13,936,821   $(44,865)  $14,263,516   $(41,362)  $14,610,376

Cash distributions        (2,792)   (15,700,088)    (9,213)   (16,335,831)    (3,630)     (359,333)   (11,168)   (1,105,640)

Net income                30,308      3,000,573     46,654      4,618,795      2,060       203,961      6,095       603,408
                        --------   ------------   --------   ------------   --------   -----------   --------   -----------

Balance at end of
period                  $(10,725)  $  2,219,785   $(10,725)  $  2,219,785   $(46,435)  $14,108,144   $(46,435)  $14,108,144
                        ========   ============   ========   ============   ========   ===========   ========   ===========
</TABLE>

          (See accompanying notes to unaudited financial statements)

                                       6
<PAGE>

COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

SUMMARIZED STATEMENTS OF CASH FLOWS

(Unaudited)

<TABLE>
<CAPTION>
                                               Nine Months Ended September 30,
                                              --------------------------------
                                                   1999             1998
                                              ----------------  --------------
<S>                                           <C>               <C>

Net cash provided by operating activities       $    947,629      $ 1,030,807
                                                ------------      -----------

Cash flows from investing activities:
  Net proceeds from sale of property              15,588,579                -
  Disposition fee incurred for Brea West sale        255,900                -
  Reversal of deferred disposition fees             (285,150)               -
  Decrease (increase) in short-term
     investments, net                                      -          196,364
                                                ------------      -----------
     Net cash provided by
       investing activities                       15,559,329          196,364
                                                ------------      -----------

Cash flows from financing activity:
  Distributions to partners                      (16,345,044)      (1,116,808)
                                                ------------      -----------

Net increase in cash
  and cash equivalents                               161,914          110,363

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

  End of period                                 $  2,325,325      $ 2,211,996
                                                ============      ===========
</TABLE>

          (See accompanying notes to unaudited financial statements)

                                       7
<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 September 30, 1999 and December 31, 1998 and the
results of its operations, its cash flows and partners' capital (deficit) for
the three and nine month periods ended September 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 its real
estate investments prior to 1989. The Partnership sold its last remaining
investment in August 1999 and, therefore, intends to liquidate and dissolve in
2000.

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

     On June 25, 1999, the Partnership sold the Brea West building for a gross
sale price of $8,530,000. 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. This fee was subsequently reversed in
conjunction with the sale of the Partnership's last remaining investment (see
Note 3) since the limited partners did not receive a return of their capital
contributions from the sale of the Partnership's investments.

<TABLE>
<CAPTION>
                             September 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>

                                       8
<PAGE>

COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

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

     On August 27, 1999, the Shasta Way joint venture investment, in which the
Partnership and an affiliate own a 58% and 42% interest, respectively, sold its
property to an unaffiliated third party for gross proceeds of $13,057,000, of
which the Partnership's share was $7,573,060. The Partnership received its 58%
share of the net proceeds, $7,463,388 after closing costs, and recognized a gain
of $2,710,344 ($97.07 per limited partnership unit) on the sale. On September
22, 1999 the Partnership made a capital distribution of $7,297,224 ($264.00 per
limited partnership unit) from the proceeds of the sale.

<TABLE>
<CAPTION>
                                        Assets and Liabilities
                                        ----------------------
                                  September 30, 1999   December 31, 1998
                                  ------------------   -----------------
<S>                               <C>                  <C>
Assets
 Real property, at cost less
  accumulated depreciation of
  $1,084,000                           $        -          $7,146,195
 Other                                          -             153,318
                                       ----------          ----------
                                                -           7,299,513

Liabilities                                     -              70,400
                                       ----------          ----------
Net assets                             $        -          $7,229,113
                                       ==========          ==========

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

                                  January 1, 1999      Nine Months Ended
                                      through            September 30,
                                  August 27, 1999             1998
                                  ---------------      -----------------
<S>                               <C>                  <C>
Revenue
 Rental income                      $  997,110            $  944,650
 Other income                            3,335                     -
                                    ----------            ----------
                                     1,000,445               944,650
                                    ----------            ----------

Expenses
 Operating expenses                    219,783               124,319
 Depreciation and amortization         308,955               345,588
                                    ----------            ----------
                                       528,738               469,907
                                    ----------            ----------

Net income                          $  471,707            $  474,743
                                    ==========            ==========
</TABLE>

                                       9
<PAGE>

COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

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

     Distributions of cash from operations relating to the quarter ended
September 30, 1999 were made on October 28, 1999 in the aggregate amount of
$238,439 ($8.54 per limited partnership unit). In addition, distributions from
operating cash flows previously held in reserves were made in the aggregate
amount of $458,450 ($16.42 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.

     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.

     On July 29, 1999, the Partnership made a capital distribution of $8,126,454
($294 per limited partnership unit) from the sale of the Brea West property.
This distribution reduced the adjusted capital contribution to $506 per unit.

     On September 22, 1999, the Partnership made a capital distribution of
$7,297,224 ($264.00 per limited partnership unit) from the sale proceeds of the
Shasta Way property. This distribution reduced the adjusted capital contribution
to $242 per unit.

     At September 30, 1999, the Partnership had $2,325,325 in cash and cash
equivalents of which $696,889 was used for cash distributions to the partners on
October 28, 1999; 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 sales of Brea West and Shasta Way and for working capital reserves.
Distributions of cash from operations relating to the first three quarters of
1998 were made at the annualized rate of 6.5% based on the adjusted capital
contribution of $800 per unit. Cash distributions from operations related to the
first two quarters of 1999 were made at the annualized rate of 5.0% on the
adjusted capital contribution of $800 per unit. Cash distributions related to
the third quarter of 1999 were made at an annualized rate of 6.0% on the
weighted average capital contribution of $569.65 per unit. The increase in the
distribution rate was due to higher cash receipts from the Shasta Way joint
venture due to a later than anticipated sale date.

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.

                                      11
<PAGE>

COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

Year 2000 Readiness Disclosure - (Continued)
--------------------------------------------

     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.

     .    AEW Capital Management successfully participated in industry-wide
          testing in August 1999.

     .    AEW Capital Management believes it is ready for Year 2000. AEW Capital
          Management has advised the Partnership that being ready means that AEW
          Capital Management has tested its internal mission critical systems
          and software applications, and based upon testing conducted, AEW
          Capital Management believes that such systems and applications are
          prepared to process dates correctly through the Year 2000.

     Based upon these assurances, the Partnership has determined that it is not
necessary for it to develop a Year 2000 contingency plan.

     Because the Partnership has sold all of its real property investments, the
Partnership no longer relies on joint venture partners and/or property managers
to supply financial and other data with respect to its real properties with the
exception of year-end audited statements. Consequently, the Partnership does not
have any material provider of data other than AEW Capital Management.

     The Partnership is 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.

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

     Investment Results

     Real estate operations were $59,240 and $627,242 for the three and nine
month periods ended September 30, 1999, respectively, compared to $233,933 and
$700,324 for the comparable periods ended September 30, 1998. Real estate
operations decreased $174,693 and $73,082 between the three and nine month
periods, respectively. These decreases are due to both the sale of Brea West in
June 1999 and the sale of Shasta Way in August 1999. The overall nine month
decrease, however, was partially offset by a rental increase at Shasta Way in
June 1998.
<PAGE>

COPLEY REALTY INCOME PARTNERS 3;
A LIMITED PARTNERSHIP

     Interest on cash and cash equivalents increased by approximately $36,000
and $25,000 between the three and nine month periods ended September 30, 1999,
compared with the same periods in 1998. The increases are primarily attributable
to higher average investment balances from the sales proceeds of Brea West and
Shasta Way in 1999 prior to the distribution of such proceeds.

     Portfolio Expenses

     General and administrative expenses primarily consist of real estate
appraisal, legal, printing, accounting and servicing agent fees. These expenses
decreased by $1,124 and $6,634 between the comparable three and nine month
periods ending September 30, 1999 and 1998. The decreases are primarily due to
lower overall expenses due to the sales during 1999 of the Partnership's last
two investments.

     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 by $33,026
and $16,458, respectively, between the comparable three and nine month periods
ending September 30, 1999 and 1998. The increases are a result of a special
distribution from operating cash flows previously held in reserves in the third
quarter of 1999 which were offset by lower fees generated by the decrease in
regular operating distributions during the nine month period in 1999 as a result
of less distributable operating cash due to the sales of the Partnership's last
two investments.

                                      13
<PAGE>

                       COPLEY REALTY INCOME PARTNERS 3;
                             A LIMITED PARTNERSHIP

                                   FORM 10-Q

                     FOR QUARTER ENDED SEPTEMBER 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: During the quarter ended September 30, 1999
               a current report on Form 8-K was filed on September 10, 1999
               reporting on Item No. 2 (Acquisition or Disposition of Assets)
               and Item No. 7 (Financial Statements and Exhibits), relating in
               both cases to the August 27, 1999 sale of real property by Hewson
               Shasta Way Associates.

                                      14
<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)

November 11, 1999
                                   /s/ Alison Husid Cutler
                                   -------------------------------
                                      Alison Husid Cutler
                                      President, Chief Executive Officer and
                                      Director of Managing General Partner,
                                      Third Income Corp.

November 11, 1999
                                   /s/ Karin J. Lagerlund
                                   --------------------------------
                                      Karin J. Lagerlund
                                      Treasurer and Principal Financial and
                                      Accounting Officer of Managing General
                                      Partner, Third Income Corp.

                                      15