<PAGE>

                                   FORM 10-Q

               UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549

(Mark One)
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     For the quarterly period ended     June 30, 2001
                                    ---------------------------------

                                      OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from             to
                                    -----------    -------------

                        Commission file number 0-20253

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
            (Exact name of registrant as specified in its charter)

            Wisconsin                                     39-1660958
     (State or other jurisdiction of                   (I.R.S. Employer
      incorporation or organization)                  Identification No.)

           101 W. 11th St., Suite 1110, Kansas City, Missouri 64105
         (Address of principal executive offices, including zip code)

                                (816) 421-7444
             (Registrant's telephone number, including area code)


     Securities registered pursuant to Section 12(b) of the Act: None

     Securities registered pursuant to Section 12(g) of the Act: Limited
     Partnership Interests

     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 12 months (or 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>

                        PART I - FINANCIAL INFORMATION
                         Item 1. Financial Statements

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                                BALANCE SHEETS

                      June 30, 2001 and December 31, 2000
                      -----------------------------------

                                    ASSETS

<TABLE>
<CAPTION>
                                                              (Unaudited)
                                                                June 30,          December 31,
                                                                  2001                2000
                                                               ----------         ------------
<S>                                                           <C>                 <C>
INVESTMENT PROPERTIES:  (Note 3)

        Land                                                   $1,553,680           $1,553,680
        Buildings and improvements                              2,249,959            2,249,959
        Accumulated depreciation                                 (876,631)            (843,984)
                                                               ----------           ----------
             Net investment properties                          2,927,008            2,959,655
                                                               ----------           ----------
OTHER ASSETS:

        Cash and cash equivalents                                 288,563              251,528
        Cash held in Indemnification Trust (Note 8)               348,915              339,740
        Rents and other receivables                                 1,610               17,982
        Property Tax Escrow                                         9,541                    0
        Deferred rent receivable                                   16,580               17,420
        Deferred fees                                               8,893               16,167
        Prepaid assets                                              1,072                2,681
        Note Receivable (Note 3)                                  135,750                    0
                                                               ----------           ----------
             Total other assets                                   810,924              645,518
                                                               ----------           ----------

             Total assets                                      $3,737,932           $3,605,173
                                                               ==========           ==========
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       2
<PAGE>

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                       LIABILITIES AND PARTNERS' CAPITAL

                      June 30, 2001 and December 31, 2000

<TABLE>
<CAPTION>
                                                                   (Unaudited)
                                                                     June 30,         December 31,
                                                                       2001              2000
                                                                  -------------      -------------
<S>                                                               <C>                <C>
LIABILITIES:

   Accounts payable and accrued expenses                          $      19,960      $      23,250
   Due to current General Partner                                           822                340
   Security deposits                                                     16,635             16,635
   Property taxes payable                                                 9,541                  0
   Unearned rental income                                                20,437             27,254
                                                                  -------------      -------------
     Total liabilities                                                   67,395             67,479
                                                                  -------------      -------------
CONTINGENT LIABILITIES:  (Note 7)

PARTNERS' CAPITAL:  (Notes 1, 4 and 9)

Current General Partner
   Cumulative net income                                                21,560              18,921
   Cumulative cash distributions                                       (10,685)             (9,630)
                                                                  ------------       -------------
                                                                        10,875               9,291
                                                                  ------------       -------------
Limited Partners (17,102.52 interests outstanding)
   Capital contributions, net of offering costs                     14,408,872          14,408,872
   Cumulative net income                                               379,265             118,006
   Cumulative cash distributions                                   (10,862,984)        (10,732,984)
   Reallocation of former general partners' deficit capital           (265,491)           (265,491)
                                                                  ------------       -------------
                                                                     3,659,662           3,528,403
                                                                  ------------       -------------

          Total partners' capital                                    3,670,537           3,537,694
                                                                  ------------       -------------

          Total liabilities and partners' capital                 $  3,737,932       $   3,605,173
                                                                  ============       =============
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       3
<PAGE>

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                             STATEMENTS OF INCOME

                                 (Unaudited)
                                  -----------

<TABLE>
<CAPTION>
                                                              Three Months Ended            Six Months Ended
                                                            ----------------------      -------------------------
                                                                    June 30,                     June 30,
                                                                    --------                     --------
                                                               2001         2000           2001           2000
                                                            ---------     --------      ---------       ---------
<S>                                                         <C>           <C>           <C>             <C>
REVENUES:
     Rental income                                          $ 87,259      $101,925       $191,197        $204,410
     Interest income                                           5,589         7,135         13,933          13,284
     Lease termination fee  (Note 3)                         181,000             0        181,000               0
     Other income                                                 32           200             32             200
     Recovery of amounts previously written off                1,610         1,073          4,829           2,683
                                                            --------      --------       --------        --------

                                                             275,490       110,333        390,991         220,577
                                                            --------      --------       --------        --------
EXPENSES:
     Partnership management fees   (Note 6)                   17,345        16,793         34,243          33,323
     Restoration fees   (Note 6)                                  64            43            193             107
     Insurance                                                   804           733          1,609           1,462
     General and administrative                               10,678        14,316         16,406          19,654
     Advisory Board fees and expenses                          1,313         2,196          3,337           6,740
     Professional services                                    16,564        19,229         31,384          35,426
     Depreciation                                             16,323        16,323         32,647          32,647
     Amortization                                              6,827           447          7,274             893
                                                            --------      --------       --------        --------

                                                              69,918        70,080        127,093         130,252
                                                            --------      --------       --------        --------

NET INCOME                                                  $205,572      $ 40,253       $263,898        $ 90,325
                                                            ========      ========       ========        ========

NET INCOME - GENERAL PARTNER                                $  2,056      $    403       $  2,639        $    903

NET INCOME - LIMITED PARTNERS                                203,516        39,850        261,259          89,422
                                                            --------      --------       --------        --------
                                                            $205,572      $ 40,253       $205,572        $ 90,325
                                                            ========      ========       ========        ========

NET INCOME PER LIMITED PARTNERSHIP INTEREST, based on
17,102.52 interests outstanding                             $  11.90      $   2.33       $  15.28        $   5.23
                                                            ========      ========       ========        ========
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       4
<PAGE>

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                           STATEMENTS OF CASH FLOWS

                                  (Unaudited)
                                  -----------

<TABLE>
<CAPTION>
                                                                   Six Months Ended June 30,
                                                                  --------------------------
                                                                    2001             2000
                                                                  ---------        ---------
<S>                                                               <C>              <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
     Net income                                                   $ 263,898        $  90,325
     Adjustments to reconcile net income to net cash from
        operating activities -
          Depreciation and amortization                              39,921           33,540
          Recovery of amounts previously written off                 (4,829)          (2,683)
          Interest applied to Indemnification Trust Account          (9,175)          (8,966)
          Lease termination fee                                    (181,000)               0
          Decrease in rents, other receivables & prepaid assets      17,981           16,594
          (Increase)/Decrease in property tax escrow                 (9,541)               0
          Decrease in deferred rent receivable                          840              840
          Increase in accounts payable and accrued expenses           6,251            8,032
          Increase in due to General Partner                            482               91
          (Decrease) in unearned rental income                       (6,817)          (3,000)
                                                                  ---------        ---------


               Net cash provided from operating activities          118,011          134,773
                                                                  ---------        ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Note receivable                                                 45,250                0
     Recoveries from former affiliates                                4,829            2,683
                                                                  ---------        ---------

               Net cash from investing activities                    50,079            2,683
                                                                  ---------        ---------

CASH FLOWS (USED IN) FINANCING ACTIVITIES:
     Cash distributions to General Partner                           (1,055)            (361)
     Cash distributions to Limited Partners                        (130,000)        (115,000)
                                                                  ---------        ---------


               Net cash (used in) financing activities             (131,055)        (115,361)
                                                                  ---------        ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS                            37,035           22,095
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                    251,528          257,312
                                                                  ---------        ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                        $ 288,563        $ 279,407
                                                                  =========        =========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       5
<PAGE>

                 DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

These unaudited interim financial statements should be read in conjunction with
DiVall Income Properties 3 Limited Partnership's (the "Partnership") 2000 annual
audited financial statements within Form 10-K.

These unaudited financial statements include all adjustments which are, in the
opinion of management, necessary to present a fair statement of financial
position as of June 30, 2001, and the results of operations for the three and
six-month periods ended June 30, 2001, and 2000, and cash flows for the
six-month periods ended June 30, 2001 and 2000. Results of operations for the
periods are not necessarily indicative of the results to be expected for the
full year.


1.   ORGANIZATION AND BASIS OF ACCOUNTING:
     ------------------------------------

The Partnership was formed on December 12, 1989, pursuant to the Uniform Limited
Partnership Act of the State of Wisconsin. The initial capital which was
contributed during 1989, consisted of $300, representing aggregate capital
contributions of $200 by the former general partners and $100 by the Initial
Limited Partner.

The Partnership initially offered two classes of Limited Partnership interests
for sale: Distribution interests ("D-interests") and Retention interests
("R-interests"). Each class was offered at a price (before volume discounts) of
$1,000 per interest. The Partnership offered the two classes of interests
simultaneously up to an aggregate of 25,000 interests.

The minimum offering requirements for the D-interests were met and escrow
subscription funds were released to the Partnership as of July 13, 1990. The
offering closed on April 23, 1992, at which point 17,102.52 D-interests had been
issued, resulting in aggregate proceeds, net of discounts and offering costs, of
$14,408,872.

The minimum offering requirements for R-interests were not met. During 1991,
680.9 R-interests were converted to D-interests and were reflected as
Partnership issuances in 1991.

The Partnership is currently engaged in the business of owning and operating its
investment portfolio (the "Properties") of commercial real estate. The
Properties are leased on a triple net basis to, and operated by, franchisers or
franchisees of national, regional and local retail chains under long-term
leases. The lessees consist of fast-food, family style, and casual/theme
restaurants. At June 30, 2001, the Partnership owned five (5) properties and
specialty leasehold improvements for use in all five (5) of the Properties.

Rental revenue from investment properties is recognized on the straight-line
basis over the life of the respective lease. Percentage rents are recorded when
the tenant has reached the breakpoint stipulated in its lease.

                                       6
<PAGE>

The Partnership considers its operations to be in only one segment and therefore
no segment disclosure is made.

Depreciation of the properties is provided on a straight-line basis over 31.5
years, which is the estimated useful lives of the buildings and improvements.

Deferred charges consist of leasing commissions paid when properties are leased
and upon the negotiated extension of a lease. Leasing commissions are
capitalized and amortized over the life of the lease.

Real estate taxes on the Partnership's investment properties are the
responsibility of the tenant. However, when a tenant fails to make the required
tax payments or when a property becomes vacant, the Partnership makes the
appropriate payment to avoid possible foreclosure of the property. Taxes are
accrued in the period for which the liability is incurred.

Cash and cash equivalents include cash on deposit in financial institutions and
highly liquid temporary investments with initial maturities of 90 days or less.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities (and disclosure of
contingent assets and liabilities) at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

The Partnership follows Statement of Financial Accounting Standards No.121
("SFAS 121"), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, which requires that all long-lived assets
be reviewed for impairment in value whenever changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.

The Partnership will be dissolved on December 1, 2015, or earlier upon the prior
occurrence of any of the following events: (a) the disposition of all interests
in real estate and other Partnership assets; (b) the decision by Majority Vote
(as defined in the Amended Agreement of Limited Partnership ("Partnership
Agreement")) of the Limited Partners to dissolve the Partnership or to compel
the sale of all or substantially all of the Partnership's assets; (c) the
failure to elect a successor General Partner within six months after removal of
the last remaining General Partner; or (d) the date of the death or the
effective date of dissolution, removal, withdrawal, bankruptcy, or incompetency
of the last remaining General Partner, unless the Partnership is continued by
vote of all Limited Partners and a replacement General Partner is previously
elected by a majority of the Limited Partners. During the Second Quarter of
1998, the General Partner received the consent of the Limited Partners to
liquidate the Partnership's assets and dissolve the Partnership. However, a
buyer was not found for the Partnership's assets, and no current liquidation or
dissolution plans are in effect. Management plans to continue normal operations
for the Partnership for the foreseeable future.

No provision for Federal income taxes has been made, as any liability for such
taxes would be that of the individual partners rather than the Partnership. At
December 31, 2000, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$3,224,000.

                                       7
<PAGE>

2.   REGULATORY INVESTIGATION:
     ------------------------

A preliminary investigation during 1992 by the Office of the Commissioner of
Securities for the State of Wisconsin and the Securities and Exchange Commission
(the "Investigation") revealed that during at least the three years ended
December 31, 1992, the former general partners of the Partnership, Gary J.
DiVall ("DiVall") and Paul E. Magnuson ("Magnuson") had transferred substantial
cash assets of the Partnership and two affiliated publicly registered
partnerships, DiVall Insured Income Fund Limited Partnership ("DiVall 1")
(dissolved effective December 31, 1998) and DiVall Insured Income Properties 2
Limited Partnership ("DiVall 2") (collectively the "Partnerships") to various
other entities previously sponsored by or otherwise affiliated with DiVall and
Magnuson. The unauthorized transfers were in violation of the respective
Partnership Agreements and resulted, in part, from material weaknesses in the
internal control system of the Partnerships.

Subsequent to discovery, and in response to the regulatory inquiries, a
third-party Permanent Manager, The Provo Group, Inc. ("TPG"), was appointed
(effective February 8, 1993) to assume responsibility for daily operations and
assets of the Partnerships as well as to develop and execute a plan of
restoration for the Partnerships. Effective May 26, 1993, the Limited Partners,
by written consent of a majority of interests, elected the Permanent Manager,
TPG, as General Partner. TPG terminated the former general partners by accepting
their tendered resignations.

In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships. At that time, an allowance was established against
amounts due from former general partners and their affiliates reflecting the
estimated $3 million receivable. This net receivable was allocated among the
Partnerships based on each Partnership's pro rata share of the total
misappropriation. Through June 30, 2001, $5,797,000 of recoveries have been
received which exceeded the original estimate of $3 million. As a result, since
1996, the Partnership has recognized $1,302,000 as income, which represents its
share of the excess recovery. The current General Partner continues to pursue
recoveries of the misappropriated funds, however no further significant
recoveries are anticipated.

3.   INVESTMENT PROPERTIES:
     ---------------------

As of June 30, 2001, the Partnership owned four (4) fast-food restaurants
comprised of: one (1) Hardee's restaurant, one (1) Applebee's restaurant, and
two (2) Denny's restaurants; and one (1) vacant property, which was previously
operated as a Hardee's restaurant. The five (5) properties are located in three
(3) states.

The Denny's property in Englewood, Colorado is located on a parcel of land where
the Partnership has entered into a long-term ground lease. The lease payments
are made by the tenant of the property.

During March 2001, Hardee's Food Systems, Inc. notified Management of its intent
to close its restaurant in Oak Creek, Wisconsin. The lease on the property was
not set to expire until 2010. In the Second Quarter of 2001, a lease termination
agreement was executed and the tenant ceased the payment of rent as of April 30,
2001. Hardee's Food Systems will pay a lease termination fee of approximately
two (2) years rent or $181,000. The payments are scheduled to be received in
four (4) equal installments of $45,250. The first payment was received in May
2001, and the subsequent installments, which are

                                       8
<PAGE>

reflected as Note receivable on the balance sheet, are scheduled to be received
in August 2001, November 2001 and February 2002. Management is actively
marketing new leasing for the vacant property.

The total cost of the investment properties includes the original purchase price
plus acquisition fees and other capitalized costs paid to an affiliate of the
former general partners. According to the Partnership Agreement, the former
general partners were to commit 82% of the original offering proceeds to the
acquisition of investment properties. Upon full investment of the net proceeds
of the offering, approximately 57% of the original offering proceeds was
invested in the Partnership's properties.

The current General Partner receives a fee for managing the Partnership equal to
4% of gross receipts, with a maximum reimbursement for office rent and related
overhead of $25,000 between the three original affiliated Partnerships as
provided in the Permanent Manager Agreement ("PMA"). On May 26, 1993, the
Permanent Manager, TPG, replaced the former general partners as the new General
Partner, as provided for in an amendment to the Partnership Agreement dated May
26, 1993. Pursuant to amendments to the Partnership Agreement, TPG continues to
provide management services for the same fee structure as provided in the PMA
mentioned above. Effective March 1, 2001, the minimum management fee and the
maximum reimbursement for office rent and overhead increased by 3.4%
representing the allowable annual Consumer Price Index adjustment per the PMA.
For purposes of computing the 4% overall fee, gross receipts includes amounts
recovered in connection with the misappropriation of assets by the former
general partners and their affiliates. TPG has received fees from the
Partnership totaling $88,561 to date on the amounts recovered, which has been
offset against the 4% minimum fee.

Several of the Partnership's property leases contain purchase option provisions
with stated purchase prices in excess of the original cost of the properties.
The current General Partner is unaware of any unfavorable purchase options in
relation to original cost.

4.   PARTNERSHIP AGREEMENT:
     ---------------------

The Partnership Agreement, prior to an amendment effective May 26, 1993,
provided that, for financial reporting and income tax purposes, net profits or
losses from operations were allocated 90% to the Limited Partners and 10% to the
former general partners. The Partnership Agreement also provided that Net Cash
Receipts, as defined, would be distributed 90% to the Limited Partners and 10%
to the former general partners, except that distributions to the former general
partners in excess of 1% in any calendar year would be subordinated to
distributions to the Limited Partners in an amount equal to their Original
Property Distribution Preference, as defined.

Net proceeds, as defined, were to be distributed as follows: (a) 1% to the
General Partners and 99% to the Limited Partners, until distributions to the
Limited Partners equal their Original Capital, as defined, plus their Original
Property Liquidation Preference, as defined, and (b) the remainder 90% to the
Limited Partners and 10% to the General Partners. Such distributions were to be
made as soon as practicable following the sale, financing or refinancing of an
original property.

On May 26, 1993, pursuant to the results of a solicitation of written consents
from the Limited Partners, the Partnership Agreement was amended to replace the
former general partners and amend various sections of the agreement. The former
general partners were replaced as General Partner, by The Provo Group,

                                       9
<PAGE>

Inc., an Illinois corporation. Under the terms of the amendment, net profits or
losses from operations are allocated 99% to the Limited Partners and 1% to the
current General Partner. The amendment also provided for distributions from Net
Cash Receipts to be made 99% to the Limited Partners and 1% to its current
General Partner. Pursuant to the amendments to the Partnership Agreement
effective June 30, 1994, distributions of Net Cash Receipts will not be made to
the General Partner unless and until each Limited Partner has received a
distribution from Net Cash Receipts in an amount equal to 10% per annum,
cumulative simple return on his or her Adjusted Original Capital, as defined,
from the Return Calculation Date, as defined, except to the extent needed by the
General Partner to pay its federal and state income taxes on the income
allocated to it attributable to such year. Distributions paid to the General
Partner are based on the estimated tax liability as a result of allocated
income. Subsequent to the filing of the General Partner's income tax returns, a
true-up of actual distributions is made. Net proceeds, as defined, were also
amended to be distributed 1% to the current General Partner and 99% to the
Limited Partners.

Additionally, as per the amendment of the Partnership Agreement dated May 26,
1993, the total compensation paid to all persons for the sale of the investment
properties shall be limited to a competitive real estate commission, not to
exceed 6% of the contract price for the sale of the property. The General
Partner may receive up to one-half of the competitive real estate commission,
not to exceed 3%, provided that the General Partner provides a substantial
amount of services in the sales effort. It is further provided that a portion of
the amount of such fees payable to the General Partner is subordinated to its
success at recovering the funds misappropriated by the former general partners.
(See Note 7.)

Effective June 1, 1993, the Partnership Agreement was amended to (i) change the
definition of "Distribution Quarter" to be consistent with calendar quarters,
and (ii) change the distribution provisions to subordinate the General Partner's
share of distributions from Net Cash Receipts and Net Proceeds, except to the
extent necessary for the General Partner to pay its federal and state income
taxes on Partnership income allocated to the General Partner. Because these
amendments do not adversely affect the rights of the Limited Partners, pursuant
to section 10.2 of the Partnership Agreement, the amendments were made by the
General Partner without a vote of the Limited Partners.

5.   LEASES:
     ------

Lease terms for the investment properties are 20 years from their inception. The
leases provide for minimum rents and additional rents based upon percentages of
gross sales in excess of specified breakpoints. The lessee is responsible for
occupancy costs such as maintenance, insurance, real estate taxes, and
utilities. Accordingly, these amounts are not reflected in the statements of
income, except in circumstances where, in management's opinion, the Partnership
will be required to pay such costs to preserve assets (i.e., payment of past-due
real estate taxes). Management has determined that the leases are properly
classified as operating leases; therefore, rental income is reported when earned
and the cost of the property, excluding the cost of the land, is depreciated
over its estimated useful life.

                                       10
<PAGE>

Aggregate minimum lease payments to be received under the leases for the
Partnership's properties are as follows:

            Year ending
            December 31,

                    2001                  $  350,713
                    2002                     321,380
                    2003                     321,380
                    2004                     321,380
                    2005                     321,380
            Thereafter                     1,524,531
                                          ----------

                                          $3,160,764
                                          ==========

Two (2) of the Partnership's properties are leased to a Denny's franchisee. Base
rent from these properties amounted to approximately 28% of total base rent in
2000.

Prior to May 1, 2001 two (2) of the Partnership's properties were leased to
Hardee's Food Systems, Inc. Base rent from these properties amounted to
approximately 44% of total base rents in 2000.

The original offering document required the Partnership to lease its properties
to a single tenant as long as the properties so leased do not constitute; in the
aggregate, more than 20% of the aggregate gross proceeds of the offering. Prior
to May 1, 2001, the Partnership leased two (2) of its properties to Hardee's
Food Systems, Inc., which constituted 21% of the aggregate gross proceeds in
2000.

6.   TRANSACTIONS WITH CURRENT GENERAL PARTNER:
     -----------------------------------------

Amounts paid to the current General Partner for the quarters ended June 30, 2001
and 2000, are as follow:

     Current General Partner                     Incurred as of   Incurred as of
     -----------------------
                                                 June 30, 2001    June 30, 2000
                                                 -------------    -------------

     Management fees                                   $34,243          $33,323
     Restoration fees                                      193              107
     Cash distribution                                   1,055              361
     Overhead allowance                                  2,778            2,697
     Reimbursement for out-of-pocket expenses            1,063            1,759
                                                       -------          -------
                                                       $39,332          $38,247
                                                       =======          =======

7.   CONTINGENT LIABILITIES:
     ----------------------

According to the Partnership Agreement, the current General Partner may receive
a disposition fee not to exceed 3% of the contract price of the sale of
investment properties. Fifty percent (50%) of all such disposition fees earned
by the current General Partner is to be in escrow until the aggregate amount of
recovery of the funds misappropriated from the Partnerships by the former
general partners is greater than

                                       11
<PAGE>

$4,500,000. Upon reaching such recovery level, full disposition fees will
thereafter be payable and fifty percent (50%) of the previously escrowed amounts
will be paid to the current General Partner. At such time as the recovery
exceeds $6,000,000 in the aggregate, the remaining escrowed disposition fees
shall be paid to the current General Partner. If such levels of recovery are not
achieved, the current General Partner will contribute the amounts in escrow
towards the recovery. In lieu of an escrow, 50% of all such disposition fees
have been paid directly to the restoration account and then distributed among
the three Partnerships. After surpassing the $4,500,000 recovery level during
March 1996, 50% of the amounts previously in escrow were refunded to the current
General Partner. The remaining amount allocated to the Partnerships may be owed
to the current General Partner if the $6,000,000 recovery level is met. As of
June 30, 2001, the Partnership may owe the current General Partner $18,862,
which is currently reflected as a recovery, if the $6,000,000 recovery level is
achieved, which is unlikely.


8.  PMA INDEMNIFICATION TRUST:
    -------------------------

The PMA provides that the Permanent Manager will be indemnified from any claims
or expenses arising out of or relating to the Permanent Manager serving in such
capacity or as substitute general partner, so long as such claims do not arise
from fraudulent or criminal misconduct by the Permanent Manager. The PMA
provides that the Partnership fund this indemnification obligation by
establishing a reserve of up to $250,000 of Partnership assets which would not
be subject to the claims of the Partnership's creditors. An Indemnification
Trust ("Trust") serving such purposes has been established at United Missouri
Bank, N.A. The Trust has been fully funded with Partnership assets as of June
30, 2001. Funds are invested in U.S. Treasury securities. In addition, interest
totaling $98,915 has been credited to the Trust as of June 30, 2001. The rights
of the Permanent Manager to the Trust shall be terminated upon the earliest to
occur of the following events: (i) the written release by the Permanent Manager
of any and all interest in the Trust; (ii) the expiration of the longest statute
of limitations relating to a potential claim which might be brought against the
Permanent Manager and which is subject to indemnification; or (iii) a
determination by a court of competent jurisdiction that the Permanent Manager
shall have no liability to any person with respect to a claim which is subject
to indemnification under the PMA. At such time as the indemnity provisions
expire or the full indemnity is paid, any funds remaining in the Trust will
revert back to the general funds of the Partnership.

9.  FORMER GENERAL PARTNERS' CAPITAL ACCOUNTS:
    -----------------------------------------

The capital account balance of the former general partners as of May 26, 1993,
the date of their removal as general partners pursuant to the results of a
solicitation of written consents from the Limited Partners, was a deficit of
$265,491. At December 31, 1993, the former general partners' deficit capital
account balance in the amount of $265,491 was reallocated to the Limited
Partners.

10. SUBSEQUENT EVENTS:
    -----------------

On August 15, 2001, the Partnership will make a distribution to the Limited
Partners for the Second Quarter 2001 of $100,000 amounting to approximately
$5.85 per limited partnership interest.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

                                       12
<PAGE>

Liquidity and Capital Resources:
-------------------------------

Investment Properties and Net Investment in Direct Financing Leases
-------------------------------------------------------------------

The investment properties, including equipment held by the Partnership at June
30, 2001, were originally purchased at a price, including acquisition costs, of
approximately $6,091,000.

During March 2001, Hardee's Food Systems, Inc. notified Management of its intent
to close its restaurant in Oak Creek, Wisconsin. The lease on the property was
not set to expire until 2010. In the Second Quarter of 2001, a lease termination
agreement was executed and the tenant ceased the payment of rent as of April 30,
2001. Management is actively marketing new leasing for the vacant property.

Other Assets
------------

Cash and cash equivalents were $289,000 at June 30, 2001, compared to $252,000
at December 31, 2000. The Partnership designated cash of $100,000 to fund the
Second Quarter 2001 distributions to Limited Partners; $53,000 for the payment
of accounts payable and accrued expenses; and the remainder represents reserves
deemed necessary to allow the Partnership to operate normally. Cash generated
through the operations of the Partnership's investment properties and sales of
investment properties will provide the sources for future fund liquidity and
Limited Partner distributions.

The Partnership established an Indemnification Trust (the "Trust") during the
Fourth Quarter of 1993 and deposited $130,000 in the Trust during 1994, $100,000
during 1995, and $20,000 during 1996. The provision to establish the Trust was
included in the PMA for the indemnification of TPG, in the absence of fraud or
gross negligence, from any claims or liabilities that may arise from TPG acting
as Permanent Manager. The Trust is owned by the Partnership. For additional
information regarding the Trust, refer to Note 8 to the financial statements.

Property taxes escrow at June 30, 2001, in the amount of $9,500, represented
four (4) months of 2001 real estate taxes for the vacant Hardee's- Oak Creek
property paid by Hardee's Food Systems, Inc. upon the lease termination
agreement with Management.

The Note receivable balance at June 30, 2001 was $135,750. In the Second Quarter
of 2001, a lease termination agreement was executed with Hardee's Food Systems
upon the closing of its restaurant in Oak Creek, Wisconsin. Hardee's Food
Systems will pay a lease termination fee of approximately two (2) years rent or
$181,000. The payments are scheduled to be received in four equal (4)
installments of $45,250. The first payment was received in May 2001, and the
subsequent payments, which are reflected in the Note receivable balance sheet,
are scheduled to be received in August 2001, November 2001 and February 2002.

Liabilities
-----------

Accounts payable and accrued expenses at June 30, 2001, in the amount of
$20,000, primarily represented the accrual of auditing fees.

Property taxes payable at June 30, 2001, in the amount of $9,500, represented
four (4) months of 2001 real estate taxes for the vacant Hardee's- Oak Creek
property paid by Hardee's Food Systems, Inc. upon the lease termination
agreement with Management.

                                       13
<PAGE>

Partners' Capital
-----------------

Net income for the quarter was allocated between the General Partner and the
Limited Partners, 1% and 99%, respectively, as provided in the Partnership
Agreement and the Amendment to the Partnership Agreement, as discussed more
fully in Note 4 of the financial statements. The former general partners'
capital account balance was reallocated to the Limited Partners at December 31,
1993. Refer to Note 9 to the financial statements for additional information
regarding the reallocation.

Cash distributions paid to the Limited Partners and to the General Partner
during 2001, of $130,000 and $1,055, respectively, have also been made in
accordance with the amended Partnership Agreement. The Second Quarter 2001
distribution of $100,000 will be paid to the Limited Partners on August 15,
2001.

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

The Partnership reported net income for the quarter ended June 30, 2001, in the
amount of $206,000 compared to net income for the quarter ended June 30, 2000 of
$40,000. Net income for the six months ended June 30, 2001 and 2000 totaled
$264,000 and $90,000, respectively.

Revenues
--------
Total revenues were $275,000, and $110,000, for the quarters ended June 30,
2001, and 2000, respectively, and were $391,000 and $221,000 for the six months
ended June 31, 2001 and 2000, respectively.

As of May 1, 2001 total revenues, should approximate $320,000 annually or
$80,000 quarterly, based on leases currently in place. Future revenues may
decrease with tenant defaults and/or sales of Partnership properties. They may
also increase with additional rents due from tenants, if those tenants
experience sales levels which require the payment of additional rent to the
Partnership.

The increase in revenues in 2001 is primarily due to the $181,000 lease
termination fee charged to Hardee's Food Systems, Inc. upon the termination of
the Hardee's- Oak Creek lease.

Expenses
--------

For the quarters ended June 30, 2001 and 2000, cash expenses amounted to
approximately 17% and 48% of total revenues, respectively. For the six months
ended June 30, 2001 and 2000, cash expenses totaled 23% and 44% of total
revenues, respectively. Total expenses, including non-cash items, amounted to
25% and 64% of total revenues for the quarters ended June 30, 2001 and 2000,
respectively, and totaled 33% and 59% of total revenues for the six months ended
June 30, 2001 and 2000, respectively. The fluctuation is due to the increase in
revenues in 2001, primarily due to the $181,000 lease termination fee.

Inflation:
---------

Inflation has a minimal effect on operating earnings and related cash flows from
a portfolio of triple net leases. By their nature, such leases actually fix
revenues and are not impacted by rising costs of maintenance, insurance, or real
estate taxes. If inflation causes operating margins to deteriorate for lessees
if expenses grow faster than revenues, then, inflation may well negatively
impact the portfolio through tenant defaults.

                                       14
<PAGE>

It would be misleading to associate inflation with asset appreciation for real
estate, in general, and the Partnership's portfolio, specifically. Due to the
"triple net" nature of the property leases, asset values generally move
inversely with interest rates.


Item 3.  Quantitative and Qualitative Disclosure About Market Risk

None.

                                       15
<PAGE>

                           PART II - OTHER INFORMATION

Items 1 - 5.

Not Applicable.

Item 6.  Exhibits and Reports on Form 8-K

(a)   Listing of Exhibits:

      99.0   Correspondence to the Limited Partners dated August 15, 2001,
             regarding the Second Quarter 2001 distribution.

(b)   Report on Form 8-K:

      The Registrant filed no reports on Form 8-K during the first quarter of
fiscal year 2001.

                                       16
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.


DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP


By:    The Provo Group, Inc., General Partner



By:    /s/ Bruce A. Provo
       ---------------------------------
       Bruce A. Provo, President


Date:  August 13, 2001


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.



By:    The Provo Group, Inc., General Partner



By:    /s/ Bruce A. Provo
       ---------------------------------
       Bruce A. Provo, President


Date:  August 13, 2001



By:    /s/ Diane R. Conley
       ---------------------------------
       Diane R. Conley
       Controller


Date:  August 13, 2001

                                       17