<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     September 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

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

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                     (Unaudited)
                                                                                     September 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                                                        (892,955)           (843,984)
                                                                                      ----------          ----------

             Net investment properties                                                 2,910,684           2,959,655
                                                                                      ----------          ----------

OTHER ASSETS:

        Cash and cash equivalents                                                        267,548             251,528
        Cash held in Indemnification Trust (Note 8)                                      352,894             339,740
        Rents and other receivables                                                        9,445              17,982
        Property Tax Escrow                                                                9,541                   0
        Deferred rent receivable                                                          16,160              17,420
        Deferred fees                                                                      8,629              16,167
        Prepaid assets                                                                       268               2,681
        Note Receivable (Note 3)                                                          90,500                   0
                                                                                      ----------          ----------

             Total other assets                                                          754,985             645,518
                                                                                      ----------          ----------
             Total assets                                                             $3,665,669          $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

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

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

   Accounts payable and accrued expenses                      $     26,438    $     23,250
   Due to current General Partner                                      119             340
   Security deposits                                                16,635          16,635
   Property taxes payable                                            9,541               0
   Unearned rental income                                           12,771          27,254
                                                              ------------    ------------

     Total liabilities                                              65,504          67,479
                                                              ------------    ------------

CONTINGENT LIABILITIES:  (Note 7)

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

Current General Partner -
   Cumulative net income                                            21,857          18,921
   Cumulative cash distributions                                   (10,804)         (9,630)
                                                              ------------    ------------

                                                                    11,053           9,291
                                                              ------------    ------------

Limited Partners (17,102.52 interests outstanding)
   Capital contributions, net of offering costs                 14,408,872      14,408,872
   Cumulative net income                                           408,715         118,006
   Cumulative cash distributions                               (10,962,984)    (10,732,984)
   Reallocation of former general partners' deficit capital       (265,491)       (265,491)
                                                              ------------    ------------

                                                                 3,589,112       3,528,403
                                                              ------------    ------------

          Total partners' capital                                3,600,165       3,537,694
                                                              ------------    ------------

          Total liabilities and partners' capital             $  3,665,669    $  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     Nine Months Ended
                                                 --------------------   -------------------
                                                     September 30,         September 30,
                                                     -------------         -------------

                                                   2001        2000       2001       2000
                                                 --------    --------   --------   --------
<S>                                              <C>         <C>        <C>        <C>
REVENUES:
     Rental income                               $ 79,925    $101,925   $271,122   $306,335
     Interest income                                5,568       7,618     19,501     20,902
     Lease termination fee (Note 3)                     0           0    181,000          0
     Other income                                       0           0         32        200
     Recovery of amounts previously written off         0       1,609      4,829      4,292
                                                 --------    --------   --------   --------

                                                   85,493     111,152    476,484    331,729
                                                 --------    --------   --------   --------

EXPENSES:
     Partnership management fees (Note 6)          17,409      16,836     51,652     50,159
     Restoration fees (Note 6)                          0           0        193        107
     Insurance                                        804         734      2,413      2,196
     General and administrative                     5,524       4,385     22,318     24,039
     Advisory Board fees and expenses               1,313       1,313      4,649      8,053
     Professional services                         14,108      14,573     45,105     49,999
     Depreciation                                  16,324      16,324     48,971     48,971
     Amortization                                     264         446      7,538      1,339
                                                 --------    --------   --------   --------

                                                   55,746      54,611    182,839    184,863
                                                 --------    --------   --------   --------

NET INCOME                                       $ 29,747    $ 56,541   $293,645   $146,866
                                                 ========    ========   ========   ========

NET INCOME - GENERAL PARTNER                     $    297    $    565   $  2,936   $  1,469

NET INCOME - LIMITED PARTNERS                      29,450      55,976    290,709    145,397
                                                 --------    --------   --------   --------

                                                 $ 29,747    $ 56,541   $293,645   $146,866
                                                 ========    ========   ========   ========

NET INCOME PER LIMITED PARTNERSHIP INTEREST,
based on 17,102.52 interests outstanding         $   1.72    $   3.27   $  17.00   $   8.50
                                                 ========    ========   ========   ========
</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>
                                                                      Nine Months Ended September 30,
                                                                      -------------------------------

                                                                            2001         2000
                                                                         ---------    ---------
<S>                                                                      <C>          <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
     Net income                                                          $ 293,645    $ 146,866
     Adjustments to reconcile net income to net cash from
      operating activities -
          Depreciation and amortization                                     56,509       50,310
          Recovery of amounts previously written off                        (4,829)      (4,292)
          Interest applied to Indemnification Trust Account                (13,154)     (13,988)
          Lease termination fee                                           (135,750)           0
          Decrease in rents, other receivables & prepaid assets             10,950       18,401
          (Increase)/Decrease in property tax escrow                        (9,541)           0
          Decrease in deferred rent receivable                               1,260        1,260
          Increase/(Decrease) in accounts payable and accrued expenses      12,729       (2,391)
          (Decrease)/ Increase in due to General Partner                      (221)          91
          (Decrease) in unearned rental income                             (14,483)      (3,000)
                                                                         ---------    ---------

               Net cash provided from operating activities                 197,115      193,322
                                                                         ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Payments on note receivable                                            45,250            0
     Recoveries from former affiliates                                       4,829        4,292
                                                                         ---------    ---------

               Net cash from investing activities                           50,079        4,292
                                                                         ---------    ---------

CASH FLOWS (USED IN) FINANCING ACTIVITIES:
     Cash distributions to General Partner                                  (1,174)        (587)
     Cash distributions to Limited Partners                               (230,000)    (180,000)
                                                                         ---------    ---------

               Net cash (used in) financing activities                    (231,174)    (180,587)
                                                                         ---------    ---------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                   16,020       17,027

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                           251,528      257,312
                                                                         ---------    ---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                               $ 267,548    $ 274,339
                                                                         =========    =========
</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 September 30, 2001, and the results of operations for the three
and nine-month periods ended September 30, 2001, and 2000, and cash flows for
the nine-month periods ended September 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 September 30, 2001, the Partnership owned five (5) properties
and specialty leasehold improvements for use in all five (5) of the Properties.

                                       6

<PAGE>

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.

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.

                                       7

<PAGE>

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.

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 September 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 September 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

                                       8

<PAGE>

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 upon the execution of the agreement, and the subsequent
installments were reflected as Note receivable on the balance sheet. The first
Note receivable installment was received in August 2001. The remaining
installments, which are reflected in the Note receivable on the balance sheet at
September 30, 2001, are scheduled to be received in 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

                                       9

<PAGE>

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, 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 in
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 allowed 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 September 30,
2001 and 2000, are as follows:

    Current General Partner                      Incurred as of  Incurred as of
    -----------------------
                                                 September 30,     September 30,
                                                 ------------      ------------
                                                     2001             2000
                                                     ----             ----
    Management fees                                $51,652          $50,159
    Restoration fees                                   193              107
    Cash distribution                                1,174              587
    Overhead allowance                               4,183            4,056
    Reimbursement for out-of-pocket expenses         1,795            2,215
                                                   -------          -------
                                                   $58,997          $57,124
                                                   =======          =======

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

                                       11

<PAGE>

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 $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 September 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
September 30, 2001. Funds are invested in U.S. Treasury securities. In addition,
interest totaling $102,894 has been credited to the Trust as of
September 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 November 15, 2001, the Partnership will make a distribution to the Limited
Partners for the Third Quarter 2001 of $80,000 amounting to approximately $4.68
per limited partnership interest.

                                       12

<PAGE>

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

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

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

The investment properties, including equipment held by the Partnership at
September 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 $268,000 at September 30, 2001, compared to
$252,000 at December 31, 2000. The Partnership designated cash of $80,000 to
fund the Third Quarter 2001 distributions to Limited Partners; $41,000 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 September 30, 2001, in the amount of approximately
$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 September 30, 2001 was $90,500. 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 upon the
execution of the agreement, and the subsequent installments were reflected as
Note receivable on the balance sheet. The first Note receivable installment was
received in August 2001. The remaining installments, which are reflected in the
Note receivable on the balance sheet at September 30, 2001,are scheduled to be
received in November 2001 and February 2002.

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

                                       13

<PAGE>

Accounts payable and accrued expenses at September 30, 2001, in the amount of
$26,000, primarily represented the accrual of auditing fees.

Property taxes payable at September 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.

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 $230,000 and $1,174, respectively, have also been made in
accordance with the amended Partnership Agreement. The Third Quarter 2001
distribution of $80,000 will be paid to the Limited Partners on November 15,
2001.

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

The Partnership reported net income for the quarter ended September 30, 2001, in
the amount of $30,000 compared to net income for the quarter ended September
30, 2000 of $57,000. Net income for the nine months ended September 30, 2001 and
2000 totaled $294,000 and $147,000, respectively.

Revenues
--------

Total revenues were $85,000, and $111,000, for the quarters ended September 30,
2001, and 2000, respectively, and were $476,000 and $332,000 for the nine months
ended September 30, 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 fluctuation in the 2001 Third Quarter revenues is due primarily to decreased
rental income upon the lease termination of Hardee's- Oak Creek as of April 30,
2001. The increase in revenues in 2001 is primarily due to the $181,000 lease
termination fee charged to Hardee's Food Systems, Inc. in the Second Quarter
upon the termination of the Hardee's- Oak Creek lease.

Expenses
--------

For the quarters ended September 30, 2001 and 2000, cash expenses amounted to
approximately 46% and 34% of total revenues, respectively. For the nine months
ended September 30, 2001 and 2000, cash expenses totaled 27% and 41% of total
revenues, respectively. Total expenses, including non-cash items, amounted to
65% and 49% of total revenues for the quarters ended September 30, 2001 and
2000, respectively, and totaled 38% and 56% of total revenues for the nine
months ended September 30, 2001 and 2000, respectively. The fluctuation in the
Third Quarter of 2001 is due primarily to decreased rental

                                       14

<PAGE>

income upon the lease termination of Hardee's- Oak Creek as of April 30, 2001.
The fluctuation in 2001 is due to the increase in revenues, 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.

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 November 15,  2001,
               regarding the Third 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:    November 12, 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:    November 12, 2001



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

Date:   November 12, 2001

                                       17