<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     March 31, 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

                     March 31, 2001 and December 31, 2000
                     ------------------------------------

                                    ASSETS


<TABLE>
<CAPTION>

                                                  (Unaudited)
                                                   March 31,    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                       (860,308)      (843,984)
                                                  ----------     ----------
        Net investment properties                  2,943,331      2,959,655
                                                  ----------     ----------
OTHER ASSETS:
     Cash and cash equivalents                       270,466        251,528
     Cash held in Indemnification Trust (Note 8)     345,489        339,740
     Rents and other receivables                      19,088         17,982
     Deferred rent receivable                         17,000         17,420
     Deferred fees                                    15,720         16,167
     Prepaid assets                                    1,877          2,681
                                                  ----------     ----------
     Total other assets                              669,640        645,518
                                                  ----------     ----------
      Total assets                                $3,612,971     $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

                     March 31, 2001 and December 31, 2000
                     ------------------------------------



<TABLE>
<CAPTION>
                                                                 (Unaudited)
                                                                   March 31,          December 31,
                                                                     2001                 2000
                                                                 ------------         ------------
<S>                                                              <C>                  <C>
LIABILITIES:
  Accounts payable and accrued expenses                          $     23,062         $     23,250
  Due to current General Partner                                          233                  340
  Security deposits                                                    16,635               16,635
  Unearned rental income                                               42,254               27,254
                                                                 ------------         ------------
    Total liabilities                                                  82,184               67,479
                                                                 ------------         ------------
CONTINGENT LIABILITIES:  (Note 7)

PARTNERS' CAPITAL:  (Notes 1, 4 and 9)
Current General Partner -
  Cumulative net income                                                19,504               18,921
  Cumulative cash distributions                                        (9,863)              (9,630)
                                                                 ------------         ------------
                                                                        9,641                9,291
                                                                 ------------         ------------
Limited Partners (17,102.52 interests outstanding)
  Capital contributions, net of offering costs                     14,408,872           14,408,872
  Cumulative net income                                               175,749              118,006
  Cumulative cash distributions                                   (10,797,984)         (10,732,984)
  Reallocation of former general partners' deficit capital           (265,491)            (265,491)
                                                                 ------------         ------------
                                                                    3,521,146            3,528,403
                                                                 ------------         ------------
         Total partners' capital                                    3,530,787            3,537,694
                                                                 ------------         ------------
         Total liabilities and partners' capital                 $  3,612,971         $  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 March 31,
                                                       ----------------------------
                                                         2001                2000
                                                       --------            --------
<S>                                                    <C>                 <C>
REVENUES:
  Rental income                                        $103,938            $102,485
  Interest income                                         8,344               6,149
  Recovery of amounts previously written off              3,219               1,610
                                                       --------            --------

                                                        115,501             110,244
                                                       --------            --------
EXPENSES:
  Partnership management fees (Note 6)                   16,898              16,530
  Restoration fees (Note 6)                                 129                  64
  Insurance                                                 804                 729
  General and administrative                              6,117               5,338
  Advisory Board fees and expenses                        2,024               4,544
  Professional services                                  14,432              16,197
  Depreciation                                           16,324              16,324
  Amortization                                              447                 446
                                                       --------            --------
                                                         57,175              60,172
                                                       --------            --------
NET INCOME                                             $ 58,326            $ 50,072
                                                       --------            --------
NET INCOME - GENERAL PARTNER                           $    583            $    501
NET INCOME - LIMITED PARTNERS                            57,743              49,571
                                                       --------            --------
                                                       $ 58,326            $ 50,072
                                                       --------            --------
NET INCOME PER LIMITED PARTNERSHIP
INTEREST, based on 17,102.52 interests outstanding     $   3.38            $   2.90
                                                       ========            ========
</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>
                                                                                Three Months Ended March 31,
                                                                               ------------------------------
<S>                                                                            <C>             <C>
                                                                                     2001            2000
                                                                                   --------        --------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
     Net income                                                                    $ 58,326        $ 50,072
     Adjustments to reconcile net income to net cash from (used in)
        operating activities -
          Depreciation and amortization                                              16,771          16,770
          Recovery of amounts previously written off                                 (3,219)         (1,610)
          Interest applied to Indemnification Trust Account                          (5,749)         (4,131)
          (Increase)/Decrease in rents, other receivables & prepaid assets             (302)          4,200
          Decrease in deferred rent receivable                                          420             420
          Increase/(Decrease) in accounts payable and accrued expenses                 (188)          2,456
          Increase/(Decrease) in due to General Partner                                (107)            260
          Increase/(Decrease) in unearned rental income                              15,000          (3,000)
                                                                                   --------        --------

               Net cash provided from operating activities
                                                                                     80,952          65,437
                                                                                   --------        --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
     Recoveries from former affiliates                                                3,219           1,610
                                                                                   --------        --------

               Net cash provided from investing activities                            3,219           1,610
                                                                                   --------        --------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
     Cash distributions to General Partner                                             (233)           (200)
     Cash distributions to Limited Partners                                         (65,000)        (50,000)
                                                                                   --------        --------
               Net cash (used in) financing activities
                                                                                    (65,233)        (50,200)
                                                                                   --------        --------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                            18,938          16,847
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                    251,528         257,312
                                                                                   --------        --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                         $270,466        $274,159
                                                                                   ========        ========
</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 March 31, 2001, and the results of operations for the three-month
periods ended March 31, 2001, and 2000, and cash flows for the three-month
periods ended March 31, 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 March 31, 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 March 31, 2001, $5,794,000 of recoveries have been
received which exceeded the original estimate of $3 million. As a result, since
1996, the Partnership has recognized $1,300,000 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 March 31, 2001, the Partnership owned five (5) fast-food restaurants
comprised of: two (2) Hardee's restaurants, one (1) Applebee's restaurant, and
two (2) Denny's restaurants.  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 does not expire until 2010, and Hardee's is required to continue making
rent payments until that time or until a lease termination agreement is entered
into.

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

                                       8
<PAGE>

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 $88,497 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, 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

                                       9
<PAGE>

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, was 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.

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

<TABLE>
<CAPTION>
              Year ending
             December 31,
            <S>                                    <C>

                     2001                            $  409,380
                     2002                               409,380
                     2003                               409,380
                     2004                               409,380
                     2005                               409,380
               Thereafter                             1,913,198
                                                     ----------
                                                     $3,960,098
                                                     ==========
</TABLE>

                                       10
<PAGE>

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.

Two (2) of the Partnership's properties are 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.  As of
March 31, 2001, the Partnership has leased two of its properties to Hardees Food
Systems, Inc., which constitute 21% of the aggregate gross proceeds.

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

Amounts paid to the current General Partner for the quarters ended March 31,
2001 and 2000, are as follow:

<TABLE>
<CAPTION>
                                            Incurred as of  Incurred as of
Current General Partner                     March 31, 2001  March 31, 2000
------------------------------------------  --------------  --------------
<S>                                         <C>             <C>
Management fees                                    $16,898         $16,530
Restoration fees                                       129              64
Cash distribution                                      233             200
Overhead allowance                                   1,374           1,339
Reimbursement for out-of-pocket expenses               813           1,077
                                                   -------         -------
                                                   $19,447         $19,210
                                                   =======         =======

</TABLE>

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 $4,500,000. Upon reaching such recovery level,
full disposition fees will thereafter be payable and fifty percent (50%) of the
previously escrow amounts will be paid to the current General Partner. At such
time as the recovery exceeds $6,000,000 in the aggregate, the remaining escrow
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 March 31, 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.

                                       11
<PAGE>

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 March
31, 2001.  Funds are invested in U.S. Treasury securities.  In addition,
interest totaling $95,489  has been credited to the Trust as of March 31, 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 May 15, 2001, the Partnership will make a distribution to the Limited
Partners for the First Quarter 2001 of $65,000 amounting to approximately $3.80
per limited partnership interest.

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 March
31, 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 does
not expire until 2010, and Hardee's is required to continue making rent payments
until that time or until a lease termination agreement is entered into.

                                       12

<PAGE>

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

Cash and cash equivalents were $270,000 at March 31, 2001, compared to $252,000
at December 31, 2000. The Partnership designated cash of $65,000 to fund the
First Quarter 2001 distributions to Limited Partners; $68,000 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.

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

Accounts payable and accrued expenses at March 31, 2001, in the amount of
$23,000, primarily represented the accrual of auditing fees.

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 $65,000 and $233, respectively, have also been made in
accordance with the amended Partnership Agreement.  The First Quarter 2001
distribution of $65,000 will be paid to the Limited Partners on May 15, 2001.

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

The Partnership reported  net income for the quarter ended March 31, 2001, in
the amount of $58,000 compared to net income for the quarter ended March 31,
2000 of $50,000.

Revenues
--------
Total revenues were $116,000, and $110,000, for the quarters ended March 31,
2001, and 2000, respectively.

Total revenues, should approximate $400,000 annually or $100,000 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.

                                       13

<PAGE>

Expenses
--------

For the quarters ended March 31, 2001 and 2000, cash expenses amounted to
approximately 35% and 39% of total revenues, respectively.  Total expenses,
including non-cash items, amounted to 50% and 55% of total revenues for the
quarters ended March 31, 2001 and 2000, respectively.

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.

                                       14

<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 May 15, 2001, regarding
            the First 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.

                                       15

<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, thereunto 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:  May 15, 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:  May 15, 2001


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

Date:  May 15, 2001

                                       16