<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, 1999
                                    --------------------------------------------

                                       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, 1999 and December 31, 1998
                    ----------------------------------------

                                     ASSETS


<TABLE>
<CAPTION>
                                                   (Unaudited)
                                                  September 30,   December 31,
                                                       1999           1998
                                                  --------------  -------------
INVESTMENT PROPERTIES:  (Note 3)
<S>  <C>                                          <C>             <C>
     Land                                            $1,553,680     $1,553,680
     Buildings and improvements                       2,249,959      2,249,959
     Accumulated depreciation                          (762,367)      (713,396)
                                                     ----------     ----------
     Net investment properties                        3,041,272      3,090,243
                                                     ----------     ----------
OTHER ASSETS:
     Cash and cash equivalents                          256,416        230,807
     Cash held in Indemnification Trust (Note 8)        316,476        306,386
     Rents and other receivables                         10,405         14,463
     Deferred rent receivable                            19,518         20,778
     Deferred fees                                       18,399         19,738
     Prepaid assets                                         339          3,393
                                                     ----------     ----------
     Total other assets                                 621,553        595,565
                                                     ----------     ----------

     Total assets                                    $3,662,825     $3,685,808
                                                     ==========     ==========
</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, 1999 and December 31, 1998
                    ----------------------------------------



<TABLE>
<CAPTION>
                                                                (Unaudited)
                                                               September 30,   December 31,
                                                                    1999           1998
                                                               --------------  -------------
LIABILITIES:
<S>                                                            <C>             <C>
   Accounts payable and accrued expenses                        $     25,749   $     18,816
   Due to current General Partner                                        158            229
   Security deposits                                                  16,635         16,635
   Unearned rental income                                             45,254         27,254
                                                                ------------   ------------
     Total liabilities                                                87,796         62,934
                                                                ------------   ------------
CONTINGENT LIABILITIES:  (Note 7)

PARTNERS' CAPITAL:  (Notes 1, 4 and 9)
Current General Partner -
   Cumulative net income (loss)                                       16,284         14,756
   Cumulative cash distributions                                      (8,576)        (7,965)
                                                                ------------   ------------

                                                                       7,708          6,791
                                                                ------------   ------------
Limited Partners (17,102.52 interests outstanding)
   Capital contributions, net of offering costs                   14,408,872     14,408,872
   Cumulative net loss                                              (143,076)      (294,314)
   Cumulative cash distributions                                 (10,432,984)   (10,232,984)
   Reallocation of former general partners' deficit capital         (265,491)      (265,491)
                                                                ------------   ------------
                                                                   3,567,321      3,616,083
                                                                ------------   ------------
          Total partners' capital                                  3,575,029      3,622,874
                                                                ------------   ------------
          Total liabilities and partners' capital               $  3,662,825   $  3,685,808
                                                                ============   ============
</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,
                                                      -------------------   -------------------
                                                        1999       1998       1999       1998
                                                      --------   --------   --------   --------
<S>                                                   <C>        <C>        <C>        <C>
REVENUES:
    Rental income                                     $103,780   $ 95,308   $319,348   $304,514
    Interest income                                      5,411      7,233     16,056     34,360
    Other income                                           211          0        386         42
    Gain on sale of assets                                   0          0          0    238,698
    Recovery of amounts previously written off           2,146         52      4,829         52
                                                      --------   --------   --------   --------
                                                       111,548    102,593    340,619    577,666
                                                      --------   --------   --------   --------
EXPENSES:
    Partnership management fees                         16,387     16,215     49,161     48,475
    Restoration fees                                        86          0        193          0
    Insurance                                            1,018      1,094      3,054      3,284
    General and administrative                           8,237      5,649     25,257     32,186
    Advisory Board fees and expenses                     2,600      4,578      8,250     13,489
    Professional services                               20,189     20,881     44,928     68,300
    Professional services related to investigation           0        194          0      1,480
    Appraisals                                               0          0          0     13,776
    Environmental inspections                            1,000          0      1,000      8,250
    Land title surveys                                   5,700     11,950      5,700     11,950
    Disposition fees                                         0          0          0     37,500
    Depreciation                                        16,324     20,591     48,971     63,512
    Amortization                                           446        446      1,339      1,339
                                                      --------   --------   --------   --------
                                                        71,987     81,598    187,853    303,541
                                                      --------   --------   --------   --------
NET INCOME                                            $ 39,561   $ 20,995   $152,766   $274,125
                                                      ========   ========   ========   ========

NET INCOME - GENERAL PARTNER                          $    396   $    210   $  1,528   $  2,741
NET INCOME - LIMITED PARTNERS                           39,165     20,785    151,238    271,384
                                                      --------   --------   --------   --------
                                                      $ 39,561   $ 20,995   $152,766   $274,125
                                                      ========   ========   ========   ========
NET INCOME PER LIMITED PARTNERSHIP INTEREST,
  based on 17,102.52 interests outstanding            $   2.29   $   1.22   $   8.84   $  15.87
                                                      ========   ========   ========   ========
</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,
                                                                     ---------------------------------
                                                                          1999              1998
                                                                     ---------------  ----------------
<S>                                                                  <C>              <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
     Net income                                                           $ 152,766       $   274,125
     Adjustments to reconcile net income to net cash from
        operating activities -
          Depreciation and amortization                                      50,310            64,851
          Gain on sale of assets                                                  0          (238,698)
          Recovery of amounts previously written off                         (4,829)                0
          Interest applied to Indemnification Trust Account                 (10,090)          (12,939)
          Decrease in rents, other receivables and prepaid assets             7,112            26,346
          Decrease in deferred rent receivable                                1,260             9,832
          Increase in accounts payable and accrued expenses                   6,933               124
          (Decrease) in security deposits                                         0           (20,184)
          (Decrease) in due to General Partner                                  (71)           (1,311)
          Increase (Decrease) in unearned rental income                      18,000           (15,000)
                                                                          ---------       -----------

               Net cash provided from operating activities                  221,391            87,146
                                                                          ---------       -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
     Recoveries from former affiliates                                        4,829                 0
     Proceeds from sale of assets                                                 0         1,242,562
                                                                          ---------       -----------
               Net cash provided from investing activities                    4,829         1,242,562
                                                                          ---------       -----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
     Cash distributions to General Partner                                     (611)           (1,096)
     Cash distributions to Limited Partners                                (200,000)       (1,695,000)
                                                                          ---------       -----------
               Net cash (used in) financing activities                     (200,611)       (1,696,096)
                                                                          ---------       -----------
NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS                                                               25,609          (366,388)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                            230,807           595,420
                                                                          ---------       -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                $ 256,416       $   229,032
                                                                          =========       ===========



</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") 1998 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 the
Partnership's financial position as of September 30, 1999, and the results of
operations for the three and nine-month periods ended September 30, 1999, and
1998, and cash flows for the nine-month periods ended September 30, 1999 and
1998. 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 escrowed
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, franchisors 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, 1999, 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 accrued
throughout the year based on the tenant's actual reported year-to-date sales
along with Management's estimate of the tenant's sales for any remaining
unreported periods during the year.


                                       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
to tenants other than the original tenant. 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.

During 1996, the Partnership adopted 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 adoption of
SFAS 121 had no impact on the Partnership's financial statements.

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. On July 22,
1999, the General Partner entered into a Real Estate Purchase Contract for the
sale of all of the properties for $3,550,000. However, until such sale is
actually consummated, which is uncertain, the Partnership plans to continue
normal operations until an actual sale of the properties is completed.

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, 1998, the tax basis of the Partnership's

                                       7
<PAGE>


assets exceeded the amounts reported in the accompanying financial statements by
approximately $3,200,000.

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, 1999, $5,772,000 of recoveries have been
received which exceeded the original estimate of $3 million. As a result, the
Partnership has recognized $1,288,000 as income over the past four years, 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, 1999, 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 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.

                                       8
<PAGE>

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") which amount has been
reduced due to the 1998 sale of DiVall 1. 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, 1999, the minimum management fee and the maximum
reimbursement for office rent and overhead increased by 1.6% 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
$88,004 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 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

                                       9
<PAGE>

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>

                1999       $  409,380
                2000          409,380
                2001          409,380
                2002          409,380
                2003          409,380
         Thereafter         2,731,958
                           ----------
                           $4,778,858
                           ==========
</TABLE>

Two (2) of the Partnership's properties are leased to a Denny's franchisee.
Base rent from these properties amounted to approximately 27% of total base rent
in 1998.

                                       10
<PAGE>

Two (2) of the Partnership's properties are leased to Hardee's Food Systems,
Inc. Base rent from these properties amounted to approximately 43% of total base
rents.

During October 1999, Management was notified that an involuntary Bankruptcy
Petition had been filed against the tenant of the Partnership's Applebee's
property. Our tenant has represented that they expect the Bankruptcy Petition to
be dismissed, and we expect no adverse change in the tenant's credit worthiness.
The tenant is currently not delinquent in the payment of rent.

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
September 30, 1999, 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 nine months ended September
30, 1999 and 1998, are as follow:

<TABLE>
<CAPTION>
Current General Partner                     Incurred as of  Incurred as of
-----------------------                     September 30,   September 30,
                                                1999            1998
                                            --------------  --------------
<S>                                         <C>             <C>
Management fees                                    $49,161         $48,475
Disposition fees                                         0          37,500
Restoration fees                                       193               0
Cash distribution                                      611           1,096
Overhead allowance                                   3,973           3,911
Reimbursement for out-of-pocket expenses             2,322           8,954
                                                   -------         -------
                                                   $56,260         $99,936
                                                   =======         =======

</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 escrowed 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 escrowed 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 escrowed was
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

                                       11
<PAGE>

September 30, 1999, 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, 1999. Funds are invested in U.S. Treasury securities. In addition,
interest totaling $66,476 has been credited to the Trust as of September 30,
1999. 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, 1999, the Partnership made a distribution to the Limited
Partners for the Third Quarter 1999 of $50,000 amounting to approximately $2.92
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
September 30, 1999, were originally purchased at a price, including acquisition
costs, of approximately $6,091,000.

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

Cash and cash equivalents were $256,000 at September 30, 1999, compared to
$231,000 at December 31, 1998. The Partnership designated cash of $50,000 to
fund the Third Quarter 1999 distributions to Limited

                                       12
<PAGE>

Partners; $55,000 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 September 30, 1999, in the amount of
$26,000, primarily represented the accrual of legal and 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 1999, of $200,000 and $611, respectively, have also been made in
accordance with the amended Partnership Agreement. The Third Quarter 1999
distribution of $50,000 was paid to the Limited Partners on November 15, 1999.

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

The Partnership reported net income for the quarter ended September 30, 1999, in
the amount of $40,000 compared to net income for the quarter ended September 30,
1998 of $21,000. Net income for the nine months ended September 30, 1999 and
1998 totaled $153,000 and $274,000, respectively.

Revenues
--------

Total revenues were $112,000, and $103,000, for the quarters ended September 30,
1999, and 1998, respectively, and were $341,000 and $578,000 for the nine months
ended September 30, 1999 and 1998, respectively. The 1998 income includes a
first quarter gain of $239,000 recognized on the sale of a Denny's property to
the tenant.

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 September 30, 1999 and 1998, cash expenses amounted to
approximately 50% and 59% of total revenues, respectively. For the nine months
ended September 30, 1999 and 1998, cash expenses totaled 40% and 41% of total
revenues, respectively. Total expenses, including non-cash items, amounted to
65% and 80% of total revenues for the quarters ended September 30, 1999 and
1998, respectively and totaled 55% and 53% of total revenues for the nine months
ended September 30, 1999 and 1998, respectively. During 1998, disposition fees
of $37,500 on the sale of the Denny's property in Sanford, Florida, and fees
incurred for the appraisal, survey, and environmental inspection of the
Partnership's properties totaling $34,000 and legal fees totaling $25,000 had a
negative impact on expenses. However, the gain recorded during 1998 had a
favorable impact on the expense to revenue ratios.

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.

Year 2000
---------

The Partnership's operations are not dependent on date sensitive software. The
Partnership is not aware of any Year 2000 problems with its current software.
Accounting and Partnership records software are owned and operated by third
parties who provide services to the Partnership under contract and any cost to
make the software Year 2000 compliant will be borne by the third parties. The
Partnership has received assurances from a majority of these third parties that
such software is Year 2000 compliant or will be by January 1, 2000. The
Partnership believes, however, that even if any Year 2000 problems are not
corrected on schedule, the cost and disruption to operations of the Partnership
are expected to be minimal.

Tenants are responsible for the operation of any equipment located at the
Partnership's properties. While the Partnership is not fully aware of the
compliance attainment efforts of its tenants, tenant preparedness for the Year
2000 should have minimal impact on the Partnership and are not expected to be
material to the Partnership's operations, financial condition or liquidity.
While the Partnership has received assurances from some tenants regarding Year
2000 compliance, to the extent the Partnership is not satisfied with the status
of a tenant's or third party provider's Year 2000 compliance, the Partnership
has developed and will implement appropriate contingency plans.

Item 3.   Quantitative and Qualitative Disclosure About Market Risk

None.

                                       14
<PAGE>

                          PART II - OTHER INFORMATION

Items 1 - 4.

Not Applicable.

Item 5.   Other Information.

     As previously disclosed in the Partnership's Form 10-Q for the quarter
ended June 30, 1999, the Partnership has entered into a contract (the "MSP
Contract") to sell all five of the Partnership's remaining properties to
Milwaukee Street Partners, LLC ("MSP"). Recently, however, certain disagreements
with respect to the MSP Contract have arisen between the Partnership and MSP
which threaten completion of the contemplated sale. While the Partnership and
MSP continue to communicate, there can be no assurance that a final sale of the
properties pursuant to the MSP contract will be consummated. Given the
uncertainties surrounding the MSP Contract, the Partnership is uncertain whether
the sale of the properties and distribution of the sale proceeds to the Limited
Partners in liquidation of the Partnership will occur in calendar year 1999, as
originally anticipated.

Item 6.   Exhibits and Reports on Form 8-K

(a)  Listing of Exhibits:

     99.0   Correspondence to the Limited Partners dated November 15, 1999,
            regarding the Third Quarter 1999 distribution.

(b)  Report on Form 8-K:

     The Registrant filed no reports on Form 8-K during the third quarter of
     fiscal year 1999.

                                       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:  November 12, 1999


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, 1999



By:  /s/Kristin J. Atkinson
     --------------------------------------------
     Kristin J. Atkinson
     Vice President - Finance and Administration


Date:  November 12, 1999

                                       16