<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, 2002
                                    ----------------------

                                       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, 2002 AND DECEMBER 31, 2001
                      ------------------------------------

                                     ASSETS
<TABLE>
<CAPTION>

                                                                 (Unaudited)
                                                                  March 31,       December 31,
                                                                    2002             2001
                                                                    ----             ----
INVESTMENT PROPERTIES:  (NOTE 3)
<S>                                                              <C>            <C>

    Land                                                         $ 1,239,326    $ 1,553,680
    Buildings and improvements                                     1,770,920      2,036,749
    Property held for sale                                           580,183              0
    Accumulated depreciation                                        (851,537)      (836,890)
                                                                 -----------    -----------
      Net investment properties                                    2,738,892      2,753,539
                                                                 -----------    -----------
OTHER ASSETS:

    Cash and cash equivalents                                        233,248        240,148
    Cash held in Indemnification Trust (NOTE 8)                      356,536        355,012
    Property taxes escrow                                                 22          9,563
    Rents and other receivables  (Net of allowance of $30,137)        30,566         26,044
    Deferred rent receivable                                           4,215          4,350
    Due from General Partner                                               0            682
    Deferred fees                                                      8,101          8,365
    Prepaid assets                                                     2,857          4,082
    Note receivable (NOTE 3)                                               0         45,250
                                                                 -----------    -----------

      Total other assets                                             635,545        693,496
                                                                 -----------    -----------


      Total assets                                               $ 3,374,437    $ 3,447,035
                                                                 ===========    ===========
</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, 2002 and December 31, 2001
                      ------------------------------------

<TABLE>
<CAPTION>
                                                                  (Unaudited)
                                                                   March 31,          December 31,
                                                                     2002                2001
                                                                   ----------          ---------
<S>                                                              <C>                <C>
LIABILITIES:
   Accounts payable and accrued expenses                         $     36,400       $     33,050
   Property taxes payable                                               5,832             34,734
   Security deposits                                                    8,425              8,425
   Unearned rental income                                              20,437             20,437
                                                                 ------------       ------------


     Total liabilities                                                 71,094             96,646
                                                                 ------------       ------------
CONTINGENT LIABILITIES: (Note 7)

PARTNERS' CAPITAL: (Notes 1, 4 and 9)
Current General Partner -
   Cumulative net income                                               19,933             20,153
   Cumulative cash distributions                                      (10,122)           (10,122)
                                                                 ------------       ------------

                                                                        9,811             10,031
                                                                 ------------       ------------
Limited Partners (17,102.52 interests outstanding)
   Capital contributions, net of offering costs                    14,408,872         14,408,872
   Cumulative net income                                              218,135            239,961
   Cumulative cash distributions                                  (11,067,984)       (11,042,984)
   Reallocation of former general partners' deficit capital          (265,491)          (265,491)
                                                                 ------------       ------------
                                                                    3,293,532          3,340,358
                                                                 ------------       ------------
          Total partners' capital                                   3,303,343          3,350,389
                                                                 ------------       ------------
          Total liabilities and partners' capital                $  3,374,437       $  3,447,035
                                                                 ============       ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       3

<PAGE>

                  DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                           STATEMENTS OF INCOME (LOSS)

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

<TABLE>
<CAPTION>
                                                             Three Months Ended March 31,
                                                             ---------------------------

                                                                   2002         2001
                                                                 --------     --------
<S>                                                            <C>          <C>
REVENUES:
     Rental income                                             $  52,196    $ 103,938
     Interest income                                               1,961        8,344
     Recovery of amounts previously written-off                        0        3,219
     Other income                                                  4,865            0
                                                               ---------    ---------

                                                                  59,022      115,501
                                                               ---------    ---------
EXPENSES:
     Partnership management fees (Notes 3 and 6)                  17,571       16,898
     Restoration fees (Note 6)                                         0          129
     Insurance                                                     1,225          804
     General and administrative                                    8,400        6,117
     Advisory Board fees and expenses                              2,519        2,024
     Professional services                                        24,362       14,432
     Defaulted/Vacant tenant                                      12,080            0
     Depreciation                                                 14,647       16,324
     Amortization                                                    264          447
                                                               ---------    ---------

                                                                  81,068       57,175
                                                               ---------    ---------
NET (LOSS) INCOME                                              ($ 22,046)   $  58,326
                                                               ---------    ---------
NET (LOSS) INCOME - GENERAL PARTNER                            ($    220)   $     583

NET (LOSS) INCOME - LIMITED PARTNERS                             (21,826)      57,743
                                                               ---------    ---------
                                                               ($ 22,046)   $  58,326
                                                               ---------    ---------
NET (LOSS) INCOME PER LIMITED PARTNERSHIP INTEREST, based on
17,102.52 interests outstanding                                ($   1.28)   $    3.38
                                                               =========    =========
</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,
                                                                          ------------------------------
                                                                                2002         2001
                                                                             ---------    ---------
<S>                                                                       <C>             <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
  Net (loss) income
  Adjustments to reconcile net (loss) income to net cash (used in)            ($22,046)   $  58,326
   from operating activities -
     Depreciation and amortization                                              14,911       16,771
     Recovery of amounts previously written off                                      0       (3,219)
     Interest applied to Indemnification Trust Account                          (1,524)      (5,749)
     (Increase) in rents, other receivables & prepaid assets                    (3,297)        (302)
     Decrease in property taxes escrow                                           9,541            0
     Decrease in deferred rent receivable                                          135          420
     Increase/(Decrease) in accounts payable and accrued expenses                3,350         (188)
     (Decrease) in property taxes payable                                      (28,902)           0
     Increase/(Decrease) in due to (from) General Partner                          682         (107)
                                                                                     0       15,000
     Increase in unearned rental income                                      ---------    ---------

       Net cash provided (used in) from operating activities                   (27,150)      80,952
                                                                             ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Recoveries from former affiliates
  Payments on note receivable                                                        0        3,219
                                                                                45,250            0
                                                                             ---------    ---------

       Net cash provided from investing activities                              45,250        3,219
                                                                             ---------    ---------


CASH FLOWS (USED IN) FINANCING ACTIVITIES:
  Cash distributions to General Partner                                              0         (233)
  Cash distributions to Limited Partners                                       (25,000)     (65,000)
                                                                             ---------    ---------

       Net cash (used in) financing activities                                 (25,000)     (65,233)
                                                                             ---------    ---------


NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                            (6,900)      18,938
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                               240,148      251,528
                                                                             ---------    ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                   $ 233,248    $ 270,466
                                                                             =========    =========
</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") 2001
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, 2002, and the results of operations for the three-month
periods ended March 31, 2002, and 2001, and cash flows for the three-month
periods ended March 31, 2002 and 2001. 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, 2002, the Partnership owned four (4) properties and
specialty leasehold improvements for use in all four (4) 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 fees 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 previously followed Statement of Financial Accounting Standards
No. 121 ("FAS 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. In October 2001,
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144") was issued. FAS 144
supercedes FAS 121. FAS 144 primarily addresses issues relating to the
implementation of FAS 121 and develops a single accounting model for long-lived
assets to be disposed of, whether previously held and used or newly acquired.
The provisions of FAS 144 became effective for fiscal years beginning after
December 15, 2001. The Company adopted FAS 144 on January 1, 2002 with no impact
on 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
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 incompetence 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. The General Partner received the consent of
the Limited Partners to liquidate the Partnership's assets and dissolve the
Partnership, during the Second Quarter of 1998. During 1999, Management entered
into an agreement to sell the Properties. The sale was not consummated and the
agreement was terminated. Management has recently found a buyer for the Colorado
Springs property within the parameters of the consent and

                                        7

<PAGE>

anticipates the property to be sold by the end of 2002. In addition, Management
has accepted an offer for the remaining three (3) Partnership properties.
However, the sale is expressly conditioned upon the Limited Partners authorizing
the General Partner to enter into the contract and to sell all of the
Partnership's properties and subsequently liquidate and dissolve the Partnership
not later than December 31, 2002. If the Limited Partners do not authorize such
sale of the remaining three (3) properties, Management will continue normal
operations 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, 2001, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$3,286,000.

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 March 31, 2002, $5,803,000 of recoveries has been
received which exceeded the original estimate of $3 million. As a result, since
1996, the Partnership has recognized $1,303,000 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:
     ---------------------

At December 31, 2000 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. However, due to the write-off of the former
Denny's- Englewood property during the Fourth Quarter of 2001 only four (4)
properties remain at March 31, 2002. In addition, the former Hardee's- Oak Creek
lease was terminated

                                       8

<PAGE>

in the Second Quarter of 2001 and the former Denny's- Colorado Springs lease was
rejected in the Fourth Quarter of 2001. Both properties remain vacant as of
March 31, 2002. Therefore, the four (4) remaining properties at March 31, 2002
are comprised of: one (1) Hardee's restaurant in St. Francis, Wisconsin, one (1)
Applebee's restaurant in Pittsburgh, Pennsylvania, and two (2) vacant
properties. The four (4) properties are located in three (3) states. Management
has recently found a buyer for the Colorado Springs property and anticipates the
property to be sold by the end of 2002. In addition, Management has accepted an
offer for the remaining three (3) Partnership properties. However, it is
expressly conditioned upon the Limited Partners authorizing the General Partner
to enter into the contract and to sell all of the Partnership's properties and
subsequently liquidate and dissolve the Partnership not later than December 31,
2002. If the Limited Partners do not authorize such sale of the remaining three
(3) properties, Management will continue normal operations for the foreseeable
future and it is comfortable that the two remaining leases are sound and that
the Partnership will be able to adequately meet its future expenses. In
addition, Management is prepared to defer payment of the Partnership's monthly
Management fees due to TPG if the need should arise, until the fees can be
satisfied from liquidation activities.

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.

The Partnership previously owned a Denny's restaurant on Arapahoe Road in
Englewood, Colorado, which was located on a parcel of land where the Partnership
had entered into a Ground Lease. The Partnership had been assigned all of the
rights and interest in the Ground Lease by the Ground Lease Lessee, Phoenix
Restaurant Group, Inc., ("Phoenix"). However, Phoenix retained the obligations
under the Ground Lease and the former tenant made the ground lease payments. The
Partnership, as the Landlord, also entered into the Englewood Property Lease
with tenant, Phoenix. Due to bankruptcy proceedings of Phoenix, the Englewood
Property Lease between the Partnership and Phoenix was rejected in the Fourth
Quarter and rent on the Englewood property ceased as of December 2001.
Management is uncertain whether the $9,600 due from the former tenant, all of
which has been reserved, will be collected. In addition, the bankruptcy court
granted the motion filed by Phoenix to release it from both the Englewood
Property Lease and the Ground Lease, and thus the Partnership's rights and
interest in the Ground Lease have been discharged. Because the Partnership did
not assume any of Phoenix's obligations under the Ground Lease, the Partnership
has taken the position that it is not liable for any amounts of unpaid rent or
expenses due to the Ground Lessor. Possession of the property was returned to
the Ground Lessor, which resulted in a write-off of the Englewood property and a
$141,000 loss in the Fourth Quarter of 2001.

Due to bankruptcy proceedings by a former tenant, Phoenix Restaurant Group,
Inc., ("Phoenix"), the related lease on the Colorado Springs property was
rejected in the Fourth Quarter of 2001 and rent ceased as of December 2001. The
entire amount due of approximately $20,600 from the former tenant has been
reserved. The amount is included in the Partnership's filing for damages in
Bankruptcy Court of approximately $77,000, or one year of rent, although it is
uncertain whether the amount will be collectible. Management has recently found
a buyer for the Colorado Springs property and anticipates the property to be
sold by the end of 2002.

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

                                       9

<PAGE>

as of April 30, 2001. Hardee's Food Systems agreed to pay a lease termination
fee of approximately two (2) years rent or $181,000. The payments were scheduled
to be received in four (4) equal installments of $45,250. The first payment was
received in May 2001 upon the execution of the agreement, and the subsequent
installments were reflected as Note receivable on the balance sheet. Note
receivable installments were received in August and October 2001. The final
installment, which was reflected in the Note receivable on the balance sheet at
December 31, 2001, was received in January 2002. Management has recently
accepted an aggregate purchase offer for three of the Partnership properties,
which includes the Oak Creek property. The sale is contingent upon Limited
Partner approval to sell the remaining properties and to subsequently liquidate
and dissolve the Partnership.

According to the Partnership Agreement, the former general partners were to
commit 82% of the original offering proceeds to the acquisition of investment
properties. Upon full investment of the net proceeds of the offering,
approximately 57% of the original offering proceeds was invested in the
Partnership's properties.

The current General Partner receives a fee for managing the Partnership equal to
4% of gross receipts, with a maximum reimbursement for office rent and related
overhead of $25,000 between the three original affiliated Partnerships as
provided in the Permanent Manager Agreement ("PMA"). On May 26, 1993, the
Permanent Manager, TPG, replaced the former general partners as the new General
Partner, as provided for in an amendment to the Partnership Agreement dated May
26, 1993. Pursuant to amendments to the Partnership Agreement, TPG continues to
provide management services for the same fee structure as provided in the PMA
mentioned above. Effective March 1, 2002, the minimum management fee and the
maximum reimbursement for office rent and overhead increased by 2.8%
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 $88,690 to date on the amounts recovered, which has been
offset against the 4% minimum fee.

One of the Partnership's property leases contains a purchase option provision
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

                                       10

<PAGE>

Partners and 10% to the General Partners. Such distributions were to be made as
soon as practicable following the sale, financing or refinancing of an original
property.

On May 26, 1993, pursuant to the results of a solicitation of written consents
from the Limited Partners, the Partnership Agreement was amended to replace the
former general partners and amend various sections of the agreement. The former
general partners were replaced as General Partner, by The Provo Group, Inc., an
Illinois corporation. Under the terms of the amendment, net profits or losses
from operations are allocated 99% to the Limited Partners and 1% to the current
General Partner. The amendment also provided for distributions from Net Cash
Receipts to be made 99% to the Limited Partners and 1% to its current General
Partner. Pursuant to the amendments to the Partnership Agreement effective June
30, 1994, distributions of Net Cash Receipts will not be made to the General
Partner unless and until each Limited Partner has received a distribution from
Net Cash Receipts in an amount equal to 10% per annum, cumulative simple return
on his or her Adjusted Original Capital, as defined, from the Return Calculation
Date, as defined, except to the extent needed by the General Partner to pay its
federal and state income taxes on the income allocated to it attributable 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.

The provisions regarding distribution of Net Proceeds, as defined, were also
amended to provide that Net Proceeds are to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital; (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a Liquidation Preference equal to a 13.0% per annum, cumulative
simple return on Adjusted Original Capital from the Return Calculation Date
including in the calculation of such return on all prior distributions of Net
Cash Receipts and any prior distributions of Net Proceeds under this clause,
except to the extent needed by the General Partner to pay its federal and state
income tax on the income allocated to its attributable to such year; and (c)
then, to Limited Partners, 99%, and to the General Partner, 1%, of remaining Net
Proceeds available for distribution.

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.

                                       11

<PAGE>

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:

      Year ending
      December 31,

           2002                              $208,040
           2003                               208,040
           2004                               208,040
           2005                               208,040
           2006                               208,040
     Thereafter                               622,117
                                           ----------
                                           $1,662,317
                                           ==========

During 2001, two (2) of the Partnership's properties, (located in Colorado
Springs and Englewood, Colorado), were leased to Phoenix Restaurant Group, Inc.
Base rent from these properties amounted to approximately 32% of total base rent
in 2001. Due to bankruptcy proceedings of Phoenix, the aforementioned leases
were rejected in the Fourth Quarter of 2001. In addition, possession of the
Englewood property was returned to the Ground Lessor resulting in the write-off
of the property and a $141,000 loss in the Fourth Quarter of 2001. As of March
31, 2002 the Colorado Springs property remains vacant.

Until April 30, 2001 two (2) of the Partnership's properties, (located in Oak
Creek and St. Francis, Wisconsin), were leased to a Hardee's Food Systems, Inc.
Base rent from these properties amounted to approximately 35% of total base
rents in 2001. In the Second Quarter of 2001 a lease termination agreement was
executed in relation to the Oak Creek property and the property remains vacant
at March 31, 2002.

At December 31, 2000 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. However, due to the write-off of the former
Denny's- Englewood property during the Fourth Quarter of 2001 only four (4)
properties remain at March 31, 2002. In addition, the Hardee's- Oak Creek lease
was terminated in the Second Quarter of 2001 and the Denny's- Colorado Springs
lease was rejected in the Fourth Quarter of 2001. Therefore, the four (4)
remaining properties are comprised of: one (1) Hardee's restaurant, one (1)
Applebee's restaurant, and two (2) vacant properties.

                                       12

<PAGE>

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. Until
April 30, 2001, the Partnership had leased two of its properties to Hardee's
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,
2002 and 2001, are as follows:

<TABLE>
<CAPTION>
     Current General Partner                              Incurred as of         Incurred as of
     -----------------------                              March 31, 2002         March 31, 2001
                                                          --------------         --------------
<S>                                                       <C>                    <C>
     Management fees                                             $17,571                 $16,898
     Restoration fees                                                  0                     129
     Cash distribution                                                 0                     233
     Overhead allowance                                            1,418                   1,374
     Reimbursement for out-of-pocket expenses                        630                     813
                                                                 -------                 -------
                                                                 $19,619                 $19,447
                                                                 =======                 =======
</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, 2002, 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

                                       13

<PAGE>

$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, 2002. Funds are invested in
U.S. Treasury securities. In addition, interest totaling $106,536 has been
credited to the Trust as of March 31, 2002. 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.

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, 2002, were originally purchased at a price, including acquisition costs, of
approximately $5,667,000.

At December 31, 2000 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. However, due to the write-off of the former
Denny's- Englewood property during the Fourth Quarter of 2001 only four (4)
properties remain at March 31, 2002. In addition, the former Hardee's- Oak Creek
lease was terminated in the Second Quarter of 2001 and the former Denny's-
Colorado Springs lease was rejected in the Fourth Quarter of 2001. Both
properties remain vacant as of March 31, 2002. Therefore, the four (4) remaining
properties at March 31, 2002 are comprised of: one (1) Hardee's restaurant in
St. Francis, Wisconsin, one (1) Applebee's restaurant in Pittsburgh,
Pennsylvania, and two (2) vacant properties. Management has recently found a
buyer for the Colorado Springs property and anticipates the property to be sold
by the end of 2002. In addition, Management has accepted an offer for the
remaining three (3) Partnership properties. However, it is expressly conditioned
upon the Limited Partners authorizing the General Partner to enter into the
contract and to sell all of the Partnership's properties and subsequently
liquidate and dissolve the Partnership not later than December 31, 2002. If the
Limited Partners do not authorize such sale of the remaining three (3)
properties, Management will continue normal operations for the foreseeable
future and it is comfortable that the two remaining leases are sound and that
the Partnership will be able to adequately meet its future expenses. In
addition, Management is prepared to

                                       14

<PAGE>

defer payment of the Partnership's monthly Management fees due to TPG if the
need should arise, until the fees can be satisfied from liquidation activities.

The Partnership previously owned a Denny's restaurant on Arapahoe Road in
Englewood, Colorado, which was located on a parcel of land where the Partnership
had entered into a Ground Lease. The Partnership had been assigned all of the
rights and interest in the Ground Lease by the Ground Lease Lessee, Phoenix
Restaurant Group, Inc., ("Phoenix"). However, Phoenix retained the obligations
under the Ground Lease and the former tenant made the ground lease payments. The
Partnership, as the Landlord, also entered into the Englewood Property Lease
with tenant, Phoenix. Due to bankruptcy proceedings of Phoenix, the Englewood
Property Lease between the Partnership and Phoenix was rejected in the Fourth
Quarter and rent on the Englewood property ceased as of December 2001.
Management is uncertain whether the $9,600 due from the former tenant, all of
which has been reserved, will be collected. In addition, the bankruptcy court
granted the motion filed by Phoenix to release it from both the Englewood
Property Lease and the Ground Lease, and thus the Partnership's rights and
interest in the Ground Lease have been discharged. Because the Partnership did
not assume any of Phoenix's obligations under the Ground Lease, the Partnership
has taken the position that it is not liable for any amounts of unpaid rent or
expenses due to the Ground Lessor. Possession of the property was returned to
the Ground Lessor, which resulted in a write-off of the Englewood property and a
$141,000 loss in the Fourth Quarter of 2001.

Due to bankruptcy proceedings by a former tenant, Phoenix Restaurant Group,
Inc., ("Phoenix"), the related lease on the Colorado Springs property was
rejected in the Fourth Quarter of 2001 and rent ceased as of December 2001. The
entire amount due of approximately $20,600 from the former tenant has been
reserved. The amount is included in the Partnership's filing for damages in
Bankruptcy Court of approximately $77,000, or one year of rent, although it is
uncertain whether the amount will be collectible. Management has recently found
a buyer for the Colorado Springs property and anticipates the property to be
sold by the end of 2002.

During March 2001, Hardee's Food Systems, Inc. notified Management of its intent
to close its restaurant in Oak Creek, Wisconsin. The lease on the property was
not set to expire until 2010. In the Second Quarter of 2001, a lease termination
agreement was executed and the tenant ceased the payment of rent as of April 30,
2001. Hardee's Food Systems agreed to pay the Partnership a lease termination
fee of approximately two years rent or $181,000. Management has recently
accepted an aggregate purchase offer for three of the Partnership properties,
which includes the Oak Creek property. The sale is contingent upon Limited
Partner approval to sell the remaining properties and to subsequently liquidate
and dissolve the Partnership.

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

Cash and cash equivalents were $233,000 at March 31, 2002, compared to $240,000
at December 31, 2001. The Partnership designated $103,000 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

                                       15

<PAGE>

provision to establish the Trust was included in the PMA for the indemnification
of TPG, in the absence of fraud or gross negligence, from any claims or
liabilities that may arise from TPG acting as Permanent Manager. The Trust is
owned by the Partnership. For additional information regarding the Trust, refer
to Note 8 to the financial statements.

Property taxes escrow at December 31, 2001, in the amount of approximately
$9,600, represented four (4) months of 2001 real estate taxes for the former
Hardee's- Oak Creek property paid by Hardee's Food Systems, Inc. upon the lease
termination agreement with Management. The property taxes were paid in January
2002 by the Partnership.

Deferred fees were approximately $8,100 and $8,400, net of amortization, at
March 31, 2002 and December 31, 2001, respectively. Deferred fees represent
leasing commissions paid when properties are leased and/or upon the negotiated
extension of a lease. Leasing commissions are capitalized and amortized over the
life of the lease. During the Second Quarter of 2001, the net deferred fee
balance related to the former Hardee's- Oak Creek tenant was written-off due to
its lease termination.

The Note receivable balance at December 31, 2001 was $45,250. In the Second
Quarter of 2001, a lease termination agreement was executed with Hardee's Food
Systems upon the closing of its restaurant in Oak Creek, Wisconsin. Hardee's
Food Systems agreed to pay a lease termination fee of approximately two (2)
years rent or $181,000. The payments were scheduled to be received in four equal
(4) installments of $45,250. The first payment was received in May 2001 upon the
execution of the agreement, and the subsequent installments were reflected as
Note receivable on the balance sheet. Note receivable installments were received
in August and October 2001. The final installment, which is reflected in the
Note receivable on the balance sheet at December 31, 2001, was received in
January 2002.

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

Accounts payable and accrued expenses at March 31, 2002, in the amount of
$36,000, primarily represented the accrual of auditing, tax, legal, and data
processing fees and an equipment lien release fee relating to the vacant
Colorado Springs property.

Property taxes payable at December 31, 2001, in the amount of $35,000,
represented accruals of 2001 real estate taxes in relation to the vacant Oak
Creek and Colorado Springs properties. The second property tax installment
related to the vacant Colorado Springs property remains accrued as of March 31,
2002.

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

The net loss 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.

                                       16

<PAGE>

Cash distributions paid to the Limited Partners during 2002, of $25,000 have
also been made in accordance with the amended Partnership Agreement. Due to a
First Quarter 2002 cash deficit there will not be a distribution to the Limited
Partners on May 15, 2002.

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

The Partnership reported a net loss for the quarter ended March 31, 2002, in the
amount of $22,000 compared to net income for the quarter ended March 31, 2001 of
$58,000. The net loss in 2002 is primarily due to decreased rental income, upon
the termination of the Hardee's- Oak Creek lease in the Second Quarter of 2001,
and both the rejection of the Denny's- Colorado Springs lease and the non-cash
disposal of the Denny's Englewood property, in the Fourth Quarter of 2001, as
well as increased expenditures in 2002 due to the tenant defaults and lease
terminations.

Revenues
--------
Total revenues were $59,000, and $116,000, for the quarters ended March 31,
2002, and 2001, respectively. The decrease in revenue in 2002 is primarily due
to decreased rental income, upon the termination of the Hardee's- Oak Creek
lease in the Second Quarter of 2001, and both the rejection of the Denny's-
Colorado Springs lease and the non-cash disposal of the Denny's Englewood
property in the Fourth Quarter of 2001.

Total revenues, should approximate $208,000 annually or $52,000 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.

Expenses
--------

For the quarters ended March 31, 2002 and 2001, cash expenses amounted to
approximately 112% and 35% of total revenues, respectively. Total expenses,
including non-cash items, amounted to 137% and 50% of total revenues for the
quarters ended March 31, 2002 and 2001, respectively. The increase in total
expenditures in 2002 is due primarily to the increase in legal fees and property
expenditures in connection with tenant defaults, lease terminations and
Partnership dissolution issues.

The loss on disposal of asset, write-off of uncollectible receivables,
depreciation, and amortization are non-cash items and do not affect current
operating cash flow of the Partnership or distributions to the Limited Partners.

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.

                                       17

<PAGE>

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

New Accounting Pronouncement:
-----------------------------

In October 2001, Statement of Financial Accounting Standards No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" (FAS 144) was issued. FAS
144 supercedes Statement of Financial Accounting Standards No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" (FAS 121). FAS 144 primarily addresses issues relating to the implementation
of FAS 121 and develops a single accounting model for long-lived assets to be
disposed of, whether previously held and used or newly acquired. The provisions
of FAS 144 are effective for fiscal years beginning after December 15, 2001. The
Company adopted FAS 144 on January 1, 2002 with no impact on financial
statements.

Critical Accounting Policies:
-----------------------------

The Partnership believes that its most significant accounting policies deal
with:

Depreciation methods and lives- Depreciation of the properties is provided on a
straight-line basis over 31.5 years, which is the estimated useful life of the
buildings and improvements. While the Partnership believes these are the
appropriate lives and methods, use of different lives and methods could result
in different impacts on net income. Additionally, the value of real estate is
typically based on market conditions and property performance, so depreciated
book value of real estate may not reflect the market value of real estate
assets.

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

The Partnership periodically reviews its long-lived assets, primarily real
estate, for impairment whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. The Partnership's
review involves comparing current and future operating performance of the
assets, the most significant of which is undiscounted operating cash flows, to
the carrying value of the assets. Based on this analysis, a provision for
possible loss to write down the asset to its fair value is recognized, if any.

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

None.

                                       18

<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, 2002,
               regarding the First Quarter 2002 distribution.

(b)      Report on Form 8-K:

         The Registrant filed no reports on Form 8-K during the first quarter of
fiscal year 2002.

                                       19

<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
         -----------------------------


Date:    May 8, 2002


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
         -----------------------------


Date:    May 8, 2002



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

         Diane R. Conley
         Controller

Date:    May 8, 2002

                                       20