<PAGE>
 
                        DiVall Income Properties 3, L.P.
                                 QUARTERLY NEWS

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

A publication of The Provo Group, Inc.                       FOURTH QUARTER 1998

Inquiring Minds Want to Know ...

As we enter the year 1999,  many investors are asking,  "What's taking so long?"
or "Will it ever sell?" and finally,  "Why are my  distribution  checks so low?"
Reasonable questions, let's get some answers ...

What's  taking  so long?  Because  this  partnership  has a  limited  number  of
properties  there is a lack of  diversity  and  stability  creating  more risks,
thereby limiting its  attractiveness to potential buyers. The lack of appeal may
also be attributed to its primary concepts ... Hardee's and Denny's.

Will it ever  sell?  The best  answer to that  question  is to give you the most
current  information and let you be the judge.  There are five (5) properties in
this portfolio, an Applebees, 2 Hardee's and 2 Denny's.

The  Applebee's  restaurant  located  in  Pittsburgh,  PA  continues  to perform
exceedingly well, with 1998 sales increasing 10% over 1997. This restaurant is a
good  anchor for the  portfolio,  but it has a "right of first  refusal"  on any
proposed  third  party  sale.  Therefore  if a  buyer  makes  an  offer  for the
portfolio,  the tenant may choose to buy the property  rather than  allowing the
bidder to buy it.

The two Hardee's  restaurants  have been  experiencing  a decline in sales since
1992.  Nationwide,  Hardee's has been viewed as a weak and  struggling  concept.
Good  news  though,  change is on its way.  CKE  Restaurants,  ("CKE")  has been
selected as the top  restaurant  stock for 1999 by several stock  analysts.  Why
does that affect you? CKE  purchased  all of the  Hardee's  stock and is now the
parent  company  of  Hardee's  Food  Systems  (Thus,  CKE now owns  both of your
Hardee's).  CKE now has a viable plan to turn  Hardee's  business  around via an
extensive  remodeling  plan,  menu  revisions,   and  improvements  in  national
advertising.  Many Hardee's  restaurants are being dual branded with the popular
Carl's Jr. restaurant chain also owned by CKE. A new owner with a strong balance
sheet  could  significantly  improve  Hardee's  operations.  This would make the
portfolio  more  marketable.  In the  meantime,  increased  sales would  improve
percentage rents which may increase distributions.

The Denny's restaurants are effectively status quo. They remain current in their
rental  payments,  but show no signs of any significant  increase or decrease in
sales for 1999.

Why are my  distribution  checks so low?  Again,  there are only five restaurant
properties  remaining in this  portfolio.  Each time a restaurant has been sold,
the sale proceeds have been paid to the investors in one lump sum. Consequently,
after each sale there were fewer  properties  contributing to monthly  revenues.
The bottom line is that the remaining five properties generate limited revenues.
Therefore,  funds  available  for  distribution  are limited  and  significantly
impacted  by the cost of  "public"  reporting.  This is one reason why The Provo
Group  recognizes  a sale of  this  portfolio  is in the  best  interest  of the
investors  and  continues  to  pursue  purchasers.  However,  while  we  hope to
liquidate the Partnership in a timely manner, we won't compromise your value for
a quick sale.
<PAGE>
 
PAGE 2                               DIVALL 3                             4 Q 98


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


                             DISTRIBUTION HIGHLIGHTS


               o    2.8% (approx.)  annualized  return from operations
                    based  on  $8,700,000   ("net"  remaining  initial
                    "book" investment).


               o    $60,000  total amount  distributed  for the Fourth
                    Quarter   1998   which   was    consistent    with
                    projections.


               o    $3.51 per unit  (approx.)  for the Fourth  Quarter
                    1998 from cash flow from operations.

               o    $680.00 to $516.00 range of distributions per unit
                    from the  first  unit  sold to the last  unit sold
                    before   the   offering   closed   (April   1992),
                    respectively.


     [NOTE: Distributions are from both cash flow from operations and "net"
            cash activity from financing and investing activities.]

             (NOTE: Original units were purchased for $1,000/unit.)


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



                  STATEMENTS OF INCOME AND CASH FLOW HIGHLIGHTS

               o    7% increase  in "total"  operating  revenues  from
                    projections.

               o    There  was an  increase  of  $400,000  in  "total"
                    expenses from projections.

               o    Revenues were higher than  anticipated  due to the
                    non-cash accrual of percentage rents which will be
                    billed and collected in 1999.

               o    Expenses were higher than  anticipated  due to the
                    non-cash write down of the two Hardee's properties
                    to their appraised value.
<PAGE>
 
PAGE 3                              DIVALL 3                              4 Q 98


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


                               PROPERTY HIGHLIGHTS

                                    VACANCIES

                  There were no vacancies at December 31, 1998.


                                RENTS RECEIVABLE

          There were no outstanding rents due as of December 31, 1998.


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


                                RETURN OF CAPITAL

The following  table has been updated to present the breakdown of  distributions
since the  Partnership's  first  quarterly  distribution,  for the period  ended
September 30, 1990 through December 31, 1998.

<TABLE>
<CAPTION>


                                                  Distribution       Capital
                                                   Analysis          Balance

<S>                                               <C>                <C>        
Original Capital Balance                                    --     $ 17,102,520
Cash Flow From Operations Since Inception         $  1,859,816               --
Total Distributions Since Inception                (10,292,983)              --

(Return) of Capital                               ($ 8,433,167)      (8,433,167)
                                                  ============     ------------

"Net" Remaining Initial Investment
         by Original Partners                               --     $  8,669,353
                                                                   ============
</TABLE>



            (NOTE: For a more individualized discussion of return of
                      capital contact Investor Relations.)
<PAGE>
 
PAGE 4                              DIVALL 3                              4 Q 98


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


                               QUESTIONS & ANSWERS

1.       What is the value of my investment?

         Management is currently calculating an estimated Net Unit Value for the
         Partnership,  as of December 31, 1998. We plan to have this information
         available on February 26, 1999.


2.       When can I expect my next distribution mailing?

         o        Your distribution correspondence for the First Quarter of 1999
                  is scheduled to be mailed on May 14, 1999.

                                      * * *



 For questions or additional information, please contact Investor Relations at:
                        1-800-547-7686 or 1-816-421-7444

                All written inquiries may be mailed or faxed to:

                              The Provo Group, Inc.

                        101 West 11th Street, Suite 1110
                           Kansas City, Missouri 64105

                               (FAX 816-221-2130)

                                www.tpgdivall.com
<PAGE>

[LOGO FOR THE PROVO GROUP APPEARS HERE]
 
                        DIVALL INCOME PROPERTIES 3 L.P.
                   STATEMENT OF INCOME AND CASH FLOW CHANGES
               FOR THE THREE MONTH PERIOD ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------
                                            PROJECTED      ACTUAL      VARIANCE
                                            ------------------------------------
                                              4TH          4TH      
                                            QUARTER       QUARTER      BETTER
OPERATING REVENUES                          12/31/98      12/31/98     (WORSE)
                                            --------      --------     ------
 Rental income                              $105,281      $116,116     $10,835
 Interest income                               8,140         5,213      (2,927)
 Other income                                      0             0           0
TOTAL OPERATING REVENUES                    --------     ---------   ---------
                                            $113,421      $121,329      $7,908 
                                            --------     ---------   ---------
OPERATING EXPENSES                                                 
 Insurance                                    $1,203        $1,044        $159
 Management fees                              16,440        16,215         225
 Overhead allowance                            1,326         1,308          18
 Advisory Board                                3,400         4,360        (960)
 Administrative                                7,745         6,700       1,045
 Professional services                         2,830         2,931        (101)
 Property write-downs                              0       400,374    (400,374)
 Auditing                                      8,250         9,067        (817)
 Legal                                         1,800         1,325         475
 Defaulted tenants                               300            26         274
TOTAL OPERATING EXPENSES                    --------     ---------   ---------
                                             $43,294      $443,350   ($400,056)
                                            --------     ---------   ---------
INVESTIGATION AND RESTORATION EXPENSES          $546            $0        $546  
                                            --------     ---------   ---------
NON-OPERATING EXPENSES                                             
 Depreciation                                $20,592       $20,592          $0
 Amortization                                    446           466          (0)
TOTAL NON-OPERATING EXPENSES                --------     ---------   ---------
                                             $21,038       $21,038         $(0)
                                            --------     ---------   ---------
TOTAL EXPENSES                               $64,878      $464,388   ($399,510)
                                            --------     ---------   ---------
NET INCOME                                   $48,543     ($343,059)  ($391,602)
                                                                   
OPERATING CASH RECONCILIATION                                         VARIANCE
                                                                      ---------
 Depreciation and amortization                21,038        21,038           0
 Property write-downs                              0       400,374     400,374  
 (Increase) Decrease in current assets       (10,686)      (19,859)     (9,173)
 Increase (Decrease) in current liabilities   (1,958)       (6,722)     (4,764)
 (Increase) Decrease in cash reserved for                          
  payables                                     1,764         6,700       4,936
 Advance from/(to) future cash flows for                           
  current distributions                        2,000         2,000           0
Net Cash Provided From Operating Activities --------     ---------   ---------
                                             $60,701       $60,472       ($229)
                                            --------     ---------   ---------
CASH FLOWS FROM (USED IN) INVESTING                                
 AND FINANCING ACTIVITIES                                          
 Proceeds from sale of property                    0             0           0
                                            --------     ---------   ---------
Net Cash Provided from Investing And                               
 Financing Activities                             $0            $0          $0
                                            --------     ---------   ---------
Total Cash Flow for Quarter                  $60,701       $60,472       ($229)
Cash Balance Beginning of Period             241,584       229,032     (12,552)
Less 3rd quarter distribution paid 11/98     (60,000)      (50,000)     10,000
Change in cash reserved for payables or                            
 distributions                                (3,764)       (8,700)     (4,936)
Cash Balance End of Period                  --------     ---------   ---------
                                            $238,521      $230,804     ($7,717)
Cash reserved for 4th quarter L.P.                                 
 distributions                               (60,000)      (60,000)          0
Cash advanced from (reserved for) future                           
 distributions                                     0             0           0
Cash reserved for payment of payables         (6,679)      (46,300)    (39,621)
                                            --------     ---------   ---------
Unrestricted Cash Balance End of Period     $171,842      $124,504    ($47,338)
                                            ========     =========   =========
--------------------------------------------------------------------------------
                                            PROJECTED      ACTUAL      VARIANCE
                                            ------------------------------------
                                            $60,000        $60,000          $0
*Quarterly Distribution
 Mailing Date                                 2/15/99  (enclosed)         -
--------------------------------------------------------------------------------

*Refer to distribution letter for detail of quarterly distribution.
<PAGE>

[PROVO LOGO APPEARS HERE]
 
<TABLE>
<CAPTION>
                                                                                                  --------------------------------
                                                                                                  ORIGINAL CAPITAL     $17,102,520
PROJECTIONS FOR                                                                                   NET DISTRIBUTION OF
DISCUSSION PURPOSES     DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP                              CAPITAL SINCE
                                   1998 PROPERTY SUMMARY                                            INCEPTION           $8,433,167
                                AND RELATED ESTIMATED RECEIPTS                                                        ------------
                                                                                                  CURRENT EQUITY        $8,669,353
                                                                                                  --------------------------------
PORTFOLIO (Note 1)
                                                 -------------------------------------
                                                              REAL ESTATE
                                                 -------------------------------------
                                                                     ANNUAL
----------------------------------------                             BASE
CONCEPT             LOCATION                         COST            RENT      % YIELD
----------------------------------------         -------------------------------------
<S>                 <C>                          <C>             <C>           <C>
APPLEBEE'S          PITTSBURGH, PA                   891,333     116,040       13.02%
    "                     "
DENNY'S             CO SPRINGS, CO                   580,183      77,460       13.35%
DENNY'S             ENGLEWOOD, CO                    213,211      35,880       16.83%

HARDEE'S (3)        ST. FRANCIS, WI                1,194,381      92,000        7.70%
    "                      "

HARDEE'S (3)        OAK CREEK, WI                  1,341,906      88,000        6.56%
    "                     "
----------------------------------------         ------------------------------------

----------------------------------------         ------------------------------------
PORTFOLIO TOTALS (5 Properties)                    4,221,014     409,380        9.70%
----------------------------------------         ------------------------------------
</TABLE>
<TABLE>
<CAPTION>
                                            ---------------------------------------  ---------------------------
                                                                EQUIPMENT                     TOTALS
                                            ---------------------------------------  ---------------------------
                                            LEASE                   ANNUAL
----------------------------------------    EXPIRATION              LEASE        %              ANNUAL     %
CONCEPT             LOCATION                DATE            COST    RECEIPTS  RETURN    COST    RECEIPTS  RETURN
----------------------------------------    ----------   ---------  --------  ------  --------- --------  ------
<S>                 <C>                     <C>          <C>        <C>        <C>    <C>        <C>       <C>
APPLEBEE'S          PITTSBURGH, PA                         290,469             0.00%  1,239,896  116,040   9.36%
    "                     "                                 58,094             0.00%

DENNY'S             CO SPRINGS, CO                         210,976         0   0.00%    791,159   77,460   9.79%
DENNY'S             ENGLEWOOD, CO                          210,976             0.00%    424,187   35,880   8.46%

HARDEE'S (3)        ST. FRANCIS, WI                (2)     369,688         0   0.00%  1,648,569   92,000   5.58%
    "                      "                       (2)      84,500         0   0.00%

HARDEE'S (3)        OAK CREEK, WI                  (2)     482,078         0   0.00%  1,929,472   88,000   4.56%
    "                     "                        (2)     105,488         0   0.00%
                                            ----------   ---------  --------   ------ --------- --------   -----
                                                         ---------------------------- --------------------------
PORTFOLIO TOTALS (5 Properties)                          1,812,269         0   0.00%  6,033,283  409,380   6.79%
                                                                            ------------------------------------
</TABLE>
<TABLE>
<CAPTION>
                                                        TOTAL %
                                                     ON $8,669,353
----------------------------------------                 EQUITY
CONCEPT             LOCATION                             RAISE
----------------------------------------             -------------
<S>                 <C>                              <C>
APPLEBEE'S          PITTSBURGH, PA
    "                     "

DENNY'S             CO SPRINGS, CO
DENNY'S             ENGLEWOOD, CO

HARDEE'S (3)        ST. FRANCIS, WI
    "                      "

HARDEE'S (3)        OAK CREEK, WI
    "                     "
                                                      ------------
----------------------------------------              ------------
PORTFOLIO TOTALS (5 Properties)                              4.72%
----------------------------------------              ------------
</TABLE>
Note 1: This property summary includes only current property and equipment held 
        by the Partnership.
        Equipment lease receipts shown include a return of capital.
     2: The lease was terminated and the equipment sold to Hardee's Food Systems
        in conjunction with their assumption of the Terratron leases.
     3: These leases were assumed by Hardee's Food Systems at rental rates lower
        than those stated in the original leases.