<PAGE>

                                   FORM 10-K
               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the fiscal year ended   December 31, 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)

  (Former name, former address and former fiscal year, if changed since last
                                   report.)

     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 ______
                                       -----

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     The aggregate market value of the voting securities held by nonaffiliates
of the Registrant: The aggregate market value of limited partnership interests
held by nonaffiliates is not determinable since there is no public trading
market for the limited partnership interests.

                Index to Exhibits located on page:   30 - 31
                                                   ------------
<PAGE>

                                    PART I
Item 1.  Business

Background
----------

The Registrant, DiVall Income Properties 3 Limited Partnership (the
"Partnership"), is a limited partnership organized under the Wisconsin Uniform
Limited Partnership Act pursuant to an Agreement of Limited Partnership dated as
of December 12, 1989, and amended as of December 18, 1989, February 19, 1990,
April 9, 1990, February 8, 1993, May 26, 1993, June 1, 1993, and June 30, 1994
(collectively the "Partnership Agreement"). As of December 31, 1999, the
Partnership consisted of one General Partner and 1,080 Limited Partners owning
an aggregate of 17,102.52 Limited Partnership D-Interests (the "D-Interests")
acquired at a public offering price of $1,000 per Interest before volume
discounts. The Interests were sold pursuant to a Registration Statement on Form
S-11 filed under the Securities Act of 1933 dated April 23, 1990. On April 23,
1992, the Partnership closed the offering at 17,102.52 D-Interests
($17,102,520), providing net proceeds to the Partnership after volume discounts
and offering costs of $14,408,872.

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 December 31, 1999, the Partnership owned five (5) Properties and
specialty leasehold improvements for use in all five (5) of the Properties, as
more fully described in Item 2. During the Second Quarter of 1998, the General
Partner received the written consent of a majority of the Limited Partners to
liquidate the Partnership's assets and dissolve the Partnership. During 1999,
Management entered into an agreement to sell the Properties. The sale was not
consummated, and the agreement was terminated. Management is currently seeking a
purchaser for the Partnership's Properties within the parameters of this
consent. However, management expects to continue normal operations for the
Partnership for the foreseeable future.

The Partnership's return on its investment will be derived principally from
rental payments received from its lessees. Therefore, the Partnership's return
on its investment is largely dependent upon, among other factors, the business
success of its lessees. The business success of the Partnership's individual
lessees can be adversely affected on three general levels. First, the tenants
rely heavily on the management contributions of a few key entrepreneurial
owners. The business operations of such entrepreneurial tenants can be adversely
affected by death, disability or divorce of a key owner, or by such owner's poor
business decisions such as an undercapitalized business expansion. Second,
changes in a local market area can adversely affect a lessee's business
operation. A local economy can suffer a downturn with high unemployment.
Socioeconomic neighborhood changes can affect retail demand at specific sites
and traffic patterns may change, or stronger competitors may enter a market.
These and other local market factors can potentially adversely affect the
lessees of Partnership properties. Finally, despite an individual lessee's solid
business plans in a strong local market, the chain concept itself can suffer
reversals or changes in management policy which can in turn affect the
profitability of operations for Partnership properties. Therefore, there can be
no assurance that any specific lessee will have the ability to pay its rent over
the entire term of its lease with the Partnership.

                                       2
<PAGE>

Since all of the Partnership's investment in properties and equipment involves
restaurant tenants, the restaurant market is the major market segment with a
material impact on Partnership operations. It would appear that the management
skill and potential operating efficiencies realized by Partnership lessees will
be a major ingredient for their future operating success in a very competitive
restaurant and food service marketplace.

There is no way to determine with any certainty, which, if any, tenants will
succeed or fail in their business operations over the term of their respective
leases with the Partnership. It can be reasonably anticipated that some lessees
will default on future lease payments to the Partnership which will result in
the loss of expected lease income for the Partnership. Management will use its
best efforts to vigorously pursue collection of any defaulted amounts and to
protect the Partnership assets and future rental income potential by trying to
re-lease any Properties with rental defaults. External events which could impact
the Partnership's liquidity are the entrance of other competitors into the
market areas of our tenants; liquidity and working capital needs of the
leaseholders; and failure or withdrawal of any of the national franchises held
by the Partnership's tenant. Each of these events, alone or in combination,
would affect the liquidity level of leaseholders resulting in possible default
by the tenant. Since the information regarding plans for future liquidity and
expansion of closely held organizations, which are tenants of the Partnership,
tends to be of a private and proprietary nature, anticipation of individual
liquidity problems is difficult, and prediction of future events is nearly
impossible.

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, two of 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") 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.

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 the responsibility for daily operations and assets
of the Partnerships as well as to develop and execute a plan of restoration to
the Partnerships. As reported in the Partnership's report on Form 8-K dated May
26, 1993, effective as of that date, the Limited Partners, by written consent of
a majority of interests, elected the Permanent Manager, TPG, as General Partner.
Additional results of the solicitation included the approval of the Permanent
Manager Agreement ("PMA"), the acceptance of the resignations of the former
general partners, amendments to certain provisions of the Partnership Agreement
pertaining to general partner interests and compensation, and an amendment of
the Partnership Agreement providing for an Advisory Board (the "Board").

The Permanent Manager Agreement
-------------------------------

The PMA was entered into on February 8, 1993, between the Partnership, DiVall 1
(which was dissolved in December 1998), DiVall 2, the now former general
partners DiVall and Magnuson, their controlled affiliates, and TPG, naming TPG
as the Permanent Manager. The PMA contains provisions allowing the Permanent
Manager to submit the PMA, the issue of electing the Permanent Manager as
General Partner,

                                       3
<PAGE>

and the issue of acceptance of the resignations of the former general partners
to a vote of the Limited Partners through a solicitation of written consents.

TPG, as the new General Partner, has been operating and managing the affairs of
the Partnership in accordance with the provisions of the PMA and the Partnership
Agreement.

Advisory Board
--------------

The concept of the Advisory Board was first introduced by TPG during the
solicitation of written consents for the Partnerships, and is the only type of
oversight body known to exist for similar partnerships at this time. The first
Advisory Board was appointed in October 1993, and held its first meeting in
November 1993. The three person Advisory Board is empowered to, among other
functions, review operational policies and practices, review extraordinary
transactions, and advise and serve as an audit committee to the Partnership and
the General Partner. The Advisory Board does not have the authority to direct
management decisions or policies of the Partnership or remove the General
Partner. The powers of the Advisory Board are advisory only. The Advisory Board
has full and free access to the Partnership's books and records, and individual
Advisory Board members have the right to communicate directly with the Limited
Partners concerning Partnership business. Members of the Advisory Board are
compensated $3,000 annually and $1,200 for each quarterly meeting attended.

The Advisory Board currently consists of a broker dealer representative, Steven
Carson; and a Limited Partner from each of the two remaining Partnerships:
Richard Otte from DiVall 2 and Albert Gerritz from the Partnership. For a brief
description of each Advisory Board member, refer to Item 10, Directors and
Executive Officers of the Registrant.

The Partnership has no employees.

All of the Partnership's business is conducted in the United States.

Item 2.  Properties

The Partnership's Properties are leased under 20 year leases. All leases are
triple net which require the tenant to pay all property operating costs
including maintenance, repairs, utilities, property taxes, and insurance. All
leases contain percentage rent provisions which require the tenant to pay a
specified percentage (3% to 7%) of gross sales above a threshold amount.

The Partnership owned the following Properties (including specialty leasehold
improvements) as of December 31, 1999:

<TABLE>
<CAPTION>
                                                                                    Lease
Acquisi-        Property Name                         Purchase         Rental Per   Expiration    Renewal
tion Date       & Address           Lessee            Price (1)        Annum        Date          Options
---------       ---------           ------            ---------        -----        -----         -------
<S>         <C>                     <C>               <C>              <C>          <C>           <C>
 08/14/90   Hardee's                Hardee's Food      1,648,569(2)     92,000       01/31/2010   None
            2450 E Layton Ave       Systems, Inc.
            St Francis, WI
</TABLE>

                                       4
<PAGE>

<TABLE>
<CAPTION>
                                                                                         Lease
Acquisi-        Property Name                              Purchase         Rental Per   Expiration    Renewal
tion Date       & Address                Lessee            Price (1)        Annum        Date          Options
---------       ---------                ------            ---------        -----        -----         -------
<S>             <C>                      <C>               <C>              <C>          <C>           <C>
09/11/90        Applebee's               B.T. Woodlipp,    1,297,990(2)     116,040      11/30/2009    None
                2101 Greentree Rd        Inc.
                Pittsburgh, PA

02/05/91        Hardee's                 Hardee's Food     1,929,472(2)      88,000      05/31/2010    None
                9505 S 13th St           Systems, Inc.
                Oak Creek, WI

07/01/91        Denny's                  DenAmerica, Inc.    424,187(2)      35,880      06/30/2011    None
                9060 Arapahoe Rd
                Englewood, CO

04/28/92        Denny's                  DenAmerica, Inc.    791,159(2)      77,460      05/31/2012    (3)
                4375 Sinton Rd                               -------         ------
                Colorado Springs, CO

                                                          $6,091,377       $409,380
                                                          ==========       ========
</TABLE>

Footnotes.

(1) Purchase price includes all costs incurred to acquire the property.
(2) Purchase price includes cost of specialty leasehold improvements.
(3) Renewal options available.

In connection with the proposed liquidation of the Partnership, appraisals were
received on all of the Partnership's Properties. The two Hardee's were written
down to their estimated net realizable values based on the appraisals received.
The write-downs recorded during 1998, approximated $400,000.

During 1997, the Partnership sold its Hardee's property in Wahoo, Nebraska for
approximately $405,000, resulting in a gain, before disposition fees, of
approximately $8,000.

During January 1998, the Partnership sold its Denny's property in Sanford,
Florida to the tenant for $1,250,000, resulting in a gain, before disposition
fees, of approximately $240,000.

Item 3.  Legal Proceedings

None.

Item 4.  Submission of Matters to a Vote of Security Holders

None.

                                       5
<PAGE>

                                    PART II

Item 5.  Market Price and Dividends on Registrant's Common Equity and Related
Stockholder Matters

(a)  Although some Interests have been traded, there is no active public market
     for the Interests and it is not anticipated that an active public market
     for the Interests will develop.

(b)  As of December 31, 1999, there were 1,080 record holders of Interests in
     the Partnership.

(c)  The Partnership does not pay dividends.  However, the Partnership Agreement
     provides for distributable net cash receipts of the Partnership to be
     distributed on a quarterly or monthly basis, 99% to the Limited Partners
     and 1% to the General Partner, subject to the limitations on distributions
     to the General Partner described in the Partnership Agreement.  During 1999
     and 1998, $250,000 and $1,745,000, respectively, were distributed in the
     aggregate to the Limited Partners.  In 1999 and 1998, the General Partner
     received aggregate distributions of $788 and $1,325, respectively.

Item 6.  Selected Financial Data

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
                       (a Wisconsin limited partnership)

                 December 31, 1999, 1998, 1997, 1996, and 1995
                 (not covered by Independent Auditors' Report)

<TABLE>
<CAPTION>
                                1999            1998            1997           1996            1995
--------------------------------------------------------------------------------------------------------
<S>                         <C>            <C>             <C>             <C>            <C>

Total Revenue                  $  455,885     $  698,995       $  939,210     $1,812,164      $  951,189
--------------------------------------------------------------------------------------------------------

Net Income (Loss)                 197,113        (68,993)         604,505        697,472          20,425
--------------------------------------------------------------------------------------------------------

Net Income (Loss) per
 Limited Partner Interest           11.41          (3.99)           34.99          40.37            1.18
--------------------------------------------------------------------------------------------------------

Total Assets                    3,658,298      3,685,808        5,543,931      6,720,437       8,001,587
--------------------------------------------------------------------------------------------------------

Total Partners' Capital         3,569,199      3,622,874        5,438,132      6,486,045       7,441,362
--------------------------------------------------------------------------------------------------------

Cash Distributions
per Limited Partnership
Interest                            14.62         102.03            96.48          96.48           42.98
--------------------------------------------------------------------------------------------------------
</TABLE>

(a)  The above selected financial data should be read in conjunction with the
     financial statements and the related notes appearing elsewhere in this
     annual report.

                                       6
<PAGE>

Item 7.  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 Properties, including equipment held by the Partnership at December 31,
1999, were originally purchased at a price, including acquisition costs, of
approximately $6,091,000.

During 1997, the Partnership sold its Hardee's property in Wahoo, Nebraska for
approximately $405,000, resulting in a gain, before disposition fees, of
approximately $8,000.

During 1998, the Partnership sold its Denny's property in Sanford, Florida, to
the tenant for $1,250,000, resulting in a gain before disposition fees of
approximately $240,000.

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

Cash and cash equivalents held by the Partnership, were $257,000 at December 31,
1999, compared to $231,000 at December 31, 1998.  The Partnership designated
cash of $50,000 to fund the Fourth Quarter 1999 distributions to Limited
Partners paid in February 2000; $73,000 for the payment of year-end 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 Properties, and sales of 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 Permanent Manager Agreement 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 included in Item 8 of this report.

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

Accounts payable and accrued expenses at December 31, 1999, in the amount of
$27,000, primarily represented accruals of legal and auditing fees.

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

Net income for the year was allocated between the General Partner and the
Limited Partners, 1% and 99%, respectively, as provided in the Partnership
Agreement as discussed more fully in Note 4 of the financial statements included
in Item 8 of this report. 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 included in Item 8 of this report for additional
information regarding the reallocation.

                                       7
<PAGE>

Cash distributions paid to the Limited Partners and to the General Partner
during 1999, of $250,000 and $788, respectively, have also been made in
accordance with the Partnership Agreement. The Fourth Quarter 1999 distribution
of $50,000 was paid to the Limited Partners on February 15, 2000.

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

The Partnership reported net income for the year ended December 31, 1999, in the
amount of $197,000 compared to net income (loss) for the years ended December
31, 1998 and 1997 of $(69,000) and $605,000.  Results for all three years were
different than would be expected from "normal" operations, primarily because of
non-cash write-downs of Properties to their net realizable values, and property
valuation costs. In addition, 1997 results were impacted by the reversal of a
portion of the former general partner receivable write-off, and 1998 was
impacted by a gain on the sale of the Florida Denny's Property.

Revenues
--------

Total revenues were $456,000, $699,000, and $939,000, for the years ended
December 31, 1999, 1998, and 1997, respectively. A 1997 reversal of a prior year
write-off amounted to $283,000. 1998 revenue included a $239,000 gain on the
sale of the Florida Denny's Property. Overall, revenues have decreased due to
the sale of Properties, leaving fewer revenue-generating Properties in the
Partnership's portfolio.

Total revenues should approximate $400,000 annually, based on leases currently
in place. Future revenues may decrease with tenant defaults and/or sales of
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 years ended December 31, 1999, 1998, and 1997, cash expenses amounted to
approximately 42%, 40%, and 24% of total revenues, respectively.  Total
expenses, including non-cash items, amounted to 57%, 110%, and 36% of total
revenues for the years ended December 31, 1999, 1998, and 1997, respectively.
Property write-downs negatively impacted expenses during 1998.  In addition,
during 1998 and 1999 the Partnership incurred legal fees, appraisal costs, and
fees for environmental inspections and land title surveys in connection with the
proposed liquidation of the Partnership.

The Property write-downs and depreciation 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.  Although the Partnership's leases have percentage rent clauses,
percentage rents represented only 4% of total rental income for 1999.  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.

                                       8
<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.

Year 2000:
----------

Management of the Partnership took steps to ensure that all software and systems
were Year 2000 compliant, including evaluating the preparedness of its tenants
and vendors. The move to the Year 2000 had no impact on the Partnership's
operations or those of its tenants. The amount spent by the Partnership on Year
2000 compliance was immaterial.

Item 7A.  Quantitative and Qualitative Disclosure About Market Risk

None.

                                       9
<PAGE>

Item 8.  Financial Statements and Supplementary Data

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
                ----------------------------------------------

                       (a Wisconsin limited partnership)
                       ---------------------------------

                  INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
                  -------------------------------------------

<TABLE>
<CAPTION>

                                                                 Page
                                                                 ----
     <S>                                                         <C>
     Report of Independent Public Accountants.................... 11

     Balance Sheets, December 31, 1999 and 1998................... 2 - 13

     Statements of Income for the Years
     Ended December 31, 1999, 1998, and 1997..................... 14

     Statement of Partners' Capital for the
     Years Ended December 31, 1999, 1998,
     and 1997.................................................... 15

     Statements of Cash Flows for the Years
     Ended December 31, 1999, 1998, and 1997..................... 16 - 17

     Notes to Financial Statements............................... 18 - 25

     Schedule III--Real Estate and Accumulated
     Depreciation................................................ 32
</TABLE>

                                       10
<PAGE>

                                                       [LOGO OF ARTHUR ANDERSEN]


                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




  To the Partners of
  Divall Insured Properties 3 Limited Partnership:

  We have audited the accompanying balance sheets of Divall Income Properties 3
  Limited Partnership (the Partnership), as of December 31, 1999 and 1998, and
  the related statements of income, partners' capital and cash flows for each of
  the three years in the period ended December 31, 1999. These financial
  statements are the responsibility of the Partnership's management. Our
  responsibility is to express an opinion on these financial statements based on
  our audits.

  We conducted our audits in accordance with auditing standards generally
  accepted in the United States. Those standards require that we plan and
  perform the audit to obtain reasonable assurance about whether the financial
  statements are free of material misstatement. An audit includes examining, on
  a test basis, evidence supporting the amounts and disclosures in the financial
  statements. An audit also includes assessing the accounting principles used
  and significant estimates made by management, as well as evaluating the
  overall financial statement presentation. We believe that our audits provide a
  reasonable basis for our opinion.

  In our opinion, the financial statements referred to above present fairly, in
  all material respects, the financial position of Divall Income Properties 3
  Limited Partnership, as of December 31, 1999 and 1998, and the results of its
  operations and its cash flows for each of the three years in the period ended
  December 31, 1999, in conformity with accounting principles generally accepted
  in the United States.

  Our audit was made for the purpose of forming an opinion on the basic
  financial statements taken as a whole. The schedule listed in the index of
  financial statements is presented for purposes of complying with the
  Securities and Exchange Commission's rules and is not part of the basic
  financial statements. This schedule has been subjected to the auditing
  procedures applied in the audit of the basic financial statements and, in our
  opinion, fairly states in all material respects the financial data required to
  be set forth therein in relation to the basic financial statements taken as a
  whole.

                                         /s/ Arthur Andersen LLP



  Chicago, Illinois
  January 28, 2000

                                       11
<PAGE>

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                                BALANCE SHEETS

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


                                 ASSETS

<TABLE>
<CAPTION>
                                                 December 31,       December 31,
                                                    1999               1998
                                                 ------------      -------------
 <S>                                             <C>               <C>
INVESTMENT PROPERTIES:  (Note 3)

     Land                                        $ 1,553,680       $1,553,680
     Buildings and improvements                    2,249,959        2,249,959
     Accumulated depreciation                       (778,690)        (713,396)
                                                 -----------       ----------
          Net investment properties                3,024,949        3,090,243
                                                 -----------       ----------

OTHER ASSETS:

     Cash and cash equivalents                       257,312          230,807
     Cash held in indemnification trust (Note 8)     320,341          306,386
     Rents and other receivables                      16,247           14,463
     Deferred rent receivable                         19,099           20,778
     Deferred fees                                    17,952           19,738
     Prepaid assets                                    2,398            3,393
                                                 -----------       ----------
          Total other assets                         633,349          595,565
                                                 -----------       ----------
     Total assets                                $ 3,658,298       $3,685,808
                                                 ===========       ==========
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       12
<PAGE>

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                                BALANCE SHEETS

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

                       LIABILITIES AND PARTNERS' CAPITAL

<TABLE>
<CAPTION>
                                                                      December 31,        December 31,
                                                                          1999                1998
                                                                      ------------        ------------
<S>                                                                   <C>                 <C>
LIABILITIES:

     Accounts payable and accrued expenses                              $    27,140        $     18,816
     Due to current General Partner                                              70                 229
     Security deposits                                                       16,635              16,635
     Unearned rental income                                                  45,254              27,254
                                                                      -------------       -------------

          Total liabilities                                                  89,099              62,934
                                                                      -------------        ------------
CONTINGENT LIABILITIES: (Note 7)

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

     Current General Partner -
          Cumulative net income                                              16,727              14,756
          Cumulative cash distributions                                      (8,753)             (7,965)
                                                                       ------------        ------------

                                                                              7,974               6,791
                                                                       ------------        ------------
     Limited Partners (17,102.52 interests outstanding)
          Capital contributions, net of offering costs                   14,408,872          14,408,872
          Cumulative net loss                                               (99,172)           (294,314)
          Cumulative cash distributions                                 (10,482,984)        (10,232,984)
          Reallocation of former general partners' deficit capital         (265,491)           (265,491)
                                                                       ------------        ------------

                                                                          3,561,225           3,616,083
                                                                       ------------        ------------

               Total partners' capital                                    3,569,199           3,622,874
                                                                       ------------        ------------
               Total liabilities and partners' capital                 $  3,658,298        $  3,685,808
                                                                       ============        ============
</TABLE>

The accompanying notes are an integral part of these statements.

                                       13
<PAGE>

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                             STATEMENTS OF INCOME

             For the Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
                                                                1999              1998              1997
                                                           -------------      -------------     ------------
<S>                                                        <C>                <C>               <C>
 REVENUES:
     Rental income (Note 5)                                 $   426,042        $   420,630       $   597,697
     Interest income on direct financing leases                       0                  0             1,708
     Interest income                                             21,946             39,573            31,435
     Other income                                                   386                 94            17,714
     Gain on sale of assets                                           0            238,698             7,585
     Recovery of amounts previously written off                   7,511                  0           283,071
      (Note 2)                                             ------------       ------------      ------------
                                                                455,885            698,995           939,210
                                                           ------------       ------------      ------------
 EXPENSES:

     Management fees (Note 6)                                    65,420             64,690            52,177
     Disposition fees (Note 6)                                        0             37,500            12,150
     Restoration fees (Note 6)                                      300                  0            11,323
     Insurance                                                    3,873              4,328             4,925
     General and administrative                                  28,395             40,219            39,119
     Advisory Board fees and expenses                            10,850             17,850            14,752
     Appraisals                                                       0             13,776                 0
     Environmental inspections                                    1,000              8,250                 0
     Land title surveys                                           5,700             11,950                 0
     Professional services                                       75,880             81,622            49,768
     Professional services related to Investigation                   0              1,480            37,754
     Depreciation                                                65,294             84,103           110,951
     Amortization                                                 1,786              1,786             1,786
     Write-off of uncollectible receivables                         274                  0                 0
     Write-down of properties to net realizable
     Write-down of properties to net realizable value                 0            400,374                 0
     (Note 3)                                              ------------       ------------      ------------

                                                                258,772            767,928           334,705
                                                           ------------       ------------      ------------

NET INCOME (LOSS)                                           $   197,113        $   (68,933)       $  604,505
                                                           ============       ============      ============
NET INCOME (LOSS) - CURRENT GENERAL PARTNER                 $     1,971        $      (689)       $    6,045

NET INCOME (LOSS) - LIMITED PARTNERS                            195,142            (68,244)          598,460
                                                           ------------       ------------      ------------
                                                            $   197,113        $   (68,933)       $  604,505
                                                           ============       ============      ============

NET INCOME (LOSS) PER LIMITED PARTNERSHIP INTEREST,
   based on 17,102.52 interests outstanding                 $     11.41        $     (3.99)       $    34.99
                                                           ============       ============      ============
</TABLE>
       The accompanying notes are an integral part of these statements.

                                       14
<PAGE>

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                        STATEMENTS OF PARTNERS' CAPITAL

             For the years ended December 31, 1999, 1998 and 1997
             ----------------------------------------------------


<TABLE>
<CAPTION>
                                              Current General Partner                          Limited Partners
                                       --------------------------------------    ------------------------------------------
                                                                                    Capital
                                       Cumulative     Cumulative                 Contributions,  Cumulative    Cumulative
                                       Net Income       Cash                         Net of      Net Income       Cash
                                         (Loss)     Distributions      Total     Offering Costs    (Loss)     Distributions
                                       ----------   -------------     -------    --------------  ----------   -------------
<S>                                    <C>          <C>               <C>        <C>             <C>          <C>
BALANCE AT DECEMBER 31, 1996              $ 9,400        $ (4,222)    $ 5,178       $14,408,872   $(824,530)   $ (6,837,984)
  Cash Distributions
    ($96.48 per limited partnership
     interest outstanding)                                 (2,418)     (2,418)                                   (1,650,000)
  Net Income                                6,045                       6,045                       598,460
                                       ----------   -------------     -------    --------------  ----------    ------------

BALANCE AT DECEMBER 31, 1997              $15,445        $ (6,640)    $ 8,805       $14,408,872   $(226,070)   $ (8,487,984)

  Cash Distributions
    ($102.03 per limited partnership
     interest outstanding)                                 (1,325)     (1,325)                                   (1,745,000)
  Net Loss                                   (689)                       (689)                      (68,244)
                                       ----------   -------------     -------    --------------  ----------    ------------

BALANCE AT DECEMBER 31, 1998              $14,756        $ (7,965)    $ 6,791       $14,408,872   $(294,314)   $(10,232,984)

  Cash Distributions
    ($14.62 per limited partnership
     interest outstanding)                                   (788)       (788)                                     (250,000)
  Net Income                                1,971                       1,971                       195,142
                                       ----------   -------------     -------    --------------  ----------   -------------

BALANCE AT DECEMBER 31, 1999              $16,727        $ (8,753)    $ 7,974       $14,408,872   $ (99,172)   $(10,482,984)
                                       ==========   =============     =======    ==============  ==========   =============

<CAPTION>
                                           Reallocation           Total
                                           ------------        -----------
<S>                                        <C>                 <C>
BALANCE AT DECEMBER 31, 1996                  $(265,491)       $ 6,480,867

  Cash Distributions
    ($96.48 per limited partnership
     interest outstanding)                                      (1,650,000)
  Net Income                                                       598,460
                                           ------------        -----------

BALANCE AT DECEMBER 31, 1997                  $(265,491)       $ 5,429,327

  Cash Distributions
    ($102.03 per limited partnership
     interest outstanding)                                      (1,745,000)
  Net Loss                                                         (68,244)
                                           ------------        -----------

BALANCE AT DECEMBER 31, 1998                  $(265,491)       $ 3,616,083

  Cash Distributions
    ($14.62 per limited partnership
     interest outstanding)                                        (250,000)
  Net Income                                                       195,142
                                           ------------        -----------

BALANCE AT DECEMBER 31, 1999                  $(265,491)       $ 3,561,225
                                           ============        ===========
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       15
<PAGE>

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                           STATEMENTS OF CASH FLOWS

             For the Years Ended December 31, 1999, 1998, and 1997
             -----------------------------------------------------

<TABLE>
<CAPTION>
                                                                                      1998          1998            1997
                                                                                    ---------    -----------     -----------
<S>                                                                                 <C>          <C>             <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
     Net income (loss)                                                              $ 197,113    $   (68,933)    $   604,505
     Adjustments to reconcile net income (loss) to net cash from (used in)
      operating activities -
          Depreciation and amortization                                                67,080         85,889         112,737
          Write-down of properties to net realizable value                                  0        400,374               0
          Net gain on disposition                                                           0       (238,698)         (7,585)
          Recovery of amounts previously written off                                   (7,511)             0        (283,071)
          Write-off of uncollectible receivables                                          274              0               0
          Interest applied to Indemnification Trust Account                           (13,955)       (15,724)        (14,414)
          (Increase)/Decrease in rents, other receivables and prepaid assets           (1,063)         8,855           4,667
          Decrease in deferred rent receivable                                          1,679         10,251          10,079
          Deposits (received) applied for real estate taxes                                 0              0          81,447
          Increase/(Decrease) in accounts payable and accrued expenses                  8,324         (6,515)         (4,949)
          Increase/(Decrease) in due to General Partner                                  (159)        (1,166)        (47,932)
          (Decrease) in security deposits                                                   0        (20,184)        (10,160)
          Increase/(Decrease) in real estate taxes payable                                  0              0         (81,217)
          Increase/(Decrease) in unearned rental income                                18,000        (15,000)         15,665
                                                                                    ---------    -----------     -----------

               Net cash provided from (used in) operating activities                  269,782        139,149         379,772
                                                                                    ---------    -----------     -----------

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
     Principal payments received on direct financing leases                                 0              0          25,017
     Recoveries from former G.P. affiliates                                             7,511              0         283,071
     Proceeds from sale of land and buildings                                               0      1,242,563         404,850
                                                                                    ---------    -----------     -----------

               Net cash provided from investing activities                              7,511      1,242,563         712,938
                                                                                    ---------    -----------     -----------

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:

     Cash distributions to General Partner                                               (788)        (1,325)         (2,418)
     Cash distributions to Limited Partners                                          (250,000)    (1,745,000)     (1,650,000)
                                                                                    ---------    -----------     -----------

               Net cash (used in) financing activities                               (250,788)    (1,746,325)     (1,652,418)
                                                                                    ---------    -----------     -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   26,505       (364,613)       (559,708)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                        230,807        595,420       1,155,128
                                                                                    ---------    -----------     -----------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                            $ 257,312    $   230,807     $   595,420
                                                                                    =========    ===========     ===========
</TABLE>

       The accompanying notes are an integral part of these statements.



                                       16
<PAGE>

           Supplemental Information to the Statements of Cash Flows
           --------------------------------------------------------

The following significant non-cash transactions occurred during the three years
affecting the Partnership's financial statements:

     1.   During 1996, the Partnership incurred leasing commissions totaling
          $23,310 which were unpaid at year-end.  The amount was paid in full
          during 1997.


       The accompanying notes are an integral part of these statements.

                                       17
<PAGE>

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                         NOTES TO FINANCIAL STATEMENTS

                       DECEMBER 31, 1999, 1998, AND 1997

1.  ORGANIZATION AND BASIS OF ACCOUNTING:
    -------------------------------------

DiVall Income Properties 3 Limited Partnership (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 December 31, 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.  Revenue from direct financing
leases is recognized at level rates of return over the term of the lease.
Percentage rents have historically been 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.
However, during 2000, the partnership adopted SAB 101, which requires the
recording of percentage rents only when the tenant has reached the breakpoint
stipulated in the lease.

The Partnership operates in only one segment and therefore no further segment
reporting 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.

                                       18
<PAGE>

Deferred charges represent 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.

The Partnership follows Statement of Financial Accounting Standards No.121
("SFAS 121"), Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of, which requires that all long-lived assets be
reviewed for impairment in value whenever changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.

The Partnership will be dissolved on December 1, 2015, or earlier upon the prior
occurrence of any of the following events: (a) the disposition of all
interests in real estate and other Partnership assets; (b) the decision by
Majority Vote 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.  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 is currently seeking a
buyer for the Partnership's Properties within the parameters of the consent.
However, Management expects to continue normal operations for the Partnership
for the foreseeable future.

No provision for Federal income taxes has been made, as any liability for such
taxes would be that of the individual partners rather than the Partnership.  At
December 31, 1999, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$3,219,000.

                                       19
<PAGE>

The following represents a reconciliation of net income (loss) as stated on the
Partnership's statements of income to net income for tax reporting purposes:

<TABLE>
<CAPTION>
                                                                 1999              1998              1997
                                                           ----------------  ----------------  ----------------
     <S>                                                  <C>               <C>               <C>
     Net income (loss) per statements of income                $197,113           $(68,933)        $604,505

     Book to tax depreciation difference                        (16,725)               368            8,014

     Straight line rent adjustment                               (1,679)           (10,251)         (10,079)

     Prepaid rent                                                18,000            (15,000)               0

     Property write-downs                                             0            400,374                0

     Other, net                                                      37             (2,547)           5,231
                                                               --------           --------         --------

                                                               $196,746           $304,011         $607,671
     Net income for tax reporting purposes                     ========           ========         ========
</TABLE>

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") 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.  Restoration expenses and recoveries have been allocated based
on the same percentages. Through December 31, 1999, $5,780,000 of recoveries
have been received which exceeded the original estimate of $3 million.  As a
result, during 1996, 1997 and 1999, the Partnership has recognized $1,291,000 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.

                                       20
<PAGE>

3.  INVESTMENT PROPERTIES:
    ----------------------

As of December 31, 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.

During 1997, the Partnership sold its Hardee's property in Wahoo, Nebraska, for
approximately $405,000, resulting in a gain, before disposition fees, of
approximately $8,000.

During January 1998, the Partnership sold its Denny's property in Sanford,
Florida, to the tenant for $1,250,000, resulting in a gain, before disposition
fees, of approximately $240,000.

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.

In connection with the proposed liquidation of the Partnership, appraisals were
received on all of the Partnership's Properties.  During 1998, the two Hardee's
were written down to their estimated net realizable values based on the
appraisals received.  The write-downs totaled approximately $400,000.

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 the close 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
office overhead of $25,000 between the three original affiliated Partnerships.
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 Permanent Manager
Agreement ("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 $88,197 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.

                                       21
<PAGE>

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 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.,

                                       22
<PAGE>

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>
             2000                          $  409,380
             2001                             409,380
             2002                             409,380
             2003                             409,380
             2004                             409,380
          Thereafter                        2,322,578
                                           ----------

                                           $4,369,478
                                           ==========
</TABLE>

Percentage rentals included in rental income in 1999, 1998, and 1997 were
$18,341, $11,692, and $20,658, respectively.

Two (2) of the Partnership's properties are leased to a Denny's franchise.  Base
rent from these properties amounted to approximately 28% of total base rent in
1999.

Two (2) of the Partnership's properties are leased to a Hardee's franchise.
Base rent from these properties is approximately 44% of total base rents.

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
December 31, 1999, the Partnership has leased two of its properties to Hardee's
Food Systems, Inc., which constituted 21% of the aggregate gross proceeds.

                                       23
<PAGE>

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

Amounts incurred to the current General Partner for the years ended December 31,
1999, 1998, and 1997, are as follows:

<TABLE>
<CAPTION>
Current General Partner                        Incurred           Incurred            Incurred
-----------------------
                                         for the year ended  for the year ended   for the year ended
                                          December 31, 1999   December 31, 1998    December 31, 1997
                                         ------------------- -------------------  -------------------
<S>                                      <C>                 <C>                  <C>
Management fees                                 $65,420             $ 64,690             $52,177
Disposition fees                                      0               37,500              12,150
Restoration fees                                    300                    0              11,323
Leasing commissions                                   0                    0                   0
Cash distribution                                   788                1,325               2,418
Overhead allowance                                5,303                5,219               5,150
Reimbursement for out-of-pocket                   3,532               10,229              11,493
 expenses                                       -------             --------             -------
                                                $75,343             $118,963             $94,711
                                                =======             ========             =======
</TABLE>

7.  CONTINGENT LIABILITIES:
    ----------------------

According to the Partnership Agreement, as amended, 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 a restoration account and then
distributed among the three Partnerships.  Fifty percent (50%) of the total
amount paid to the recovery was refunded to the current General Partner during
1996, after exceeding the $4,500,000 recovery level.  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 December 31, 1999, the Partnership may
owe the current General Partner $18,862, which has been reflected as a recovery,
if the $6,000,000 recovery level is achieved.  Management believes it is
unlikely that this recovery level will be achieved.

8.  PMA INDEMNIFICATION TRUST:
    --------------------------

The Permanent Manager Agreement ("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

                                       24
<PAGE>

December 31, 1999. Funds are invested in U.S. Treasury securities. In addition,
interest totaling $70,341 has been credited to the Trust as of December 31,
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:
     ------------------

In February 2000, the Partnership made a distribution to the Limited Partners
from operations for the Fourth Quarter 1999 of $50,000 amounting to $2.92 per
Interest.

                                      25
<PAGE>

Item 9.  Changes in and Disagreements With Accountants on Accounting and
         Financial Disclosure

None

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

TPG is an Illinois corporation with its principal office at 101 West 11th
Street, Suite 1110, Kansas City, Missouri 64105.  TPG was elected General
Partner by vote of the Limited Partners effective May 26, 1993.  Prior to such
date, TPG had been managing the Partnership since February 8, 1993, under the
terms of the Permanent Manager Agreement ("PMA"), which remains in effect.  TPG
also serves as the corporate general partner for DiVall 2.  See Items 1 and 13
hereof for additional information about the PMA and the election of TPG as the
General Partner.

The executive officers and director of the General Partner who control the
affairs of the Partnership are as follows:

     Bruce A. Provo, Age 49 - President, Founder and Director.   Mr. Provo has
     been involved in the management of real estate and other asset portfolios
     since 1979.  Since he founded the company in 1985, Mr. Provo has been
     President of TPG.  From 1982 to 1986, Mr. Provo served as President and
     Chief Operating Officer of the North Kansas City Development Company
     ("NKCDC"), North Kansas City, Missouri.  NKCDC was founded in 1903 and the
     assets of the company were sold in December, 1985 for $102,500,000.  NKCDC
     owned commercial and industrial properties, including an office park and a
     retail district, as well as apartment complexes, motels, recreational
     facilities, fast food restaurants, and other properties.  NKCDC's holdings
     consisted of over 100 separate properties and constituted approximately 20%
     of the privately held real property in North Kansas City, Missouri (a four
     square mile municipality).  Following the sale of the company's real
     estate, Mr. Provo served as the President and Chief Executive Officer and
     Liquidating Trustee of NKCDC from 1986 to 1991.

     Mr. Provo graduated from Miami University, Oxford, Ohio in 1972 with a B.S.
     in Accounting.  He became a Certified Public Accountant in 1974 and was a
     manager in the banking and financial services division of Arthur Andersen
     LLP prior to joining Rubloff Development Corporation in 1979.  From 1979
     through 1985, Mr. Provo served as Vice President - Finance and then as
     President of Rubloff Development Corporation.  Mr. Provo has previously
     served on the Board of Directors of the National Realty Committee, a
     legislative "watchdog" organization for the commercial real estate industry
     headquartered in Washington, DC.

     Kristin J. Atkinson, Age 37 - Vice President - Finance and Administration.
     Ms. Atkinson joined TPG in September 1994, to provide management expertise
     in the areas of financial controls and management accounting services for
     four limited partnerships managed by TPG.  Prior to joining TPG, Ms.
     Atkinson was Manager of Financial

                                      26
<PAGE>

     Reporting for Farm & Home Savings Association (a $4 billion savings and
     loan association) for nine years where she was responsible for supervision
     of the preparation of internal and external financial documentation,
     including regulatory filings for the savings association and its parent
     company. Ms. Atkinson graduated Magna Cum Laude with a B.S. in Accounting
     from Missouri Southern State College in Joplin, Missouri and worked as an
     accountant for James P. Arthur and Company for one year before joining Farm
     & Home Savings Association.

The Advisory Board, although its members are not "Directors" or "Executive
Officers" of the Partnership, provides advisory oversight to management of the
Partnership and consists of:

     Steve Carson - Self-Employed Investment Advisor. Mr. Carson's primary
     client concentration includes labor union, pension, and annuity funds. Mr.
     Carson worked for First Albany Corporation for 11 years. He began his
     career as a retail broker at E.F Hutton & Company and served as Vice
     President, Shearson American Express from 1980-1986. Mr. Carson attended
     Northrup University in Los Angeles, California. He has served as Board
     Member and President on various Civic Boards in Syracuse, New York. Mr.
     Carson represents the broker-dealer community.

     Richard W. Otte - Editorial Writer.  Mr. Otte is in his seventh year as an
     Editorial Board Member and editorial writer for The Volusion, a DeLand,
     Florida, subsidiary of the News-Journal Corporation in Daytona Beach,
     Florida.  Mr. Otte retired in 1988 after 34 years with the Dispatch
     Printing Co., serving his last eight years as Managing Editor of the
     Columbus Dispatch and as a member of its Operating Committee.  He
     previously was the executive sports editor of the newspaper in Ohio's
     capital city.  Mr. Otte's 49 years in professional journalism also include
     news reporting, editing and sports assignments with the Daytona Journal
     Herald and Springfield News-Sun.  Mr. Otte is a Limited Partner
     representing  DiVall 2.

     Albert Gerritz - Retired, Perinton Volunteer Ambulance Corps. Mr. Gerritz
     has held various offices in Finance and Administration, including
     President. Mr. Gerritz retired in 1986 after 36 years with Eastman Kodak
     Co. where he was Supervisor of Engineering Services, Research Labs. Mr.
     Gerritz was instrumental in identifying the need and pursuing the
     development of a unique research complex for Kodak, which became the case
     study for his consulting activities on research facilities nationwide. Mr.
     Gerritz also worked for forty years in the Bushnell's Basin Fire Department
     and served five years as Chief. Mr. Gerritz has a life membership in
     National Society of Professional Engineers. Mr. Gerritz is a Limited
     Partner representing DiVall 3.

Item 11.  Executive Compensation

The Partnership has not paid any "executive compensation" to the corporate
General Partner or to the directors and officers of the General Partner.  The
General Partner's participation in the income of the Partnership is set forth in
the Partnership Agreement, which is filed as Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5
hereto.  The current General Partner received management fees and expense
reimbursements during the year.

                                      27
<PAGE>

See Item 13 below, and Note 6 to the financial statements in Item 8 hereof, for
further discussion of payments by the Partnership to the General Partner and
former general partners.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

(a)  As of December 31, 1999, the following entity is known to beneficially own
5% or more of the outstanding Interests as follows:

<TABLE>
<CAPTION>
                                                                 Interests      Percentage of
 Title of                          Name and Address of          Beneficially     Interests of
 Class                             Beneficial Owner               Owned         Outstanding
 ------                            -------------------          ------------    --------------
<S>                         <C>                                 <C>             <C>
 Limited Partnership        The Engineers Joint Pension Fund        1,500             8.77%
 Interests                  4325 S. Salina Street
                                 Syracuse, NY 13205
</TABLE>

(b) As of December 31, 1999, neither the General Partner nor any of its
affiliates owned any Interests in the Partnership.

Item 13.  Certain Relationships and Related Transactions

The compensation to be paid to TPG is governed by the Partnership Agreement, as
amended by vote of the Limited Partners to reflect the terms of the PMA. TPG's
compensation includes a base fee equal to 4% of the Partnership's gross
collected receipts, subject to a minimum of $57,000 per year. For this purpose,
"gross collected receipts" means all cash revenues arising from operations and
reserves of the Partnerships, including any proceeds recovered with respect to
the obligations of the former general partners. The portion of such fee
resulting from recoveries from former general partners is designated as
restoration fees. TPG is also entitled to reimbursement for office rent and
utilities not to exceed $4,750 per year. TPG is entitled to reimbursement of
reasonable direct costs and expenses, such as travel, lodging, overnight
delivery and postage, but has no right to be reimbursed for administrative
expenses such as payroll, payroll taxes, insurance, retirement and other
benefits, base phone and fax charges, office furniture and equipment, copier
rent, and the like. Between the Partnerships, TPG is entitled to an aggregate
minimum base management fee of $300,000 per year and reimbursement for office
rent in the maximum amount of $25,000 per year. The Partnership shall only be
responsible for its allocable share of such minimum and maximum amounts as
indicated above ($57,000 minimum base fee and $4,750 maximum rent
reimbursement). TPG is entitled to an annual increase in the minimum base
management fee and maximum office overhead reimbursement in an amount not to
exceed the percentage increase in the Consumer Price Index ("CPI") for the
immediately preceding calendar year. 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 CPI adjustment.
Additionally, TPG is allowed up to one-half of the Competitive Real Estate
Commission, not to exceed 3% upon the disposition of assets. The payment of a
portion of such fees is subordinated to TPG's success at recovering the funds
misappropriated by the former general partners.

The PMA has an expiration date of December 31, 2002, but may be terminated
earlier (a) by a vote at any time by a majority in interest of the Limited
Partners, (b) upon the dissolution and winding up of the Partnership, (c) upon
the entry of an order of a court finding that the Permanent Manager has engaged
in fraud or other like misconduct or has shown itself to be incompetent in
carrying out its duties under the

                                      28
<PAGE>

Partnership Agreement, or (d) upon sixty (60) days written notice from the
Permanent Manager to the Limited Partners of the Partnership. Upon termination
of the PMA, other than by the voluntary action of TPG, TPG shall be paid a
termination fee of one month's Base Fee allocable to the Partnership, subject to
a minimum of $4,750. In the event that TPG is terminated by action of a
substitute general partner, TPG shall also receive, as part of this termination
fee, 4% of any proceeds recovered with respect to the obligations of the former
general partners, whenever such proceeds are collected.

Under the PMA, TPG shall be indemnified by the Partnership, DiVall and Magnuson,
and their controlled affiliates, and shall be held harmless from all claims of
any party to the Partnership Agreement and from any third party including,
without limitation, the Limited Partners of the Partnership, for any and all
liabilities, damages, costs, and expenses, including reasonable attorneys' fees,
arising from or related to claims relating to or arising from the PMA or its
status as Permanent Manager.  The indemnification does not extend to claims
arising from fraud or criminal misconduct of TPG as established by court
findings.  To the extent possible, the Partnership is to provide TPG with
appropriate errors and omissions, officers liability or similar insurance
coverage, at no cost to TPG.  In addition, TPG is granted the right to establish
the Trust in an amount not to exceed $250,000, solely for the purpose of funding
such indemnification obligations.  Once a determination has been made that no
such claims can or will be made against TPG, the balance of the Trust will
become unrestricted cash of the Partnership.  As of December 31, 1999, the
Partnership had fully funded the Trust.

The following fees and reimbursements from the Partnership were incurred to
management in 1999:

  The Provo Group, Inc.
  ---------------------

     Management Fees                             $65,420
     Restoration Fees                                300
     Office Overhead Allowance                     5,303
     Direct Cost Reimbursements                    3,532
                                                 -------

       1999 Total                                $74,555
                                                 =======

                                      29
<PAGE>

                                 PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)    1.    Financial Statements

             The following financial statements of DiVall Income Properties 3
             Limited Partnership are included in Part II, Item 8:

             Report of Independent Public Accountants

             Balance Sheets, December 31, 1999 and 1998

             Statements of Income for the Years Ended December 31, 1999, 1998
             and 1997

             Statements of Partners' Capital for the Years Ended December 31,
             1999, 1998 and 1997

             Statements of Cash Flows for the Years Ended December 31, 1999,
             1998 and 1997

             Notes to Financial Statements

     2.      Financial Statement Schedules

             Schedule III - Real Estate and Accumulated Depreciation

     All other schedules for which provision is made in the applicable
     accounting regulation of the Securities and Exchange Commission are not
     required under the related instruction or are inapplicable and, therefore,
     have been omitted.

     3.      Listing of Exhibits

             3.1  Agreement of Limited Partnership dated as of December 12,
                  1989, and amended as of December 18, 1989, February 19, 1990,
                  and April 9, 1990, filed as Exhibit 3A to Amendment No.2 to
                  the Partnership's Registration Statement on Form S-11 dated
                  April 23, 1990, incorporated herein by reference.

             3.2  Amendment to Amended Agreement of Limited Partnership dated as
                  of February 8, 1993, filed as Exhibit 3.3 to the Partnership's
                  10-K for the year ended December 31, 1992, and incorporated
                  herein by reference.

             3.3  Amendment to Amended Agreement of Limited Partnership dated as
                  of May 26, 1993, filed as Exhibit 3.3 to the Partnership's 10-
                  K for the year ended December 31, 1993, and incorporated
                  herein by reference.

             3.4  Amendment to Amended Agreement of Limited Partnership dated as
                  of June 1, 1993, filed as Exhibit 3.4 to the Partnership's 10-
                  K for the year ended December 31, 1993, and incorporated
                  herein by reference.

                                      30
<PAGE>

          3.5  Amendment to Amended Agreement of Limited Partnership dated as of
               June 30, 1994, filed as Exhibit 3.5 to the Partnership's 10-K for
               the year ended December 31, 1994, and incorporated herein by
               reference.

          10.0  Permanent Manager Agreement filed as an exhibit to the Current
                Report on Form 8-K dated January 22, 1993, incorporated herein
                by reference.

          99.0  Correspondence to the Limited Partners dated February 15, 2000,
                regarding the Fourth Quarter 1999 distribution.

(b)  Report on Form 8-K:

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

                                      31
<PAGE>

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
            SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                               DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                                                                                Gross amount at which
                                                  Initial cost to Partnership                carried at end of year (A)
                                                 -----------------------------               ----------------------------
                                                                    Building                          Building
                                                                      and                               and
           Property                Encumbrances        Land        Improvements         Land         Improvements        Total
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>              <C>            <C>                <C>            <C>               <C>
Pittsburgh, Pennsylvania                  $  -      $   274,467      $  616,866       $   274,467     $  616,866       $  891,333
St. Francis, Wisconsin                       -         485,354          709,028          468,354         606,153        1,074,507
Oak Creek, Wisconsin                         -         496,505          845,400          496,505         547,901        1,044,406
Englewood, Colorado                          -               -          213,210                -         213,210          213,210
Colorado Springs, Colorado                   -         314,354          265,829          314,354         265,829          580,183

                              ----------------------------------------------------------------------------------------------------
                                          $  0      $1,570,680       $2,650,333       $1,553,680      $2,249,959       $3,803,639
                              ====================================================================================================

<CAPTION>
                                                                                                 Life on which
                                                                                                  depreciation
                                                                                                   in latest
                                                                                                   statement
                                                                                                 of operations
                                  Accumulated             Date of               Date              is computed
           Property               depreciation          construction          acquired              (years)
----------------------------------------------------------------------------------------------------------------
<S>                               <C>                   <C>                   <C>                <C>
Pittsburgh, Pennsylvania               $ 194,985            1990                 9/11/90              31.5
St. Francis, Wisconsin                   221,906            1990                 8/14/90              31.5
Oak Creek, Wisconsin                     238,124            1991                  2/5/91              31.5
Englewood, Colorado                       58,977            1991                  7/1/91              31.5
Colorado Springs, Colorado                64,698             -                   4/28/92              31.5
                                  --------------
                                       $ 778,690
                                  ==============
</TABLE>

(A) Represents aggregate costs for federal income tax purposes.

(B) Reconciliation of "Real Estate and Accumulated Depreciation":

<TABLE>
<CAPTION>
                                     Year ended               Year ended
Investments in Real Estate        December 31, 1999       December 31, 1998
-------------------------------------------------------------------------------
<S>                               <C>                     <C>
Balance at beginning of year            $ 3,803,639             $ 5,340,446

Property write-down                               0                (400,374)


Sale of Property                                  0              (1,136,433)
                                  ---------------------------------------------

Balance at end of year                  $ 3,803,639             $ 3,803,639
                                  =============================================
</TABLE>

<TABLE>
<CAPTION>
                                        Year ended              Year ended
Accumulated Depreciation            December 31, 1999        December 31, 1998
---------------------------------------------------------------------------------
<S>                                 <C>                      <C>
Balance at beginning of year                 $ 713,396                $ 761,861

Additions charged to costs
  and expenses                                  65,294                   84,103

Sale of Property                                     0                 (132,568)
                                  ------------------------------------------------

Balance at end of year                       $ 778,690                $ 713,396
                                  ================================================
</TABLE>

                                      32
<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:
      ----------------------------------------
      Bruce A. Provo, President


Date: March 26, 2000


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:
      ----------------------------------------
      Bruce A. Provo, President


Date: March 26, 2000



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


Date: March 26, 2000

                                       33
<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: March 26, 2000


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: March 26, 2000



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


Date: March 26, 2000

                                      33