<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, 2001
                               ---------------------------

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from _____________ to ____________

                         Commission file number 0-20253

                 DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
             (Exact name of registrant as specified in its charter)

          Wisconsin                                            39-1660958
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                              Identification No.)

            101 W. 11th St., Suite 1110, Kansas City, Missouri 64105
          (Address of principal executive offices, including zip code)

                                 (816) 421-7444
              (Registrant's telephone number, including area code)

         (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:   33 - 34
                                                      -----------

<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, 2001, the
Partnership consisted of one General Partner and 977 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, 2001, the Partnership owned four (4) Properties and
specialty leasehold improvements for use in all four (4) 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
buyers for the Partnership's remaining four (4) Properties within the parameters
of the consent and anticipates that all the Properties will be sold by the end
of 2002. However, Management expects to continue normal operations for the
Partnership until the sales are complete.

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.

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

                                       2

<PAGE>

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, 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.

                                       3

<PAGE>

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 four 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 $1,500 annually and $500 for each quarterly meeting attended.

The Advisory Board currently consists of a broker dealer representative, William
Arnold; and Limited Partners from each of the two remaining Partnerships:
Richard Otte and Jesse Small from DiVall 2 and Albert Kramer 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 (7% to 8%) of gross sales above a threshold amount.

The Partnership owned the following Properties (including specialty leasehold
improvements) as of December 31, 2001:

<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

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    Vacant              Vacant            1,929,472(2)           0            NA       NA
            9505 S 13th St
            Oak Creek, 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>
04/28/92    Vacant                 Vacant           791,159(2)           0       NA          NA
                                                 ----------       --------
            4375 Sinton Rd
            Colorado Springs, CO
                                                 $5,667,190       $208,040
                                                 ==========       ========
</TABLE>

Footnotes.

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

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

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

During March 2001, Hardee's Food Systems, Inc. notified Management of its intent
to close its restaurant in Oak Creek, Wisconsin. The lease on the property was
not set to expire until 2010. In the Second Quarter of 2001, a lease termination
agreement was executed and the tenant ceased the payment of rent as of April 30,
2001. Hardee's Food Systems agreed to pay the Partnership a lease termination
fee of approximately two years rent or $181,000. Management is actively
marketing new leasing or a potential buyer for the vacant property.

                                       5

<PAGE>

Item 3. Legal Proceedings

None.

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

None.

                                       6

<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, 2001, there were 977 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 2001
     and 2000, $310,000 and $250,000 was distributed in the aggregate to the
     Limited Partners. In 2001 and 2000, the General Partner received aggregate
     distributions of $492 and $877, respectively.

Item 6. Selected Financial Data

The Partnership's selected financial data included below has been derived from
the Partnership's financial statements. Arthur Andersen LLP's report on the
financial statements, for the years ended December 31, 2001 and 2000, is
included in this annual report on page 15. The financial data selected below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and with the financial
statements and the related notes appearing elsewhere in this annual report.

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

                  December 31, 2001, 2000, 1999, 1998, and 1997

<TABLE>
<CAPTION>
    ------------------------------------------------------------------------------------------
                                 2001         2000         1999         1998          1997
    ------------------------------------------------------------------------------------------
    <S>                        <C>          <C>          <C>          <C>           <C>
    Total Revenue              $  576,659   $  458,923   $  455,885   $   698,995   $  939,210
    ------------------------------------------------------------------------------------------
    Net Income (Loss)             123,187      219,372      197,113       (68,993)     604,505
    ------------------------------------------------------------------------------------------
    Net Income (Loss) per
    Limited Partner
    Interest                         7.13        12.70        11.41         (3.99)       34.99
    ------------------------------------------------------------------------------------------
    Total Assets                3,447,035    3,605,173    3,658,298     3,685,808    5,543,931
    ------------------------------------------------------------------------------------------
    Total Partners' Capital     3,350,389    3,537,694    3,569,199     3,622,874    5,438,132
    ------------------------------------------------------------------------------------------
    Cash Distributions per
    Limited Partnership
    Interest                        18.13        14.62        14.62        102.03        96.48
    ------------------------------------------------------------------------------------------
</TABLE>

                                        7

<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,
2001, were originally purchased at a price, including acquisition costs, of
approximately $5,667,000.

At December 31, 2000 the Partnership owned five (5) fast-food restaurants
comprised of: two (2) Hardee's restaurants, one (1) Applebee's restaurant, and
two (2) Denny's restaurants. However, due to the write-off of the former
Englewood property during the Fourth Quarter of 2001 only four (4) properties
remain at December 31, 2001. In addition, the former Hardee's- Oak Creek lease
was terminated in the Second Quarter of 2001 and the former Denny's- Colorado
Springs lease was terminated in the Fourth Quarter of 2001. Both properties
remain vacant as of December 31, 2001. Therefore, the four (4) remaining
properties at December 31, 2001 are comprised of: one (1) Hardee's restaurant,
one (1) Applebee's restaurant, and two (2) vacant properties. Management
anticipates that the remaining four properties will be sold by the end of 2002.
If this timing should not occur, Management is comfortable that the two
remaining property leases are sound and that the Partnership will be able to
adequately meet its future expenses. In addition, Management is prepared to
waive Management fees paid by the Partnership to TPG if the need should arise.

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

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

                                       8

<PAGE>

During March 2001, Hardee's Food Systems, Inc. notified Management of its intent
to close its restaurant in Oak Creek, Wisconsin. The lease on the property was
not set to expire until 2010. In the Second Quarter of 2001, a lease termination
agreement was executed and the tenant ceased the payment of rent as of April 30,
2001. Hardee's Food Systems agreed to pay the Partnership a lease termination
fee of approximately two years rent or $181,000. Management is actively
marketing new leasing or a potential buyer for the vacant property.

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

Cash and cash equivalents held by the Partnership, were $240,000 at December 31,
2001, compared to $252,000 at December 31, 2000. The Partnership designated cash
of $25,000 to fund the Fourth Quarter 2001 distributions to Limited Partners,
which is scheduled to be paid in February 2002; $59,000 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.

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

Deferred fees were approximately $8,000 and $16,000, net of amortization, at
December 31, 2001 and 2000, respectively. Deferred fees represent leasing
commissions paid when properties are leased and/or upon the negotiated extension
of a lease. Leasing commissions are capitalized and amortized over the life of
the lease. During the Second Quarter of 2001, the net deferred fee balance
related to the former Hardee's- Oak Creek tenant was written-off due to its
lease termination.

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

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

Accounts payable and accrued expenses at December 31, 2001, in the amount of
$33,000, primarily represented accruals of auditing, tax, and data processing
fees.

                                       9

<PAGE>

Property taxes payable at December 31, 2001, in the amount of $35,000,
represented accruals of 2001 real estate taxes in relation to the vacant Oak
Creek and Colorado Springs properties.

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.

Cash distributions paid to the Limited Partners and to the General Partner
during 2001, of $310,000 and $492, respectively, have also been made in
accordance with the Partnership Agreement. The Fourth Quarter 2001 distribution
of $25,000 is scheduled to be paid to the Limited Partners on February 15, 2002.

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

The Partnership reported net income for the year ended December 31, 2001, in the
amount of $123,000 compared to net income for the years ended December 31, 2000
and 1999 of $219,000 and $197,000. Results for 2001 were different than would be
expected from "normal" operations, primarily because of the former Hardee's- Oak
Creek $181,000 lease termination fee, the non-cash disposal of the
Denny's-Englewood property at a loss of $141,000, defaulted tenant real estate
taxes, and write-offs for uncollectible rents in the Fourth Quarter. In
addition, results for 1999 were different than would be expected from "normal"
operations, primarily because of property valuation costs.

Revenues
--------

Total revenues were $577,000, $459,000, and $456,000, for the years ended
December 31, 2001, 2000, and 1999, respectively. The increase in revenue in 2001
was due primarily to the $181,000 lease termination fee, offset by decreased
rental income, upon the termination of the Hardee's-Oak Creek property lease in
the Second Quarter of 2001.

As of December 31, 2001 total revenues, should approximate $208,000 annually or
$52,000 quarterly, based on leases currently in place. Future revenues may
decrease with tenant defaults and/or sales of Partnership properties. They may
also increase with additional rents due from tenants, if those tenants
experience sales levels which require the payment of additional rent to the
Partnership.

Expenses
--------

For the years ended December 31, 2001, 2000, and 1999, cash expenses amounted to
approximately 36%, 38%, and 42% of total revenues, respectively. Total expenses,
including non-cash items, amounted to 79%, 52%, and 57% of total revenues for
the years ended December 31, 2001, 2000, and 1999, respectively. The increase in
total expenses in 2001 is due primarily to the loss on the disposal of the
Denny's-Englewood property, defaulted tenant real estate taxes, and the
write-off of uncollectible receivables in the Fourth Quarter. In addition, in
1999 the Partnership incurred legal fees, and fees for environmental inspections
and land title surveys in connection with the proposed liquidation of the
Partnership.

                                       10

<PAGE>

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

Selected Quarterly Financial Information (unaudited)
----------------------------------------------------
                                                Quarter Ended
                             March 31,   June 30,   September 30,   December 31,
                               2001        2001         2001            2001
                             ---------   --------   -------------   ------------
Revenues                     $115,502    $275,490      $85,493        $100,174
Net Income (Loss)              58,327     205,572       29,747        (170,459)
Net Income (Loss) Per Unit       3.38       11.90         1.72           (9.87)

                                                Quarter Ended
                             March 31,   June 30,   September 30,   December 31,
                               2001        2001         2001            2001
                             ---------   --------   -------------   ------------
Revenues                     $110,244    $110,333     $111,152        $127,194
Net Income (Loss)              50,072      40,253       56,541          72,506
Net Income (Loss) Per Unit       2.90        2.33         3.27            4.20

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 8% of total rental income for 2001. If
inflation causes operating margins to deteriorate for lessees, if expenses grow
faster than revenues, then, inflation may well negatively impact the portfolio
through tenant defaults.

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

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

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

                                       11

<PAGE>

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

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

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

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

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

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

None.

                                       12

<PAGE>

Item 8. Financial Statements and Supplementary Data

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

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

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

                                                                    Page
                                                                    -----
Report of Independent Public Accountants   ......................      14

Balance Sheets, December 31, 2001 and 2000 ......................   15-16

Statements of Income for the Years
Ended December 31, 2001, 2000, and 1999    ......................      17

Statement of Partners' Capital for the
Years Ended December 31, 2001, 2000,
and 1999                                   ......................      18

Statements of Cash Flows for the Years
Ended December 31, 2001, 2000, and 1999    ......................      19

Notes to Financial Statements              ......................   20-28

Schedule III--Real Estate and Accumulated
Depreciation                               ......................      35

                                       13

<PAGE>

                    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, 2001 and 2000, and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 2001. 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, 2001 and 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, 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

ARTHUR ANDERSEN LLP

Chicago, Illinois
March 8, 2002

<PAGE>

                 DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                                 BALANCE SHEETS

                           December 31, 2001 and 2000

                                     ASSETS

                                                 December 31,   December 31,
                                                     2001           2000
                                                 ------------   ------------
INVESTMENT PROPERTIES:  (Note 3)
   Land                                          $ 1,553,680    $ 1,553,680
   Buildings and improvements                      2,036,749      2,249,959
   Accumulated depreciation                         (836,890)      (843,984)
                                                 -----------    -----------
        Net investment properties                  2,753,539      2,959,655
                                                 -----------    -----------
OTHER ASSETS:
   Cash and cash equivalents                         240,148        251,528
   Cash held in indemnification trust (Note 8)       355,012        339,740
   Property taxes escrow                               9,563              0
   Rents and other receivables                        26,044         17,982
   Deferred rent receivable                            4,350         17,420
   Due from General Partner                              682              0
   Deferred fees                                       8,365         16,167
   Prepaid assets                                      4,082          2,681
   Note receivable (Note 3)                           45,250              0
                                                 -----------    -----------
        Total other assets                           693,496        645,518
                                                 -----------    -----------
   Total assets                                  $ 3,447,035    $ 3,605,173
                                                 ===========    ===========

        The accompanying notes are an integral part of these statements.

                                       15

<PAGE>

                 DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                                 BALANCE SHEETS

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

                        LIABILITIES AND PARTNERS' CAPITAL

<TABLE>
<CAPTION>
                                                                   December 31,    December 31,
                                                                       2001            2000
                                                                   ------------    ------------
<S>                                                                <C>             <C>
LIABILITIES:
   Accounts payable and accrued expenses                           $     33,050    $     23,250
   Property taxes payable                                                34,734               0
   Due to current General Partner                                             0             340
    Security deposits                                                     8,425          16,635
   Unearned rental income                                                20,437          27,254
                                                                   ------------    ------------
        Total liabilities                                                96,646          67,479
                                                                   ------------    ------------
CONTINGENT LIABILITIES: (Note 7)
PARTNERS' CAPITAL: (Notes 1, 4 and 9)
   Current General Partner -
        Cumulative net income                                            20,153          18,921
        Cumulative cash distributions                                   (10,122)         (9,630)
                                                                   ------------    ------------
                                                                         10,031           9,291
                                                                   ------------    ------------
   Limited Partners (17,102.52 interests outstanding)
        Capital contributions, net of offering costs                 14,408,872      14,408,872
        Cumulative net income                                           239,961         118,006
        Cumulative cash distributions                               (11,042,984)    (10,732,984)
        Reallocation of former general partners' deficit capital       (265,491)       (265,491)
                                                                   ------------    ------------
                                                                      3,340,358       3,528,403
                                                                   ------------    ------------
             Total partners' capital                                  3,350,389       3,537,694
                                                                   ------------    ------------
             Total liabilities and partners' capital               $  3,447,035    $  3,605,173
                                                                   ============    ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       16

<PAGE>

                 DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                              STATEMENTS OF INCOME

              For the Years Ended December 31, 2001, 2000, and 1999

<TABLE>
<CAPTION>
                                                           2001       2000       1999
                                                         --------   --------   --------
<S>                                                      <C>        <C>        <C>
REVENUES:
   Rental income (Note 5)                                $365,067   $425,336   $426,042
   Interest income                                         22,512     29,070     21,946
   Other income                                                32        225        386
   Lease termination fee (Note 3)                         181,000          0          0
   Recovery of amounts previously written off (Note 2)      8,048      4,292      7,511
                                                         --------   --------   --------
                                                          576,659    458,923    455,885
                                                         --------   --------   --------
EXPENSES:
   Management fees (Note 6)                                68,932     66,930     65,420
   Restoration fees (Note 6)                                  322        172        300
   Insurance                                                3,651      2,977      3,873
   General and administrative                              24,629     25,887     28,395
   Advisory Board fees and expenses                         5,962      9,365     10,850
   Real estate taxes                                       25,193          0          0
   Environmental inspections                                    0          0      1,000
   Land title surveys                                           0          0      5,700
   Professional services                                   75,480     67,140     75,880
   Defaulted/Vacant tenant                                  5,815          0          0
   Depreciation                                            65,294     65,294     65,294
   Amortization                                             7,802      1,786      1,786
   Write-off of uncollectible receivables                  29,570          0        274
   Loss on disposal of asset (Note 3)                     140,822          0          0
                                                         --------   --------   --------
                                                          453,472    239,551    258,772
                                                         --------   --------   --------
NET INCOME                                               $123,187   $219,372   $197,113
                                                         ========   ========   ========
NET INCOME  - CURRENT GENERAL PARTNER                    $  1,232   $  2,194   $  1,971
NET INCOME  - LIMITED PARTNERS                            121,955    217,178    195,142
                                                         --------   --------   --------
                                                         $123,187   $219,372   $197,113
                                                         ========   ========   ========
NET INCOME PER LIMITED
   PARTNERSHIP INTEREST, based on 17,102.52
   interests outstanding                                 $   7.13   $  12.70   $  11.41
                                                         ========   ========   ========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       17

<PAGE>

                 DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                         STATEMENTS OF PARTNERS' CAPITAL

              For the years ended December 31, 2001, 2000 and 1999
              ----------------------------------------------------

<TABLE>
<CAPTION>
                                             Current General Partner
                                      ------------------------------------
                                                     Cumulative
                                      Cumulative       Cash
                                      Net Income   Distributions    Total
                                      ----------   -------------   -------
<S>                                    <C>           <C>           <C>
BALANCE AT DECEMBER 31, 1998           $14,756       $ (7,965)     $ 6,791
  Cash Distributions
    ($14.62 per limited partnership
interest outstanding)                                    (788)        (788)
  Net Income                             1,971                       1,971
                                       -------       --------      -------
BALANCE AT DECEMBER 31, 1999           $16,727       $ (8,753)     $ 7,974
  Cash Distributions
    ($14.62 per limited partnership
interest outstanding)                                    (877)        (877)
  Net Income                             2,194                       2,194
                                       -------       --------      -------
BALANCE AT DECEMBER 31, 2000           $18,921       $ (9,630)     $ 9,291
                                       -------       --------      -------
  Cash Distributions
    ($18.13 per limited partnership
interest outstanding)                                    (492)        (492)
  Net Income                             1,232                       1,232
                                       -------       --------      -------
BALANCE AT DECEMBER 31, 2001           $20,153       $(10,122)     $10,031
                                       =======       ========      =======

<CAPTION>
                                                                 Limited Partners
                                      -----------------------------------------------------------------------
                                         Capital
                                      Contributions,   Cumulative    Cumulative
                                         Net of        Net Income       Cash
                                      Offering Costs     (Loss)     Distributions   Reallocation     Total
                                      --------------   ----------   -------------   ------------   ----------
<S>                                    <C>             <C>          <C>              <C>           <C>
BALANCE AT DECEMBER 31, 1998           $14,408,872     $(294,314)   $(10,232,984)    $(265,491)    $3,616,083
  Cash Distributions
    ($14.62 per limited partnership
interest outstanding)                                                   (250,000)                    (250,000)
  Net Income                                             195,142                                      195,142
                                       -----------     ---------    ------------     ---------     ----------
BALANCE AT DECEMBER 31, 1999           $14,408,872     $ (99,172)   $(10,482,984)    $(265,491)    $3,561,225
  Cash Distributions
    ($14.62 per limited partnership
interest outstanding)                                                   (250,000)                    (250,000)
  Net Income                                             217,178                                      217,178
                                       -----------     ---------    ------------     ---------     ----------
BALANCE AT DECEMBER 31, 2000           $14,408,872     $ 118,006    $(10,732,984)    $(265,491)    $3,528,403
                                       -----------     ---------    ------------     ---------     ----------
  Cash Distributions
  ($18.13 per limited partnership
interest outstanding)                                                   (310,000)                    (310,000)
  Net Income                                             121,955                                      121,955
                                       -----------     ---------    ------------     ---------     ----------
BALANCE AT DECEMBER 31, 2001           $14,408,872     $ 239,961    $(11,042,984)    $(265,491)    $3,340,358
                                       ===========     =========    ============     =========     ==========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       18

<PAGE>

                 DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS

              For the Years Ended December 31, 2001, 2000, and 1999
              -----------------------------------------------------

<TABLE>
<CAPTION>
                                                                                               2001         2000       1999
                                                                                             ---------   ---------   ---------
<S>                                                                                          <C>         <C>         <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
     Net income                                                                              $ 123,187   $ 219,372   $ 197,113
     Adjustments to reconcile net income to net cash from (used in) operating activities -
          Depreciation and amortization                                                         73,096      67,080      67,080
          Lease termination fee                                                               (135,750)          0           0
          Loss on disposal of asset                                                            140,822           0           0
          Recovery of amounts previously written off                                            (8,048)     (4,292)     (7,511)
          Write-off of uncollectible receivables                                                29,570           0         274
          Interest applied to Indemnification Trust Account                                    (15,272)    (19,399)     13,955)
          (Increase) in rents, other receivables and prepaid assets                            (47,243)     (2,018)     (1,063)
          (Increase) in property taxes escrow                                                   (9,563)          0           0
          Decrease in deferred rent receivable                                                  13,070       1,679       1,679
          Increase/(Decrease) in accounts payable and accrued expenses                           9,800      (3,891)      8,324
          Increase in property taxes payable                                                    34,734           0           0
          (Decrease)/Increase in due to(from) General Partner                                   (1,022)        270        (159)
          (Decrease)/Increase in unearned rental income                                         (6,817)    (18,000)     18,000
                                                                                             ---------   ---------   ---------
               Net cash provided from operating activities                                     200,564     240,801     269,782
                                                                                             ---------   ---------   ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Recoveries from former G.P. affiliates                                                      8,048       4,292       7,511
     Payments on note receivable                                                                90,500           0           0
                                                                                             ---------   ---------   ---------
               Net cash provided from investing activities                                      98,548       4,292       7,511
                                                                                             ---------   ---------   ---------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
     Cash distributions to General Partner                                                        (492)       (877)       (788)
     Cash distributions to Limited Partners                                                   (310,000)   (250,000)   (250,000)
                                                                                             ---------   ---------   ---------
               Net cash (used in) financing activities                                        (310,492)   (250,877)   (250,788)
                                                                                             ---------   ---------   ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                           (11,380)     (5,784)     26,505
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                                 251,528     257,312     230,807
                                                                                             ---------   ---------   ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                                     $ 240,148   $ 251,528   $ 257,312
                                                                                             =========   =========   =========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       19

<PAGE>

                 DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                        DECEMBER 31, 2001, 2000, AND 1999

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, 2001, the Partnership owned four (4) properties and
specialty leasehold improvements for use in all four (4) of the Properties.

Rental revenue from investment properties is recognized on the straight-line
basis over the life of the respective lease. Percentage rents are accrued 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.

Deferred fees represent leasing commissions paid when properties are leased and
upon the negotiated extension of a lease. Leasing commissions are capitalized
and amortized over the life of the lease.

Real estate taxes on the Partnership's investment properties are the
responsibility of the tenant. However, when a tenant fails to make the required
tax payments or when a property becomes vacant, the

                                       20

<PAGE>

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

The Partnership will be dissolved on December 1, 2015, or earlier upon the prior
occurrence of any of the following events: (a) the disposition of all interests
in real estate and other Partnership assets; (b) the decision by Majority Vote
of the Limited Partners to dissolve the Partnership or to compel the sale of all
or substantially all of the Partnership's assets; (c) the failure to elect a
successor General Partner within six months after removal of the last remaining
General Partner; or (d) the date of the death or the effective date of
dissolution, removal, withdrawal, bankruptcy, or 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 buyers for the
Partnership's remaining four (4) Properties within the parameters of the consent
and anticipates that all the Properties will be sold by the end of 2002.
However, Management expects to continue normal operations for the Partnership
until the sales are complete.

No provision for Federal income taxes has been made, as any liability for such
taxes would be that of the individual partners rather than the Partnership. At
December 31, 2001, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$3,285,841.

                                       21

<PAGE>

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

<TABLE>
<CAPTION>
                                                   2001         2000         1999
                                                 ---------    ---------    ---------
     <S>                                         <C>          <C>          <C>
     Net income per statements of income         $ 123,187    $ 219,372    $ 197,113

     Book to tax depreciation difference           (11,439)     (11,586)     (16,725)

     Book over tax gain from asset disposition      (2,428)           0            0

     Straight line rent adjustment                  64,038       (1,679)      (1,679)

     Prepaid rent                                   (6,817)     (18,000)      18,000

     Bad debt reserve/expense                       30,137            0            0

     Other, net                                         47            3           37
                                                 ---------    ---------    ---------
     Net income for tax reporting purposes       $ 196,725    $ 188,110    $ 196,746
                                                 =========    =========    =========
</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, 2001, $5,803,000 of recoveries
have been received which exceeded the original estimate of $3 million. As a
result, during 1996, 1997, 1999, 2000 and 2001 the Partnership has recognized
$1,303,000 as income, which represents its share of the excess recovery. There
were no restoration activities or recoveries in 1998. The current General
Partner continues to pursue recoveries of the misappropriated funds, however, no
further significant recoveries are anticipated.

                                       22

<PAGE>

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

At December 31, 2000 the Partnership owned five (5) fast-food restaurants
comprised of: two (2) Hardee's restaurants, one (1) Applebee's restaurant, and
two (2) Denny's restaurants. However, due to the write-off of the former
Englewood property during the Fourth Quarter of 2001 only four (4) properties
remain at December 31, 2001. In addition, the former Hardee's- Oak Creek lease
was terminated in the Second Quarter of 2001 and the former Denny's- Colorado
Springs lease was terminated in the Fourth Quarter of 2001. Both properties
remain vacant as of December 31, 2001. Therefore, the four (4) remaining
properties at December 31, 2001 are comprised of: one (1) Hardee's restaurant,
one (1) Applebee's restaurant, and two (2) vacant properties. The four (4)
properties are located in three (3) states. Management anticipates that the
remaining four properties will be sold by the end of 2002. If this timing should
not occur, Management is comfortable that the two remaining leases are sound and
that the Partnership will be able to adequately meet its future expenses. In
addition, Management is prepared to accrue the Partnership's monthly Management
fees due to TPG if the need should arise, until the fees can be satisfied from
liquidation activities.

The total cost of the investment properties includes the original purchase price
plus acquisition fees and other capitalized costs paid to an affiliate of the
former general partners.

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

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

During March 2001, Hardee's Food Systems, Inc. notified Management of its intent
to close its restaurant in Oak Creek, Wisconsin. The lease on the property was
not set to expire until 2010. In the Second Quarter of 2001, a lease termination
agreement was executed and the tenant ceased the payment of rent as of April 30,
2001. Hardee's Food Systems agreed to pay a lease termination fee of

                                       23

<PAGE>

approximately two (2) years rent or $181,000. The payments are scheduled to be
received in four (4) equal installments of $45,250. The first payment was
received in May 2001 upon the execution of the agreement, and the subsequent
installments were reflected as Note receivable on the balance sheet in the
Second Quarter of 2001. Note receivable installments were received in August and
October 2001. The remaining installment, which is reflected in the Note
receivable on the balance sheet at December 31, 2001, is scheduled to be
received in February 2002. Management is actively marketing new leasing or a
potential buyer for the vacant property.

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, subject to a minimum fee, with a maximum reimbursement for
office rent and related office overhead of $25,000 between the three original
affiliated Partnerships. Effective March 1, 2001, the minimum management fee and
the maximum reimbursement for office rent and overhead increased by 3.4%
representing the allowable annual Consumer Price Index adjustment per the
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 $88,690 to date on the
amounts recovered, which has been offset against the 4% minimum fee.

Several of the Partnership's property leases contain purchase option provisions
with stated purchase prices in excess of the original cost of the properties.
The current General Partner is unaware of any unfavorable purchase options in
relation to original cost.

4. PARTNERSHIP AGREEMENT:
   ----------------------

The Partnership Agreement, prior to an amendment effective May 26, 1993,
provided that, for financial reporting and income tax purposes, net profits or
losses from operations were allocated 90% to the Limited Partners and 10% to the
former general partners. The Partnership Agreement also provided that Net Cash
Receipts, as defined, would be distributed 90% to the Limited Partners and 10%
to the former general partners, except that distributions to the former general
partners in excess of 1% in any calendar year would be subordinated to
distributions to the Limited Partners in an amount equal to their Original
Property Distribution Preference, as defined.

Net proceeds, as defined, were to be distributed as follows: (a) 1% to the
General Partners and 99% to the Limited Partners, until distributions to the
Limited Partners equal their Original Capital, as defined, plus their Original
Property Liquidation Preference, as defined, and (b) the remainder 90% to the
Limited Partners and 10% to the General Partners. Such distributions were to be
made as soon as practicable following the sale, financing or refinancing of an
original property.

On May 26, 1993, pursuant to the results of a solicitation of written consents
from the Limited Partners, the Partnership Agreement was amended to replace the
former general partners and amend various sections of the agreement. The former
general partners were replaced as General Partner, by The Provo Group, Inc., an
Illinois Corporation. Under the terms of the amendment, net profits or losses
from operations are allocated 99% to the Limited Partners and 1% to the current
General Partner. The amendment also provided for distributions from Net Cash
Receipts to be made 99% to the Limited Partners and 1% to its current General
Partner. Pursuant to the amendments to the Partnership

                                       24

<PAGE>

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., 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.

                                       25

<PAGE>

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

          Year ending
          December 31,

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

Percentage rentals included in rental income in 2001, 2000 and 1999, were
$27,423, $17,635 and $18,341, respectively.

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

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

At December 31, 2000 the Partnership owned five (5) fast-food restaurants
comprised of: two (2) Hardee's restaurants, one (1) Applebee's restaurant, and
two (2) Denny's restaurants. However, due to the write-off of the former
Englewood property during the Fourth Quarter of 2001 only four (4) properties
remain at December 31, 2001. In addition, the Hardee's- Oak Creek lease was
terminated in the Second Quarter of 2001 and the Denny's- Colorado Springs lease
was terminated in the Fourth Quarter of 2001. Therefore, the four (4) remaining
properties are comprised of: one (1) Hardee's restaurant, one (1) Applebee's
restaurant, and two (2) vacant properties.

The original offering document required the Partnership to lease its properties
to a single tenant as long as the properties so leased do not constitute; in the
aggregate, more than 20% of the aggregate gross proceeds of the offering. Until
April 30, 2001, the Partnership had leased two of its properties to Hardee's
Food Systems, Inc., which constituted 21% of the aggregate gross proceeds.

                                       26

<PAGE>

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

Amounts incurred to the current General Partner for the years ended December 31,
2001, 2000, and 1999, 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, 2001    December 31, 2000    December 31, 1999
                                           ------------------   ------------------   ------------------
<S>                                        <C>                  <C>                  <C>
Management fees                                 $68,932              $66,930              $65,420
Restoration fees                                    322                  172                  300
Cash distribution                                   492                  877                  788
Overhead allowance                                5,587                5,414                5,303
Reimbursement for out-of-pocket expenses          2,229                2,635                3,532
                                                -------              -------              -------
                                                $77,562              $76,028              $75,343
                                                =======              =======              =======
</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, 2001, 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 December 31, 2001. Funds are invested in U.S. Treasury
securities. In addition, interest totaling $105,012 has been credited to the
Trust as of December 31, 2001. The rights of the Permanent Manager to the Trust
shall be terminated upon the earliest to occur of the following events: (i) the
written release by the Permanent Manager of any and all interest in the Trust;
(ii) the expiration of the

                                       27

<PAGE>

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 January 2002, the final Note receivable installment of $45,250 was received
from Hardee's Food Systems, Inc. by the Partnership.

In February 2002, the Partnership made a distribution to the Limited Partners
from operations for the Fourth Quarter 2001 of $25,000 amounting to $1.46 per
Interest.

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

None

                                       28

<PAGE>

                                    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 51 - 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.

     Diane R. Conley, Age 40- Controller- Divall Properties. Ms. Conley joined
     TPG in November 1986 to become Controller for four limited partnerships
     managed by TPG. Ms. Conley graduated with a B.S. in Accounting from
     Rochester Institute of Technology in Rochester, New York in 1984 and became
     a Certified Public Accountant in 1986. Ms. Conley was an independent
     auditor with Coopers and Lybrand for three years and supervised audit staff
     on a variety of engagements. Prior to joining TPG she provided financial
     consulting services for clients of varied industries.

                                       29

<PAGE>

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:

     William Arnold - Investment Broker. Mr. Arnold works as a financial planner
     and investment advisor at his company, Arnold & Company. Mr. Arnold
     graduated with a Master's Degree from the University of Wisconsin and is a
     Certified Financial Planner.

     Jesse Small - Self-employed. Mr. Small is the President of a small
     Accounting Firm. In addition to being a CPA, he has a Master's Degree in
     Economics. Mr. Small is a Limited Partner representing DiVall 2.

     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 Kramer - Retired. Mr. Kramer is now retired, but previously worked
     as a Tax Litigation Manager for Phillips Petroleum Company. His education
     includes undergraduate and MBA degrees from Harvard and a J.D. degree from
     South Texas College of Law. Mr. Kramer 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.

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, 2001, 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 Interests   The Engineers Joint Pension Fund        1,500          8.77%
                                4325 S. Salina Street
                                Syracuse, NY 13205
</TABLE>

                                       30

<PAGE>

(b) As of December 31, 2001, 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, 2001, the minimum
management fee and the maximum reimbursement for office rent and overhead
increased by 3.4%, 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 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

                                       31

<PAGE>

will become unrestricted cash of the Partnership. As of December 31, 2001, the
Partnership had fully funded the Trust.

The following fees and reimbursements from the Partnership were incurred to
management in 2001:

    The Provo Group, Inc.
    ---------------------
        Management Fees                                  $68,932
        Restoration Fees                                     322
        Office Overhead Allowance                          5,587
        Direct Cost Reimbursements                         2,229
                                                         -------
             2001 Total                                  $77,070
                                                         =======

                                       32

<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, 2001 and 2000

          Statements of Income for the Years Ended December 31, 2001, 2000 and
          1999

          Statements of Partners' Capital for the Years Ended December 31, 2001,
          2000 and 1999

          Statements of Cash Flows for the Years Ended December 31, 2001, 2000
          and 1999

          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.

                                       33

<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, 2002,
               regarding the Fourth Quarter 2001 distribution.

(b)  Report on Form 8-K:

     The Registrant filed no reports on Form 8-K during the fourth quarter of
     fiscal year 2001.

                                       34

<PAGE>

                 DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
             SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 2001

<TABLE>
<CAPTION>
                                                    Initial                     Gross amount at which
                                              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 (1)         --          485,354       709,028       468,354       606,153     1,074,507
Oak Creek, Wisconsin (1)           --          496,505       845,400       496,505       547,901     1,044,406
Colorado Springs, Colorado         --          314,354       265,829       314,354       265,829       580,183
                                -----       ----------    ----------    ----------    ----------    ----------
                                $   0       $1,570,680    $2,437,123    $1,553,680    $2,036,749    $3,590,429
                                =====       ==========    ==========    ==========    ==========    ==========

<CAPTION>
                                                                      Life on which
                                                                       depreciation
                                                                         in latest
                                                                         statement
                                                                      of operations
                             Accumulated      Date of        Date      is computed
                             depreciation   construction   acquired      (years)
                             ------------   ------------   --------   -------------
<S>                           <C>               <C>        <C>            <C>
Pittsburgh, Pennsylvania      $  233,049        1990       9/11/90        31.5
St. Francis, Wisconsin (1)       256,706        1990       8/14/90        31.5
Oak Creek, Wisconsin (1)         265,558        1991        2/5/91        31.5
Colorado Springs, Colorado        81,577          --       4/28/92        31.5
                              ----------
                              $  836,890
                              ==========
</TABLE>

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

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

(1)  This property was written down to its estimated net realizable value at
     December 31, 1998.

                                        Year ended           Year ended
Investments in Real Estate (B)       December 31, 2001   December 31, 2000
--------------------------------------------------------------------------
Balance at beginning of year            $ 3,803,639         $ 3,803,639
Property write-down                               0                   0


Disposal of Property- Englewood,CO         (213,210)                  0
                                        -------------------------------

Balance at end of year                  $ 3,590,429         $ 3,803,639
                                        ===============================

                                        Year ended           Year ended
Accumulated Depreciation (B)         December 31, 2001   December 31, 2000
--------------------------------------------------------------------------
Balance at beginning of year             $ 843,984           $ 778,690

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

Disposal of Property-Englewood, CO         (72,388)                  0
                                         -----------------------------

Balance at end of year                   $ 836,890           $ 843,984
                                         =============================

                                       35

<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, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.


By:   The Provo Group, Inc., General Partner


By:   /s/ Bruce A. Provo
      --------------------------------------
      Bruce A. Provo, President

Date: March 26, 2002


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

Date: March 26, 2002

                                       36