<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, 2000
                               -----------------------

                                      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:      29 - 30
                                                  ------------------
<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, 2000, the
Partnership consisted of one General Partner and 1,030 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, 2000, the Partnership owned five (5) Properties and
specialty leasehold improvements for use in all five (5) of the Properties, as
more fully described in Item 2. During the Second Quarter of 1998, the General
Partner received the written consent of a majority of the Limited Partners to
liquidate the Partnership's assets and dissolve the Partnership. During 1999,
Management entered into an agreement to sell the Properties. The sale was not
consummated, and the agreement was terminated. Management is currently seeking a
purchaser for the Partnership's Properties within the parameters of this
consent. However, management expects to continue normal operations for the
Partnership for the foreseeable future.

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

                                       2
<PAGE>

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

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

A preliminary investigation during 1992 by the Office of the Commissioner of
Securities for the State of Wisconsin and the Securities and Exchange Commission
(the "Investigation"), revealed that during at least the three years ended
December 31, 1992, two of the former general partners of the Partnership, Gary
J. DiVall ("DiVall") and Paul E. Magnuson ("Magnuson") had transferred
substantial cash assets of the Partnership and two affiliated publicly
registered partnerships, DiVall Insured Income Fund Limited Partnership ("DiVall
1") and DiVall Insured Income Properties 2 Limited Partnership ("DiVall 2")
(collectively the "Partnerships") to various other entities previously sponsored
by or otherwise affiliated with DiVall and Magnuson. The unauthorized transfers
were in violation of the respective Partnership Agreements.

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

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

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

                                       3
<PAGE>

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

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

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

The concept of the Advisory Board was first introduced by TPG during the
solicitation of written consents for the Partnerships, and is the only type of
oversight body known to exist for similar partnerships at this time. The first
Advisory Board was appointed in October 1993, and held its first meeting in
November 1993. The 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 (3% to 7%) of gross sales above a threshold amount.

The Partnership owned the following Properties (including specialty leasehold
improvements) as of December 31, 2000:

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

                                       4
<PAGE>

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

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

07/01/91       Denny's (4)              DenAmerica, Inc.     424,187(2)        35,880       06/30/2011   None
               9060 Arapahoe Rd
               Englewood, CO

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


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

Footnotes.

(1) Purchase price includes all costs incurred to acquire the property.
(2) Purchase price includes cost of specialty leasehold improvements.
(3) Renewal options available.
(4) Ownership of lessee's interest under a ground lease. The tenant is
    responsible for payment of all rent obligations under the ground lease.


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

Item 3.  Legal Proceedings

None.

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

None.

                                       5
<PAGE>

                                    PART II


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


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

(b)       As of December 31, 2000, there were 1,030 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 both 2000 and 1999, $250,000 was
          distributed in the aggregate to the Limited Partners. In 2000 and
          1999, the General Partner received aggregate distributions of $877 and
          $788, respectively.

Item 6.   Selected Financial Data

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

                   December 31, 2000, 1999, 1998, 1997, and 1996
                 (not covered by Independent Auditors' Report)

<TABLE>
<CAPTION>
    ---------------------------------------------------------------------------------------------
                                   2000          1999          1998          1997         1996
    ---------------------------------------------------------------------------------------------
<S>                           <C>          <C>            <C>           <C>          <C>
     Total Revenue            $   458,923  $   455,885    $   698,995   $   939,210  $  1,812,164
    ---------------------------------------------------------------------------------------------
     Net Income (Loss)            219,372      197,113        (68,993)      604,505       697,472
    ---------------------------------------------------------------------------------------------
     Net Income
     (Loss) per
     Limited Partner
     Interest                       12.70        11.41          (3.99)        34.99         40.37
    ---------------------------------------------------------------------------------------------

     Total Assets               3,605,173    3,658,298      3,685,808     5,543,931     6,720,437
    ---------------------------------------------------------------------------------------------
     Total Partners'
     Capital                    3,537,694    3,569,199      3,622,874     5,438,132     6,486,045
    ---------------------------------------------------------------------------------------------
     Cash
     Distributions
     per Limited
     Partnership
     Interest                       14.62        14.62         102.03         96.48         96.48
    ---------------------------------------------------------------------------------------------
</TABLE>

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

                                       6
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
     of Operations

Liquidity and Capital Resources:
--------------------------------

Investment Properties and Net Investment in Direct Financing Leases
-------------------------------------------------------------------

The Properties, including equipment held by the Partnership at December 31,
2000, were originally purchased at a price, including acquisition costs, of
approximately $6,091,000.

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

Cash and cash equivalents held by the Partnership, were $252,000 at December 31,
2000, compared to $257,000 at December 31, 1999. The Partnership designated cash
of $65,000 to fund the Fourth Quarter 2000 distributions to Limited Partners
paid in February 2001; $50,000 for the payment of year-end accounts payable and
accrued expenses; and the remainder represents reserves deemed necessary to
allow the Partnership to operate normally. Cash generated through the operations
of the Partnership's Properties, and sales of Properties will provide the
sources for future fund liquidity and Limited Partner distributions.

The Partnership established an Indemnification Trust (the "Trust") during the
Fourth Quarter of 1993 and deposited $130,000 in the Trust during 1994, $100,000
during 1995 and $20,000 during 1996. The provision to establish the Trust was
included in the Permanent Manager Agreement for the indemnification of TPG, in
the absence of fraud or gross negligence, from any claims or liabilities that
may arise from TPG acting as Permanent Manager. The Trust is owned by the
Partnership. For additional information regarding the Trust, refer to Note 8 to
the financial statements included in Item 8 of this report.

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

Accounts payable and accrued expenses at December 31, 2000, in the amount of
$23,000, primarily represented accruals of legal and auditing fees.

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

Net income for the year was allocated between the General Partner and the
Limited Partners, 1% and 99%, respectively, as provided in the Partnership
Agreement as discussed more fully in Note 4 of the financial statements included
in Item 8 of this report. The former general partners' capital account balance
was reallocated to the Limited Partners at December 31, 1993. Refer to Note 9 to
the financial statements included in Item 8 of this report for additional
information regarding the reallocation.

Cash distributions paid to the Limited Partners and to the General Partner
during 2000, of $250,000 and $877, respectively, have also been made in
accordance with the Partnership Agreement. The Fourth Quarter 1999 distribution
of $65,000 was paid to the Limited Partners on February 15, 2001.

                                       7
<PAGE>

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

The Partnership reported net income for the year ended December 31, 2000, in the
amount of $219,000 compared to net income (loss) for the years ended December
31, 1999 and 1998 of $197,000 and $(69,000). Results for 1999 and 1998 were
different than would be expected from "normal" operations, primarily because of
non-cash write-downs of Properties to their net realizable values, and property
valuation costs. In addition, 1998 was impacted by a gain on the sale of the
Florida Denny's Property.

Revenues
--------

Total revenues were $459,000, $456,000, and $699,000, for the years ended
December 31, 2000, 1999, and 1998, respectively. Revenue in 1998 included a
$239,000 gain on the sale of the Florida Denny's Property. Overall, revenues
have decreased due to the sale of Properties, leaving fewer revenue-generating
Properties in the Partnership's portfolio.

Total revenues should approximate $400,000 annually, based on leases currently
in place. Future revenues may decrease with tenant defaults and/or sales of
Properties. They may also increase with additional rents due from tenants, if
those tenants experience sales levels which require the payment of additional
rent to the Partnership.

Expenses
--------

For the years ended December 31, 2000, 1999, and 1998, cash expenses amounted to
approximately 38%, 42%, and 40% of total revenues, respectively. Total expenses,
including non-cash items, amounted to 52%, 57%, and 110% of total revenues for
the years ended December 31, 2000, 1999, and 1998, respectively. Property
write-downs negatively impacted expenses during 1998. In addition, in 1999 and
1998 the Partnership incurred legal fees, appraisal costs, and fees for
environmental inspections and land title surveys in connection with the proposed
liquidation of the Partnership.

The Property write-downs, depreciation and amortization are non-cash items and
do not affect current operating cash flow of the Partnership or distributions to
the Limited Partners.

                                       8
<PAGE>

Selected Quarterly Financial Information (unaudited)
----------------------------------------------------

<TABLE>
<CAPTION>
                                                          Quarter Ended
                             March 31,            June 30,     September 30,       December 31,
                               2000                2000           2000                2000
                            ---------            ---------     -----------        -----------
<S>                         <C>                  <C>           <C>                <C>
Revenues                     $110,244             $110,333       $111,152            $127,194

Net Income                     50,072               40,253         56,541              72,506
Net Income Per Unit              2.90                                3.27                4.20

                                                          Quarter Ended
                             March 31,            June 30,     September           December
                               1999                1999           1999                1999
                            ---------            ---------     -----------        -----------
Revenues                     $117,086             $111,985       $111,548            $115,266

Net Income                     61,444               51,761         39,561              44,347
Net Income Per Unit              3.56                 3.00           2.29                2.56
</TABLE>

Percentage rent revenues were recognized evenly through out the year during
1999. However, during 2000, recognition of percentage rents did not occur until
the tenant reached their breakpoint specified in their lease as required by SAB
101.


Inflation:
----------

Inflation has a minimal effect on operating earnings and related cash flows from
a portfolio of triple net leases. By their nature, such leases actually fix
revenues and are not impacted by rising costs of maintenance, insurance, or real
estate taxes. Although the Partnership's leases have percentage rent clauses,
percentage rents represented only 4% of total rental income for 2000. 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.


Item 7A.  Quantitative and Qualitative Disclosure About Market Risk

None.

                                       9
<PAGE>

Item 8.  Financial Statements and Supplementary Data

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

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

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

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

     Balance Sheets, December 31, 2000 and 1999 ...................................      12 - 13

     Statements of Income for the Years
     Ended December 31, 2000, 1999, and 1998    ...................................      14

     Statement of Partners' Capital for the
     Years Ended December 31, 2000, 1999,
     and 1998                                   ...................................      15

     Statements of Cash Flows for the Years
     Ended December 31, 2000, 1999, and 1998    ...................................      16

     Notes to Financial Statements              ...................................      17 - 24

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

                                       10
<PAGE>

                                                       [LOGO OF ARTHUR ANDERSON]

                 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, 2000 and 1999, and
the related statements of income, partners' capital and cash flows for each of
the three years in the period ended December 31, 2000.  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, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, 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 Anderson LLP
ARTHUR ANDERSEN LLP


Chicago, Illinois
January 12, 2001
<PAGE>

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                                BALANCE SHEETS

                          December 31, 2000 and 1999
                          --------------------------

                                    ASSETS


                                                   December 31,     December 31,
                                                      2000             1999
                                                    --------         --------

INVESTMENT PROPERTIES:  (Note 3)

       Land                                         $1,553,680       $1,553,680
       Buildings and improvements                    2,249,959        2,249,959
       Accumulated depreciation                       (843,984)        (778,690)
                                                    ----------       ----------

            Net investment properties                2,959,655        3,024,949
                                                    ----------       ----------

OTHER ASSETS:

       Cash and cash equivalents                       251,528          257,312
       Cash held in indemnification trust (Note 8)     339,740          320,341
       Rents and other receivables                      17,982           16,247
       Deferred rent receivable                         17,420           19,099
       Deferred fees                                    16,167           17,952
       Prepaid assets                                    2,681            2,398
                                                    ----------       ----------

            Total other assets                         645,518          633,349
                                                    ----------       ----------

       Total assets                                 $3,605,173       $3,658,298
                                                    ==========       ==========


       The accompanying notes are an integral part of these statements.

                                       12
<PAGE>

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                                BALANCE SHEETS

                          December 31, 2000 and 1999
                          --------------------------

                       LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
                                                                                    December 31,     December 31,
                                                                                        2000             1999
                                                                                      --------         --------
<S>                                                                                 <C>              <C>
LIABILITIES:

       Accounts payable and accrued expenses                                         $    23,250      $    27,140
       Due to current General Partner                                                        340               70
       Security deposits                                                                  16,635           16,635
       Unearned rental income                                                             27,254           45,254
                                                                                    ------------      -----------

            Total liabilities                                                             67,479           89,099
                                                                                    ------------      -----------

CONTINGENT LIABILITIES: (Note 7)

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

       Current General Partner -
            Cumulative net income                                                         18,921           16,727
            Cumulative cash distributions                                                 (9,630)          (8,753)
                                                                                    ------------      -----------

                                                                                           9,291            7,974
                                                                                    ------------      -----------
       Limited Partners (17,102.52 interests outstanding)
            Capital contributions, net of offering costs                              14,408,872       14,408,872
            Cumulative net income (loss)                                                 118,006          (99,172)
            Cumulative cash distributions                                            (10,732,984)     (10,482,984)
            Reallocation of former general partners' deficit capital                    (265,491)        (265,491)
                                                                                    ------------      -----------

                                                                                       3,528,403        3,561,225
                                                                                    ------------      -----------
                 Total partners' capital                                               3,537,694        3,569,199
                                                                                    ------------      -----------

                 Total liabilities and partners' capital                             $ 3,605,173      $ 3,658,298
                                                                                    ============      ===========
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       13
<PAGE>

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                             STATEMENTS OF INCOME

             For the Years Ended December 31, 2000, 1999, and 1998


<TABLE>
<CAPTION>
                                                                 2000         1999          1998
                                                              ----------     --------     ---------
<S>                                                           <C>            <C>            <C>
REVENUES:
  Rental income (Note 5)                                        $425,336     $426,042      $420,630
  Interest income                                                 29,070       21,946        39,573
  Other income                                                       225          386            94
  Gain on sale of assets                                               0            0       238,698
  Recovery of amounts previously written off (Note 2)              4,292        7,511             0
                                                                --------     --------      --------
                                                                 458,923      455,885       698,995
                                                                --------     --------      --------

EXPENSES:

  Management fees (Note 6)                                        66,930       65,420        64,690
  Disposition fees (Note 6)                                            0            0        37,500
  Restoration fees (Note 6)                                          172          300             0
  Insurance                                                        2,977        3,873         4,328
  General and administrative                                      25,887       28,395        40,219
  Advisory Board fees and expenses                                 9,365       10,850        17,850
  Appraisals                                                           0            0        13,776
  Environmental inspections                                            0        1,000         8,250
  Land title surveys                                                   0        5,700        11,950
  Professional services                                           67,140       75,880        81,622
  Professional services related to Investigation                       0            0         1,480
  Depreciation                                                    65,294       65,294        84,103
  Amortization                                                     1,786        1,786         1,786
  Write-off of uncollectible receivables                               0          274             0
  Write-down of properties to net realizable value
  (Note 3)                                                             0            0       400,374
                                                                --------     --------      --------

                                                                 239,551      258,772       767,928
                                                                --------     --------      --------

NET INCOME (LOSS)                                               $219,372     $197,113      $(68,933)
                                                                ========     ========      ========

NET INCOME (LOSS) - CURRENT GENERAL PARTNER                     $  2,194     $  1,971      $   (689)

NET INCOME (LOSS) - LIMITED PARTNERS                             217,178      195,142       (68,244)
                                                                --------     --------      --------

                                                                $219,372     $197,113      $(68,933)
                                                                ========     ========      ========

NET INCOME (LOSS) PER LIMITED
 PARTNERSHIP INTEREST, based on 17,102.52
 interests outstanding                                          $  12.70     $  11.41      $  (3.99)
                                                                ========     ========      ========
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       14
<PAGE>

                 DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                         STATEMENTS OF PARTNERS' CAPITAL

              For the years ended December 31, 2000, 1999 and 1998


<TABLE>
<CAPTION>
                                                       Current General Partner
                                           ------------------------------------------
                                            Cumulative       Cumulative
                                            Net Income          Cash
                                             (Loss)         Distributions      Total
                                             -------        -------------      ------
  <S>                                       <C>             <C>                <C>
  BALANCE AT DECEMBER 31, 1997               $15,445         $(6,640)         $ 8,805

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

  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)
  Net Income                                   2,194            (877)           2,194
                                             -------         -------          -------

    BALANCE AT DECEMBER 31, 2000             $18,621         $(9,630)         $ 9,291
                                             =======         =======          =======

<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, 1997           $14,408,872      $(226,070)     ($8,487,984)    $(265,491)     $5,429,327

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

  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
                                         ===========      =========     ============    ==========      ==========
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       15
<PAGE>

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                           STATEMENTS OF CASH FLOWS

             For the Years Ended December 31, 2000, 1999, and 1998
             -----------------------------------------------------

<TABLE>
<CAPTION>
                                                                                      2000         1999          1998
                                                                                   ---------     ---------   -----------
<S>                                                                                <C>           <C>         <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
     Net income (loss)                                                             $ 219,372     $ 197,113   $   (68,933)
     Adjustments to reconcile net income (loss) to net cash from (used in)
       operating activities -
          Depreciation and amortization                                               67,080        67,080        85,889
          Write-down of properties to net realizable value                                 0             0       400,374
          Net gain on disposition                                                          0             0      (238,698)
          Recovery of amounts previously written off                                  (4,292)       (7,511)            0
          Write-off of uncollectible receivables                                           0           274             0
          Interest applied to Indemnification Trust Account                          (19,399)      (13,955)      (15,724)
          (Increase)/Decrease in rents, other receivables and prepaid assets          (2,018)       (1,063)        8,855
          Decrease in deferred rent receivable                                         1,679         1,679        10,251
          Increase/(Decrease) in accounts payable and accrued expenses                (3,891)        8,324        (6,515)
          Increase/(Decrease) in due to General Partner                                  270          (159)       (1,166)
          (Decrease) in security deposits                                                  0             0       (20,184)
          Increase/(Decrease) in unearned rental income                              (18,000)       18,000       (15,000)
                                                                                   ---------     ---------   -----------

               Net cash provided from (used in) operating activities                 240,801       269,782       139,149
                                                                                   ---------     ---------   -----------

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
     Recoveries from former G.P. affiliates                                            4,292         7,511             0
     Proceeds from sale of land and buildings                                              0             0     1,242,563
                                                                                   ---------     ---------   -----------

               Net cash provided from investing activities                             4,292         7,511     1,242,563
                                                                                   ---------     ---------   -----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
     Cash distributions to General Partner                                              (877)         (788)       (1,325)
     Cash distributions to Limited Partners                                         (250,000)     (250,000)   (1,745,000)
                                                                                   ---------     ---------   -----------

               Net cash (used in) financing activities                              (250,877)     (250,788)   (1,746,325)
                                                                                   ---------     ---------   -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                  (5,784)       26,505      (364,613)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                       257,312       230,807       595,420
                                                                                   ---------     ---------   -----------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                           $ 251,528     $ 257,312   $   230,807
                                                                                   =========     =========   ===========
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       16
<PAGE>

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                         NOTES TO FINANCIAL STATEMENTS

                       DECEMBER 31, 2000, 1999, AND 1998

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, 2000, the Partnership owned five (5) properties and
specialty leasehold improvements for use in all five (5) of the Properties.

Rental revenue from investment properties is recognized on the straight-line
basis over the life of the respective lease. Percentage rents have historically
been accrued throughout the year based on the tenant's actual reported year-to-
date sales along with Management's estimate of the tenant's sales for any
remaining unreported periods during the year. However, during 2000, the
partnership adopted SAB 101, which requires the recording of percentage rents
only when the tenant has reached the breakpoint stipulated in the lease.

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

Depreciation of the properties is provided on a straight-line basis over 31.5
years, which is the estimated useful lives of the buildings and improvements.

Deferred charges represent leasing commissions paid when properties are leased
to tenants other than the original tenant. Leasing commissions are capitalized
and amortized over the life of the lease.

                                       17
<PAGE>

Real estate taxes on the Partnership's investment properties are the
responsibility of the tenant. However, when a tenant fails to make the required
tax payments or when a property becomes vacant, the Partnership makes the
appropriate payment to avoid possible foreclosure of the property. Taxes are
accrued in the period for which the liability is incurred.

Cash and cash equivalents include cash on deposit in financial institutions and
highly liquid temporary investments with initial maturities of 90 days or less.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities (and disclosure of
contingent assets and liabilities) at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

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

The Partnership will be dissolved on December 1, 2015, or earlier upon the prior
occurrence of any of the following events: (a) the disposition of all interests
in real estate and other Partnership assets; (b) the decision by Majority Vote
of the Limited Partners to dissolve the Partnership or to compel the sale of all
or substantially all of the Partnership's assets; (c) the failure to elect a
successor General Partner within six months after removal of the last remaining
General Partner; or (d) the date of the death or the effective date of
dissolution, removal, withdrawal, bankruptcy, or incompetency of the last
remaining General Partner, unless the Partnership is continued by vote of all
Limited Partners and a replacement General Partner is previously elected by a
majority of the Limited Partners. The General Partner received the consent of
the Limited Partners to liquidate the Partnership's assets and dissolve the
Partnership, during the Second Quarter of 1998. During 1999, Management entered
into an agreement to sell the Properties. The sale was not consummated and the
agreement was terminated. Management is currently seeking a buyer for the
Partnership's Properties within the parameters of the consent. However,
Management expects to continue normal operations for the Partnership for the
foreseeable future.

No provision for Federal income taxes has been made, as any liability for such
taxes would be that of the individual partners rather than the Partnership. At
December 31, 2000, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$3,223,533.

                                       18
<PAGE>

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

<TABLE>
<CAPTION>
                                                             2000           1999           1998
                                                             ----           ----           ----
       <S>                                                 <C>            <C>            <C>
       Net income (loss) per statements of income          $219,372       $197,113       $(68,933)

       Book to tax depreciation difference                  (11,586)       (16,725)           368

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

       Prepaid rent                                         (18,000)        18,000        (15,000)

       Property write-downs                                       0              0        400,374

       Other, net                                                 3             37         (2,547)
                                                           --------       --------       --------

       Net income for tax reporting purposes               $188,110       $196,746       $304,011
                                                           ========       ========       ========
</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, 2000, $5,788,000 of recoveries
have been received which exceeded the original estimate of $3 million. As a
result, during 1996, 1997, 1999 and 2000, the Partnership has recognized
$1,297,000 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.

                                       19
<PAGE>

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

As of 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. The five (5) properties are located in three (3)
states.

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

The Partnership owns one (1) restaurant, Denny's restaurant on Arapahoe Road in
Englewood, Colorado, which, is located on a parcel of land where the Partnership
has entered into a long-term ground lease. The lease payments are made by the
tenant, Denny's restaurant.

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

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

The current General Partner receives a fee for managing the Partnership equal to
4% of gross receipts, with a maximum reimbursement for office rent and related
office overhead of $25,000 between the three original affiliated Partnerships.
Effective March 1, 2000, the minimum management fee and the maximum
reimbursement for office rent and overhead increased by 2.2% representing the
allowable annual Consumer Price Index adjustment per the Permanent Manager
Agreement ("PMA"). For purposes of computing the 4% overall fee, gross receipts
includes amounts recovered in connection with the misappropriation of assets by
the former general partners and their affiliates. TPG has received fees from the
Partnership totaling $88,197 to date on the amounts recovered, which has been
offset against the 4% minimum fee.

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


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

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

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,

                                       20
<PAGE>

plus their Original Property Liquidation Preference, as defined, and (b) the
remainder 90% to the Limited Partners and 10% to the General Partners. Such
distributions were to be made as soon as practicable following the sale,
financing or refinancing of an original property.

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

Additionally, as per the amendment of the Partnership Agreement dated May 26,
1993, the total compensation paid to all persons for the sale of the investment
properties shall be limited to a competitive real estate commission, not to
exceed 6% of the contract price for the sale of the property. The General
Partner may receive up to one-half of the competitive real estate commission,
not to exceed 3%, provided that the General Partner provides a substantial
amount of services in the sales effort. It is further provided that a portion of
the amount of such fees payable to the General Partner is subordinated to its
success at recovering the funds misappropriated by the former general partners.
(See Note 7.)

Effective June 1, 1993, the Partnership Agreement was amended to (i) change the
definition of "Distribution Quarter" to be consistent with calendar quarters,
and (ii) change the distribution provisions to subordinate the General Partner's
share of distributions from Net Cash Receipts and Net Proceeds, except to the
extent necessary for the General Partner to pay its federal and state income
taxes on Partnership income allocated to the General Partner. Because these
amendments do not adversely affect the rights of the Limited Partners, pursuant
to section 10.2 of the Partnership Agreement, the amendments were made by the
General Partner without a vote of the Limited Partners.

5.   LEASES:
     -------

Lease terms for the investment properties are 20 years from their inception. The
leases provide for minimum rents and additional rents based upon percentages of
gross sales in excess of specified breakpoints. The lessee is responsible for
occupancy costs such as maintenance, insurance, real estate taxes, and
utilities.

Accordingly, these amounts are not reflected in the statements of income, except
in circumstances where, in management's opinion, the Partnership will be
required to pay such costs to preserve assets (i.e., payment of past-due real
estate taxes). Management has determined that the leases are properly classified

                                       21
<PAGE>

as operating leases; therefore, rental income is reported when earned and the
cost of the property, excluding the cost of the land, is depreciated over its
estimated useful life.

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


                      Year ending
                      December 31,

                             2001                             $  409,380
                             2002                                409,380
                             2003                                409,380
                             2004                                409,380
                             2005                                409,380
                      Thereafter                               1,913,198
                                                              ----------
                                                              $3,960,098
                                                              ==========

Percentage rentals included in rental income in 2000, 1999, and 1998 were
$17,635, $18,341, and $11,692, respectively.

Two (2) of the Partnership's properties are leased to a Denny's franchisee. Base
rent from these properties amounted to approximately 28% of total base rent in
2000.

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

The original offering document required the Partnership to lease its properties
to a single tenant as long as the properties so leased do not constitute; in the
aggregate, more than 20% of the aggregate gross proceeds of the offering. As of
December 31, 2000, the Partnership has leased two of its properties to Hardee's
Food Systems, Inc., which constituted 21% of the aggregate gross proceeds.

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

Amounts incurred to the current General Partner for the years ended December 31,
2000, 1999, and 1998, 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, 2000      December 31, 1999      December 31, 1998
                                                    -----------------      -----------------      -----------------
<S>                                               <C>                   <C>                     <C>
Management fees                                                $66,930               $65,420               $ 64,690
Disposition fees                                                     0                     0                 37,500
Restoration fees                                                   172                   300                      0
Cash distribution                                                  877                   788                  1,325
Overhead allowance                                               5,414                 5,303                  5,219
Reimbursement for out-of-pocket expenses                         2,635                 3,532                 10,229
                                                                 -----                 -----                 ------
                                                               $76,028               $75,343               $118,963
                                                               =======               =======               ========
</TABLE>

                                       22
<PAGE>

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, 2000, 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, 2000. Funds are invested in U.S. Treasury
securities. In addition, interest totaling $89,740 has been credited to the
Trust as of December 31, 2000. The rights of the Permanent Manager to the Trust
shall be terminated upon the earliest to occur of the following events: (i) the
written release by the Permanent Manager of any and all interest in the Trust;
(ii) the expiration of the longest statute of limitations relating to a
potential claim which might be brought against the Permanent Manager and which
is subject to indemnification; or (iii) a determination by a court of competent
jurisdiction that the Permanent Manager shall have no liability to any person
with respect to a claim which is subject to indemnification under the PMA. At
such time as the indemnity provisions expire or the full indemnity is paid, any
funds remaining in the Trust will revert back to the general funds of the
Partnership.

9.   FORMER GENERAL PARTNERS' CAPITAL ACCOUNTS:
     ------------------------------------------

The capital account balance of the former general partners as of May 26, 1993,
the date of their removal as general partners pursuant to the results of a
solicitation of written consents from the Limited Partners, was a deficit of
$265,491. At December 31, 1993, the former general partners' deficit capital
account balance in the amount of $265,491 was reallocated to the Limited
Partners.

                                       23
<PAGE>

10.  SUBSEQUENT EVENTS:
     ------------------

In February 2001, the Partnership made a distribution to the Limited Partners
from operations for the Fourth Quarter 2000 of $65,000 amounting to $3.80 per
Interest.

                                       24
<PAGE>

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

None

                                       25
<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 50 - 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.

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.

                                       26
<PAGE>

      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, 2000, 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%
                                     S. Salina Street
                                     Syracuse, NY 13205
</TABLE>

(b)  As of December 31, 2000, 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

                                       27
<PAGE>

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, 2000, the minimum
management fee and the maximum reimbursement for office rent and overhead
increased by 2.2% 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 will
become unrestricted cash of the Partnership. As of December 31, 2000, the
Partnership had fully funded the Trust.

                                       28
<PAGE>

The following fees and reimbursements from the Partnership were incurred to
management in 2000:

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

         Management Fees                            $66,930
         Restoration Fees                               172
         Office Overhead Allowance                    5,414
         Direct Cost Reimbursements                   2,635
                                                    -------

              2000 Total                            $75,151
                                                    =======

                                       29
<PAGE>

                                    PART IV

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

(a)  1.   Financial Statements

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

          Report of Independent Public Accountants

          Balance Sheets, December 31, 2000 and 1999

          Statements of Income for the Years Ended December 31, 2000, 1999 and
          1998

          Statements of Partners' Capital for the Years Ended December 31, 2000,
          1999 and 1998

          Statements of Cash Flows for the Years Ended December 31, 2000, 1999
          and 1998

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

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

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

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

                                       30
<PAGE>

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

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

          99.0 Correspondence to the Limited Partners dated February 15, 2001,
               regarding the Fourth Quarter 2000 distribution.

(b)  Report on Form 8-K:

     The Registrant filed no reports on Form 8-K during the fourth quarter
of fiscal year 2000.

                                       31
<PAGE>

                DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
            SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                               DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                                                             Gross amount at which
                                           Initial cost to Partnership       carried at end of year (A)
                                           ---------------------------       -------------------------


                                                            Building                 Building
                                                               and                      and                   Accumulated
           Property          Encumbrances      Land        Improvements    Land     Improvements   Total      depreciation
----------------------------------------------------------------------------------------------------------------------------
<S>                          <C>             <C>         <C>          <C>          <C>          <C>          <C>
Pittsburgh, Pennsylvania        $  -         $  274,467  $   616,866  $   274,467  $   616,866  $   891,333     $ 214,017

St. Francis, Wisconsin             -            485,354      709,028      468,354      606,153    1,074,507       239,306

Oak Creek, Wisconsin               -            496,505      845,400      496,505      547,901    1,044,406       251,841

Englewood, Colorado                -                  -      213,210            -      213,210      213,210        65,683

Colorado Springs, Colorado         -            314,354      265,829      314,354      265,829      580,183        73,137

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

                                $  0         $1,570,680  $ 2,650,333  $ 1,553,680  $ 2,249,959  $ 3,803,639     $ 843,984
                             ============================================================================================

<CAPTION>
                                                           Life on which
                                                           depreciation
                                                        in latest statement
                                                           of operations
                                  Date of        Date      is computed
                               construction    acquired       (years)
---------------------------------------------------------------------------
<S>                            <C>             <C>      <C>
Pittsburgh, Pennsylvania            1990        9/11/90         31.5

St. Francis, Wisconsin              1990        8/14/90         31.5

Oak Creek, Wisconsin                1991         2/5/91         31.5

Englewood, Colorado                 1991         7/1/91         31.5

Colorado Springs, Colorado             -        4/28/92         31.5
</TABLE>

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

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


                                  Year ended              Year ended
Investments in Real Estate     December 31, 2000       December 31, 1999
------------------------------------------------------------------------

Balance at beginning of year     $ 3,803,639              $ 3,803,639

Property write-down                        0                        0


Sale of Property                           0                        0
                                 ------------------------------------


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


                                  Year ended              Year ended
Accumulated Depreciation       December 31, 2000        December 31, 1999
-------------------------------------------------------------------------

Balance at beginning of year       $ 778,690                $ 713,396

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

Sale of Property                           0                        0
                                   ----------------------------------


Balance at end of year             $ 843,984                $ 778,690
                                   ==================================

                                       32
<PAGE>

                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP


By:       The Provo Group, Inc., General Partner



By:
          __________________________________
          Bruce A. Provo, President


Date:     March 26, 2001


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



By:       The Provo Group, Inc., General Partner



By:
          __________________________________
          Bruce A. Provo, President


Date:     March 26, 2001



By:
          __________________________________
          Diane Conley
          Controller


Date:     March 26, 2001

                                       33
<PAGE>

                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.



DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP



By:       The Provo Group, Inc., General Partner



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


Date:     March 26, 2001


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, 2001



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


Date:     March 26, 2001

                                       34