Actually you could do either; since these are lookup fields.
FORM RULE with HIDE/SHOW solution:
Your rule will look like this:
When
[Table 3 Field 1] = "value 1"
then
show [table 3 field 1]
hide [table 2 field 1]
hide [table 2 field 2]
This logic means that when the table 3 field 1 SHOULD be visible; then it will be and under all other conditions it will be hidden. Conversely by adding the hide table 2 field 1 and 2; you're saying that when table 3 field 1 SHOULD be visible, then the other 2 fields should not be visible. So when table 3 field 1 is not visible the other table 2 field 1 and 2 WILL be visible.
FORMULA:
If( [table 3 field 1] = "value 1", [table 3 field 1], [table 2 field 1] & " " & [table 2 field 2])
(this assumes your table 2 field 1 and 2 should be displayed "together" in a single field. Also, this formula will "persist" across the entire table which would include reports, forms, formulas and emails etc. So this might be a better solution that one simple form rule that only exists in that one state. Using this formula in this way you can turn off reporting for the 3 lookup fields and rely only on this one formula.