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FORM 10-Q/A



Amendment
No. 1



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UNITED STATES

SECURITIES AND
EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30, 2003



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



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DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)



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



1100 Main Street,
Suite 1830, Kansas City, Missouri 64105

(Address of principal executive offices, including zip code)



(816) 421-7444

(Registrants telephone number, including area code)



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Securities registered pursuant to Section 12(b) of the Act: None



Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Interests



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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 ̈



EXPLANATORY NOTE



This amendment is being filed to restate the Partnerships condensed financial
statements (liquidation basis) to properly reflect the liquidation basis of accounting and to revise managements estimate of liquidation costs as of and for the period ended September 30, 2003. The net adjustment to income for the three and
nine-month periods ended September 30, 2003 was to increase income from operations by approximately $41,000 and $97,000, respectively. The net adjustment to net assets in liquidation as of September 30, 2003 was an increase of approximately $48,000.
Additionally, modifications to the statement of cash flows were made for the nine-month period ended September 30, 2003 to account for the changes in the statement of income (loss) and changes in net assets.



Except as otherwise discussed above, no other information on this Form 10-Q/A has been
updated to reflect any developments subsequent to November 14, 2003.



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PART 1- FINANCIAL INFORMATION



Item 1. Financial Statements



DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP



CONDENSED STATEMENTS OF NET ASSETS AS OF



September 30, 2003 and December 31, 2002

(Liquidation Basis)



(Unaudited)



|                                                             |  |                                            |           |                   |   |          
|------------------------------------------------------------ |  | ------------------------------------------ | --------- | ----------------- | - | ---------
|                                                             |  | September 30,2003 (As RestatedSee Note 11) |           | December 31, 2002
|ASSETS:                                                      |  |                                            |           |                   |   |          
|                                                             |  |                                           
|INVESTMENT PROPERTIES: (Note 3)                              |  | $                                          | 0         |                   | $ | 409,933  
|                                                             |  |                                           
|OTHER ASSETS:                                                |  |                                            |           |                   |   |          
|Cash and cash equivalents                                    |  |                                            | 844,363   |                   |   | 538,862  
|Cash held in indemnification trust (Note 8)                  |  |                                            | 364,043   |                   |   | 361,257  
|Property taxes escrow                                        |  |                                            | 23        |                   |   | 23       
|Rents and other receivables                                  |  |                                            | 4,514     |                   |   | 4,834    
|Due from General Partner                                     |  |                                            | 0         |                   |   | 211      
|Prepaid assets                                               |  |                                            | 116       |                   |   | 981      
|                                                             |  |                                            |           |                   |   |          
|Total other assets                                           |  |                                            | 1,213,059 |                   |   | 906,168  
|                                                             |  |                                            |           |                   |   |          
|Total assets                                                 |  |                                            | 1,213,059 |                   |   | 1,316,101
|                                                             |  |                                            |           |                   |   |          
|LIABILITIES:                                                 |  |                                            |           |                   |   |          
|                                                             |  |                                           
|Accounts payable and accrued expenses                        |  |                                            | 0         |                   |   | 7,125    
|Property taxes payable                                       |  |                                            | 0         |                   |   | 1,665    
|Reserve for estimated costs during the period of liquidation |  |                                            | 171,471   |                   |   | 276,206  
|                                                             |  |                                            |           |                   |   |          
|Total liabilities                                            |  |                                            | 171,471   |                   |   | 284,996  
|                                                             |  |                                            |           |                   |   |          
|CONTINGENT LIABILITIES:(Note 7)                              |  |                                            |           |                   |   |          
|                                                             |  |                                           
|NET ASSETS IN LIQUIDATION                                    |  | $                                          | 1,041,588 |                   | $ | 1,031,105
|                                                             |  |                                            |           |                   |   |          



The accompanying notes
are an integral part of these condensed financial statements.



2



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DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP



CONDENSED STATEMENTS OF INCOME (LOSS) AND CHANGES IN NET ASSETS



For the Periods Ended September 30, 2003 (Liquidation
Basis),

September 30, 2002 (Liquidation Basis) and June 27, 2002 (Going Concern Basis)



(Unaudited)



|                                                                                                         |  |                                                                |           |                                    |   |            |                                                            |  |                                 |           |  |                              |            |   |  |   |           |  
|-------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------- | --------- | ---------------------------------- | - | ---------- | ---------------------------------------------------------- |  | ------------------------------- | --------- |  | ---------------------------- | ---------- | - |  | - | --------- | -
|                                                                                                         |  | Three-months ended September 30,2003 (As Restated See Note 11) |           | Three-monthsendedSeptember 30,2002 |   |            | Nine-monthsendedSeptember 30,2003 (As RestatedSee Note 11) |  | June 28throughSeptember 30,2002 |           |  | January 1throughJune 27,2002 |           
|REVENUES:                                                                                                |  |                                                                |           |                                    |   |            |                                                            |  |                                 |           |  |                              |            |   |  |   |           |  
|Rental income (Note 5)                                                                                   |  | $                                                              | 0         |                                    | $ | 0          |                                                            |  | $                               | 0         |  | $                            | 0          |   |  | $ | 108,434   |  
|Interest income                                                                                          |  |                                                                | 2,031     |                                    |   | 6,414      |                                                            |  |                                 | 5,816     |  |                              | 6,414      |   |  |   | 4,094     |  
|Other income                                                                                             |  |                                                                | 30        |                                    |   | 0          |                                                            |  |                                 | 30        |  |                              | 0          |   |  |   | 4,902     |  
|Recovery of amounts previously written off (Note 2)                                                      |  |                                                                | 1,290     |                                    |   | 2,351      |                                                            |  |                                 | 4,637     |  |                              | 2,351      |   |  |   | 268       |  
|                                                                                                         |  |                                                                |           |                                    |   |            |                                                            |  |                                 |           |  |                              |            |   |  |   |           |  
|TOTAL REVENUES                                                                                           |  |                                                                | 3,351     |                                    |   | 8,765      |                                                            |  |                                 | 10,483    |  |                              | 8,765      |   |  |   | 117,698   |  
|                                                                                                         |  |                                                                |           |                                    |   |            |                                                            |  |                                 |           |  |                              |            |   |  |   |           |  
|EXPENSES:                                                                                                |  |                                                                |           |                                    |   |            |                                                            |  |                                 |           |  |                              |            |   |  |   |           |  
|Partnership management fees (Note 6)                                                                     |  |                                                                | 0         |                                    |   | 0          |                                                            |  |                                 | 0         |  |                              | 0          |   |  |   | 35,455    |  
|Restoration fees (Note 6)                                                                                |  |                                                                | 0         |                                    |   | 0          |                                                            |  |                                 | 0         |  |                              | 0          |   |  |   | 11        |  
|Insurance                                                                                                |  |                                                                | 0         |                                    |   | 0          |                                                            |  |                                 | 0         |  |                              | 0          |   |  |   | 2,449     |  
|General and administrative                                                                               |  |                                                                | 0         |                                    |   | 0          |                                                            |  |                                 | 0         |  |                              | 0          |   |  |   | 20,657    |  
|Advisory Board fees and expenses                                                                         |  |                                                                | 0         |                                    |   | 0          |                                                            |  |                                 | 0         |  |                              | 0          |   |  |   | 3,832     |  
|Professional services                                                                                    |  |                                                                | 0         |                                    |   | 0          |                                                            |  |                                 | 0         |  |                              | 0          |   |  |   | 52,107    |  
|Maintenance expense                                                                                      |  |                                                                | 0         |                                    |   | 0          |                                                            |  |                                 | 0         |  |                              | 0          |   |  |   | 4,765     |  
|Defaulted/vacant tenant                                                                                  |  |                                                                | 0         |                                    |   | 0          |                                                            |  |                                 | 0         |  |                              | 0          |   |  |   | 8,415     |  
|Real estate taxes                                                                                        |  |                                                                | 0         |                                    |   | 0          |                                                            |  |                                 | 0         |  |                              | 0          |   |  |   | 12,062    |  
|Depreciation                                                                                             |  |                                                                | 0         |                                    |   | 0          |                                                            |  |                                 | 0         |  |                              | 0          |   |  |   | 29,294    |  
|Amortization                                                                                             |  |                                                                | 0         |                                    |   | 0          |                                                            |  |                                 | 0         |  |                              | 0          |   |  |   | 8,365     |  
|Property write-downs                                                                                     |  |                                                                | 0         |                                    |   | 0          |                                                            |  |                                 | 0         |  |                              | 0          |   |  |   | 239,056   |  
|                                                                                                         |  |                                                                |           |                                    |   |            |                                                            |  |                                 |           |  |                              |            |   |  |   |           |  
|TOTAL EXPENSES                                                                                           |  |                                                                | 0         |                                    |   | 0          |                                                            |  |                                 | 0         |  |                              | 0          |   |  |   | 416,468   |  
|                                                                                                         |  |                                                                |           |                                    |   |            |                                                            |  |                                 |           |  |                              |            |   |  |   |           |  
|INCOME (LOSS) FROM OPERATIONS                                                                            |  |                                                                | 3,351     |                                    |   | 8,765      |                                                            |  |                                 | 10,483    |  |                              | 8,765      |   |  |   | (298,770  | )
|                                                                                                         |  |                                                                |           |                                    |  
|NET ASSETS, BEGINNING OF PERIOD                                                                          |  |                                                                | 1,038,237 |                                    |   | 3,260,869  |                                                            |  |                                 | 1,031,105 |  |                              | 3,025,524  |   |  |   | 3,350,389 |  
|                                                                                                         |  |                                                                |           |                                    |  
|CASH DISTRIBUTIONS                                                                                       |  |                                                                | 0         |                                    |   | (2,139,850 | )                                                          |  |                                 | 0         |  |                              | (2,139,850 | ) |  |   | (26,095   | )
|                                                                                                         |  |                                                                |           |                                    |  
|ADJUSTMENT TO LIQUIDATION BASIS                                                                          |  |                                                                | 0         |                                    |   | 0          |                                                            |  |                                 | 0         |  |                              | 235,345    |   |  |   | 0         |  
|                                                                                                         |  |                                                                |           |                                    |   |            |                                                            |  |                                 |           |  |                              |            |   |  |   |           |  
|NET ASSETS, END OF PERIOD                                                                                |  | $                                                              | 1,041,588 |                                    | $ | 1,129,784  |                                                            |  | $                               | 1,041,588 |  | $                            | 1,129,784  |   |  | $ | 3,025,524 |  
|                                                                                                         |  |                                                                |           |                                    |   |            |                                                            |  |                                 |           |  |                              |            |   |  |   |           |  
|INCOME (LOSS) FROM OPERATIONS - CURRENT GENERAL PARTNER                                                  |  | $                                                              | 34        |                                    | $ | 88         |                                                            |  | $                               | 105       |  | $                            | 88         |   |  | $ | (2,988    | )
|                                                                                                         |  |                                                                |           |                                    |  
|INCOME (LOSS) FROM OPERATIONS - LIMITED PARTNERS                                                         |  |                                                                | 3,317     |                                    |   | 8,677      |                                                            |  |                                 | 10,378    |  |                              | 8,677      |   |  |   | (295,782  | )
|                                                                                                         |  |                                                                |           |                                    |   |            |                                                            |  |                                 |           |  |                              |            |   |  |   |           |  
|                                                                                                         |  | $                                                              | 3,351     |                                    | $ | 8,765      |                                                            |  | $                               | 10,483    |  | $                            | 8,765      |   |  | $ | (298,770  | )
|                                                                                                         |  |                                                                |           |                                    |   |            |                                                            |  |                                 |           |  |                              |            |   |  |   |           |  
|INCOME (LOSS) FROM OPERATIONS PER LIMITED PARTNERSHIP INTEREST, based on 17,102.52 interests outstanding |  | $                                                              | .19       |                                    | $ | .51        |                                                            |  | $                               | .61       |  | $                            | .51        |   |  | $ | (17.29    | )
|                                                                                                         |  |                                                                |           |                                    |   |            |                                                            |  |                                 |           |  |                              |            |   |  |   |           |  



The accompanying notes
are an integral part of these condensed financial statements.





3



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DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP



CONDENSED STATEMENTS OF CASH FLOWS



For the Periods Ended



September 30, 2003 (Liquidation Basis), September 30, 2002 (Liquidation
Basis)

and June 27, 2002 (Going Concern Basis)



(Unaudited)



|                                                                                                                  |  |                                                               |          |   |                                   |   |            |                                 |  |   |          |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------- | -------- | - | --------------------------------- | - | ---------- | ------------------------------- |  | - | -------- | -
|                                                                                                                  |  | Nine-months ended September 30, 2003 (As RestatedSee Note 11) |          |   | June 28 throughSeptember 30, 2002 |   |            | January 1 through June 27, 2002 | 
|CASH FLOWS (USED IN) PROVIDED FROM OPERATING ACTIVITIES:                                                          |  |                                                               |          |   |                                   |   |            |                                 |  |   |          |  
|Income (loss) from operations                                                                                     |  | $                                                             | 10,483   |   |                                   | $ | 8,765      |                                 |  | $ | (298,770 | )
|Adjustments to reconcile income (loss) from operations to net cash (used in) provided from operating activities - |  |                                                               |          |   |                                   |   |            |                                 |  |   |          |  
|Depreciation and amortization                                                                                     |  |                                                               | 0        |   |                                   |   | 0          |                                 |  |   | 37,659   |  
|Property write-downs                                                                                              |  |                                                               | 0        |   |                                   |   | 0          |                                 |  |   | 239,056  |  
|Recovery of amounts previously written off                                                                        |  |                                                               | (4,637   | ) |                                   |   | (2,351     | )                               |  |   | (268     | )
|Interest applied to Indemnification Trust Account                                                                 |  |                                                               | (2,786   | ) |                                   |   | (1,674     | )                               |  |   | (3,123   | )
|Decrease in rents, other receivables and prepaid assets                                                           |  |                                                               | 1,185    |   |                                   |   | 1,218      |                                 |  |   | 23,659   |  
|Deposit for payment of property taxes                                                                             |  |                                                               | 0        |   |                                   |   | 0          |                                 |  |   | 9,541    |  
|Decrease in deferred rent receivable                                                                              |  |                                                               | 0        |   |                                   |   | 0          |                                 |  |   | 4,350    |  
|Decrease in security deposits                                                                                     |  |                                                               | 0        |   |                                   |   | 0          |                                 |  |   | (8,425   | )
|Decrease in accounts payable and accrued expenses                                                                 |  |                                                               | (7,125   | ) |                                   |   | 0          |                                 |  |   | (12,549  | )
|Decrease in reserve for estimated costs during the period of liquidation                                          |  |                                                               | (104,735 | ) |                                   |   | (34,331    | )                               |  |   | 0        |  
|Decrease in property taxes payable                                                                                |  |                                                               | (1,665   | ) |                                   |   | 0          |                                 |  |   | (33,069  | )
|Change in amount due from/to General Partner                                                                      |  |                                                               | 211      |   |                                   |   | (1,245     | )                               |  |   | 1,777    |  
|Decrease in unearned rental income                                                                                |  |                                                               | 0        |   |                                   |   | 0          |                                 |  |   | (20,437  | )
|                                                                                                                  |  |                                                               |          |   |                                   |   |            |                                 |  |   |          |  
|Net cash (used in) operating activities                                                                           |  |                                                               | (109,069 | ) |                                   |   | (29,618    | )                               |  |   | (60,599  | )
|                                                                                                                  |  |                                                               |          |   |                                   |   |            |                                 |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                             |  |                                                               |          |   |                                   |   |            |                                 |  |   |          |  
|Recoveries from former General Partner affiliates                                                                 |  |                                                               | 4,637    |   |                                   |   | 2,351      |                                 |  |   | 268      |  
|Net proceeds from sale of properties                                                                              |  |                                                               | 409,933  |   |                                   |   | 2,541,329  |                                 |  |   | 0        |  
|Payments on note receivable                                                                                       |  |                                                               | 0        |   |                                   |   | 0          |                                 |  |   | 45,250   |  
|                                                                                                                  |  |                                                               |          |   |                                   |   |            |                                 |  |   |          |  
|Net cash provided from investing activities                                                                       |  |                                                               | 414,570  |   |                                   |   | 2,543,680  |                                 |  |   | 45,518   |  
|                                                                                                                  |  |                                                               |          |   |                                   |   |            |                                 |  |   |          |  
|CASH FLOWS (USED IN) FINANCING ACTIVITIES:                                                                        |  |                                                               |          |   |                                   |   |            |                                 |  |   |          |  
|Cash distributions to Limited Partners                                                                            |  |                                                               | 0        |   |                                   |   | (2,140,000 | )                               |  |   | (25,000  | )
|Cash distributions to General Partner                                                                             |  |                                                               | 0        |   |                                   |   | 150        |                                 |  |   | (1,095   | )
|                                                                                                                  |  |                                                               |          |   |                                   |   |            |                                 |  |   |          |  
|Net cash (used in) financing activities                                                                           |  |                                                               | 0        |   |                                   |   | 2,139,850  |                                 |  |   | (26,095  | )
|                                                                                                                  |  |                                                               |          |   |                                   |   |            |                                 |  |   |          |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                              |  |                                                               | 305,501  |   |                                   |   | 374,212    |                                 |  |   | (41,176  | )
|                                                                                                                  |  |                                                               |         
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                                  |  |                                                               | 538,862  |   |                                   |   | 198,972    |                                 |  |   | 240,148  |  
|                                                                                                                  |  |                                                               |          |   |                                   |   |            |                                 |  |   |          |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                                        |  | $                                                             | 844,363  |   |                                   | $ | 573,184    |                                 |  | $ | 198,972  |  
|                                                                                                                  |  |                                                               |          |   |                                   |   |            |                                 |  |   |          |  



The accompanying notes
are an integral part of these condensed financial statements.



4



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DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP



NOTES TO CONDENSED FINANCIAL STATEMENTS



The accompanying unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Security and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP)
have been condensed or omitted pursuant to such rules and regulations. These unaudited interim condensed financial statements should be read in conjunction with DiVall Income Properties 3 Limited Partnerships (the Partnership) 2002
annual audited financial statements within Form 10-K. This amended Form 10-Q/A reflects changes made to the Partnerships 2002 annual financial statements from the previously filed Form 10-Q. (See Note 11)



These unaudited condensed financial statements include all adjustments, which are in the
opinion of management, necessary to present a fair statement of the Partnerships financial position as of September 30, 2003, and statements of income (loss) and changes in net assets for the three-month periods ended September 30, 2003 and
2002 and the nine-month period ended September 30, 2003 and the periods June 28, 2002 through September 30, 2002 and January 1, 2002 through June 27, 2002 and cash flows for the nine-month period ended September 30, 2003 and the periods June 28,
2002 through September 30, 2002 and January 1, 2002 through June 27, 2002.



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.



Prior to June 28, 2002, the Partnership was engaged in the business of owning and operating its investment portfolio of commercial real estate properties (the Properties). The Properties were 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 consisted primarily of fast food, family style, and casual/theme restaurants. At December 31, 2001,
the Partnership owned four (4) properties and specialty leasehold improvements for use in all four (4) of the Properties. In June 2002 the Partnership sold all but the vacant Colorado Springs property. Therefore, as of June 30, 2003 the Partnership
owned one (1) vacant property and specialty leasehold improvements for use in the one (1) property. In June 2003 the Partnership entered into a contract to sell the remaining property. The closing date of the Colorado Springs property was July 14,
2003.



As a result of the Limited Partners approval to sell all of the
Partnerships properties and dissolve and liquidate the Partnership, the Partnerships financial statements for the period subsequent to June 27, 2002 have been prepared on a liquidation basis. Accordingly, assets have been valued at
estimated net realizable values and liabilities include estimated costs associated with carrying out the plan of liquidation.



5



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Prior to June 28, 2002, rental revenue from investment properties was recognized on the straight-line basis over the life
of the respective lease. Percentage rents were accrued only when the tenant had reached the revenue breakpoint stipulated in the lease.



The Partnership considered its operations to be in only one segment, the operation of a portfolio of commercial real estate leased on a triple net basis, and therefore no
further segment reporting has been made.



Prior to June 28, 2002, depreciation
of the properties and improvements was provided on a straight-line basis over 31.5 years, which were the estimated useful lives of the buildings and improvements.



Prior to June 28, 2002, deferred fees represented leasing commissions paid when properties were leased and upon the negotiated extension of
a lease. Leasing commissions were capitalized and amortized over the original lease term.



Real estate taxes on the Partnerships investment properties were the responsibility of the tenant. However, when a tenant failed to make the required tax payments or when a property became vacant, the
Partnership made the appropriate payment to avoid possible foreclosure of the property. Taxes were accrued in the period for which the liability was 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 accounting
principles generally accepted in the United States of America 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.



In October 2001, Statement of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144) was issued. FAS
144 supercedes Statement of Financial Accounting Standards No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (FAS 121). FAS 144 develops a single accounting model for long-lived assets
to be disposed of, whether previously held and used or newly acquired. The provisions of FAS 144 became effective for fiscal years beginning after December 15, 2001. The Partnership adopted FAS 144 on January 1, 2002 and the result was that assets
disposed of or deemed to be classified as held for sale required the reclassification of current and previous years operations to discontinued operations.



Prior to June 28, 2002, the Partnership periodically reviewed its long-lived assets, primarily real estate, for impairment whenever events or changes in circumstances
indicated that the carrying amount of such assets may not be recoverable. The Partnerships review involved comparing current and future operating performance of the assets, the most significant of which is undiscounted operating cash flows, to
the carrying value of the assets. Based on this analysis, a provision for possible loss was recognized, if any.



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 on 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.



6



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During the First Quarter of 2002, Management found a buyer for the Colorado Springs property and anticipated the property
to be sold in May 2002. However, the sale was not consummated and the agreement was terminated. Management intended to continue to market the property for sale. Also, during the First Quarter of 2002, Management accepted an offer for the remaining
three (3) Partnership properties, which included the Applebees- Pittsburgh, Hardees- St. Francis and the vacant Oak Creek properties. The General Partner sought the written consent of the Limited Partners to sell all of the
Partnerships Properties and dissolve and liquidate the Partnership. Prior to the sale of the remaining properties, the General Partner had received the written consent of the holders of more than fifty percent (50%) of the Partnership
interests authorizing such sales and dissolution and liquidation of the Partnership. All of the Partnerships properties, except for the vacant Colorado Springs property, were sold in June 2002. In June 2003 the Partnership entered into a
contract to sell the remaining property. The closing date of the Colorado Springs property was July 14, 2003. The Partnership will be dissolved and liquidated prior to December 31, 2003. That step will bring to a close the SEC reporting and
compliance obligations of the Partnership. The Partnership plans to make a cash distribution to the Partners of $400,000 ($23.39/unit) in mid-November 2003.



The balance of the Partnerships assets, after making provision for known obligations of the Partnership in connection with the winding-up of the Partnerships
business, will be distributed to a newly formed limited liability company called DIP3, LLC, which has been created to assist in the Partnerships liquidation and dissolution. DIP3, LLC will hold for the benefit of the Partners: (i)
approximately $280,000 of reserves established by the General Partner to address contingent liabilities and (ii) the Partnerships right to receive the proceeds, if any, of the Indemnification Trust when they become available to the Partnership
(as described below). Any expenses of DIP3, LLC will be paid from these funds, including amounts distributed from the indemnification Trust. The General Partner will serve as the manager of DIP3 LLC and estimates that the annual expenses of DIP3,
LLC will be near $10,000. This amount is composed of fees payable to unrelated third parties of $400/month for certain recordkeeping purposes, $300/month to the General Partner (or an affiliate) as an overhead charge and the cost of annual tax
returns. The General Partner anticipates additional costs for professional fees.



The net adjustment at June 28, 2002 required to convert from the going concern (historical cost) basis to the liquidation basis of accounting was a net increase in carrying value of net assets of $235,000. The increase in the carrying value
of net assets was due to an increase in the value of investment properties to their estimated net realizable values of $550,000 offset by the recorded estimated liabilities associated with carrying out the liquidation of $315,000, and were included
in the statement of net assets as of June 30, 2002. Estimated liabilities associated with carrying out the plan of liquidation were based upon (1) historical costs for similar services, (2) based on agreements currently in place, and (3) estimates
provided by service providers.



In the third quarter of 2002, approximately
$34,000 of recorded estimated liabilities associated with carrying out the liquidation were paid. In the fourth quarter of 2002, approximately $24,000 of the recorded estimated liabilities associated with carrying out the liquidation were paid.
Additionally, during the three month period ended December 31, 2002, the adjustment to liquidation basis was reduced by $103,000 to account for a $19,000 increase in the estimated liabilities associated with carrying out the liquidation based on the
updated estimates of total costs and the write down of the remaining asset by $84,000 based upon the ultimate amount realized upon its sale.



The reserve for liquidation at September 30, 2003 was $171,000 and reflected payments of $30,000 made during the third quarter of 2003; payments of $29,000 made during
the second quarter of 2003; and payments of $46,000 made during the first quarter of 2003 against the estimated costs during the period of liquidation.



The statement of income (loss) and changes in net assets for the period April 1, 2002 through June 27, 2002 and January 1, 2002 through June 27, 2002 have been prepared
on a going concern basis of accounting on which the Partnership had previously reported its financial condition and its results of operations.



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,
2002, the tax basis of the Partnerships assets exceeded the amounts reported in the accompanying financial statements by approximately $220,499.



7



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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 September 30, 2003, $5,818,000 of recoveries have been received which exceeded the original estimate of $3 million. As a result, during
1996, 1997, 1999, 2000, 2001, 2002 and 2003 the Partnership has recognized a total of $1,312,000 as recovery of amounts previously written off on the statements of 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.



3. INVESTMENT PROPERTIES:



There were no investment properties, including equipment, held by the Partnership at September 30, 2003.



At December 31, 2001, the Partnership owned four (4) properties comprised of: one (1) Hardees restaurant, one (1) Applebees
restaurant, and two (2) vacant properties (previously operated as a Dennys restaurant and a Hardees restaurant.) During the First Quarter of 2002, Management found a buyer for the vacant Colorado Springs property and anticipated the
property to be sold in May 2002. However, the sale was not consummated and the agreement was terminated. Also during the First Quarter of 2002, Management accepted an offer for three (3) of the remaining Partnership properties. Following the receipt
of the written consent of Limited Partners holding more than fifty percent (50%) of the partnership interests authorizing such sales, the three (3) properties were sold in June 2002. In June 2003 Management entered into a contract to sell the
remaining property. The closing date on the sale of the Colorado Springs property was July 14, 2003.



During June 2003 Management accepted a $475,000 purchase offer for the sale of the vacant Colorado Springs property. Per the agreement, however, if the closing occurred prior to July 15, 2003 the purchase price was
reduced by $35,000 to $440,000. The actual closing date was July 14, 2003 and therefore the actual sales price was $440,000. The net sales proceeds totaled $409,000 after sales commissions of $26,000 and other closing costs. Of such sales
commissions, $17,600 was paid to an unaffiliated broker and $8,800 was paid to a General Partner affiliate. The net asset value of the Colorado Springs property at March 31, 2003 was approximately $494,000, and therefore, the estimated net
realizable value of the property was written down by $82,000 in June 2003. The property was written-down an additional $3,000 in the Third Quarter of 2003 to its estimated net realizable value.



8



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During the First Quarter of 2002, Management accepted offers for three (3) of the remaining Partnership properties, which
included: (i) the Oak Creek property, (ii) the St. Francis property and (iii) the Applebees property in Pittsburgh, Pennsylvania. The sales were contingent upon Limited Partner approval to sell the remaining properties and to liquidate and
dissolve the Partnership. The net asset value of the Oak Creek property was written-down by $178,000 in the First Quarter of 2002 to reflect the estimated sales price, less costs to sell, of the property at March 31, 2002 of $600,000. The St.
Francis property was written-down by $61,000 in the First Quarter of 2002 to reflect the estimated sales price, less costs to sell, of the property at March 31, 2002 of $755,000. The sales were consummated in June 2002 at an aggregate sale price of
$2,755,000, as the General Partner received Limited Partner approval.



In
connection with the sale of these three (3) properties, sales commissions of $164,650 (approximately 6%) were paid in the Second Quarter of 2002. Of such sales commissions, $82,650 was paid to an unaffiliated broker and $82,000 was paid a General
Partner affiliate.



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 were invested in the Partnerships properties.



4. PARTNERSHIP AGREEMENT:



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



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



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



9



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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 General Partner without a vote of the Limited Partners made these.



5. LEASES:



Original lease terms for the investment properties were generally 20 years from their inception. The leases had provided for minimum rents
and additional rents based upon percentages of gross sales in excess of specified breakpoints. The lessee was responsible for occupancy costs such as maintenance, insurance, real estate taxes, and utilities. Accordingly, these amounts were not
reflected in the statements of income, except in circumstances where, in managements opinion, the Partnership would be required to pay such costs to preserve assets (i.e., payment of past-due real estate taxes). Management has determined that
the leases were properly classified as operating leases; therefore, rental income was reported when earned on a straight line basis and the cost of the property, excluding the cost of the land, was depreciated over its estimated useful life.



During the first six months of 2002 the aggregate lease payments received from
the Partnership properties, Applebees- Pittsburgh, Pennsylvania and Hardees- St. Francis, Wisconsin, pursuant to their leases totaled $102,000. These two (2) properties that were generating such lease rental revenue were sold at the end
of the Second Quarter of 2002. As of June 30, 2003 the Partnership had only one (1) vacant property remaining and Management does not anticipate any additional leases or leasing income prior to the dissolution of the Partnership. In June 2003
Management accepted an offer for the sale of the final Partnership property. The closing date of the vacant Colorado Springs property sale was July 14, 2003.



6. TRANSACTIONS WITH CURRENT GENERAL PARTNER AND ITS AFFILIATES:



Between the three original affiliated Partnerships as provided in the Permanent Management Agreement (PMA), the current General Partner receives a fee for
managing the Partnership equal to 4% of gross receipts, subject to a minimum of $300,000 per year, and a maximum annual reimbursement for office rent and related overhead of $25,000. The Partnership shall only be responsible for its allocable share
of such minimum and maximum amounts as indicated above ($570,000 minimum base fee and $4,750 maximum rent reimbursement.) On May 26, 1993, the Permanent Manager, TPG, replaced the former general partners as the new General Partner, as provided for
in an amendment to the Partnership Agreement dated May 26, 1993. Pursuant to amendments to the Partnership Agreement, TPG continues to provide management services for the same fee structure as provided in the PMA mentioned above. 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, 2003, the minimum management fee and the maximum annual reimbursement for office rent and overhead increased by 1.58% representing the allowable annual Consumer Price Index adjustment per the PMA. Therefore, beginning March 1, 2003 the
monthly minimum management fee was raised to $6,060. However, due to the sale of three of the properties at the end of the Second Quarter of 2002, Management reduced by seventy-five percent (75%) the Partnerships monthly management fees due to
them. Therefore, beginning July 1, 2002 and until the sale of the final property and the commencement of the wind-up phase, the monthly minimum management fee was reduced by seventy-five percent (75%). As of March 1, 2003 and through July 2003 the
reduced minimum monthly management fee was $1,515. Pursuant to the sale



10



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of the final property, Colorado Springs, in July 2003, management fees resumed to the full minimum management fee of $6,060 beginning August 2003 and will
continue through May 2004 (through the final Partnership wind-up and dissolution period).



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 $88,961 to date on the amounts recovered, which includes $62 in fees received in the First Quarter of 2003, $72 received in the Second Quarter 2003, and $52 received in the Third Quarter of 2003. The fees received from the
Partnership on the amounts recovered reduce the 4% minimum fee by that same amount.



Amounts paid and or accrued to the current General Partner and its affiliates during 2003 and 2002 were as follows:



|                                         |  |                                                            |        |                                                           |   |       |                                                           |  |                                                        |        |                                                          |   |        |  |   |        |  
|---------------------------------------- |  | ---------------------------------------------------------- | ------ | --------------------------------------------------------- | - | ----- | --------------------------------------------------------- |  | ------------------------------------------------------ | ------ | -------------------------------------------------------- | - | ------ |  | - | ------ | -
|Current General Partner                  |  | Incurred for thethree-month period ended September 30,2003 |        | Incurred for the three-monthperiod endedSeptember 30,2002 |   |       | Incurred for thenine-month period ended September 30,2003 |  | Incurred for theperiod January 1 through June 27, 2002 |        | Incurred for theperiod June 28 throughSeptember 30, 2002 |  
|Management fees                          |  | $                                                          | 13,583 |                                                           | $ | 4,379 |                                                           |  | $                                                      | 22,492 |                                                          | $ | 35,455 |  | $ | 4,379  |  
|Restoration fees                         |  |                                                            | 52     |                                                           |   | 94    |                                                           |  |                                                        | 185    |                                                          |   | 11     |  |   | 94     |  
|Overhead allowance                       |  |                                                            | 1,467  |                                                           |   | 1,443 |                                                           |  |                                                        | 4,385  |                                                          |   | 2,862  |  |   | 1,443  |  
|Reimbursement for out-of-pocket expenses |  |                                                            | 484    |                                                           |   | 1,269 |                                                           |  |                                                        | 1,553  |                                                          |   | 1,669  |  |   | 1,269  |  
|Sales commissions                        |  |                                                            | 8,800  |                                                           |   | 0     |                                                           |  |                                                        | 8,800  |                                                          |   | 0      |  |   | 82,000 |  
|Cash distributions                       |  |                                                            | 0      |                                                           |   | (150  | )                                                         |  |                                                        | 0      |                                                          |   | 1,095  |  |   | (150   | )
|                                         |  |                                                            |        |                                                           |   |       |                                                           |  |                                                        |        |                                                          |   |        |  |   |        |  
|                                         |  | $                                                          | 24,386 |                                                           | $ | 7,035 |                                                           |  | $                                                      | 37,415 |                                                          | $ | 41,092 |  | $ | 89,035 |  
|                                         |  |                                                            |        |                                                           |   |       |                                                           |  |                                                        |        |                                                          |   |        |  |   |        |  



7. CONTINGENT LIABILITIES:



According to the Partnership Agreement, 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 are to be in escrow 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 escrow
amounts will be paid to the current General Partner. At such time as the recovery exceeds $6,000,000 in the aggregate, the remaining escrow 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 in escrow towards the recovery. In lieu of an escrow, 50% of all such disposition fees have been paid directly to the restoration account and then distributed among the three Partnerships.
After surpassing the $4,500,000 recovery level during March 1996, 50% of the amounts previously in escrow were refunded to the current General Partner. The General Partner does not expect any future refund, as the possibility of achievement of the
$6,000,000 recovery threshold appears remote.



On October 27, 2003, the
Partnership received a notice from the Internal Revenue Service (IRS) demanding payment of a penalty arising from the late filing of the Partnerships 2000 tax return. Management relied upon professional tax advisors (a Big 5
accounting firm) for federal tax compliance assistance and tax advice, including advice regarding deadlines. For 2000 Management understood that its income tax return was required to be filed on or before October 15, 2001. In August 2001, Management
learned that the return was due in mid-July 2001, and that a second extension was not filed. A second extension was necessary while awaiting IRS regulations on a newly promulgated requirement that the 2000 return be filed electronically. Management
promptly completed and filed a return electronically. A Reasonable Cause statement was attached to and made part of the 2000 Partnership tax return stating the cause for the late filing.



11



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The penalty being demanded by the IRS is approximately $190,000. Management believes the penalty is grossly unfair and disproportionate under the
circumstances. Management is working with the Partnerships current accountants and attorneys and hopes to reduce or eliminate this penalty. Once such claims (and any similar claims which may arise) are finally determined, remaining partnership
assets held by DIP3, LLC shall be distributed to the Partners on a per Unit basis.



8. PMA INDEMNIFICATION TRUST:



The 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 September 30, 2003. Funds are invested in U.S. Treasury
securities. In addition, interest totaling $114,043 has been credited to the Trust as of September 30, 2003. At such time as the indemnity provisions expire or the full indemnity is paid, any funds remaining in the Trust were to revert back to the
general funds of the Partnership.



Pursuant to the Partnerships plan of
liquidation, a new limited liability company, DIP3, LLC, which will act as a liquidating trust, will be created to hold the Partnerships right to receive the proceeds, if any, from the Trust. The net asset value of the Trust at September 30,
2003 was $364,043.



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. Upon termination of the Permanent Managers interest in the Trust, the remaining proceeds, if any, will be distributed to DIP3, LLC and then, in turn (less expenses), to the Limited Partners on a per Unit
basis.



9. FORMER GENERAL PARTNERS CAPITAL ACCOUNTS:



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



10. SUBSEQUENT EVENTS:



The third quarter 2003 Limited
Partner Distribution of $400,000 is scheduled to be made on November 15, 2003.



11. RESTATEMENT OF PREVIOUSLY ISSUED CONDENSED FINANCIAL STATEMENTS



Subsequent to the filing of the Partnerships condensed financial statements on Form 10-Q for the three and nine months ended September 30, 2003, the Partnerships management determined that the financial
statements did not properly reflect the liquidation basis of accounting. The Partnership commenced liquidation on June 28, 2002 and adopted the liquidation basis of accounting as of that date, establishing a reserve for future costs to liquidate the
Partnership. The Partnership had originally accounted for certain expense items as they came due through income (loss) from operations on the statement of operations. Management subsequently determined that these expenses were already included in
the reserve for liquidation costs established at the date of liquidation, and therefore these expenses should not have been reflected in income (loss) from operations subsequent to the liquidation date, but rather would reduce the reserve for



12



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liquidation costs as they were paid. Additionally, management revised its estimate of costs required to carry out the liquidation. As a result, the
Partnerships financial statements for the quarter ended September 30, 2003 have been restated from amounts previously reported to properly reflect the adoption of liquidation basis of accounting.



Additionally, the amounts as of December 31, 2002 within this Form 10-Q/A have been restated
from the 2002 financial statements filed with the originally filed Form 10-Q to reflect the audited financial statements as of December 31, 2002 as filed in the Partnerships 2002 financial statements on Form 10-K.



The following is a summary of the significant effects of the restatement to the financial
statements:



|                                                             |  |                                              |           |                                  |   |          
|------------------------------------------------------------ |  | -------------------------------------------- | --------- | -------------------------------- | - | ---------
|                                                             |  | As previously reported at September 30, 2003 |           | As restated at September 30,2003
|Total assets                                                 |  | $                                            | 1,213,059 |                                  | $ | 1,213,059
|                                                             |  |                                              |           |                                  |   |          
|Accounts payable and accrued expenses                        |  | $                                            | 38,315    |                                  | $ | 0        
|Reserve for estimated costs during the period of liquidation |  |                                              | 180,701   |                                  |   | 171,471  
|                                                             |  |                                              |           |                                  |   |          
|Total liabilities                                            |  | $                                            | 219,016   |                                  | $ | 171,471  
|                                                             |  |                                              |           |                                  |   |          
|Net assets in liquidation                                    |  | $                                            | 994,043   |                                  | $ | 1,041,588
|                                                             |  |                                              |           |                                  |   |          



13



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|                                                   |  |                                                                           |         |   |                                                               |   |                                                                          |  |   |                                                              |   |  |   |          
|-------------------------------------------------- |  | ------------------------------------------------------------------------- | ------- | - | ------------------------------------------------------------- | - | ------------------------------------------------------------------------ |  | - | ------------------------------------------------------------ | - |  | - | ---------
|                                                   |  | As previously reported for the three-monthperiod ended September 30, 2003 |         |   | As restated forthe three-month period ended September
30,2003 |   | As previously reported for the nine-monthperiod ended September 30, 2003 |  |   | As restated forthe nine-monthperiod ended September 30, 2003
|Interest income                                    |  | $                                                                         | 2,031   |   |                                                               | $ | 2,031                                                                    |  | $ | 5,816                                                        |   |  | $ | 5,816    
|Other income                                       |  |                                                                           | 30      |   |                                                               |   | 30                                                                       |  |   | 30                                                           |   |  |   | 30       
|Recovery of amounts previously written off         |  |                                                                           | 1,290   |   |                                                               |   | 1,290                                                                    |  |   | 4,637                                                        |   |  |   | 4,637    
|                                                   |  |                                                                           |         |   |                                                               |   |                                                                          |  |   |                                                              |   |  |   |          
|Total revenues                                     |  | $                                                                         | 3,351   |   |                                                               | $ | 3,351                                                                    |  | $ | 10,483                                                       |   |  | $ | 10,483   
|                                                   |  |                                                                           |         |   |                                                               |   |                                                                          |  |   |                                                              |   |  |   |          
|Partnership management fees                        |  |                                                                           | 13,583  |   |                                                               |   | 0                                                                        |  |   | 22,492                                                       |   |  |   | 0        
|Restoration fees                                   |  |                                                                           | 52      |   |                                                               |   | 0                                                                        |  |   | 185                                                          |   |  |   | 0        
|Insurance                                          |  |                                                                           | 347     |   |                                                               |   | 0                                                                        |  |   | 2,857                                                        |   |  |   | 0        
|General and administrative                         |  |                                                                           | 3,269   |   |                                                               |   | 0                                                                        |  |   | 12,124                                                       |   |  |   | 0        
|Advisory Board fees and expenses                   |  |                                                                           | 1,313   |   |                                                               |   | 0                                                                        |  |   | 4,952                                                        |   |  |   | 0        
|Professional services                              |  |                                                                           | 21,208  |   |                                                               |   | 0                                                                        |  |   | 50,089                                                       |   |  |   | 0        
|Maintenance expense                                |  |                                                                           | 0       |   |                                                               |   | 0                                                                        |  |   | 0                                                            |   |  |   | 0        
|Defaulted vacant tenant                            |  |                                                                           | 90      |   |                                                               |   | 0                                                                        |  |   | 1,198                                                        |   |  |   | 0        
|Other property expenses                            |  |                                                                           | (1,950  | ) |                                                               |   | 0                                                                        |  |   | 0                                                            |   |  |   | 0        
|Real estate taxes                                  |  |                                                                           | 3,241   |   |                                                               |   | 0                                                                        |  |   | 3,241                                                        |   |  |   | 0        
|Provision for non-collectible receivables          |  |                                                                           | 320     |   |                                                               |   | 0                                                                        |  |   | 320                                                          |   |  |   | 0        
|Depreciation                                       |  |                                                                           | 0       |   |                                                               |   | 0                                                                        |  |   | 0                                                            |   |  |   | 0        
|Amortization                                       |  |                                                                           | 0       |   |                                                               |   | 0                                                                        |  |   | 0                                                            |   |  |   | 0        
|Property write-downs                               |  |                                                                           | 0       |   |                                                               |   | 0                                                                        |  |   | 0                                                            |   |  |   | 0        
|                                                   |  |                                                                           |         |   |                                                               |   |                                                                          |  |   |                                                              |   |  |   |          
|Total expenses                                     |  |                                                                           | 41,473  |   |                                                               |   | 0                                                                        |  |   | 97,458                                                       |   |  |   | 0        
|                                                   |  |                                                                           |         |   |                                                               |   |                                                                          |  |   |                                                              |   |  |   |          
|Income (loss) from operations                      |  |                                                                           | (38,122 | ) |                                                               |   | 3,351                                                                    |  |   | (86,975                                                      | ) |  |   | 10,483   
|Net assets, beginning of period                    |  |                                                                           | 975,650 |   |                                                               |   | 1,038,237                                                                |  |   | 1,120,869                                                    |   |  |   | 1,031,105
|Adjustment to liquidation basis                    |  |                                                                           | 56,515  |   |                                                               |   | 0                                                                        |  |   | (39,851                                                      | ) |  |   | 0        
|                                                   |  |                                                                           |         |   |                                                               |   |                                                                          |  |   |                                                              |   |  |   |          
|Net assets, end of period                          |  | $                                                                         | 994,043 |   |                                                               | $ | 1,041,588                                                                |  | $ | 994,043                                                      |   |  | $ | 1,041,588
|                                                   |  |                                                                           |         |   |                                                               |   |                                                                          |  |   |                                                              |   |  |   |          
|Net (loss) income-General Partner                  |  | $                                                                         | (381    | ) |                                                               | $ | 34                                                                       |  | $ | (870                                                         | ) |  | $ | 105      
|                                                   |  |                                                                           |         |  
|Net (loss) income-Limited Partners                 |  |                                                                           | (37,741 | ) |                                                               |   | 3,317                                                                    |  |   | (86,105                                                      | ) |  |   | 10,378   
|                                                   |  |                                                                           |         |   |                                                               |   |                                                                          |  |   |                                                              |   |  |   |          
|Net (loss) income per Limited Partnership Interest |  | $                                                                         | (38,122 | ) |                                                               | $ | 3,351                                                                    |  | $ | (86,975                                                      | ) |  | $ | 10,483   
|                                                   |  |                                                                           |         |   |                                                               |   |                                                                          |  |   |                                                              |   |  |   |          



14



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



As discussed in Note 11, the Partnership has restated its condensed financial statements for
the quarter ended September 30, 2003. This managements discussion and analysis gives effect to this restatement.



Liquidity and Capital Resources:



Investment Properties and Net Investment in Direct Financing Leases



There were no investment properties, including equipment, held by the Partnership at September 30, 2003.



At December 31, 2001, the Partnership owned four (4) properties comprised of: one (1)
Hardees restaurant, one (1) Applebees restaurant, and two (2) vacant properties (previously operated as a Dennys restaurant and a Hardees restaurant.) During the First Quarter of 2002, Management found a buyer for the vacant
Colorado Springs property and anticipated the property to be sold in May 2002. However, the sale was not consummated and the agreement was terminated. Also during the First Quarter of 2002, Management accepted an offer for three (3) of the remaining
Partnership properties. Following the receipt of the written consent of Limited Partners holding more than fifty percent (50%) of the partnership interests authorizing such sales, the three (3) properties were sold in June 2002. During June 2003
Management entered into a contract to sell the vacant Colorado Springs property. The closing date of the property was July 14, 2003.



During June 2003 Management accepted a $475,000 purchase offer for the sale of the vacant Colorado Springs property. Per the agreement, however, if the closing occurred
prior to July 15, 2003 the purchase price was reduced by $35,000 to $440,000. The actual closing date was July 14, 2003 and therefore the actual sales price was $440,000. The net sales proceeds totaled $409,000 after sales commissions of $26,000 and
other closing costs. Of such sales commissions, $17,600 was paid to an unaffiliated broker and $8,800 was paid to a General Partner affiliate. The net asset value of the Colorado Springs property at March 31, 2003 was approximately $494,000, and
therefore, the estimated net realizable value of the property was written down by $82,000 in June 2003. The property was written-down an additional $3,000 in the Third Quarter of 2003 to its estimated net realizable value.



During the First Quarter of 2002, Management accepted purchase offers for three (3) of the
remaining Partnership properties, which included: (i) the Oak Creek property, (ii) the St. Francis property and (iii) the Applebees property in Pittsburgh, Pennsylvania. The sales were contingent upon Limited Partner approval to sell the
remaining properties and to liquidate and dissolve the Partnership. The net asset value of the Oak Creek property was written-down by $178,000 in the First Quarter of 2002 to reflect the estimated sales price, less costs to sell, of the property at
March 31, 2002 of $600,000. The St. Francis property was written-down by $61,000 in the First Quarter of 2002 to reflect the estimated sales price, less costs to sell, of the property at March 31, 2002 of $755,000. The sales were consummated in June
2002 at a sales price of $2,755,000, as the General Partner received Limited Partner approval.



In connection with the sales of these three (3) properties sales commissions of $164,650 (approximately 6%) were paid in the Second Quarter of 2002. Of such sales commissions, $82,650 was paid to an unaffiliated
broker and $82,000 was paid to a General Partner affiliate.



15



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Other Assets



Cash and cash equivalents held by the Partnership, were $844,000 at September 30, 2003,
compared to $539,000 at December 31, 2002. Cash of $171,000 is estimated to be necessary for the reserve for estimated costs during the period of liquidation, which primarily is anticipated to consist of future professional expenses, such as legal,
audit, tax, data processing, and management fees. It is anticipated that the remaining cash reserves at dissolution will be held in the newly formed limited liability company, DIP3, LLC to address contingent liabilities. For additional information
regarding this new company refer to Note 1 to the condensed financial statements included in Item 1 of this report.



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 condensed financial statements included in Item 1 of this report.



Liabilities



Accounts payable and accrued expenses at December 31, 2002 amounted to $7,125 primarily
representing accruals of auditing, tax and data processing fees.



Property
taxes payable at December 31, 2002 in the amount of $1,665 represented an accrual of 2002 real estate taxes in relation to the vacant Colorado Springs property.



Payments of estimated liabilities associated with carrying out the plan of liquidation for the three month period ended September 30, 2003 totaled of $29,889 and were
applied against the reserve for estimated costs during the period of liquidation.



Partners Capital and Net Assets in Liquidation



Income (loss) from operations for the period 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 condensed financial statements included in Item 1 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 condensed financial statements
included in Item 1 of this report for additional information regarding the reallocation.



Due to cash deficits during the Fourth Quarter of 2002, there was not a distribution to the Limited Partners on February 15, 2003. In addition, due to the First and Second Quarter 2003 cash deficits a Limited Partner
distribution was not made.



Results of
Operations



The Partnership reported income from operations
for the three-month period ended September 30, 2003 (liquidation basis), in the amount of $3,351 compared to income from operations for the three-month period ended September 30, 2002 (liquidation basis) of $8,765. The Partnership reported income
from operations of $10,483 for the nine months ended September 30, 2003 compared with a loss from operations of $298,770 for the period January 1, 2002 through June 27, 2002 (going concern basis) and income from operations of $8,765 for the period
June 28, 2002 through September 30, 2002 (liquidation basis). The variance from 2003 to 2002 in the loss resulted from: (i) the loss of rental income due to the sale of the Applebees- Pittsburgh and Hardees- St. Francis properties in the
Second Quarter of 2002; (ii) increased expenditures in 2002 due to tenant defaults, lease terminations, and Second Quarter 2002 property sales; and (iii) the property write-downs of the vacant Oak Creek and the Hardees  St. Francis
properties in the First Quarter of 2002; and (iv) Management lowering its monthly minimum management fees by 75% beginning in the Third Quarter of 2002. (The Management fees were increased to 100% beginning August 2003 upon the sale of the final
Partnership property, Colorado Springs, in July 2003.)



16



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Recent Accounting Pronouncement



In October 2001, Statement of Financial Accounting Standards No. 144 Accounting for
the Impairment or Disposal of Long-Lived Assets (FAS 144) was issued. FAS 144 supercedes Statement of Financial Accounting Standards No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of (FAS 121). FAS 144 develops a single accounting model for long-lived assets to be disposed of, whether previously held and used or newly acquired. The provisions of FAS 144 became effective for fiscal years beginning after December 15,
2001.



Critical Accounting Policies



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



The Partnership reviews its estimates of costs to carry out the
liquidation on a quarterly basis and adjusts its estimates accordingly. These estimates are influenced by the anticipated time to dispose of the remaining asset and the ultimate sale price to be realized upon such disposition.



The Partnership periodically reviews its long-lived assets, primarily real estate, for
impairment whenever events or changes in circumstances indicate that the current liquidation value may not be realizable. The Partnerships review involves comparing the current carrying value to the estimated selling price of the asset. Based
on this analysis, the carrying value will be adjusted accordingly.



17



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Item 3. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure



Although the Partnerships previous independent auditors, Arthur Andersen LLP
(Arthur Andersen), never informed the Partnership that it was unable to continue as its independent auditors, as a result of the press reports of the wind-down of Arthur Andersens business, the Partnership treated Arthur Andersen
as having constructively resigned. Effective August 26, 2002 the Partnership dismissed Arthur Andersen as its independent auditors. The dismissal was disclosed in the Partnerships Form 8-K dated August 14, 2002.



Prior to the wind-down of Arthur Andersens business, its report on the
Partnerships financial statements for either of the past two-years did not contain an adverse opinion or a disclaimer opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles. In addition, during the
Partnerships two most recent fiscal years and the interim period following the wind-down of Arthur Andersens business, there were no disagreements with Arthur Andersen on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Arthur Andersen, would have caused it to make reference to the subject matter of the disagreement in connection with the report.



The Partnership engaged Deloitte & Touche LLP (D&T) as its
new independent registered public accountants on December 19, 2002. The engagement was disclosed in the Partnerships Form 8-K dated January 2, 2003.



During the two most recent fiscal years and the interim period up to and including the date of engagement, neither the Partnership nor anyone on behalf of the Partnership
had consulted with D&T regarding (i) either the application of accounting principles to a specific transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Partnerships financial statements; or
(ii) any matter that was either the subject of a disagreement, or a reportable event, with the Partnerships former auditors Arthur Andersen.



Item 4. Quantitative and Qualitative Disclosure About Market Risk



The Partnership is not subject to market risk.



18



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PART II- OTHER INFORMATION



Items 1-4.



Not Applicable.



Item 5. Controls and Procedures



As of
the end of the period covered by this report, the Partnership carried out an evaluation, under the supervision and with the participation of the Companys management, including the Chief Executive Officer (CEO)/Financial Officer
(CFO), of the effectiveness of the design and operation of the Partnerships disclosure controls and procedures. Based on that evaluation, including the effects of the restatement discussed in Note 11 to the financial statements,
the CEO/CFO has concluded that the Partnerships disclosure controls and procedures are effective to ensure that information required to be disclosed by the Partnership in the reports it files under the Securities and Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods specified in the securities and Exchange Commission rules and forms. There have been no significant changes in the Partnerships internal controls or in other
factors that could significantly affect internal controls subsequent to the date of the evaluation period covered by this report referred to above.



Item 6. Exhibits and Reports on Form 8-K



|    |  |                                                      |  |                                                                               
|--- |  | ---------------------------------------------------- |  | ------------------------------------------------------------------------------
|(a) |  | Listing of Exhibits                                 
|    |  |                                                     
|    |  | 31.1                                                 |  | 302 Certifications                                                            
|    |  |                                                     
|    |  | 32.1                                                 |  | Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350.
|    | 
|(b) |  | Report on Form 8-K                                  
|    | 
|    |  | The Registrant filed Form 8-K on January 6, 2003.   
|    | 
|    |  | The Registrant filed Form 8-K/A on January 17, 2003.





19



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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, Chief Executive Officer
|                                               |  | and Chief Financial Officer                       
|                                               | 
|Date:                                          |  | June 16, 2005                                     



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, Chief Executive Officer
|      |  | and Chief Financial Officer                       
|      | 
|Date: |  | June 16, 2005                                     



20