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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



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(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, 2002



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



Note: This amendment is being filed to restate the Partnerships financial statements on the liquidation basis of accounting from June
28, 2002 forward pursuant to the Limited Partners approval to sell all of the Partnerships Properties and dissolve and liquidate the Partnership. The net adjustment at June 28, 2002 required to convert from the going concern (historical
cost) basis to liquidation basis of accounting was an increase in the carrying value of net assets by $235,000. The increase in carrying value of the net assets is 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 the elimination of gain and loss on sales and related commissions. Additionally certain reclassifications of
expenses have been made to the statements of operations.



Except as otherwise
discussed above, no other information on this form 10-Q/A has been updated to reflect any developments subsequent to November 13, 2002.



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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, 2002 (Liquidation Basis) and December 31, 2001 (Going Concern Basis)



(Unaudited)



|                                                             |  |                                               |           |                   |   |          
|------------------------------------------------------------ |  | --------------------------------------------- | --------- | ----------------- | - | ---------
|                                                             |  | September 30, 2002 (As Restated, see Note 10) |           | December 31, 2001
|ASSETS:                                                      |  |                                               |           |                   |   |          
|                                                             |  |                                              
|INVESTMENT PROPERTY: (Note 3)                                |  | $                                             | 494,386   |                   | $ | 2,753,539
|                                                             |  |                                              
|OTHER ASSETS:                                                |  |                                               |           |                   |   |          
|                                                             |  |                                              
|Cash and cash equivalents                                    |  |                                               | 573,184   |                   |   | 240,148  
|Cash held in Indemnification Trust (Note 8)                  |  |                                               | 359,809   |                   |   | 355,012  
|Property taxes escrow                                        |  |                                               | 22        |                   |   | 9,563    
|Rents and other receivables, net                             |  |                                               | 4,841     |                   |   | 26,044   
|Deferred rent receivable                                     |  |                                               | 0         |                   |   | 4,350    
|Due from General Partner                                     |  |                                               | 150       |                   |   | 682      
|Deferred fees                                                |  |                                               | 0         |                   |   | 8,365    
|Prepaid assets                                               |  |                                               | 408       |                   |   | 4,082    
|Note receivable (Note 3)                                     |  |                                               | 0         |                   |   | 45,250   
|                                                             |  |                                               |           |                   |   |          
|Total other assets                                           |  |                                               | 938,414   |                   |   | 693,496  
|                                                             |  |                                               |           |                   |   |          
|Total assets                                                 |  |                                               | 1,432,800 |                   |   | 3,447,035
|                                                             |  |                                               |           |                   |   |          
|LIABILITIES:                                                 |  |                                               |           |                   |   |          
|                                                             |  |                                              
|Accounts payable and accrued expenses                        |  |                                               | 20,501    |                   |   | 33,050   
|Property taxes payable                                       |  |                                               | 1,665     |                   |   | 34,734   
|Security deposits                                            |  |                                               | 0         |                   |   | 8,425    
|Unearned rental income                                       |  |                                               | 0         |                   |   | 20,437   
|Reserve for estimated costs during the period of liquidation |  |                                               | 280,850   |                   |   | 0        
|                                                             |  |                                               |           |                   |   |          
|Total liabilities                                            |  |                                               | 303,016   |                   |   | 96,646   
|                                                             |  |                                               |           |                   |   |          
|CONTINGENT LIABILITIES: (Note 7)                             |  |                                               |           |                   |   |          
|                                                             |  |                                              
|NET ASSETS IN LIQUIDATION                                    |  | $                                             | 1,129,784 |                   | $ | 3,350,389
|                                                             |  |                                               |           |                   |   |          



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 AND CHANGES IN NET ASSETS



FOR THE PERIODS ENDED



September 30, 2002 (Liquidation Basis), June 27, 2002 (Going Concern Basis)
and September 30, 2001 (Going Concern Basis)



(Unaudited)



|                                                                                                        |  |                                                               |            |   |                                      |   |           |                                                             |  |   |                                                           |   |  |                                     |           |   |  |   |           |  
|------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------- | ---------- | - | ------------------------------------ | - | --------- | ----------------------------------------------------------- |  | - | --------------------------------------------------------- | - |  | ----------------------------------- | --------- | - |  | - | --------- | -
|                                                                                                        |  | Three monthsendedSeptember 30, 2002 (As Restated,see Note
10) |            |   | Three monthsended September 30, 2001 |   |           | June 28 throughSeptember 30,2002 (As Restated, see Note
10) |  |   | January 1through June 27, 2002 (As Restated, see Note 10) |   |  | Nine monthsended September 30, 2001 |          
|REVENUES:                                                                                               |  |                                                               |            |   |                                      |   |           |                                                             |  |   |                                                           |   |  |                                     |           |   |  |   |           |  
|Rental income                                                                                           |  | $                                                             | 0          |   |                                      | $ | 79,925    |                                                             |  | $ | 0                                                         |   |  | $                                   | 108,434   |   |  | $ | 271,122   |  
|Interest income                                                                                         |  |                                                               | 6,414      |   |                                      |   | 5,568     |                                                             |  |   | 6,414                                                     |   |  |                                     | 4,094     |   |  |   | 19,501    |  
|Lease termination fee (Note 3)                                                                          |  |                                                               | 0          |   |                                      |   | 0         |                                                             |  |   | 0                                                         |   |  |                                     | 0         |   |  |   | 181,000   |  
|Other income                                                                                            |  |                                                               | 0          |   |                                      |   | 0         |                                                             |  |   | 0                                                         |   |  |                                     | 4,902     |   |  |   | 32        |  
|Recovery of amounts previously written off                                                              |  |                                                               | 2,351      |   |                                      |   | 0         |                                                             |  |   | 2,351                                                     |   |  |                                     | 268       |   |  |   | 4,829     |  
|                                                                                                        |  |                                                               |            |   |                                      |   |           |                                                             |  |   |                                                           |   |  |                                     |           |   |  |   |           |  
|TOTAL REVENUES                                                                                          |  |                                                               | 8,765      |   |                                      |   | 85,493    |                                                             |  |   | 8,765                                                     |   |  |                                     | 117,698   |   |  |   | 476,484   |  
|                                                                                                        |  |                                                               |            |   |                                      |   |           |                                                             |  |   |                                                           |   |  |                                     |           |   |  |   |           |  
|EXPENSES:                                                                                               |  |                                                               |            |   |                                      |   |           |                                                             |  |   |                                                           |   |  |                                     |           |   |  |   |           |  
|Partnership management fees (Note 6)                                                                    |  |                                                               | 0          |   |                                      |   | 17,409    |                                                             |  |   | 0                                                         |   |  |                                     | 35,455    |   |  |   | 51,652    |  
|Restoration fees (Note 6)                                                                               |  |                                                               | 0          |   |                                      |   | 0         |                                                             |  |   | 0                                                         |   |  |                                     | 11        |   |  |   | 193       |  
|Insurance                                                                                               |  |                                                               | 0          |   |                                      |   | 804       |                                                             |  |   | 0                                                         |   |  |                                     | 2,449     |   |  |   | 2,413     |  
|Property write-downs                                                                                    |  |                                                               | 0          |   |                                      |   | 0         |                                                             |  |   | 0                                                         |   |  |                                     | 239,056   |   |  |   | 0         |  
|General and administrative                                                                              |  |                                                               | 0          |   |                                      |   | 5,044     |                                                             |  |   | 0                                                         |   |  |                                     | 20,657    |   |  |   | 21,759    |  
|Advisory Board fees and expenses                                                                        |  |                                                               | 0          |   |                                      |   | 1,313     |                                                             |  |   | 0                                                         |   |  |                                     | 3,832     |   |  |   | 4,649     |  
|Professional services                                                                                   |  |                                                               | 0          |   |                                      |   | 14,108    |                                                             |  |   | 0                                                         |   |  |                                     | 52,107    |   |  |   | 45,105    |  
|Real estate taxes                                                                                       |  |                                                               | 0          |   |                                      |   | 0         |                                                             |  |   | 0                                                         |   |  |                                     | 12,062    |   |  |   | 0         |  
|Defaulted/vacant tenant                                                                                 |  |                                                               | 0          |   |                                      |   | 480       |                                                             |  |   | 0                                                         |   |  |                                     | 8,415     |   |  |   | 480       |  
|Maintenance                                                                                             |  |                                                               | 0          |   |                                      |   | 0         |                                                             |  |   | 0                                                         |   |  |                                     | 4,765     |   |  |   | 79        |  
|Depreciation                                                                                            |  |                                                               | 0          |   |                                      |   | 16,324    |                                                             |  |   | 0                                                         |   |  |                                     | 29,294    |   |  |   | 48,971    |  
|Amortization                                                                                            |  |                                                               | 0          |   |                                      |   | 264       |                                                             |  |   | 0                                                         |   |  |                                     | 8,365     |   |  |   | 7,538     |  
|                                                                                                        |  |                                                               |            |   |                                      |   |           |                                                             |  |   |                                                           |   |  |                                     |           |   |  |   |           |  
|TOTAL EXPENSES                                                                                          |  |                                                               | 0          |   |                                      |   | 55,746    |                                                             |  |   | 0                                                         |   |  |                                     | 416,468   |   |  |   | 182,839   |  
|                                                                                                        |  |                                                               |            |   |                                      |   |           |                                                             |  |   |                                                           |   |  |                                     |           |   |  |   |           |  
|(LOSS) INCOME FROM OPERATIONS                                                                           |  |                                                               | 8,765      |   |                                      |   | 29,747    |                                                             |  |   | 8,765                                                     |   |  |                                     | (298,770  | ) |  |   | 293,645   |  
|NET ASSETS, BEGINNING OF PERIOD                                                                         |  |                                                               | 3,260,869  |   |                                      |   | 3,670,537 |                                                             |  |   | 3,025,524                                                 |   |  |                                     | 3,350,389 |   |  |   | 3,537,694 |  
|CASH DISTRIBUTIONS                                                                                      |  |                                                               | (2,139,850 | ) |                                      |   | (100,119  | )                                                           |  |   | (2,139,850                                                | ) |  |                                     | (26,095   | ) |  |   | (231,174  | )
|ADJUSTMENT TO LIQUIDATION BASIS                                                                         |  |                                                               | 0          |   |                                      |   | 0         |                                                             |  |   | 235,345                                                   |   |  |                                     | 0         |   |  |   | 0         |  
|                                                                                                        |  |                                                               |            |   |                                      |   |           |                                                             |  |   |                                                           |   |  |                                     |           |   |  |   |           |  
|NET ASSETS, END OF PERIOD                                                                               |  | $                                                             | 1,129,784  |   |                                      | $ | 3,600,165 |                                                             |  | $ | 1,129,784                                                 |   |  | $                                   | 3,025,524 |   |  | $ | 3,600,165 |  
|                                                                                                        |  |                                                               |            |   |                                      |   |           |                                                             |  |   |                                                           |   |  |                                     |           |   |  |   |           |  
|(LOSS) INCOME FROM OPERATIONS- GENERAL PARTNER                                                          |  | $                                                             | 0          |   |                                      | $ | 297       |                                                             |  | $ | 0                                                         |   |  | $                                   | (2,988    | ) |  | $ | 2,936     |  
|(LOSS) INCOME FROM OPERATIONS- LIMITED PARTNERS                                                         |  |                                                               | 0          |   |                                      |   | 29,450    |                                                             |  |   | 0                                                         |   |  |                                     | (295,782  | ) |  |   | 290,709   |  
|                                                                                                        |  |                                                               |            |   |                                      |   |           |                                                             |  |   |                                                           |   |  |                                     |           |   |  |   |           |  
|                                                                                                        |  | $                                                             | 0          |   |                                      | $ | 29,747    |                                                             |  | $ | 0                                                         |   |  | $                                   | (298,770  | ) |  | $ | 293,645   |  
|                                                                                                        |  |                                                               |            |   |                                      |   |           |                                                             |  |   |                                                           |   |  |                                     |           |   |  |   |           |  
|(LOSS) INCOME FROM OPERATIONS PER LIMITED PARTNERSHIP INTEREST, based on 17102.52 interests outstanding |  | $                                                             | 0.00       |   |                                      | $ | 1.72      |                                                             |  | $ | 0.00                                                      |   |  | $                                   | (17.29    | ) |  | $ | 17.00     |  
|                                                                                                        |  |                                                               |            |   |                                      |   |           |                                                             |  |   |                                                           |   |  |                                     |           |   |  |   |           |  



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, 2002 (Liquidation Basis), June 27, 2002 (Going Concern Basis)
and September 30, 2001 (Going Concern Basis)



(Unaudited)



|                                                                                                                  |  |                                                              |            |   |                                                            |   |          |                                     |  |   |          |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------ | ---------- | - | ---------------------------------------------------------- | - | -------- | ----------------------------------- |  | - | -------- | -
|                                                                                                                  |  | June 28 throughSeptember 30, 2002 (As Restated, see Note 10) |            |   | January 1 Through June 27, 2002 (As Restated, see Note 10) |   |          | Nine MonthsEnded September 30, 2001 | 
|CASH FLOWS (USED IN) PROVIDED FROM OPERATING ACTIVITIES:                                                          |  |                                                              |            |   |                                                            |   |          |                                     |  |   |          |  
|(Loss) income from operations                                                                                     |  | $                                                            | 8,765      |   |                                                            | $ | (298,770 | )                                   |  | $ | 293,645  |  
|Adjustments to reconcile (loss) income from operations to net cash (used in) provided from operating activities - |  |                                                              |            |   |                                                            |   |          |                                     |  |   |          |  
|Depreciation and amortization                                                                                     |  |                                                              | 0          |   |                                                            |   | 37,659   |                                     |  |   | 56,509   |  
|Recovery of amounts previously written off                                                                        |  |                                                              | (2,351     | ) |                                                            |   | (268     | )                                   |  |   | (4,829   | )
|Property write-downs                                                                                              |  |                                                              | 0          |   |                                                            |   | 239,056  |                                     |  |   | 0        |  
|Interest applied to Indemnification Trust Account                                                                 |  |                                                              | (1,674     | ) |                                                            |   | (3,123   | )                                   |  |   | (13,154  | )
|Lease Termination Fee                                                                                             |  |                                                              | 0          |   |                                                            |   | 0        |                                     |  |   | (135,750 | )
|Decrease in rents, other receivables & prepaid assets                                                             |  |                                                              | 1,218      |   |                                                            |   | 23,659   |                                     |  |   | 10,950   |  
|Decrease/(Increase) in property taxes escrow                                                                      |  |                                                              | 0          |   |                                                            |   | 9,541    |                                     |  |   | (9,541   | )
|Decrease in deferred rent receivable                                                                              |  |                                                              | 0          |   |                                                            |   | 4,350    |                                     |  |   | 1,260    |  
|(Decrease) in security deposits                                                                                   |  |                                                              | 0          |   |                                                            |   | (8,425   | )                                   |  |   | 0        |  
|(Decrease)/Increase in accounts payable and accrued expenses                                                      |  |                                                              | 0          |   |                                                            |   | (12,549  | )                                   |  |   | 12,729   |  
|Decrease in reserve for estimated costs during the period of liquidation                                          |  |                                                              | (34,331    | ) |                                                            |   | 0        |                                     |  |   | 0        |  
|(Decrease) in property taxes payable                                                                              |  |                                                              | 0          |   |                                                            |   | (33,069  | )                                   |  |   | 0        |  
|(Decrease) in due to General Partner                                                                              |  |                                                              | (1,245     | ) |                                                            |   | 1,777    |                                     |  |   | (221     | )
|(Decrease) in unearned rental income                                                                              |  |                                                              | 0          |   |                                                            |   | (20,437  | )                                   |  |   | (14,483  | )
|                                                                                                                  |  |                                                              |            |   |                                                            |   |          |                                     |  |   |          |  
|Net cash (used in) provided from operating activities                                                             |  |                                                              | (29,618    | ) |                                                            |   | (60,599  | )                                   |  |   | 197,115  |  
|                                                                                                                  |  |                                                              |            |   |                                                            |   |          |                                     |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                             |  |                                                              |            |   |                                                            |   |          |                                     |  |   |          |  
|Recoveries from former affiliates                                                                                 |  |                                                              | 2,351      |   |                                                            |   | 268      |                                     |  |   | 4,829    |  
|Net proceeds from sale of properties                                                                              |  |                                                              | 2,541,329  |   |                                                            |   | 0        |                                     |  |   | 0        |  
|Payments received on note receivable                                                                              |  |                                                              | 0          |   |                                                            |   | 45,250   |                                     |  |   | 45,250   |  
|                                                                                                                  |  |                                                              |            |   |                                                            |   |          |                                     |  |   |          |  
|Net cash provided from investing activities                                                                       |  |                                                              | 2,543,680  |   |                                                            |   | 45,518   |                                     |  |   | 50,079   |  
|                                                                                                                  |  |                                                              |            |   |                                                            |   |          |                                     |  |   |          |  
|CASH FLOWS (USED IN) FINANCING ACTIVITIES:                                                                        |  |                                                              |            |   |                                                            |   |          |                                     |  |   |          |  
|Cash distributions to General Partner                                                                             |  |                                                              | 150        |   |                                                            |   | (1,095   | )                                   |  |   | (1,174   | )
|Cash distributions to Limited Partners                                                                            |  |                                                              | (2,140,000 | ) |                                                            |   | (25,000  | )                                   |  |   | (230,000 | )
|                                                                                                                  |  |                                                              |            |   |                                                            |   |          |                                     |  |   |          |  
|Net cash (used in) financing activities                                                                           |  |                                                              | (2,139,850 | ) |                                                            |   | (26,095  | )                                   |  |   | (231,174 | )
|                                                                                                                  |  |                                                              |            |   |                                                            |   |          |                                     |  |   |          |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                              |  |                                                              | 374,212    |   |                                                            |   | (41,176  | )                                   |  |   | 16,020   |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                                  |  |                                                              | 198,972    |   |                                                            |   | 240,148  |                                     |  |   | 251,528  |  
|                                                                                                                  |  |                                                              |            |   |                                                            |   |          |                                     |  |   |          |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                                        |  | $                                                            | 573,184    |   |                                                            | $ | 198,972  |                                     |  | $ | 267,548  |  
|                                                                                                                  |  |                                                              |            |   |                                                            |   |          |                                     |  |   |          |  



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



These unaudited interim financial statements should be read in conjunction with DiVall Income
Properties 3, Limited Partnerships (the Partnership) 2001 annual audited financial statements within Form 10-K.



These unaudited financial statements include all adjustments, which are, in the opinion of management, necessary to present a fair statement of financial position as of
September 30, 2002, and the results of operations for the three and nine-month periods ended September 30, 2002 and 2001, and cash flows for the nine-month periods ended September 30, 2002 and 2001. Results of operations for the periods are not
necessarily indicative of the results to be expected for the full year.



During
the First Quarter of 2002, Management accepted an offer for three (3) of the remaining 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 three (3) Properties, the General Partner had received the written consent of the
holders of more than fifty percent (50%) of the Partnership interests authorizing such sale. All of the Partnerships properties, except for the vacant Colorado Springs property, were sold in June 2002.



As a result of the Limited Partners approval to sell all of the Partnerships
Properties and dissolve and liquidate the Partnership effective June 28, 2002, the Partnerships financial statements as of September 30, 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.



The reserve for liquidation at September 30, 2002 was $280,000 and reflected payments of $35,000 made against the estimated liabilities previously established as of June
28, 2002.



The statement of net assets as of September 30, 2001 and the
statement of income and changes in net assets for the period ended September 30, 2001 have been prepared using the historical cost basis of accounting on which the Partnership had previously reported its financial condition and its results of
operations.



1. ORGANIZATION AND BASIS OF ACCOUNTING:



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.



5



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The minimum offering requirements for the D-interests were met and escrow subscription funds were released to the
Partnership as of July 13, 1990. The offering closed on April 23, 1992, at which point 17,102.52 D-interests had been issued, resulting in aggregate proceeds, net of discounts and offering costs, of $14,408,872.



The minimum offering requirements for R-interests were not met. During 1991, 680.9
R-interests were converted to D-interests and were reflected as Partnership issuances in 1991.



The Partnership is currently engaged in the business of owning and operating its investment portfolio (the Properties) of commercial real estate. The Properties are leased on a triple net basis to, and
operated by, franchisers or franchisees of national, regional and local retail chains under long-term leases. The lessees consist of fast food, family style, and casual/theme restaurants. At December 31, 2001, the Partnership owned four (4)
properties and specialty leasehold improvements for use in all four (4) of the Properties. In June 2002 the Partnership sold all but the vacant Colorado Springs property. Therefore, as of September 30, 2002 the Partnership owned one (1) property and
specialty leasehold improvements for use in the one (1) property.



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



The Partnership considers its operations to be in only one segment and therefore no segment
disclosure is made.



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



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



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



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



The preparation of financial statements in conformity with 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.



The Partnership previously followed Statement of Financial Accounting Standards No. 121 (FAS 121), Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of, which required that all long-lived assets be reviewed for impairment in value whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In October 2001,
Statement of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144) was issued. FAS 144 supercedes FAS 121. FAS 144 primarily addresses issues relating to the
implementation of FAS 121 and develops a single accounting model for long-lived assets to be disposed of, whether previously held and used or newly acquired. The provisions of FAS 144 became effective for fiscal years beginning after December 15,
2001. The Company adopted FAS 144 on January 1, 2002. See Note 3 for a discussion of the effect of adopting FAS 144.



6



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The Partnership will be dissolved on December 1, 2015, or earlier upon the prior occurrence of any of the following
events: (a) the disposition of all interests in real estate and other Partnership assets; (b) the decision by Majority Vote of the Limited Partners to dissolve the Partnership or to compel the sale of all or substantially all of the
Partnerships assets; (c) the failure to elect a successor General Partner within six months after removal of the last remaining General Partner; or (d) the date of the death or the effective date of dissolution, removal, withdrawal,
bankruptcy, or incompetence of the last remaining General Partner, unless the Partnership is continued by vote of all Limited Partners and a replacement General Partner is previously elected by a majority of the Limited Partners. The General Partner
received the consent of the Limited Partners to liquidate the Partnerships assets and dissolve the Partnership, during the Second Quarter of 1998. During 1999, Management entered into an agreement to sell the Properties. The sale was not
consummated and the agreement was terminated. During the First Quarter of 2002, Management found a buyer for the Colorado Springs property within the parameters of the consent and anticipated the property to be sold in May 2002. However, the sale
was not consummated and the agreement was terminated. Management intends to continue to market the property for sale. 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 three (3) Properties, the General Partner had received the written consent of the holders of more than fifty percent (50%) of the Partnership interests authorizing such sale. All of the Partnerships
properties, except for the vacant Colorado Springs property, were sold in June 2002.



As a result of the Limited Partners approval to sell all of the Partnerships Properties and dissolve and liquidate the Partnership effective June 28, 2002, the Partnerships financial statements as of September 30, 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.



The net adjustment at June 28, 2002 required to convert from the going concern (historical
cost) basis to the liquidation basis of accounting was an increase in carrying value of net assets by $235,000, which is included in the statements of income and change in net assets (liquidation basis) for 2002. The increase in the carrying value
of net assets is due to an increase in the value of investment properties (three of which were sold subsequent to liquidation) to their estimated net realizable values of $550,000, offset by the recorded estimated liabilities associated with
carrying out the liquidation of $315,000. The investment properties net realizable basis was based on recent offers to purchase the properties. Estimated liabilities associated with carrying out the liquidation were based upon (1) historical
costs for similar items and services, (2) based on agreements currently in place and (3) estimates provided by service providers.



The reserve for liquidation at September 30, 2002 was $280,000 and reflected payments of $35,000 made against the estimated liabilities previously established as of June
30, 2002.



The statement of net assets as of September 30, 2001 and the
statement of income and changes in net assets for the three and nine month period ended September 30, 2001 have been prepared using the historical cost basis of accounting on which the Partnership had previously reported its financial condition and
its results of operations.



7



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No provision for Federal income taxes has been made, as any liability for such taxes would be that of the individual
partners rather than the Partnership. At December 31, 2001, the tax basis of the Partnerships assets exceeded the amounts reported in the accompanying financial statements by approximately $3,286,000.



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)
(dissolved effective December 31, 1998) 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. Through September 30, 2002, $5,808,000 of recoveries has been received which exceeded the original estimate of $3 million. As a result, since 1996, the Partnership has recognized
$1,306,000 as income as recovery of amounts previously written-off in the statements of income and changes in net assets, which represents its share of the excess recovery. The current General Partner continues to pursue recoveries of the
misappropriated funds, however no further significant recoveries are anticipated.



3. INVESTMENT PROPERTIES:



The total cost of the
investment properties as of December 31, 2001 includes the original purchase price plus acquisition fees and other capitalized costs paid to an affiliate of the former general partners. Investment properties at September 30, 2002 represent the
estimated net realizable value of the remaining property in liquidation.



At
December 31, 2000 the Partnership owned five (5) fast-food restaurants comprised of: two (2) Hardees restaurants, one (1) Applebees restaurant, and two (2) Dennys restaurants. However, due to the write-off of the former
Dennys- Englewood property during the Fourth Quarter of 2001 only four (4) properties remained at December 31, 2001. The former Hardees- Oak Creek lease was terminated in the Second Quarter of 2001 and the former Dennys- Colorado
Springs lease was rejected in the tenants bankruptcy proceeding during the Fourth Quarter of 2001. Both properties remained vacant as of March 31, 2002. Therefore, the four (4) remaining properties at March 31, 2002 were comprised of: one (1)
Hardees restaurant in St. Francis, Wisconsin, one (1) Applebees restaurant in Pittsburgh, Pennsylvania, one (1) vacant property in Oak Creek, Wisconsin, and one (1) vacant property in Colorado



8



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Springs, Colorado. The four (4) properties were located in three (3) states. 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 intends 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. Following the receipt of the written consent of Limited Partners holding more than fifty percent (50%) of the Partnership interests
authorizing such sale; the three (3) properties were sold in June 2002.



In
July of 1991, L & H Restaurants, Inc. a predecessor in interest to the Phoenix Restaurant Group, Inc. (Phoenix) entered into a ground lease (the Ground Lease) with respect to certain land and improvements in Englewood,
Colorado (the Englewood Property.) Simultaneously, Phoenix assigned its rights in the Ground Lease to the Partnership, which assumed all of Phoenixs rights and interest, but not the obligations under the Ground Lease. In turn, the
Partnership as landlord and Phoenix as tenant entered into a Net Lease for the Englewood Property (the Englewood Lease), pursuant to which Phoenix would pay the amounts due to the landlord under the Ground Lease as well as additional
rent to the Partnership.



On October 31, 2001 Phoenix filed a voluntary
petition for bankruptcy relief. On November 6, 2001 the bankruptcy court granted Phoenixs motion to reject both the Ground Lease and the Englewood Lease. Because the Partnership did not assume any of Phoenixs obligations under the Ground
Lease, the Partnership took the position that it is not liable for any amounts of unpaid rent or expenses due to the Ground Lessor. Possession of the property was returned to the Ground landlord under the Lease, which resulted in a write-off of the
Englewood Property and a $141,000 loss in the Fourth Quarter of 2001. Management is uncertain whether any of the $9,600 due from Phoenix as past due rent, all of which has been reserved, will be collected.



Due to bankruptcy proceedings by Phoenix, the related lease on the Colorado Springs property
was rejected in the Fourth Quarter of 2001 and rent ceased as of December 2001. The entire amount due of approximately $20,600 from Phoenix has been reserved. The amount is included in the Partnerships claim filed in Bankruptcy Court of
approximately $77,000, or one year of rent, although it is uncertain whether the amount will be collectible. During the First Quarter of 2002, Management found a buyer for the Colorado Springs property and anticipated the property would be sold in
May 2002. However, the sale was not consummated and Management is remarketing the property for sale.



During the First Quarter of 2002, Management accepted an aggregate purchase offer for three (3) of the Partnership properties, which included: (i) the Oak Creek property, (ii) the St. Francis property and (iii) the
Applebees property in Pittsburgh, Pennsylvania. The aggregate sale was 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 fair value 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 fair value of the
property at March 31, 2002 of $755,000. The sale was 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 a sales commission of $165,000 (less than 6%) was paid in the Second Quarter of
2002. Of such sales commission, $82,650 was paid to an unaffiliated broker and $82,000 was paid to TPG.



9



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During March 2001, Hardees Food Systems, Inc. notified Management of its intent to close its restaurant in Oak
Creek, Wisconsin. The lease on the property was not set to expire until 2010. In the Second Quarter of 2001, a lease termination agreement was executed and the tenant ceased the payment of rent as of April 30, 2001. Hardees Food Systems agreed
to pay a lease termination fee of approximately two (2) years rent or $181,000. The payments were received in four (4) equal installments of $45,250. The first payment was received in May 2001 upon the execution of the agreement, and the remaining
balance represented a Note receivable of $135,750. The first and second Note receivable installments were received in August and October 2001. The final installment, which was reflected as a Note receivable on the balance sheet at December 31, 2001,
was received in January 2002.



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 full investment of the net proceeds of the offering, approximately 57% of the original offering proceeds was invested in
the Partnerships properties.



The current General Partner receives a fee
for managing the Partnership equal to 4% of gross receipts, with a maximum annual reimbursement for office rent and related overhead of $25,000 between the three original affiliated Partnerships as provided in the Permanent Manager Agreement
(PMA). 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. Effective March 1, 2002, the minimum management fee and the maximum annual reimbursement for office rent and
overhead increased by 2.8% representing the allowable annual Consumer Price Index adjustment per the PMA. Therefore, beginning March 1, 2002 the monthly minimum management fee is $5,965. 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 wind-up phase commences,
the current monthly minimum management fee is $1,491. Management fees will then resume to the full minimum management fee through the Partnership liquidation 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 $88,795 to date on the amounts recovered, which includes $105 in fees received in the current year 2002. The fees received from the Partnership on
the amounts recovered reduce the 4% minimum fee by that same amount.



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.



10



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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.



The provisions regarding distribution of Net Proceeds, as defined, were also amended to provide that Net Proceeds are to be distributed as follows: (a) to the Limited
Partners, an amount equal to 100% of their Adjusted Original Capital; (b) then, to the Limited Partners, an amount necessary to provide each Limited Partner a Liquidation Preference equal to a 13.0% per annum, cumulative simple return on Adjusted
Original Capital from the Return Calculation Date including in the calculation of such return on all prior distributions of Net Cash Receipts and any prior distributions of Net Proceeds under this clause, except to the extent needed by the General
Partner to pay its federal and state income tax on the income allocated to its attributable to such year; and (c) then, to Limited Partners, 99%, and to the General Partner, 1%, of remaining Net Proceeds available for distribution.



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



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



11



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5. LEASES:



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



During the period January 1, 2002 to June 27, 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 $102,286. These two (2) properties that were generating such lease rental were sold at the end of
the Second Quarter of 2002. As of September 30, 2002 the Partnership has only one (1) vacant property remaining and Management does not anticipate any additional leases or leasing income prior to the dissolution of the Partnership.



During 2001, two (2) of the Partnerships properties, (located in Colorado Springs and
Englewood, Colorado), were leased to Phoenix Restaurant Group, Inc. Base rent from these properties amounted to approximately 32% of total base rent in 2001. Due to bankruptcy proceedings of Phoenix, the aforementioned leases were rejected in the
Fourth Quarter of 2001. In addition, possession of the Englewood property was returned to the Ground lease Landlord, resulting in the write-off of the property and a $141,000 loss in the Fourth Quarter of 2001 (see Investment Properties in Note 3.)
As of September 30, 2002 the Colorado Springs property remains vacant and continues to be marketed for sale.



Until April 30, 2001 two (2) of the Partnerships properties, (located in Oak Creek and St. Francis, Wisconsin), were leased to a Hardees Food Systems, Inc. Base rent from these properties amounted to
approximately 35% of total base rents in 2001. In the Second Quarter of 2001 a lease termination agreement was executed in relation to the Oak Creek property and the property remained vacant at March 31, 2002. The Oak Creek property was sold in June
2002, along with the Applebees  Pittsburgh, Pennsylvania and Hardees St. Francis, Wisconsin properties, as part of an aggregate purchase agreement.



At December 31, 2000 the Partnership owned five (5) fast-food restaurants comprised of: two (2) Hardees restaurants, one (1)
Applebees restaurant, and two (2) Dennys restaurants. However, due to the write-off of the former Dennys- Englewood property (see Investment Properties in Note 3) during the Fourth Quarter of 2001 only four (4) properties remained
at December 31, 2001. The Hardees- Oak Creek lease was terminated in the Second Quarter of 2001 and the Dennys- Colorado Springs lease was rejected in the Fourth Quarter of 2001. Therefore, at March 31, 2002 the four (4) remaining
properties were comprised of: one (1) Hardees restaurant, one (1) Applebees restaurant, one (1) vacant property in Oak Creek, Wisconsin, and one (1) vacant property in Colorado Springs, Colorado. In June 2002 all of the
Partnerships properties, except for the vacant Colorado Springs property were sold. Therefore, only one (1) vacant property remains at September 30, 2002.



12



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6. TRANSACTIONS WITH CURRENT GENERAL PARTNER:



Amounts paid and or accrued to the current General Partner and its affiliates for the period
from January 1 to June 27, 2002, June 28 to September 30, 2002, and the three and nine month periods ended September 30, 2002 and 2001 are as follows:



|                                         |  |                                                            |       |   |                                                            |   |                                                         |  |   |                                                       |   |                                                           |   |                                                           |  |   |         |  |   |       
|---------------------------------------- |  | ---------------------------------------------------------- | ----- | - | ---------------------------------------------------------- | - | ------------------------------------------------------- |  | - | ----------------------------------------------------- | - | --------------------------------------------------------- | - | --------------------------------------------------------- |  | - | ------- |  | - | ------
|Current General Partner                  |  | Incurred for thethree-monthperiod ended September 30, 2002 |       |   | Incurred for thethree-monthperiod ended September 30, 2001 |   | Incurred for theperiod June 28throughSeptember 30, 2002 |  |   | Incurred for theperiod January 1through June 27, 2002 |   | Incurred for thenine-monthperiod ended September 30, 2002 |   | Incurred for thenine-monthperiod ended September 30, 2001
|Management fees                          |  | $                                                          | 4,379 |   |                                                            | $ | 17,409                                                  |  | $ | 4,379                                                 |   |                                                           | $ | 35,455                                                    |  | $ | 39,834  |  | $ | 51,652
|Restoration fees                         |  |                                                            | 94    |   |                                                            |   | 0                                                       |  |   | 94                                                    |   |                                                           |   | 11                                                        |  |   | 105     |  |   | 193   
|Commissions on disposition of assets     |  |                                                            | 0     |   |                                                            |   | 0                                                       |  |   | 0                                                     |   |                                                           |   | 82,000                                                    |  |   | 82,000  |  |   | 0     
|Cash distribution                        |  |                                                            | (150  | ) |                                                            |   | 119                                                     |  |   | (150                                                  | ) |                                                           |   | 1,095                                                     |  |   | 945     |  |   | 1,174 
|Overhead allowance                       |  |                                                            | 1,443 |   |                                                            |   | 1,405                                                   |  |   | 1,443                                                 |   |                                                           |   | 2,862                                                     |  |   | 4,305   |  |   | 4,183 
|Reimbursement for out-of-pocket expenses |  |                                                            | 1,269 |   |                                                            |   | 732                                                     |  |   | 1,269                                                 |   |                                                           |   | 1,669                                                     |  |   | 2,938   |  |   | 1,795 
|                                         |  |                                                            |       |   |                                                            |   |                                                         |  |   |                                                       |   |                                                           |   |                                                           |  |   |         |  |   |       
|                                         |  | $                                                          | 7,035 |   |                                                            | $ | 19,665                                                  |  | $ | 7,035                                                 |   |                                                           | $ | 123,092                                                   |  | $ | 130,127 |  | $ | 58,997
|                                         |  |                                                            |       |   |                                                            |   |                                                         |  |   |                                                       |   |                                                           |   |                                                           |  |   |         |  |   |       



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 achievement of the $6,000,000 recovery
threshold appears remote.



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, 2002. Funds are invested in U.S. Treasury securities. In addition, interest totaling $109,809 has
been credited to the Trust as of September 30, 2002. 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



13



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which might be brought against the Permanent Manager and which is subject to indemnification; or (iii) a determination by
a court of competent jurisdiction that the Permanent Manager shall have no liability to any person with respect to a claim which is subject to indemnification under the PMA. At such time as indemnity provisions expire or the full indemnity is paid,
any funds remaining in the Trust will revert back to the general funds of the Partnership.



9. FORMER GENERAL PARTNERS CAPITAL ACCOUNTS:



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



10. RESTATEMENT OF PREVIOUSLY ISSUED 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, 2002, 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. The Partnership had originally accounted for
the sale of the three properties on the going concern (historical cost) basis, recognized a gain on their sale and then adjusted the financial statements for the liquidation basis of accounting. However, management determined that the Partnership
should adopt the liquidation basis of accounting prior to the sale of the properties. The adoption of the liquidation basis increased the investment properties to their net realizable values of $550,000 offset by the recorded estimated liabilities
associated with the carrying out the liquidation of $315,000. The reserve for liquidation at September 30, 2002 reflects payments of $35,000 made against the estimated liability previously established. As a result, the Partnerships financial
statements for the quarter ended September 30, 2002 have been restated from amounts previously reported to properly reflect the adoption of liquidation basis of accounting.



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



|                                                             |  |                                           |           |                                 |   |          
|------------------------------------------------------------ |  | ----------------------------------------- | --------- | ------------------------------- | - | ---------
|                                                             |  | As PreviouslyReported AtSeptember 30,2002 |           | As Restated AtSeptember 30,2002
|Investment Properties                                        |  | $                                         | 492,276   |                                 | $ | 494,386  
|                                                             |  |                                          
|Total Assets                                                 |  |                                           | 1,430,690 |                                 |   | 1,432,800
|                                                             |  |                                          
|Reserve for Estimated Costs During the Period of Liquidation |  |                                           | 0         |                                 |   | 280,850  
|                                                             |  |                                          
|Net Assets in Liquidation                                    |  |                                           | 0         |                                 |   | 1,129,784
|                                                             |  |                                          
|Partners Capital                                            |  |                                           | 1,398,649 |                                 |   | 0        



14



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|                                           |  |                                                                            |         |   |                                                                |   |            |                                                                           |  |                                                              |         |  |                                                            |            |   |  |   |           |  
|------------------------------------------ |  | -------------------------------------------------------------------------- | ------- | - | -------------------------------------------------------------- | - | ---------- | ------------------------------------------------------------------------- |  | ------------------------------------------------------------ | ------- |  | ---------------------------------------------------------- | ---------- | - |  | - | --------- | -
|                                           |  | As Previously Reported For the Three Month Period Ended September 30, 2002 |         |   | As Restated Forthe Three Month Period Ended September
30, 2002 |   |            | As Previously Reported For the Nine Month Period Ended September 30, 2002 |  | As Restated Forthe Period June 28 through September 30, 2002 |         |  | As Restated For the Period January 1 through June 27, 2002 |           
|REVENUES:                                  |  |                                                                            |         |   |                                                                |   |            |                                                                           |  |                                                              |         |  |                                                            |            |   |  |   |           |  
|Rental Income                              |  | $                                                                          | 0       |   |                                                                | $ | 0          |                                                                           |  | $                                                            | 108,434 |  | $                                                          | 0          |   |  | $ | 108,434   |  
|Interest Income                            |  |                                                                            | 6,414   |   |                                                                |   | 6,414      |                                                                           |  |                                                              | 10,508  |  |                                                            | 6,414      |   |  |   | 4,094     |  
|Lease Termination Fee                      |  |                                                                            | 0       |   |                                                                |   | 0          |                                                                           |  |                                                              | 0       |  |                                                            | 0          |   |  |   | 0         |  
|Gain on Sale of Assets                     |  |                                                                            | 0       |   |                                                                |   | 0          |                                                                           |  |                                                              | 716,958 |  |                                                            | 0          |   |  |   | 0         |  
|Other Income                               |  |                                                                            | 0       |   |                                                                |   | 0          |                                                                           |  |                                                              | 4,902   |  |                                                            | 0          |   |  |   | 4,902     |  
|Recovery of Amounts Previously Written-off |  |                                                                            | 2,350   |   |                                                                |   | 2,351      |                                                                           |  |                                                              | 2,619   |  |                                                            | 2,351      |   |  |   | 268       |  
|                                           |  |                                                                            |         |   |                                                                |   |            |                                                                           |  |                                                              |         |  |                                                            |            |   |  |   |           |  
|Total Revenues                             |  |                                                                            | 8,764   |   |                                                                |   | 8,765      |                                                                           |  |                                                              | 843,421 |  |                                                            | 8,765      |   |  |   | 117,698   |  
|                                           |  |                                                                            |         |   |                                                                |   |            |                                                                           |  |                                                              |         |  |                                                            |            |   |  |   |           |  
|EXPENSES:                                  |  |                                                                            |         |   |                                                                |   |            |                                                                           |  |                                                              |         |  |                                                            |            |   |  |   |           |  
|Partnership Management Fee                 |  |                                                                            | 4,379   |   |                                                                |   | 0          |                                                                           |  |                                                              | 39,834  |  |                                                            | 0          |   |  |   | 35,455    |  
|Restoration Fees                           |  |                                                                            | 94      |   |                                                                |   | 0          |                                                                           |  |                                                              | 105     |  |                                                            | 0          |   |  |   | 11        |  
|Insurance                                  |  |                                                                            | 1,225   |   |                                                                |   | 0          |                                                                           |  |                                                              | 3,674   |  |                                                            | 0          |   |  |   | 2,449     |  
|Property Write-Downs                       |  |                                                                            | 0       |   |                                                                |   | 0          |                                                                           |  |                                                              | 0       |  |                                                            | 0          |   |  |   | 239,056   |  
|Loss on Sale of Assets                     |  |                                                                            | 0       |   |                                                                |   | 0          |                                                                           |  |                                                              | 240,838 |  |                                                            | 0          |   |  |   | 0         |  
|Commissions on Sale of Assets              |  |                                                                            | 0       |   |                                                                |   | 0          |                                                                           |  |                                                              | 164,650 |  |                                                            | 0          |   |  |   | 0         |  
|General and Administrative                 |  |                                                                            | 5,483   |   |                                                                |   | 0          |                                                                           |  |                                                              | 26,142  |  |                                                            | 0          |   |  |   | 20,657    |  
|Advisory Board Expenses                    |  |                                                                            | 1,313   |   |                                                                |   | 0          |                                                                           |  |                                                              | 5,144   |  |                                                            | 0          |   |  |   | 3,832     |  
|Professional Expenses                      |  |                                                                            | 31,148  |   |                                                                |   | 0          |                                                                           |  |                                                              | 83,255  |  |                                                            | 0          |   |  |   | 52,107    |  
|Real Estate Taxes                          |  |                                                                            | 0       |   |                                                                |   | 0          |                                                                           |  |                                                              | 12,062  |  |                                                            | 0          |   |  |   | 12,062    |  
|Depreciation                               |  |                                                                            | 2,110   |   |                                                                |   | 0          |                                                                           |  |                                                              | 31,404  |  |                                                            | 0          |   |  |   | 29,294    |  
|Amortization                               |  |                                                                            | 0       |   |                                                                |   | 0          |                                                                           |  |                                                              | 8,365   |  |                                                            | 0          |   |  |   | 8,365     |  
|Defaulted/Vacant Tenant                    |  |                                                                            | 563     |   |                                                                |   | 0          |                                                                           |  |                                                              | 13,743  |  |                                                            | 0          |   |  |   | 8,415     |  
|Maintenance                                |  |                                                                            | 0       |   |                                                                |   | 0          |                                                                           |  |                                                              | 0       |  |                                                            | 0          |   |  |   | 4,765     |  
|                                           |  |                                                                            |         |   |                                                                |   |            |                                                                           |  |                                                              |         |  |                                                            |            |   |  |   |           |  
|Total Expenses                             |  |                                                                            | 46,315  |   |                                                                |   | 0          |                                                                           |  |                                                              | 629,216 |  |                                                            | 0          |   |  |   | 416,468   |  
|                                           |  |                                                                            |         |   |                                                                |   |            |                                                                           |  |                                                              |         |  |                                                            |            |   |  |   |           |  
|Net (Loss) Income                          |  | $                                                                          | (37,551 | ) |                                                                |   |            |                                                                           |  | $                                                            | 214,205 |  |                                                            |            |   |  |   |           |  
|                                           |  |                                                                            |         |   |                                                                |   |            |                                                                           |  |                                                              |         |  |                                                            |            |   |  |   |           |  
|(Loss) Income from Operations              |  |                                                                            |         |   |                                                                |   | 8,765      |                                                                           |  |                                                              |         |  |                                                            | 8,765      |   |  |   | (298,770  | )
|Net Assets, Beginning of Period            |  |                                                                            |         |   |                                                                |   | 3,260,869  |                                                                           |  |                                                              |         |  |                                                            | 3,025,524  |   |  |   | 3,350,389 |  
|Cash Distributions                         |  |                                                                            |         |   |                                                                |   | (2,139,850 | )                                                                         |  |                                                              |         |  |                                                            | (2,139,850 | ) |  |   | (26,095   | )
|Adjustment to Liquidation Basis            |  |                                                                            |         |   |                                                                |   | 0          |                                                                           |  |                                                              |         |  |                                                            | 235,345    |   |  |   | 0         |  
|                                           |  |                                                                            |         |   |                                                                |   |            |                                                                           |  |                                                              |         |  |                                                            |            |   |  |   |           |  
|Net Assets, End of Period                  |  |                                                                            |         |   |                                                                | $ | 1,129,784  |                                                                           |  |                                                              |         |  | $                                                          | 1,129,784  |   |  | $ | 3,025,524 |  
|                                           |  |                                                                            |         |   |                                                                |   |            |                                                                           |  |                                                              |         |  |                                                            |            |   |  |   |           |  



15



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|                                                   |  |                                                                           |         |   |                                                                |   |                                                                          |  |                                                             |         |                                                           |   |   |  |   |  
|-------------------------------------------------- |  | ------------------------------------------------------------------------- | ------- | - | -------------------------------------------------------------- | - | ------------------------------------------------------------------------ |  | ----------------------------------------------------------- | ------- | --------------------------------------------------------- | - | - |  | - | -
|                                                   |  | As PreviouslyReported For the Three Month Period
Ended September 30, 2002 |         |   | As Restated Forthe Three Month Period Ended September
30, 2002 |   | As PreviouslyReported For the Nine Month Period
Ended September 30, 2002 |  | As Restated Forthe Period June 28 throughSeptember 30, 2002 |         | As Restated For the Period January 1through June 27, 2002
|Net (Loss) Income- General Partner                 |  | $                                                                         | (3,755  | ) |                                                                | $ | 0                                                                        |  | $                                                           | 2,142   |                                                           | $ | 0 |  | $ | 0
|Net (Loss) Income- Limited Partners                |  | $                                                                         | (33,796 | ) |                                                                | $ | 0                                                                        |  | $                                                           | 212,063 |                                                           | $ | 0 |  | $ | 0
|Net (Loss) Income per Limited Partnership Interest |  | $                                                                         | (1.98   | ) |                                                                | $ | 0                                                                        |  | $                                                           | 12.40   |                                                           | $ | 0 |  | $ | 0



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



As discussed in Note 10, the Partnership has restated its condensed financial statements for the quarter ended September 30, 2002. This managements discussion and analysis gives effect to this restatement.



During the First Quarter of 2002, Management accepted an offer for three (3) of the remaining
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 three (3) Properties, the General Partner had received the written consent of the holders of more than fifty percent (50%) of the Partnership interests authorizing such
sale. All of the Partnerships properties, except for the vacant Colorado Springs property, were sold in June 2002.



As a result of the Limited Partners approval to sell all of the Partnerships Properties and dissolve and liquidate the Partnership effective June 28, 2002,
the Partnerships financial statements as of September 30, 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.



The net adjustment at June 28, 2002 required to
convert from the going concern (historical cost) basis to the liquidation basis of accounting was an increase in carrying value of net assets by $235,000, which is included in the statements of income and change in net assets (liquidation basis) for
2002. The increase in the carrying value of net assets is due to an increase in the value of investment properties (three of which were sold subsequent to liquidation) to their estimated net realizable values of $550,000, offset by the recorded
estimated liabilities associated with carrying out the liquidation of $315,000. The investment properties net realizable basis was based on recent offers to purchase the properties. Estimated liabilities associated with carrying out the
liquidation were based upon (1) historical costs for similar items and services, (2) based on agreements currently in place and (3) estimates provided by service providers.



The reserve for liquidation at September 30, 2002 was $280,000 and reflected payments of $35,000 made against the estimated liabilities
previously established as of June 30, 2002.



16



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The statement of net assets as of September 30, 2001 and the statement of income and changes in net assets for the period
ended September 30, 2001 have been prepared using the historical cost basis of accounting on which the Partnership had previously reported its financial condition and its results of operations.



Liquidity and Capital Resources:



Investment Properties and Net Investment in Direct Financing Leases



The investment property, including equipment held by the Partnership
at December 31, 2001, was originally purchased at a price, including acquisition costs, of approximately $791,000. As of September 30, 2002, the investment property reflects its estimated net realizable value associated with carrying out the plan of
liquidation of $494,000.



At December 31, 2000 the Partnership owned five (5)
fast-food restaurants comprised of: two (2) Hardees restaurants, one (1) Applebees restaurant, and two (2) Dennys restaurants. However, due to the write-off of the former Dennys- Englewood property (see third paragraph below)
during the Fourth Quarter of 2001 only four (4) properties remained at December 31, 2001. The former Hardees- Oak Creek lease was terminated in the Second Quarter of 2001 and the former Dennys- Colorado Springs lease was rejected in the
tenants bankruptcy proceeding during the Fourth Quarter of 2001. Both properties remained vacant as of March 31, 2002. Therefore, the four (4) remaining properties at March 31, 2002 were comprised of: one (1) Hardees restaurant in St.
Francis, Wisconsin, one (1) Applebees restaurant in Pittsburgh, Pennsylvania, and one (1) vacant property in Oak Creek, Wisconsin and one (1) vacant property in Colorado Springs, Colorado. The four (4) properties were located in three (3)
states. 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 Management is remarketing the property for sale. Also
during the First Quarter of 2002, Management accepted an offer for the remaining three (3) Partnership properties, which included Applebees- Pittsburgh, Hardees- St. Francis, and vacant Oak Creek. Following the receipt of the written
consent of Limited Partners holding more than fifty percent (50%) of the Partnership interests authorizing such sale; the three (3) properties were sold in June 2002.



In July of 1991, L & H Restaurants, Inc. a predecessor in interest to the Phoenix Restaurant Group, Inc. (Phoenix) entered
into a ground lease (the Ground Lease) with respect to certain land and improvements in Englewood, Colorado (the Englewood Property). Simultaneously, Phoenix assigned its rights in the Ground Lease to the Partnership, which
assumed all of Phoenixs rights and interest, but not the obligations under the Ground Lease. In turn, the Partnership as landlord and Phoenix as tenant entered into a Net Lease for the Englewood Property (the Englewood Lease),
pursuant to which Phoenix would pay the amounts due to the Landlord under the Ground Lease as well as additional rent to the Partnership.



On October 31, 2001 Phoenix filed a voluntary petition for bankruptcy relief. On November 6, 2001 the bankruptcy court granted Phoenixs motion to reject both the
Ground Lease and the Englewood Lease. Because the Partnership did not assume any of Phoenixs obligations under the Ground Lease, the Partnership took the position that it is not liable for any amounts of unpaid rent or expenses due to the
Ground Lessor. Possession of the property was returned to the Ground landlord under the Lease, which resulted in a write-off of the Englewood Property and a $141,000 loss in the Fourth Quarter of 2001. Management is uncertain whether any of the
$9,600 due from Phoenix as past due rent, all of which has been reserved, will be collected.



17



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Due to bankruptcy proceedings by Phoenix, the related lease on the Colorado Springs property was rejected in the Fourth
Quarter of 2001 and rent ceased as of December 2001. The entire amount due of approximately $20,600 from Phoenix has been reserved. The amount is included in the Partnerships claim filed in Bankruptcy Court of approximately $77,000, or one
year of rent, although it is uncertain whether the amount will be collectible. During the First Quarter of 2002, Management found a buyer for the Colorado Springs property and anticipated the property would be sold by the end of May 2002. However,
the sale was not consummated and Management is remarketing the property for sale.



During the First Quarter of 2002, Management accepted an aggregate purchase offer for three (3) of the Partnership properties, which included: (i) the Oak Creek property, (ii) the St. Francis property and (iii) the Applebees property
in Pittsburgh, Pennsylvania. The aggregate sale was 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 fair value 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 fair value of the property at March 31, 2002 of
$755,000. The sale was 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 a sales commission of $165,000 (less than 6%) was paid in the Second Quarter of 2002. Of such sales commission,
$82,650 was paid to an unaffiliated broker and $82,000 was paid to TPG.



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



Other Assets:



Cash and cash equivalents were $573,000 at September 30, 2002, compared to $240,000 at
December 31, 2001. Cash of $471,000 is anticipated to be used for the payment of accounts payable, accrued expenses, and future distributions; and the remainder represents amounts deemed necessary to allow the Partnership to continue its plan of
liquidation. Cash generated through the operations of the Partnerships investment properties and sales of investment properties will provide the sources for future fund liquidity and Limited Partner distributions.



The Partnership established an Indemnification Trust (the Trust) during the
Fourth Quarter of 1993 and deposited $130,000 in the Trust during 1994, $100,000 during 1995, and $20,000 during 1996. The provision to establish the Trust was included in the Permanent Management Agreement (PMA) 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.



Property taxes escrow at December 31, 2001, in
the amount of approximately $9,600, represented four (4) months of 2001 real estate taxes for the former Hardees- Oak Creek property paid by Hardees Food Systems, Inc. upon the lease termination agreement with Management. The property
taxes were paid in January 2002 by the Partnership.



18



---

Deferred fees were approximately $8,400, net of amortization, at December 31, 2001. Deferred fees represent leasing
commissions paid when properties are leased and/or upon the negotiated extension of a lease. Leasing commissions are capitalized and amortized over the life of the lease. During the Second Quarter of 2001, the net deferred fee balance related to the
former Hardees- Oak Creek tenant was written-off due to its lease termination. During the Second Quarter of 2002, the net deferred fee balance related to the Hardees- St. Francis property was written-off due to the sale of the property
in June 2002.



The Note receivable balance at December 31, 2001 was $45,250. In
the Second Quarter of 2001, a lease termination agreement was executed with Hardees Food Systems upon the closing of its restaurant in Oak Creek, Wisconsin. Hardees Food Systems agreed to pay a lease termination fee of approximately two
(2) years rent or $181,000. The payments were received in four equal (4) installments of $45,250. The first payment was received in May 2001 upon the execution of the agreement, and the remaining balance represented a Note receivable of $135,750.
The first and second Note receivable installments were received in August and October 2001. The final installment, which is reflected as a Note receivable on the balance sheet at December 31, 2001, was received in January 2002.



Liabilities:



Accounts payable and accrued expenses at September 30, 2002, in the amount of $20,501
primarily represented the accrual of auditing, tax, and data processing fees.



Property taxes payable at December 31, 2001, in the amount of $35,000, represented accruals of 2001 real estate taxes in relation to the vacant Oak Creek and Colorado Springs properties. The Oak Creek taxes were paid in the First Quarter of
2002 and the Colorado Springs taxes were paid in the Second Quarter of 2002.



Reserve for estimated costs during the period of liquidation amounted to $280,000 at September 30, 2002. As a result of the Limited Partners approval to sell all of the Partnerships Properties and dissolve and liquidate the
Partnership, the Partnerships financial statements as of September 30, 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.



The net adjustment at June 28, 2002
required to convert from the going concern (historical cost) basis to the liquidation basis of accounting was an increase in carrying value of net assets by $235,000, which is included in the statements of income and change in net assets
(liquidation basis) for 2002. The increase in the carrying value of net assets is due to an increase in the value of investment properties (three of which were sold subsequent to liquidation) to their estimated net realizable values of $550,000,
offset by the recorded estimated liabilities associated with carrying out the liquidation of $315,000. The investment properties net realizable basis was based on recent offers to purchase the properties. Estimated liabilities associated with
carrying out the liquidation were based upon (1) historical costs for similar items and services, (2) based on agreements currently in place and (3) estimates provided by service providers.



Security deposits at December 31, 2001 amounted to $8,400. The tenant security deposit
related to the Applebees- Pittsburgh property and was relinquished upon its sale in June 2002.



Unearned rental income at December 31, 2001 amounted to $20,400. The unearned rental income related to the Hardees- St. Francis property and was relinquished upon its sale in June 2002.



19



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Partners Capital



The income from operations for the quarter was allocated between the General Partner and the Limited Partners, 1% and 99%, respectively, as
provided in the Partnership Agreement and the Amendment to the Partnership Agreement, as discussed more fully in Note 4 of the condensed financial statements. The former general partners capital account balance was reallocated to the Limited
Partners at December 31, 1993. Refer to Note 9 to the financial statements for additional information regarding the reallocation.



Cash distributions paid to the Limited Partners during 2002 of $2,165,000, resulting from the sale of investment properties, have also been made in accordance with the
amended Partnership Agreement. Due to the First Quarter 2002 operating cash deficit there was not a distribution to the Limited Partners on May 15, 2002. In addition, due to the Third Quarter 2002 operating cash deficit a Limited Partner
distribution was not scheduled for November 15, 2002.



Results of
Operations:



The Partnership reported income from operations for
the quarter ended September 30, 2002, in the amount of $9,000 compared to income from operations for the quarter ended September 30, 2001 of $30,000. Loss from operations for the nine-months ended September 30, 2002 totaled $290,000 compared to the
income from operations of $294,000 for the nine-months ended September 30, 2001. The decrease in income from operations in 2002 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 and the Hardees- Oak Creek lease termination in the Second Quarter of 2001, the Dennys- Colorado Springs lease and the Dennys- Englewood lease rejections at the end of the Fourth
Quarter of 2001; and (ii) increased expenditures 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. These adverse effects were also offset by Management lowering its monthly minimum management fees by 75% beginning in the Third Quarter of 2002.



Revenues:



Total revenues were $9,000, and $85,000, for the quarters ended September 30, 2002, and 2001, respectively, and were $126,000 and $476,000 for the nine-months ended
September 30, 2002 and 2001, respectively. Total revenues were $9,000 for the period from June 28 through September 30, 2002 and $117,000 for the period January 1 through June 27, 2002. Total revenues in 2002 includes decreased rental income, upon
the termination of the Hardees- Oak Creek lease in the Second Quarter of 2001, and both the rejection of the Dennys- Colorado Springs lease and the non-cash disposal of the Dennys Englewood property in the Fourth Quarter of 2001,
and the sale of the Applebees- Pittsburgh and Hardees- St. Francis properties in the Second Quarter of 2002. In addition, in the Second Quarter of 2001 an $181,000 lease termination fee was charged to Hardees Food System, Inc. upon
the termination of the Hardees - Oak Creek lease, which offset some of the lost rental income.



The Partnership only owns one (1) vacant property and Management does not anticipate any additional leases or leasing income prior to the dissolution of the Partnership. However, in the Third Quarter of 2002 the
Partnership did generate revenues of $9,000. These revenues came from interest earnings and small recoveries from former General Partners. Management anticipates that such revenue types may continue to be generated until Partnership dissolution.



20



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Expenses:



There were no expenses for the quarter ended September 30, 2002 or the period from June 28 through September 30, 2002, as all expenses to liquidate and dissolve the
Partnership were accrued at the date of liquidation. Total expenses amounted to 65% of total revenues for the quarter ended September 30, 2001 and totaled 329% and 38% of total revenues for the nine-months ended September 30, 2002, and 2001,
respectively. The increase in total expenditures in 2002 is due primarily to the property write-downs in the First Quarter of 2002, and the increase in legal fees and property expenditures in connection with maintenance, tenant default, lease
terminations, property sales and Partnership dissolution. The fluctuation is also due to the increase in revenues in 2001 primarily due to the $181,000 lease termination fee. In addition, income in 2002 includes decreased rental income. Also,
beginning in the Third Quarter of 2002, Management reduced its management fees by seventy-five percent (75%) due to the property sales at the end of the Second Quarter of 2002.



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



Inflation:



Inflation has
a minimal effect on operating earnings and related cash flows from a portfolio of triple net leases. By their nature, such leases actually fix revenues and are not impacted by rising costs of maintenance, insurance, or real estate taxes. If
inflation causes operating margins to deteriorate for lessees and if expenses grow faster than revenues, then, inflation may well negatively impact the portfolio through tenant defaults.



It would be misleading to associate inflation with asset appreciation for real estate, in general, and the Partnerships portfolio,
specifically. Due to the triple net nature of the property leases, asset values generally move inversely with interest rates. However, currently, the only property owned by the Partnership is vacant and the Partnership is actively
marketing such property for sale.



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 primarily addresses issues relating to the implementation of FAS 121 and develops a single accounting model for long-lived assets to be disposed of, whether previously held
and used or newly acquired. The provisions of FAS 144 are effective for fiscal years beginning after December 15, 2001. The Company adopted FAS 144 on January 1, 2002.



Critical Accounting Policies:



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



Accounting basis- As a result of the Limited Partners approval to sell all of the Partnerships Properties and dissolve and
liquidate the Partnership, the Partnerships financial statements 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.



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



21



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believes these are the appropriate lives and methods, use of different lives and methods could result in different
impacts on net income. Additionally, the value of real estate is typically based on market conditions and property performance, so depreciated book value of real estate may not reflect the market value of real estate assets.



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



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



Item 3. Quantitative and Qualitative Disclosure About Market Risk



The Partnership is not subject to market risk.



22



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PART II - OTHER INFORMATION



Items 1-3.



None.



Item 4. Controls and Procedures



As of
September 30, 2002, 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, the CEO/CFO has concluded as of September 30, 2002 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 during the most recent quarter and
subsequent to September 30, 2002.



Item 5. Other Information



Registrants interim financial statements in this Form 10-Q/A have been revised from
the Form 10-Q filed for the quarterly period ended September 30, 2002 on November 13, 2002. An independent public accountant has reviewed the interim financial statements on this Form 10-Q/A.



As a result of the Limited Partners approval to sell all of the Partnerships
Properties and dissolve and liquidate the Partnership, the Partnerships financial statements as of September 30, 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.



In the Third Quarter of 2002 approximately $35,000 of recorded estimated liabilities associated with carrying out the liquidation were paid.



The statement of net assets as of September 30, 2001 and the statement of income and changes in net assets for the period ended September
30, 2001 have been prepared using the going concern basis of accounting on which the Partnership had previously reported its financial condition and its results of operations.



23



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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.                                            
|    |  |                                                    
|    |  | 99.0                                                |  | Correspondence to the Limited Partners dated November 15, 2002, regarding the Third Quarter 2002 distribution calculation.
|    | 
|(b) |  | Report on Form 8-K:                                
|    | 
|    |  | The Registrant filed Form 8-K on August 14, 2002.  
|    | 
|    |  | The Registrant filed Form 8-K/A on August 27, 2002.



24



---

SIGNATURES



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



|                                               |  |                                       
|---------------------------------------------- |  | --------------------------------------
|DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
|                                               | 
|By:                                            |  | The Provo Group, Inc., General Partner
|                                               | 
|By:                                            |  | /s/ Bruce A. Provo                    
|                                               |  | Bruce A. Provo, President             
|                                               | 
|Date:                                          |  | March 22, 2004                        



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



|      |  |                                                                    
|----- |  | -------------------------------------------------------------------
|By:   |  | The Provo Group, Inc., General Partner                             
|      | 
|By:   |  | /s/ Bruce A. Provo                                                 
|      |  | Bruce A. Provo, President                                          
|      | 
|Date: |  | March 22, 2004                                                     
|      | 
|By:   |  | /s/ Bruce A. Provo                                                 
|      |  | Bruce A. Provo, Chief Executive Officer and Chief Financial Officer
|      | 
|Date: |  | March 22, 2004                                                     



25