<PAGE>

                                    FORM 10-Q

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

(Mark One)
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

               For the quarterly period ended September 30, 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

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

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

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

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


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

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

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes  X  No___
                                       ---

                                        1

<PAGE>

                         PART I - FINANCIAL INFORMATION
                          Item 1. Financial Statements

                 DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                                 BALANCE SHEETS

                    September 30, 2002 and December 31, 2001

                                     ASSETS

<TABLE>
<CAPTION>
                                                                          (Unaudited)
                                                                          September 30,       December 31,
                                                                              2002               2001
                                                                          -----------         -----------
<S>                                                                       <C>                 <C>
INVESTMENT PROPERTIES: (Note 3)

     Land                                                                 $   314,354         $ 1,553,680
     Buildings and improvements                                               265,829           2,036,749
     Accumulated depreciation                                                 (87,907)           (836,890)
                                                                          -----------         -----------
          Net investment properties                                           492,276           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 of allowance of $30,137)                  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                                                    $ 1,430,690         $ 3,447,035
                                                                          ===========         ===========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       2

<PAGE>

                 DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                        LIABILITIES AND PARTNERS' CAPITAL

                    September 30, 2002 and December 31, 2001

<TABLE>
<CAPTION>
                                                                     (Unaudited)
                                                                    September 30,       December 31,
                                                                        2002                2001
                                                                   -------------       --------------
<S>                                                                <C>                 <C>
LIABILITIES:

   Accounts payable and accrued expenses                           $       30,376      $       33,050
   Property taxes payable                                                   1,665              34,734
   Due to General Partner                                                       0                   0
   Security deposits                                                            0               8,425
   Unearned rental income                                                       0              20,437
                                                                   --------------      --------------

     Total liabilities                                                     32,041              96,646
                                                                   --------------      --------------
CONTINGENT LIABILITIES:  (Note 7)

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

Current General Partner -
   Cumulative net income                                                   22,295              20,153
   Cumulative cash distributions                                          (11,067)            (10,122)
                                                                   --------------      --------------

                                                                           11,228              10,031
                                                                   --------------      --------------
Limited Partners (17,102.52 interests outstanding)
   Capital contributions, net of offering costs                        14,408,872          14,408,872
   Cumulative net income                                                  452,024             239,961
   Cumulative cash distributions                                      (13,207,984)        (11,042,984)
   Reallocation of former general partners' deficit capital              (265,491)           (265,491)
                                                                   --------------      --------------
                                                                        1,387,421           3,340,358
                                                                   --------------      --------------
          Total partners' capital                                       1,398,649           3,350,389
                                                                   --------------      --------------
          Total liabilities and partners' capital                  $    1,430,690      $    3,447,035
                                                                   ==============      ==============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                        3

<PAGE>

                 DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                           STATEMENTS OF INCOME (LOSS)

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                              Three Months Ended            Nine Months Ended
                                                           ------------------------       ---------------------
                                                                September 30,                 September 30,
                                                                -------------                 -------------
                                                              2002           2001           2002         2001
                                                           ----------       -------       --------     --------
<S>                                                        <C>              <C>           <C>          <C>
REVENUES:
     Rental income                                         $        0       $79,925       $108,434     $271,122
     Interest income                                            6,414         5,568         10,508       19,501
     Lease termination fee (Note 3)                                 0             0              0      181,000
     Gain on sale of assets                                         0             0        716,958            0
     Other income                                                   0             0          4,902           32
     Recovery of amounts previously written off                 2,350             0          2,619        4,829
                                                           ----------       -------       --------     --------

                                                                8,764        85,493        843,421      476,484
                                                           ----------       -------       --------     --------
EXPENSES:
     Partnership management fees (Note 6)                       4,379        17,409         39,834       51,652
     Restoration fees (Note 6)                                     94             0            105          193
     Insurance                                                  1,225           804          3,674        2,413
     General and administrative                                 5,483         5,524         26,142       22,318
     Advisory Board fees and expenses                           1,313         1,313          5,144        4,649
     Professional services                                     31,148        14,108         83,255       45,105
     Real estate taxes                                              0             0         12,062            0
     Loss on disposition of assets                                  0             0        240,838            0
     Commissions on sale of properties                              0             0        164,650            0
     Defaulted/vacant tenant                                      563             0         13,743            0
     Depreciation                                               2,110        16,324         31,404       48,971
     Amortization                                                   0           264          8,365        7,538
                                                           ----------       -------       --------     --------

                                                               46,315        55,746        629,216      182,839
                                                           ----------       -------       --------     --------

NET (LOSS) INCOME                                            ($37,551)      $29,747       $214,205     $293,645
                                                           ==========       =======       ========     ========

NET (LOSS) INCOME - GENERAL PARTNER                           ($3,755)      $   297       $  2,142     $  2,936
-----------------------------------                        ----------       -------       --------     --------

NET (LOSS) INCOME - LIMITED PARTNERS                          (33,796)       29,450        212,063      290,709
------------------------------------                       ----------       -------       --------     --------

                                                             ($37,551)      $29,747       $214,205     $293,645
                                                           ==========       =======       ========     ========
NET (LOSS) INCOME PER LIMITED
-----------------------------
PARTNERSHIP INTEREST, based on 17,102.52                       ($1.98)      $  1.72       $  12.40     $  17.00
----------------------------------------                   ==========       =======       ========     ========
interests outstanding
---------------------
</TABLE>

        The accompanying notes are an integral part of these statements.

                                        4

<PAGE>

                 DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                     Nine Months Ended September 30,
                                                                                  ------------------------------------
                                                                                        2002                 2001
                                                                                    ------------        ------------
<S>                                                                                 <C>                 <C>
CASH FLOWS (USED IN) PROVIDED FROM OPERATING ACTIVITIES:
     Net income
     Adjustments to reconcile net income to net cash (used in)                      $    214,205        $    293,645
       provided from operating activities -
         Depreciation and amortization                                                    39,769              56,509
         Recovery of amounts previously written off                                       (2,619)             (4,829)
         Gain on sale of assets                                                         (716,958)                  0
         Loss on disposition of properties                                               240,838                   0
         Interest applied to Indemnification Trust Account                                (4,797)            (13,154)
         Lease Termination Fee                                                                 0            (135,750)
         Decrease in rents, other receivables & prepaid assets                            25,409              10,950
         Decrease/(Increase) in property taxes escrow                                      9,541              (9,541)
         Decrease in deferred rent receivable                                              4,350               1,260
         (Decrease) in security deposits                                                  (8,425)                  0
         (Decrease)/Increase in accounts payable and accrued expenses                     (2,674)             12,729
         (Decrease) in property taxes payable                                            (33,069)                  0
         (Decrease) in due to General Partner                                                  0                (221)
         (Decrease) in unearned rental income                                            (20,437)            (14,483)
                                                                                    ------------        ------------

           Net cash provided (used in) from operating activities                        (254,867)            197,115
                                                                                    ------------        ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Recoveries from former affiliates                                                     2,619               4,829
     Net proceeds from sale of properties                                              2,705,979                   0
     Payments received on note receivable                                                 45,250              45,250
                                                                                    ------------        ------------

           Net cash provided from investing activities                                 2,753,848              50,079
                                                                                    ------------        ------------

CASH FLOWS (USED IN) FINANCING ACTIVITIES:
     Cash distributions to General Partner                                                  (945)             (1,174)
     Cash distributions to Limited Partners                                           (2,165,000)           (230,000)
                                                                                    ------------        ------------

           Net cash (used in) financing activities                                    (2,165,945)           (231,174)
                                                                                    ------------        ------------


NET INCREASE IN CASH AND CASH EQUIVALENTS                                                333,036              16,020

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                         240,148             251,528
                                                                                    ------------        ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                          $    573,184        $    267,548
                                                                                    ============        ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       5

<PAGE>

                 DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP

                          NOTES TO 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.

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.

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.

                                       6

<PAGE>

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

The Partnership 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 with no impact
on financial statements.

The Partnership will be dissolved on December 1, 2015, or earlier upon the prior
occurrence of any of the following events: (a) the disposition of all interests
in real estate and other Partnership assets; (b) the decision by Majority Vote
of the Limited Partners to dissolve the Partnership or to compel the sale of all
or substantially all of the Partnership's assets; (c) the failure to elect a
successor General Partner within six months after removal of the last remaining
General Partner; or (d) the date of the death or the effective date of
dissolution, removal, withdrawal, bankruptcy, or 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

                                       7

<PAGE>

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. Also during the
First Quarter of 2002, Management accepted an offer for the remaining three (3)
Partnership properties, which included the Applebee's- Pittsburgh, Hardee's- St.
Francis and the vacant Oak Creek properties. The General Partner sought the
written consent of the Limited Partners to sell all of the Partnership's
Properties and subsequently 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. Management will
continue normal operations for the foreseeable future until the remaining
property is sold.

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, which

                                       8

<PAGE>

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:

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, 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 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. Management will continue normal operations for the foreseeable future
until the vacant Colorado Springs property is sold.

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

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 an Absolutely 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 has taken
the position that it is not liable for any amounts of unpaid rent or expenses
due to the Ground Lessor. Possession of the property was returned to the Ground
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

                                       9

<PAGE>

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 to be sold in May 2002.
However, the sale was not consummated and Management is remarketing the property
for sale.

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. The second and third 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.

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 subsequently liquidate
and dissolve the Partnership. The sale was consummated in June 2002 at an
aggregate sale price of $2,755,000. The General Partner received Limited Partner
approval. The sales price of the Oak Creek property was $600,000 and resulted in
a net loss of $176,000 in the Second Quarter of 2002. The sales price of the
Applebee's- Pittsburgh property was $1,400,000 and resulted in a net gain of
$717,000 in the Second Quarter of 2002. The sales price of the St. Francis
property was $755,000 and resulted in a net loss of $64,000 in the Second
Quarter of 2002.

In connection with the sale of these three (3) properties a sales commission of
$165,000 (approximately 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.

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 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 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

                                       10

<PAGE>

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.

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

                                       11

<PAGE>

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.

5.   LEASES:

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

During the first six-months of 2002 the aggregate lease payments received from
the Partnership properties, Applebee's- Pittsburgh, Pennsylvania and Hardee's-
St. Francis, Wisconsin, pursuant to their leases totaled $102,286. These two (2)
properties that were generating such lease rental were sold at the end of the
Second Quarter of 2002. As of June 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.

                                       12

<PAGE>

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.

6.   TRANSACTIONS WITH CURRENT GENERAL PARTNER:

Amounts paid to the current General Partner for the quarters ended September 30,
2002 and 2001, are as follows:

<TABLE>
<CAPTION>
Current General Partner                          Incurred as of         Incurred as of
-----------------------                        September 30, 2002     September 30, 2002
                                               ------------------     ------------------
<S>                                            <C>                    <C>
Management fees                                           $ 39,834               $ 51,652
Restoration fees                                               105                    193
Commissions on disposition of assets                        82,000                      0
Cash distribution                                              945                  1,174
Overhead allowance                                           4,305                  4,183
Reimbursement for out-of-pocket expenses                     2,938                  1,795
                                                          --------               --------
                                                          $130,127               $ 58,997
                                                          ========               ========
</TABLE>

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

                                       13

<PAGE>

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 remaining
amount allocated to the Partnerships may be owed to the current General Partner
if the $6,000,000 recovery level is met. As of September 30, 2002, the
Partnership may owe the current General Partner $18,862, which is currently
reflected as a recovery, if the $6,000,000 recovery level is achieved, which is
unlikely.

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 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.

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

Liquidity and Capital Resources:

Investment Properties and Net Investment in Direct Financing Leases

The investment property, including equipment held by the Partnership at
September 30, 2002, were originally purchased at a price, including acquisition
costs, of approximately $791,000.

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

                                       14

<PAGE>

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.
Management will continue normal operations for the foreseeable future until the
vacant Colorado Springs property is sold.

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 an Absolutely 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 has taken
the position that it is not liable for any amounts of unpaid rent or expenses
due to the Ground Lessor. Possession of the property was returned to the Ground
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 to be sold by the end of May 2002. However, the sale was not
consummated and Management is remarketing the property for sale.

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

                                       15

<PAGE>

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.

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 subsequently liquidate
and dissolve the Partnership. The sale was consummated in June 2002 at an
aggregate sale price of $2,755,000. The General Partner received Limited Partner
approval. The sales price of the Oak Creek property was $600,000 and resulted in
a net loss of $176,000 in the Second Quarter of 2002. The sales price of the
Applebee's- Pittsburgh property was $1,400,000 and resulted in a net gain of
$717,000 in the Second Quarter of 2002. The sales price of the St. Francis
property was $755,000 and resulted in a net loss of $64,000 in the Second
Quarter of 2002.

In connection with the sale of these three (3) properties a sales commission of
$165,000 (approximately 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.

Other Assets:

Cash and cash equivalents were $573,000 at September 30, 2002, compared to
$240,000 at December 31, 2001. The Partnership designated $471,000 for the
payment of accounts payable, accrued expenses, and future distributions; and the
remainder represents reserves deemed necessary to allow the Partnership to
operate normally. 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 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 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.

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.

                                       16

<PAGE>

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. The second and third 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
$30,375 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.

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.

Partners' Capital

The net loss 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 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, have
also been made in accordance with the amended Partnership Agreement. Due to the
First Quarter 2002 cash deficit there was not a distribution to the Limited
Partners on May 15, 2002. In addition, due to the Third Quarter 2002 cash
deficit a Limited Partner distribution is not scheduled for November 15, 2002.

Results of Operations:

The Partnership reported a net loss for the quarter ended September 30, 2002, in
the amount of $38,000 compared to net income for the quarter ended September 30,
2001 of $30,000. The net income for the nine-months ended September 30, 2002
totaled $214,000 compared to the net income of $294,000 for the nine-months
ended September 30, 2001. The decrease in net income 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; (ii) increased expenditures due to tenant defaults,
lease terminations, Second

                                       17

<PAGE>

Quarter 2002 property sales, and change in auditor issues; and (iii) Second
Quarter 2002 net losses on the sales of the Hardee's- St. Francis and Hardee's-
Oak Creek properties. These adverse effects were offset in large part by the
Second Quarter 2002 gain on the sale of the Applebee's- Pittsburgh property.
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 $843,000 and $476,000 for the nine-months
ended September 30, 2002 and 2001, respectively. The increase in revenue in 2002
is primarily due to the sale of the Applebee's- Pittsburgh property in the
Second Quarter. However, revenue in 2002 also 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.

As of July 1, 2002, total rental revenues should approximate zero (0) annually,
as the Partnership currently does not own a property with a lease currently in
place. 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 Partner's. Management anticipates that such
revenue types may continue to be generated until Partnership dissolution.

Expenses:

For the quarters ended September 30, 2002 and 2001, cash expenses amounted to
approximately 504% and 46% of total revenues, respectively. For the nine-months
ended September 30, 2002 and 2001, cash expenses totaled 41% and 27% of total
revenues, respectively. Total expenses, including non-cash items, amounted to
528% and 65% of total revenues for the quarters ended September 30, 2002 and
2001, respectively, and totaled 75% 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 increase in legal fees and
property expenditures in connection with tenant default, lease terminations,
property sales , Partnership dissolution and change in auditor issues, and the
losses incurred upon the Second Quarter sales of the Hardee's- St. Francis and
the vacant Oak Creek properties. 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 a Second Quarter gain on the sale of the
Applebee's- Pittsburgh property and 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 2002.

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

                                       18

<PAGE>

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
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.

New Accounting Pronouncement:

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

Critical Accounting Policies:

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

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

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

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

                                       19

<PAGE>

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

None.

                                       20

<PAGE>

PART II - OTHER INFORMATION

Items 1 - 4.

Not Applicable.


Item 5.  Other Information

Registrant's interim financial statements in this Form 10-Q have not been
reviewed by an independent public accountant due to the wind-down of Arthur
Andersen's business. See Item 4 to Registrant's Form 8-K, filed August 14, 2002,
and Registrant's Form 8-K/A filed August 27, 2002, and incorporated herein by
reference. Registrant will amend this form 10-Q to contain a review by an
independent public accountant as soon as Registrant engages this accountant.

Item 6.  Exhibits and Reports on Form 8-K

(a)  Listing of Exhibits:

     99.0  Correspondence to the Limited Partners dated November 15, 2002,
           regarding the Third Quarter 2002 distribution calculation.

     99.1  Certification of Periodic Financial Report Pursuant to 18 U.S.C.
           Section 1350.

(b)  Report on Form 8-K:

     The Registrant filed Form 8-K on August 14, 2002.

     The Registrant filed Form 8-K/A on August 27, 2002.

                                       21

<PAGE>

                                   SIGNATURES

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

DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP



By:   The Provo Group, Inc., General Partner



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

Date: November 13, 2002


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

By:   The Provo Group, Inc., General Partner



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

Date: November 13, 2002



By:   /s/ Bruce A. Provo
      ---------------------------------
      Bruce A. Provo, Chief Executive Officer and Chief Financial Officer

Date: November 13, 2002

                                       22