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FORM 10-K



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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark One)

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

For the fiscal year ended December 31, 2006

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 0-17686



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DIVALL INSURED INCOME PROPERTIES
2 LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Wisconsin                                                      |  | 39-1606834                          
|(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)

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 is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ̈No  x

Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ̈No  x

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):



|                         |  |                    |  |                         
|------------------------ |  | ------------------ |  | ------------------------
|Large accelerated filer ̈ |  | Accelerated filer ̈ |  | Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    Yes ̈No  x

The aggregate market value of the voting securities held by non-affiliates of the Registrant: The aggregate market value of limited
partnership interests held by non-affiliates is not determinable since there is no public trading market for the limited partnership interests.

Index to Exhibits located on page: 51-52



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PART I

Item 1. Business

Background

The Registrant, DiVall Insured Income Properties 2 Limited Partnership (the Partnership), is a limited partnership organized under the Wisconsin Uniform
Limited Partnership Act pursuant to an Agreement of Limited Partnership dated as of November 18, 1987, and amended as of November 25, 1987, February 20, 1988, June 21, 1988, February 8, 1993, May 26,
1993 and June 30, 1994 (collectively, the Partnership Agreement). As of December 31, 2006, the Partnership consisted of one General Partner (Management) and 2,045 Limited Partners owning an aggregate of 46,280.3
Limited Partnership Interests (the Interests) acquired at a public offering price of $1,000 per Interest before volume discounts. The Interests were sold commencing February 23, 1988, pursuant to a Registration Statement on Form
S-11 filed under the Securities Act of 1933 (Registration 33-18794) as amended. On June 30, 1989, the former general partners exercised their option to extend the offering period to a date no later than February 22, 1990. On
February 22, 1990, the Partnership closed the offering at 46,280.3 Interests ($46,280,300), providing net proceeds to the Partnership after volume discounts and offering costs of $39,358,468.

The Partnership is currently engaged in the business of owning and operating its investment portfolio of commercial real estate properties (the Properties.)
The Properties are leased on a triple net basis to, and operated by, primarily franchisees of national, regional and local retail chains under long-term leases. The lessees are predominantly fast food, family style, and casual/theme restaurants, but
also include a video rental store and a child-care center. At December 31, 2006, the Partnership owned 19 properties with specialty leasehold improvements in six (6) of these properties, as noted in Item 2- Properties. During the
Second Quarters of 2001, 2003 and 2005, consent solicitations were circulated (the 2001, 2003 and 2005 Consents, respectively), which if approved would have authorized the sale of the Partnerships assets and dissolution of the
Partnership. A majority of the Limited Partners did not vote in favor of either the 2001, 2003 or 2005 Consents. Therefore, the Partnership continued to operate as a going concern. The bi-annual consent solicitation is scheduled to be mailed in May
of 2007, which if approved would authorize the sale of the Partnerships assets and dissolution of the Partnership.

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

Since over 90% of the Partnerships investment in properties involves restaurant tenants, the restaurant market is the major market
segment with a material impact on Partnership operations. It would appear that the management skill and potential operating efficiencies realized by Partnership lessees will be a major ingredient for their future operating success in a very
competitive restaurant and food service marketplace.



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

A preliminary investigation during 1992 by the Office of the Commissioner of Securities for the State of Wisconsin and
the Securities and Exchange Commission (the Investigation), revealed that during at least the four years ended December 31, 1992, two of the former general partners of the Partnership, Gary J. DiVall (DiVall) and Paul E.
Magnuson (Magnuson) had transferred substantial cash assets of the Partnership and two affiliated publicly registered limited partnerships, DiVall Insured Income Fund Limited Partnership (DiVall 1) and DiVall Income
Properties 3 Limited Partnership (DiVall 3) (collectively the Partnerships) to various other entities previously sponsored by or otherwise affiliated with DiVall and Magnuson. The unauthorized transfers were in violation of
the respective Partnership Agreements.

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

The Permanent Manager Agreement

The Permanent Management Agreement (PMA) was entered into on February 8,
1993, between the Partnership, DiVall 1 (which was dissolved in December 1998), DiVall 3 (which was dissolved in December 2003), the now former general partners DiVall and Magnuson, their controlled affiliates, and TPG, naming TPG as the Permanent
Manager. The PMA contains provisions allowing the Permanent Manager to submit the PMA, the issue of electing the Permanent Manager as General Partner, and the issue of acceptance of the resignations of the former general partners to a vote of the
Limited Partners through a solicitation of written consents.

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

The PMA had an original expiration date of December 31, 2002.
At the end of the original term, it was extended three years by TPG to an expiration date of December 31, 2005. Effective January 1, 2006, the PMA was renewed by TPG for the three-year period ending December 31, 2008. The new
expiration date could be terminated earlier (a) by a vote at any time by a majority in interest of the Limited Partners, (b) upon the



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dissolution and winding up of the Partnership, (c) upon the entry of an order of a court finding that the Permanent Manager has engaged in fraud or
other like misconduct or has shown itself to be incompetent in carrying out its duties under the Partnership Agreement, or (d) upon sixty (60) days written notice from the Permanent Manager to the Limited Partners of the Partnership.

Advisory Board

The
concept of the Advisory Board was first introduced by TPG during the solicitation of written consents seeking to elect TPG as the substitute general partner, and is the only type of oversight body known to exist for similar partnerships at this
time. The first Advisory Board was appointed in October 1993, and held its first meeting in November 1993. Among other functions, the three person Advisory Board has the following rights: to review operational policies and practices; to review
extraordinary transactions; to review internal financial controls and practices; and to review the performance of the independent auditors of the Partnership. The Advisory Board powers are advisory only and the Board does not have the authority to
direct management decisions or policies of the Partnership or remove the General Partner. The Advisory Board has full and free access to the Partnerships books and records, and individual Advisory Board members have the right to communicate
directly with the Limited Partners concerning Partnership business. Members of the Advisory Board are compensated $1,500 annually and $500 for each quarterly meeting attended.

The Advisory Board currently consists of a broker dealer representative, William Arnold; and Limited Partners from the Partnership: Jesse Small and Albert Kramer. For a brief description of each Advisory Board member,
refer to Item 10, Directors and Executive Officers of the Registrant.

The Partnership has no employees.

All of the Partnerships business is conducted in the United States.

Item 1a. Risk Factors

General Risks Associated
With Real Estate Ownership

The Partnership is subject to all of the general risks associated with the ownership of real estate. In
particular, the Partnership faces the risk that rental revenue from its Properties may be insufficient to cover all operating expenses. Additional real estate ownership risks include:



| |  |  | Adverse changes in general or local economic conditions;
| | - |  | --------------------------------------------------------



| |  |  | Changes in supply of, or demand for, similar or competing properties;
| | - |  | ---------------------------------------------------------------------



| |  |  | Changes in interest rates and operating expenses;
| | - |  | -------------------------------------------------



| |  |  | Competition for tenants;
| | - |  | ------------------------



| |  |  | Changes in market rental rates;
| | - |  | -------------------------------



| |  |  | Inability to lease properties upon termination of existing leases;
| | - |  | ------------------------------------------------------------------



| |  |  | Renewal of leases at lower rental rates;
| | - |  | ----------------------------------------



| |  |  | Inability to collect rents from tenants due to financial hardship, including bankruptcy;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | Changes in tax, real estate, zoning and environmental laws that may have an adverse impact
| | - |  | ------------------------------------------------------------------------------------------

upon the value of real estate;



| |  |  | Uninsured property liability;
| | - |  | -----------------------------



| |  |  | Property damage or casualty losses;
| | - |  | -----------------------------------



| |  |  | Unexpected expenditures for capital improvements or to bring properties into compliance with
| | - |  | --------------------------------------------------------------------------------------------

applicable federal, state and local laws;



| |  |  | Acts of terrorism and war; and
| | - |  | ------------------------------



| |  |  | Acts of God and other factors beyond the control of our management.
| | - |  | -------------------------------------------------------------------



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Risks Related to Tenants

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

Since over 90% of the
Partnerships investment in properties involves restaurant tenants, the restaurant market is the major market segment with a material impact on Partnership operations. It would appear that the management skill and potential operating
efficiencies realized by Partnership lessees will be a major ingredient for their future operating success in a very competitive restaurant and food service marketplace.

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

Illiquidity of Real Estate Investments

Because real estate investments are relatively
illiquid, the Partnership is limited in its ability to quickly sell one or more Properties in response to changing economic, financial and investment conditions. The real estate market is affected by many forces, such as
general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond the Partnerships control. There is no way to predict whether the Partnership will
be able to sell any property for a price or on terms that would be acceptable to the Partnership. It is also impossible to predict the length of time needed to find a willing purchaser and to close the sale of a
Property.

The Partnership May Be Subject to Unknown Environmental Liabilities

Investments in real property can create a potential for environmental liability. An owner of property can face liability for environmental contamination created by the
presence or discharge of hazardous substances on the property. The Partnership can face such liability regardless of the knowledge of the contamination; the timing or cause of the contamination; or the party
responsible for the contamination of the property.



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The presence of hazardous substances on a property may adversely affect the Partnerships ability to sell
that property and it may incur substantial remediation costs. Although the Partnership leases generally require tenants to operate in compliance with all applicable federal, state and local environmental laws, ordinances and
regulations, and to indemnify the Partnership against any environmental liabilities arising from the tenants activities on the property, the Partnership could nevertheless be subject to strict liability by virtue of its ownership interest.
There also can be no assurance that tenants could or would satisfy their indemnification obligations under their leases. The discovery of environmental liabilities attached to the Partnerships Properties could have an adverse effect on the
Partnerships results of operations, financial condition or ability to make distributions to limited partners.

Item 1b. Unresolved Staff
Comments

None.

Item 2. Properties

Original lease terms for the majority of the investment properties were generally 520 years from their
inception. All leases are triple-net which require the tenant to pay all property operating costs including maintenance, repairs, utilities, property taxes, and insurance. A majority of the leases contain percentage rent provisions, which require
the tenant to pay a specified percentage (6% to 8%) of gross sales above a threshold amount.

The Partnership owned the following Properties (including
specialty leasehold improvements for use in some of these properties and properties held for sale) as of December 31, 2006:



|                   |  |                                                              |  |                             |  |                    |           |     |                  |   |                       |  |                 |  |      |  
|------------------ |  | ------------------------------------------------------------ |  | --------------------------- |  | ------------------ | --------- | --- | ---------------- | - | --------------------- |  | --------------- |  | ---- | -
|Acquisi- tion Date |  | Property Name & Address                                      |  | Lessee                      |  | Purchase Price (1) |           |     | Rental Per Annum |   | Lease Expiration Date |  | Renewal Options | 
|06/15/88           |  | Chinese Super Buffet 8801 N 7th St Phoenix, AZ               |  | Jun Cheng Pan & YhenYan Guo |  | $                  | 1,087,137 | (2) |                  | $ | 66,000                |  | 1-20-2013       |  | (3   | )
|08/15/88           |  | Dennys 2360 W Northern Ave Phoenix, AZ                      |  | First Foods, Inc.           |  |                    | 1,155,965 | (2) |                  |   | 54,167                |  | 10-31-2007      |  | None |  
|10/10/88           |  | Kentucky Fried Chicken (4) 1014 S St Francis
Dr Santa Fe, NM |  | Palo Alto, Inc,             |  |                    | 451,230   |     |                  |   | 60,000                |  | 06-30-2018      |  | None |  
|12/22/88           |  | Wendys (7) 1721 Sam Rittenburg Blvd Charleston, SC          |  | WenCoast Restaurants        |  |                    | 596,781   |     |                  |   | 76,920                |  | 11-6-2016       |  | None |  
|12/22/88           |  | Wendys (7) 3013 Peach Orchard Rd Augusta, GA                |  | WenCoast Restaurants        |  |                    | 649,594   |     |                  |   | 86,160                |  | 11-6-2016       |  | None |  
|12/29/88           |  | Popeyes 2562 Western Ave Park Forest, IL                    |  | Quality Foods I, LLC.       |  |                    | 580,938   |     |                  |   | 77,280                |  | 12-31-2009      |  | None |  
|02/21/89           |  | Wendys (7) 1901 Whiskey Rd Aiken, SC                        |  | WenCoast Restaurants        |  |                    | 776,344   |     |                  |   | 96,780                |  | 11-6-2016       |  | None |  



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|         |  |                                                         |  |                         |  |   |            |     |  |   |           |  |            |  |      |  
|-------- |  | ------------------------------------------------------- |  | ----------------------- |  | - | ---------- | --- |  | - | --------- |  | ---------- |  | ---- | -
|02/21/89 |  | Wendys (7) 1730 Walton Way Augusta, GA                 |  | WenCoast Restaurants    |  |   | 728,813    |     |  |   | 96,780    |  | 11-6-2016  |  | None |  
|02/21/89 |  | Wendys (7) 347 Folly Rd Charleston, SC                 |  | WenCoast Restaurants    |  |   | 528,125    |     |  |   | 70,200    |  | 11-6-2016  |  | None |  
|02/21/89 |  | Wendys (7) 361 Hwy 17 Bypass Mount Pleasant, SC        |  | WenCoast Restaurants    |  |   | 580,938    |     |  |   | 77,280    |  | 11-6-2016  |  | None |  
|03/14/89 |  | Wendys (7) 1004 Richland Ave Aiken, SC                 |  | WenCoast Restaurants    |  |   | 633,750    |     |  |   | 90,480    |  | 11-6-2016  |  | None |  
|04/20/89 |  | Daytonas All Sports Café 4875 Merle
Hay Des Moines, IA |  | Karl ShaenValderrama    |  |   | 897,813    | (2) |  |   | 72,000    |  | 02-28-08   |  | None |  
|12/28/89 |  | Panda Buffet 2451 Columbia Rd Grand Forks, ND           |  | Panda Buffet, Inc.      |  |   | 845,000    | (2) |  |   | 36,000    |  | 6-30-2013  |  | (5   | )
|12/29/89 |  | Wendys (7) 1717 Martintown Rd N Augusta, SC            |  | WenCoast Restaurants    |  |   | 660,156    |     |  |   | 87,780    |  | 11-6-2016  |  | None |  
|12/29/89 |  | Wendys (7) 1515 Savannah Hwy Charleston, SC            |  | WenCoast Restaurants    |  |   | 580,938    |     |  |   | 77,280    |  | 11-6-2016  |  | None |  
|12/29/89 |  | Wendys (7) 3869 Washington Rd Martinez, GA             |  | WenCoast Restaurants    |  |   | 633,750    |     |  |   | 84,120    |  | 11-6-2016  |  | None |  
|01/01/90 |  | Sunrise Preschool (6) 4111 E Ray Rd Phoenix, AZ         |  | Borg Holdings, Inc.     |  |   | 1,182,735  | (2) |  |   | 140,706   |  | 05-31-2009 |  | None |  
|01/31/90 |  | Blockbuster Video 336 E 12th St Ogden, UT               |  | Blockbuster Videos,Inc. |  |   | 646,425    |     |  |   | 108,000   |  | 01-31-2008 |  | None |  
|05/31/90 |  | Applebees 2770 Brice Rd Columbus, OH                   |  | Thomas & King, Inc.     |  |   | 1,434,434  | (2) |  |   | 135,780   |  | 10-31-2009 |  | None |  
|         |  |                                                         |  |                         |  |   |            |     |  |   |           |  |            |  |      |  
|         |  |                                                         |  |                         |  | $ | 14,650,866 |     |  | $ | 1,593,713 |  |            |  |      |  
|         |  |                                                         |  |                         |  |   |            |     |  |   |           |  |            |  |      |  

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Footnotes:



|(1) | Purchase price includes all costs incurred to acquire the property.
|--- | -------------------------------------------------------------------

|(2) | Purchase price includes cost of specialty leasehold improvements.
|--- | -----------------------------------------------------------------

|(3) | The tenant has two five year lease renewal options available.
|--- | -------------------------------------------------------------

|(4) | Ownership of lessees interest under a ground lease. The tenant is responsible for payment of all rent obligations under the ground lease.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|(5) | The tenant has three five year lease renewal options available.
|--- | ---------------------------------------------------------------

|(6) | Monthly rent charges increase every July 1 based upon the increase in the Consumer Price Index. Management entered into a listing agreement for the sale of the property in June
of 2006. A sales contract was executed in January of 2007 for the sale of the property (see first paragraph below).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | The most recent audited financial statements available for Wencoast prepared by Thompson Dunavant, PLC are for the periods ended January 2, 2005 and January 1, 2006. Those
audited financial statements
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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are attached as Exhibit 99.1 to the Report of which these Financial Statements are a part. Such audited financial statements were prepared on behalf of
Wencoast and may be considered relevant to an investor because Wencoast leases more than 20% of the Partnerships properties, both by number and asset value.

The following summarizes significant developments, by property, for properties with such developments.

Sunrise Preschool- Phoenix, AZ Property

A listing agreement for the sale of the property was executed in June 2006. In early January of 2007, a sales contract was executed for the sale of the property for $1.6 million. Per notice from the Partnership, tenant, Borg Holdings, Inc.
(Borg), had 30 days from January 16, 2007, to act upon their right of first refusal to purchase the Phoenix property, since a separate buyer entered into a real estate contract for the purchase of the property. On January 29,
2007, Borg informed the Partnership that they would be exercising their right to accept the terms of the contract for the sale of the Phoenix, AZ property. Closing is anticipated to be during the summer of 2007 and commissions totaling 6%, which
includes 2% to a General Partner affiliate, are expected to be paid. The net book value of the property at December 31, 2006, classified as property held for sale, was approximately $617,000, which included $241,000 related to land, $386,000
related to buildings and improvements, and $10,000 related to security deposits.

Ogden, UT property

The Blockbuster lease on the current 6,000 square foot space expired on January 31, 2006. During lease renewal negotiations with Management, the tenant maintained
possession of the property and paid the Partnership holdover rent for February and March 2006. In April of 2006, Management executed a two-year renewal lease agreement with the tenant, retroactive to February 1, 2006. The first base year rent
will total $108,000. Leasing commissions related to the lease renewal execution totaled approximately $13,000, ($6,500 paid to a non-affiliated broker and $6,500 paid to a General Partner affiliate).

Grand Forks, ND Property

On
January 24, 2006, the owners of the Panda Buffet Restaurant in Grand Forks, ND gave notice to Management that they intended to exercise their purchase option in relation to the property. A sales contract was executed on February 27, 2006
for the sale of the Grand Forks, ND property at a sales price of $525,000. Although closing was anticipated to be in the First Quarter of 2006, the sale was not consummated and the sales contract expired in late March of 2006. The original lease,
which is set to expire in 2013, remains effective and includes the tenants option to purchase the property.

Popeyes- Park Forest, IL

As of December 31, 2006, Popeyes is delinquent on its April and May 2006 rent obligations and
property taxes escrow payments totaling approximately $13,000 and $10,000, respectively. These unpaid amounts are accrued for at December 31, 2006. As of December 31, 2006, the tenant has a property tax escrow cash balance held with the
Partnership of approximately $12,000. The Partnership received the required June through December 2006 rent and property taxes escrow payments.

In the
Second Quarter of 2006, Management defaulted Popeyes for failure to meet its lease obligations, and filed for possession of the Park Forest property in the Cook County Judicial Court. The Partnership continues the pursuit of all legal remedies
available to recover possession and terminate the Lease. Popeyes remains responsible for monthly rent obligations and property taxes through the remainder of its Lease (expires December 31, 2009).



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A Release and Settlement Agreement was executed with Popeyes in November 2004. In settlement of all claims and
disputes the following significant items were agreed to: (i) Popeyes is to make monthly escrow property taxes payments applicable to 2004 and for future property taxes installments due throughout the remaining lease term obligation;
(ii) Popeyes gross sales breakpoint was increased to $1,000,000 and therefore, percentage rent shall be an amount equal to 8% of gross sales in excess of $1,000,000, and (iii) Popeyes delinquent percentage rents were waived.

During 2004, property taxes escrow charges applicable to 2004 property taxes were reflected in the financial statements as escrow payments were actually
received, and were recorded as a reversal of 2004 property taxes expense equal to the amount of payment received. The Partnership recognized property taxes recovery income of approximately $129,000 during 2004, which related to Popeyes
reimbursement to the Partnership of defaulted property taxes and penalties that had been previously expensed and paid by the Partnership. During 2005, property taxes escrow charges applicable to property taxes previously accrued and expensed in
2004, were reflected in the financial statements as escrow payments were actually received, and were recorded as property taxes recovery income equal to the amount of payment received. Property taxes recovery income during 2005 totaled approximately
$35,000. Due to Popeyes full reimbursement to the Partnership for past property taxes paid on the tenants behalf, and Popeyes agreement to meet billing and escrow obligations, the 2005 and 2006 estimated property taxes were not
expensed and accrued as of December 31, 2005 and 2006, respectively.

4785 Merle Hay Road- Des Moines, IA

In September 2005, the Partnership paid Daytonas- All Sports Cafés (Daytonas) first installment of its 2004 property
taxes, which amounted to approximately $10,000. Daytonas reimbursed the Partnership in the Fourth Quarter of 2005. Beginning in December 2005, Management requested that Daytonas escrow its future property taxes liabilities with the
Partnership on a monthly basis. Daytonas remains current on its property tax escrow obligations. As of December 31, 2006, escrow payments held by the Partnership totaled approximately $18,000.

Former Miami Subs- Palm Beach, FL Property

The Palm Beach, FL property was sold in June 2004. At the time of closing the former tenant, DiFede Finance Group (DiFede), was delinquent $17,000 in past rent (after the application of a $15,000 security deposit). The former
tenant also owed the Partnership approximately $13,360 in property taxes as the Partnership paid the propertys delinquent 2003 property taxes in June 2004. Management continued to pursue legal remedies to collect the former tenants total
past due balances. Due to the uncertainty of collection, fifty percent (50 %) of the total outstanding receivable balance was reserved in June 2004.

In
November 2004, a Settlement Agreement (DiFede Agreement) was executed with DiFede. Per the DiFede Agreement the former tenant agreed to pay the Partnership by December 31, 2004 approximately $36,000 in past due rent, late charges,
related attorney and court fees and other miscellaneous items. However, the settlement payment per the DiFede Agreement was not received by the Partnership. Further legal action was taken by the Partnership and the Circuit Court in Broward County,
Florida entered a final judgment (the Judgment) against DiFede in early January 2005, awarding approximately $42,000 in damages to the Partnership. Due to the uncertainty of collection, the remaining fifty percent (50 %) of the total
outstanding receivable balance was written-off. The receivable balance and applicable allowance were removed from the balance sheet at December 31, 2004. Throughout 2005, Management continued their pursuit of legal action to collect the
Judgment. In satisfaction of the Judgment (which was recorded in the Circuit Court in March 2006), the Partnership received $25,000 from Difede in the First Quarter of 2006.

Former Hooters- Richland Hills, TX

A sales contract was executed in October 2005 for the sale of the property in the Fourth Quarter of 2005 at a sales price of $1,575,000. The closing date on the sale of the property was December 2005 and the net sales



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proceeds totaled approximately $1,505,000. A net gain on the sale of $668,000 was recognized in the Fourth Quarter of
2005. Closing and other sale related costs amounted to $70,000, which included a sales commission paid to a General Partner affiliate totaling $47,250.

Former Twin Falls, ID property

In August 2004, the Partnership sold a piece of land adjacent to the former Twin
Falls property for $5,000. The land had no recorded value.

Item 3. Legal Proceedings

Phoenix Foods Preference Claim

The
trustee in the Phoenix Foods bankruptcy made a claim seeking to recover from the Partnership alleged preferential payments by Phoenix Foods to the Partnership in the amount of approximately $16,500. The payments the trustee sought to
recover were rent payments received in the ordinary course of business prior to Phoenix Foods bankruptcy. The Partnership did not believe such payments were preferential under the Bankruptcy Code and vigorously contested such characterization.
A verbal settlement of this claim was reached in November 2004 and the Partnership finalized such settlement in April 2005. The settlement called for the bankruptcy trustee to release its preference claims and the Partnership to release its claims
as an unsecured creditor in the Phoenix Foods bankruptcy. Although the Partnership believes its claims are valid, the Partnership determined that the time and cost of pursuing such claims exceeded the likely recovery given the bankrupts lack
of assets from which to satisfy unsecured claims.

Former South Milwaukee, WI property

The Partnership sold real property and improvements located at 106 N. Chicago Avenue, South Milwaukee, Wisconsin to F2BL, LLC (the Buyer) on
April 17, 2003 pursuant to a Real Estate Purchase Agreement dated October 10, 2002 (the Contract). In October of 2003, the Buyer notified the Partnership that an underground storage tank (UST) and
petroleum release had been discovered on this Property. Since that time, the Buyer removed the UST and remediated the petroleum release. A substantial amount of the costs incurred in such efforts were paid by the Wisconsin Petroleum Environmental
Clean Up Fund (the PECUF). In sporadic correspondence since the Fourth Quarter of 2003, the Buyer claimed, and the Partnership denied, that the Partnership was responsible for payment of those costs not reimbursed by the PECUF.

On January 23, 2006, the Buyer initiated a lawsuit against the Partnership by filing a Complaint with the Milwaukee County Circuit Court. The
Complaint alleged, among other things that (i) the Partnership breached its representation in the Contract that, to the best of the Partnerships knowledge, the Partnership was in compliance with all environmental laws, and (ii) the
Partnership failed to deliver to Buyer a Phase I Environmental Assessment of the Property which had been performed in 1998. The Buyer sought a judgment awarding it damages to be proven at trial, plus its attorneys fees. Prior to filing suit,
the Buyer alleged approximately $100,000 of actual unreimbursed damages incurred in the removal of the UST and remediation of the petroleum release and alleged consequential damages of $190,000. The Court set certain deadlines which included the
completion of discovery and the filing of dispositive motions by February 20, 2007.

In September of 2006, Management and the Buyer entered into a
Mutual Release of All Claims Agreement (F2BL Agreement). It is understood and agreed that the F2BL Agreement is a compromise of a doubtful and disputed claim, and that liability is expressly denied by the parties released. Pursuant to
this F2BL Agreement the Partnership paid the Buyer $25,000 in settlement costs. Management believes that it had meritorious defenses to all of the Buyers claims and did not believe that a material recovery by the Buyer was
probable. However, the Partnership determined that the time and cost to vigorously defend such litigation would exceed the settlement cost achieved.



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DeDan bankruptcy

During January 2004, the Partnership received a one-time payment of approximately $25,000 from the Bankruptcy Court in relation to bankruptcy litigation. In the late 1980s, the Partnership leased properties to
DeDan, Inc., and the leases were guaranteed by Dan Fore, the owner of DeDan, Inc. These leases went into default in the early 1990s and the Partnership obtained possession of the properties and re-leased them to various
entities. The original lessee, DeDan, Inc. and Dan Fore, filed for bankruptcy and the Partnership filed a claim in the Bankruptcy Court for damages incurred due to the lease defaults. The payment received was the result of extended litigation
in the Bankruptcy Court. No additional payments are anticipated.

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

None.



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##### Table of Contents

PART II

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



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



|(b) | As of December 31, 2006, there were 2,045 record holders of Interests in the Partnership.
|--- | -----------------------------------------------------------------------------------------



|(c) | The Partnership does not pay dividends. However, the Partnership Agreement provides for distributable net cash receipts of the Partnership to be distributed on a quarterly basis,
99% to the Limited Partners and 1% to the General Partner, subject to the limitations on distributions to the General Partner described in the Partnership Agreement. During 2006 and 2005, $3,100,000 and $1,730,000, respectively, were distributed in
the aggregate to the Limited Partners. The General Partner received aggregate distributions of $4,973 and $8,484 in 2006 and 2005, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 6. Selected Financial Data

The Partnerships selected financial data included below has been derived from the Partnerships financial statements. The financial data selected below should be read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations, and with the financial statements and the related notes appearing elsewhere in this annual report.

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

(A Wisconsin limited partnership)

As of and for the years ended

December 31, 2006, 2005, 2004, 2003, and 2002



|                                                    |  |      |            |      |   |            |  |      |            |      |   |            |  |   |           
|--------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ----------
|                                                    |  | 2006 |            | 2005 |   | 2004       |  | 2003 |            | 2002
|Total Operating Revenue                             |  | $    | 1,885,064  |      | $ | 1,928,708  |  | $    | 2,068,255  |      | $ | 1,962,312  |  | $ | 1,985,045 
|                                                    |  |      |            |      |   |            |  |      |            |      |   |            |  |   |           
|Income from Continuing Operations                   |  | $    | 1,131,625  |      | $ | 1,199,988  |  | $    | 1,297,976  |      | $ | 884,358    |  | $ | 1,030,181 
|Income from Discontinued Operations                 |  |      | 111,608    |      |   | 921,203    |  |      | 494,697    |      |   | 699,974    |  |   | 505,124   
|                                                    |  |      |            |      |   |            |  |      |            |      |   |            |  |   |           
|Net Income                                          |  | $    | 1,243,233  |      | $ | 2,121,191  |  | $    | 1,792,673  |      | $ | 1,584,332  |  | $ | 1,535,305 
|                                                    |  |      |            |      |   |            |  |      |            |      |   |            |  |   |           
|Net Income per Limited Partner Interest             |  | $    | 26.59      |      | $ | 45.38      |  | $    | 38.35      |      | $ | 33.89      |  | $ | 32.84     
|                                                    |  |      |            |      |   |            |  |      |            |      |   |            |  |   |           
|Total Assets                                        |  | $    | 10,325,153 |      | $ | 12,149,329 |  | $    | 11,804,154 |      | $ | 12,398,831 |  | $ | 15,746,665
|                                                    |  |      |            |      |   |            |  |      |            |      |   |            |  |   |           
|Total Partners Capital                             |  | $    | 10,058,535 |      | $ | 11,920,275 |  | $    | 11,537,568 |      | $ | 12,057,066 |  | $ | 15,319,264
|                                                    |  |      |            |      |   |            |  |      |            |      |   |            |  |   |           
|Cash Distributions per Limited Partnership Interest |  | $    | 66.98      |      | $ | 37.38      |  | $    | 49.81      |      | $ | 104.58     |  | $ | 36.95     
|                                                    |  |      |            |      |   |            |  |      |            |      |   |            |  |   |           



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##### Table of Contents

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

Liquidity and Capital Resources:

Investment Properties and Net Investment in Direct Financing Leases

The Properties held by the
Partnership at December 31, 2006 (does not include properties held for sale) were originally purchased at a price, including acquisition costs, of approximately $13,468,131.

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

As of December 31, 2006, the Partnership owned properties containing 17 fully constructed fast-food restaurants, a video store, and a
preschool (all of which are owned and operated by entities unaffiliated with the Partnership). The 19 properties are composed of the following: ten (10) Wendys restaurants, one (1) Dennys restaurant, one
(1) Applebees restaurant, one (1) Popeyes Famous Fried Chicken restaurant, one (1) Kentucky Fried Chicken restaurant, one (1) Chinese Super Buffet restaurant, one (1) Panda Buffet restaurant, one
(1) Daytonas- All Sports Café, one (1) Blockbuster Video store, and one (1) Sunrise Preschool (classified as property held for sale in June of 2006). The 19 properties are located in a total of nine (9) states.

Ten (10) of the nineteen (19) properties are leased to Wencoast Restaurants, Inc. (Wencoast). Since more than 20% of the
Partnerships properties, both by asset value and number, are leased to a single tenant, the financial status of the tenant may be considered relevant to investors. At the request of the Partnership, Wencoast provided it with copies of
Wencoasts most recent available audited financial statements for the periods ended January 2, 2005 and January 1, 2006. Those audited financial statements are attached to the December 31, 2006 Annual Report 10-K as Exhibit
99.1. These financial statements were prepared by Wencoasts auditors. The Partnership has no rights to audit Wencoast and no right to dictate the form of the audited financials provided by Wencoast. The Partnerships auditors
have not audited the financial statements received from Wencoast. The Partnership has no reason to believe the Wencoast financial statements do not accurately reflect the financial position of Wencoast.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, current
and historical results from operations for disposed properties and assets classified as held for sale that occur subsequent to January 1, 2002 are reclassified separately as discontinued operations.

During 2006, 2005 and 2004, the Partnership recognized income from discontinued operations of approximately $112,000, $921,000, and $495,000, respectively. The 2006
income from discontinued operations is attributable to the reclassification of the Sunrise Preschool- Phoenix, AZ property to property held for sale in the Second Quarter of 2006. The 2005 and 2004 income from discontinued operations is attributable
to the reclassification of the Sunrise Preschool- Phoenix, AZ property to property held for sale in the Second Quarter of 2006 and the sale of the Hooterss- Richland Hills, TX property in December of 2005. The 2004 income from discontinued
operations also includes the sale of the Miami Subs- Palm Beach, FL property in June of 2004. The 2005 income from discontinued operations included a Fourth Quarter net gain on the sale of the Hooters restaurant property of approximately
$668,000. The 2004 income from discontinued operations included a Second Quarter net gain on the sale of the Miami Subs property of approximately $211,000, a Third Quarter net gain on the sale of a parcel of land located adjacent to the former
vacant Twin Falls, ID property of $5,000 (the land had no recorded value), and Second and Fourth Quarter provisions for non-collectible rents and other receivables related to the Miami Subs property.



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##### Table of Contents

The components of property held for sale in the condensed balance sheets as of December 31, 2006 and 2005 are
outlined below.



|                       |  |      |         |   |      |   |  
|---------------------- |  | ---- | ------- | - | ---- | - | -
|                       |  | 2006 |         |   | 2005
|Balance Sheet:         |  |      |         |   |      |   |  
|Land                   |  | $    | 241,371 |   |      | $ | 0
|Buildings              |  |      | 385,840 |   |      |   | 0
|Security deposits      |  |      | (9,945  | ) |      |   | 0
|                       |  |      |         |   |      |   |  
|Property held for sale |  | $    | 617,266 |   |      | $ | 0
|                       |  |      |         |   |      |   |  

The components of discontinued operations included in the statements of income for the years ended
December 31, 2006, 2005 and 2004 are outlined below.



|                                                          |  |      |         |      |   |         |  |   |        
|--------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                                          |  | 2006 |         | 2005 |   | 2004   
|Revenues                                                  |  |      |         |      |   |         |  |   |        
|Rental Income                                             |  | $    | 127,665 |      | $ | 291,451 |  | $ | 347,483
|                                                          |  |      |         |      |   |         |  |   |        
|Total Revenues                                            |  |      | 127,665 |      |   | 291,451 |  |   | 347,483
|                                                          |  |      |         |      |   |         |  |   |        
|Expenses                                                  |  |      |         |      |   |         |  |   |        
|Property write-down                                       |  |      | 0       |      |   | 0       |  |   | 0      
|Depreciation                                              |  |      | 12,861  |      |   | 34,916  |  |   | 37,981 
|Professional services                                     |  |      | 3,196   |      |   | 3,500   |  |   | 0      
|Provision for non-collectible rents and other receivables |  |      | 0       |      |   | 0       |  |   | 30,359 
|                                                          |  |      |         |      |   |         |  |   |        
|Total Expenses                                            |  |      | 16,057  |      |   | 38,416  |  |   | 68,340 
|                                                          |  |      |         |      |   |         |  |   |        
|Net gain on sale of properties                            |  |      | 0       |      |   | 668,168 |  |   | 215,554
|                                                          |  |      |         |      |   |         |  |   |        
|Income from Discontinued Operations                       |  | $    | 111,608 |      | $ | 921,203 |  | $ | 494,697
|                                                          |  |      |         |      |   |         |  |   |        

The following summarizes significant developments, by property, for properties
with such developments.

Sunrise Preschool- Phoenix, AZ Property

A listing agreement for the sale of the property was executed in June 2006. In early January 2007, a sales contract was executed for the sale of the property for $1.6
million. Per notice from the Partnership, tenant, Borg Holdings, Inc. (Borg), had 30 days from January 16, 2007, to act upon their right of first refusal to purchase the Phoenix property, since a separate buyer entered into a real
estate contract for the purchase of the property. On January 29, 2007, Borg informed the Partnership that they would be exercising their right to accept the terms of the contract for the sale of the Phoenix , AZ property. Closing is anticipated
to be during the summer of 2007 and commissions totaling 6%, which includes 2% to a General Partner affiliate, are expected to be paid. The net book value of the property at December 31, 2006, classified as property held for sale, was
approximately $617,000, which included $241,000 related to land, $386,000 related to buildings and improvements, and $10,000 related to security deposits.



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Ogden, UT property

The Blockbuster lease on the current 6,000 square foot space expired on January 31, 2006. During lease renewal negotiations with Management, the tenant maintained possession of the property and paid the
Partnership holdover rent for February and March 2006. In April 2006, Management executed a two-year renewal lease agreement with the tenant, retroactive to February 1, 2006. The first base year rent will total $108,000. Leasing commissions
related to the lease renewal execution totaled approximately $13,000, ($6,500 paid to a non-affiliated broker and $6,500 paid to a General Partner affiliate).

Grand Forks, ND Property

On
January 24, 2006, the owners of the Panda Buffet Restaurant in Grand Forks, ND gave notice to Management that they intended to exercise their purchase option in relation to the property. A sales contract was executed on February 27, 2006
for the sale of the Grand Forks, ND property at a sales price of $525,000. Although closing was anticipated to be in the First Quarter of 2006, the sale was not consummated and the sales contract expired in late March 2006. The original lease, which
is set to expire in 2013, remains effective and includes the tenants option to purchase the property.

Popeyes- Park Forest, IL

As of December 31, 2006, Popeyes is delinquent on its April and May 2006 rent obligations and
property taxes escrow payments totaling approximately $13,000 and $10,000, respectively. These unpaid amounts are accrued for at December 31, 2006. As of December 31, 2006, the tenant has a property tax escrow cash balance held with the
Partnership of approximately $12,000. The Partnership received the required June through December 2006 rent and property taxes escrow payments.

In the
Second Quarter of 2006, Management defaulted Popeyes for failure to meet its lease obligations, and filed for possession of the Park Forest property in the Cook County Judicial Court. The Partnership continues the pursuit of all legal remedies
available to recover possession and terminate the Lease. Popeyes remains responsible for monthly rent obligations and property taxes through the remainder of its Lease (expires December 31, 2009).

A Release and Settlement Agreement was executed with Popeyes in November 2004. In settlement of all claims and disputes the following significant items were agreed
to: (i) Popeyes is to make monthly escrow property taxes payments applicable to 2004 and for future property taxes installments due throughout the remaining lease term obligation; (ii) Popeyes gross sales breakpoint was
increased to $1,000,000 and therefore, percentage rent shall be an amount equal to 8% of gross sales in excess of $1,000,000, and (iii) Popeyes delinquent percentage rents were waived.

During 2004, property taxes escrow charges applicable to 2004 property taxes were reflected in the financial statements as escrow payments were actually received, and
were recorded as a reversal of 2004 property taxes expense equal to the amount of payment received. The Partnership recognized property taxes recovery income of approximately $129,000 during 2004, which related to Popeyes reimbursement to the
Partnership of defaulted property taxes and penalties that had been previously expensed and paid by the Partnership. During 2005, property taxes escrow charges applicable to property taxes previously accrued and expensed in 2004, were reflected in
the financial statements as escrow payments were actually received, and were recorded as property taxes recovery income equal to the amount of payment received. Property taxes recovery income during 2005 totaled approximately $35,000. Due to
Popeyes full reimbursement to the Partnership for past property taxes paid on the tenants behalf, and Popeyes agreement to meet billing and escrow obligations, the 2005 and 2006 estimated property taxes were not expensed and
accrued as of December 31, 2005 and 2006, respectively.



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4785 Merle Hay Road- Des Moines, IA

In September 2005, the Partnership paid Daytonas- All Sports Cafés (Daytonas) first installment of its 2004 property taxes, which amounted
to approximately $10,000. Daytonas reimbursed the Partnership in the Fourth Quarter of 2005. Beginning in December 2005, Management requested that Daytonas escrow its future property taxes liabilities with the Partnership on a monthly
basis. Daytonas remains current on its property tax escrow obligations. As of December 31, 2006, escrow payments held by the Partnership totaled approximately $18,000.

Former Miami Subs- Palm Beach, FL Property

The Palm Beach, FL property was sold in June 2004. At the time of closing the former tenant, DiFede Finance Group (DiFede), was delinquent $17,000 in past rent (after the application of a $15,000 security deposit). The former
tenant also owed the Partnership approximately $13,360 in property taxes as the Partnership paid the propertys delinquent 2003 property taxes in June 2004. Management continued to pursue legal remedies to collect the former tenants total
past due balances. Due to the uncertainty of collection, fifty percent (50 %) of the total outstanding receivable balance was reserved in June 2004.

In
November 2004, a Settlement Agreement (DiFede Agreement) was executed with DiFede. Per the DiFede Agreement the former tenant agreed to pay the Partnership by December 31, 2004 approximately $36,000 in past due rent, late charges,
related attorney and court fees and other miscellaneous items. However, the settlement payment per the DiFede Agreement was not received by the Partnership. Further legal action was taken by the Partnership and the Circuit Court in Broward County,
Florida entered a final judgment (the Judgment) against DiFede in early January 2005, awarding approximately $42,000 in damages to the Partnership. Due to the uncertainty of collection, the remaining fifty percent (50 %) of the total
outstanding receivable balance was written-off. The receivable balance and applicable allowance were removed from the balance sheet at December 31, 2004. Throughout 2005, Management continued their pursuit of legal action to collect the
Judgment. In satisfaction of the Judgment (which was recorded in the Circuit Court in March 2006), the Partnership received $25,000 from Difede in the First Quarter of 2006.

Former Hooters- Richland Hills, TX

A sales contract was executed in October 2005 for the sale of the property in the Fourth Quarter of 2005 at a sales price of $1,575,000. The closing date on the sale of the property was December 2005 and the net sales proceeds totaled
approximately $1,505,000. A net gain on the sale of $668,000 was recognized in the Fourth Quarter of 2005. Closing and other sale related costs amounted to $70,000, which included a sales commission paid to a General Partner affiliate totaling
$47,250.

Former Twin Falls, ID property

In August 2004, the Partnership sold a piece of land adjacent to the former Twin Falls property for $5,000. The land had no recorded value.

Other Investment in Properties Information

According to the Partnership Agreement, the former general partners were to commit 80% of the original offering proceeds to investment in properties. Upon the close of the offering, approximately 75% of the original proceeds were invested
in the Partnerships properties.

At December 31, 2005, the tenant of the Panda Buffet property had an option to purchase the property at a
price, which (i) exceeded the original cost of the property less accumulated depreciation and (ii) was not less than the fair market value of the property at the time the option was granted. On January 24, 2006, the owners of the
Panda Buffet Restaurant in Grand Forks, ND gave notice to Management that they intended to exercise their



16



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##### Table of Contents

purchase option in relation to the property, but the proposed sale was not consummated. (For further discussion see Grand Forks, ND Property
above and in Note 3 to the condensed financial statements.) The original lease, which is set to expire in 2013, remains effective and includes the tenants option to purchase the property. The General Partner is not aware of any unfavorable
purchase options in relation to the original cost or fair market value of the property at the time the option was granted, contained in any of the Partnerships existing leases.

Other Assets

Cash and cash equivalents held by the Partnership totaled approximately $626,000 at
December 31, 2006, compared to $2,219,000 at December 31, 2005. Cash of $370,000 is anticipated to be used to fund the Fourth Quarter 2006 distributions to Limited Partners in February 2007, and cash of $89,000 is anticipated to be used
for the payment of year-end accounts payable and accrued expenses, and the remainder represents amounts deemed necessary to allow the Partnership to operate normally.

Cash generated through the operations of the Partnerships Properties and sales of Properties will provide the sources for future fund liquidity and Limited Partner distributions.

Property held for sale at December 31, 2006 amounted to approximately $617,000 and related to the Sunrise Preschool property in Phoenix, AZ. A listing for the sale
of the property was executed in June of 2006. In January of 2007, a sales contract was executed for the sale of the property for $1.6 million. Closing is anticipated to be during the summer of 2007. The property held for sale amount includes
$241,000 related to land, $386,000 related to buildings and improvements, and $10,000 related to security deposits. (For further disclosure see Investment Properties in Note 3 to Financial Statements, Part I- Item 2, and Part II- Item 7.)

Property tax cash escrow amounted to approximately $30,000 and $17,000 at December 31, 2006 and 2005, respectively. Daytonas property tax cash
escrow balance as of December 31, 2005 was approximately $3,000 and payments of approximately $35,000 were received by the Partnership from Daytonas in 2006. The Partnership paid the tenants 2004 second property taxes installment of
approximately $10,000 in the First Quarter of 2006 and the first property taxes installment for 2005 of approximately $11,000 in the Third Quarter of 2006. Daytonas property tax cash escrow balance held by the Partnership as of
December 31, 2006 was approximately $18,000. Daytonas second property taxes installment for 2005 is scheduled to be due in the First Quarter of 2007. (For further disclosure see Investment Properties in Note 3 to Financial Statements,
Part I- Item 2, and Part II- Item 7.) Popeyes property tax escrow cash balance as of December 31, 2005 was approximately $14,000 and payments of approximately $52,000 were received by the Partnership from Popeyes in 2006.
The Partnership paid the tenants first property taxes installment for 2005 of approximately $25,000 in the First Quarter of 2006 and the tenants second property taxes installment for 2005 of approximately $29,000 in the Third Quarter of
2006. Popeyes property tax cash escrow balance held with the Partnership as of December 31, 2006 was approximately $12,000. Popeyes first property taxes installment for 2006 is scheduled to be due in the First Quarter of 2007. (For
further disclosure see Investment Properties in Note 3 to Financial Statements, Part I- Item 2, and Part II- Item 7.)

The Partnership
established an Indemnification Trust (the Trust) during the Fourth Quarter of 1993, deposited $100,000 in the Trust during 1993 and completed funding of the Trust with $150,000 during 1994. The provision to establish the Trust was
included in the Permanent Manager Agreement for the indemnification of TPG, in the absence of fraud or gross negligence, from any claims or liabilities that may arise from TPG acting as Permanent Manager. The Trust is owned by the Partnership. (For
additional information regarding the Trust refer to Note 8 to Financial Statements- PMA Indemnification Trust.)

Rents and other receivables amounted to
$432,000 at December 31, 2006, compared to $431,000 as of December 31, 2005. As of December 31, 2006, Popeyes- Park Forest was delinquent on two monthly lease obligations totaling approximately $13,000.(For further
disclosure see Investment Properties in Note 3 to Financial Statements, Part I- Item 2, and Part II- Item 7.) At December 31, 2006, rents and other receivables also included



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$417,000 in percentage rents accrued during 2006 for tenants who had reached their individual sales breakpoints. These percentage rents included $18,000
which were billed to tenants in the Fourth Quarter of 2006 and $399,000 which will not be billed to or owed by the tenants until the First Quarter of 2007. The December 31, 2005 rents and other receivables balance primarily
represented unbilled 2005 quarterly percentage rent accruals. The 2005 percentage rents were billed in the First Quarter of 2006 and were fully collected as of June 30, 2006.

Property taxes receivable at December 31, 2006 totaled approximately $11,000. The balance primarily represented property taxes escrow charges due from Popeyes  Park Forest applicable to its 2006
property taxes due in 2007. (For further disclosure see Investment Properties in Note 3 to Financial Statements, Part I- Item 2, and Part II- Item 7.)

Prepaid Insurance amounted to approximately $32,000 at December 31, 2006 and $33,000 at December 31, 2005, which represented approximately ten months of prepaid insurance paid by the Partnership.

Deferred charges totaled approximately $244,000 and $247,000, net of accumulated amortization, at December 31, 2006 and December 31, 2005, respectively.
Deferred charges represent leasing commissions paid when properties are leased or upon the negotiated extension of a lease. Leasing commissions of approximately $13,000 were accrued at March 31, 2006 and paid in April of 2006, due to the
Blockbuster two-year lease renewal. (For further disclosure see Investment Properties- Ogden, UT property in Note 3 to Financial Statements, Part I- Item 2, and Part II- Item 7.)Leasing commissions are capitalized and amortized
over the life of the lease.

Liabilities

Accounts payable and accrued expenses at December 31, 2006, and December 31, 2005 amounted to approximately $89,000 and $59,000, respectively, and primarily
represented the year-end accruals of auditing, tax and data processing fees.

Property taxes payable at December 31, 2006, amounted to approximately
$41,000. The balances primarily represented Popeyes- Park Forests and Daytonas property taxes escrow charges related to the tenants property taxes which are scheduled to be due in 2007. Property taxes payable at
December 31, 2005, in the amount of $24,000, primarily represented 2005 property escrow charges for the Popeyes- Park Forest property related to it first installment of 2006 property taxes which were paid in 2006. (For further disclosure
see Investment Properties in Note 3 to Financial Statements, Part I- Item 2, and Part II- Item 7.)

The amounts Due to the
Current General Partner were $2,380 at December 31, 2006, and primarily represented the General Partners portion of the Fourth Quarter 2006 distribution.

Partners Capital

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

Cash distributions paid to the Limited Partners and to the General Partner during 2006 of $3,100,000 and $4,973, respectively, have also been made in accordance with the
Partnership Agreement. The Fourth Quarter 2006 Limited Partner distributions totaling $370,000 were paid February 15, 2007.



18



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##### Table of Contents

Results of Operations

The Partnership reported income from continuing operations for the year ended December 31, 2006, in the amount of $1,132,000 compared to income from continuing operations for the years ended December 31,
2005 and 2004 of $1,200,000 and $1,298,000, respectively. The variance in income from continuing operations in 2006 compared to 2005 and 2004 is due primarily to: (i) an unexpected insurance premium adjustment payment in the Second Quarter of
2006 of approximately $12,000 related to the 04/05 policy year, and Second through Fourth Quarter of 2006 accruals totaling $14,000 for estimated insurance premium adjustments related to the 05/06 and 06/07 policy years; (ii) higher income tax
expenditures in the First through Third Quarters of 2006 related to the 2005 South Carolina tax return and the 2006 South Carolina estimated tax payments; (iii) higher professional service fees during 2006, such as data processing; (iv) a
settlement payment of $25,000 paid in the Third Quarter of 2006 to the Buyer of the former South Milwaukee property (For further discussion see Legal Proceedings in Note 10 to Financial Statements and Part I- Item 3.); (v) the First
through Third Quarter of 2005 total collections and revenue recognition of approximately $35,000 in property tax recoveries from Popeyes (see Note 3- Investment Properties for further discussion) and (vi) a Third Quarter 2005 income tax
liability accrual, payable to the City of Columbus, Ohio for the tax years 1999 through 2004. (vii) the Second through Fourth Quarter of 2004 collections and revenue recognition of $129,000 in property tax recoveries from Popeyes (see
Note 3- Investment Properties for further discussion; (viii) higher 2004 operating percentage rent accruals compared to 2005 and 2006; (ix) increased general and administrative expenditures related to investor communication, and increased
professional expenditures, due to the 2005 Consent mailing in the Second Quarter of 2005; and (x) the March 2004 payment of Popeyes 2001 property taxes second installment and related penalties due to tenant default.

Discontinued Operations

Income from discontinued
operations was approximately $112,000, $921,000 and $495,000 for the years ended December 31, 2006, 2005, and 2004, respectively. In accordance with SFAS 144, discontinued operations represent the operations of properties disposed of or
classified as held for sale subsequent to January 1, 2002 as well as any gain or loss recognized in their disposition. The 2006 income from discontinued operations is attributable to the reclassification of the Sunrise Preschool- Phoenix, AZ
property to property held for sale in the Second Quarter of 2006. The 2005 and 2004 income from discontinued operations is attributable to the reclassification of the Sunrise Preschool- Phoenix, AZ property to property held for sale in the Second
Quarter of 2006 and the sale of the Hooterss- Richland Hills, TX property in December of 2005. The 2004 income from discontinued operations also includes the sale of the Miami Subs- Palm Beach, FL property in June of 2004. The 2005 income from
discontinued operations included a Fourth Quarter net gain on the sale of the Hooters restaurant property of approximately $668,000. The 2004 income from discontinued operations included a Second Quarter net gain on the sale of the Miami Subs
property of approximately $211,000, a Third Quarter net gain on the sale of a parcel of land located adjacent to the former vacant Twin Falls, ID property of $5,000 (the land had no recorded value), and Second and Fourth Quarter provisions for
non-collectible rents and other receivables related to the Miami Subs property.

Revenues

Total operating revenues were $1,885,000, $1,929,000, and $2,068,000, for the years ended December 31, 2006, 2005, and 2004, respectively. During 2005 the
Partnership received payments from Popeyes totaling $35,000 relating to 2004 property tax recoveries. During 2004 the Partnership received payments from Popeyes totaling $129,000 relating to property tax reimbursements and recoveries.
(For further disclosure see Investment Properties in Note 3 to Financial Statements, Part I- Item 2, and Part II- Item 7.)



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##### Table of Contents

As of December 31, 2006, total base operating rent revenues should approximate $1,453,000 for the year 2007 based on
leases currently in place (does not include the Sunrise Preschool property which was classified as property held for sale in the Second Quarter of 2006). Future operating rent revenues may decrease with tenant defaults and/or the reclassification of
Properties as held for sale. They may also increase with additional rents due from tenants, if those tenants experience sales levels, which require the payment of additional rent to the Partnership.

Expenses

For the
years ended December 31, 2006, 2005, and 2004 total operating expenses amounted to approximately 44%, 40% and 40%, of total operating revenues, respectively.

The variance in operating expenditures are due to: (i) an unexpected insurance premium adjustment payment in the Second Quarter of 2006 of approximately $12,000 related to the 04/05 policy year, and Second through Fourth Quarter of
2006 accruals totaling $14,000 for estimated insurance premium adjustments related to the 05/06 and 06/07 policy years; (ii) higher income tax expenditures in the First through Third Quarters of 2006 related to the 2005 South Carolina tax
return and the 2006 South Carolina estimated tax payments; (iii) higher professional service fees during 2006, such as data processing; (iv) a settlement payment of $25,000 paid in the Third Quarter of 2006 to the Buyer of the former South
Milwaukee property (For further discussion see Legal Proceedings in Note 10 to Financial Statements and Part I- Item 3.); (v) the First through Third Quarter of 2005 total collections and revenue recognition of approximately $35,000 in
property tax recoveries from Popeyes (see Note 3- Investment Properties for further discussion) and (vi) a Third Quarter 2005 income tax liability accrual, payable to the City of Columbus, Ohio for the tax years 1999 through 2004.
(vii) the Second through Fourth Quarter of 2004 collections and revenue recognition of $129,000 in property tax recoveries from Popeyes (see Note 3- Investment Properties for further discussion; (viii) increased general and
administrative expenditures related to investor communication, and increased professional expenditures, due to the 2005 Consent mailing in the Second Quarter of 2005; and (ix) the March 2004 payment of Popeyes 2001 property taxes second
installment and related penalties due to tenant default.

Depreciation and amortization are non-cash items and do not affect current operating cash flow of
the Partnership or distributions to the Limited Partners.

There were no operating write-offs for non-collectible rents and receivables for the years ended
December 31, 2006, 2005 and 2004. Such write-offs would primarily be the result of tenant defaults.

Other Income

For the years ended December 31, 2006, 2005, and 2004 the Partnership did generate other income of approximately $73,000, $37,000 and $49,000, respectively. During
March of 2006 the Partnership received $25,000 from DiFede in satisfaction of the Judgment recorded in the Broward County, Florida Circuit Court in January of 2005. (See Investment Properties- Former Miami Subs- Palm Beach, FL Property in Note 3 to
Financial Statements and Part I- Item 2.) During January 2004 the Partnership received a one-time settlement payment of approximately $25,000 from the Bankruptcy Court in relation to the DeDan bankruptcy litigation. In the late 1980s, the
Partnership leased some properties to DeDan, Inc., and the leases were guaranteed by the owner of DeDan, Dan Fore. These leases went into default in the early 1990s and the Partnership obtained possession of the properties and
re-leased them to various entities. The original lessee, DeDan and Dan Fore, filed for bankruptcy and the Partnership filed a claim in the Bankruptcy Court for damages incurred due to the lease defaults. (For further disclosure see Investment
Properties in Note 3 to Financial Statements, Part II- Item 8, and Part I- Item 3.)



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##### Table of Contents

During 2006, 2005 and 2004, revenues were generated from interest earnings and small recoveries from former General
Partners. Management anticipates that such revenue types may continue to be generated until Partnership dissolution.

Inflation

Inflation has a minimal effect on operating earnings and related cash flows from a portfolio of
triple net leases. By their nature, such leases actually fix revenues and are not impacted by rising costs of maintenance, insurance, or real estate taxes. Although the majority of the Partnerships leases have percentage rent clauses, revenues
from operating percentage rents represented only 23% of operating rental income for 2006. If inflation causes operating margins to deteriorate for lessees, or 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.

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 sales breakpoint stipulated in the lease.

Impairment- 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 is recognized, if any.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

The Partnership is not subject to market risk.



21



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##### Table of Contents

Item 8. Financial Statements and Supplementary Data

DIVALL INSURED INCOME PROPERTIES 2 LIMITED
PARTNERSHIP

(A Wisconsin limited partnership)

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE



|                                                                                      |  |       
|------------------------------------------------------------------------------------- |  | ------
|                                                                                      |  | Page  
|Reports of Independent Registered Public Accounting Firms                             |  | 23-24 
|                                                                                      | 
|Balance Sheets, December 31, 2006 and 2005                                            |  | 25 26
|                                                                                      | 
|Statements of Income for the Years Ended December 31, 2006, 2005, and 2004            |  | 27    
|                                                                                      | 
|Statements of Partners Capital for the Years Ended December 31, 2006, 2005, and 2004 |  | 28    
|                                                                                      | 
|Statements of Cash Flows for the Years Ended December 31, 2006, 2005, and 2004        |  | 29    
|                                                                                      | 
|Notes to Financial Statements                                                         |  | 30 44
|                                                                                      | 
|Schedule IIIReal Estate and Accumulated Depreciation, December 31, 2006              |  | 53 -54



22



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

Partners of

Divall Insured Income Properties 2 Limited Partnership

We have audited the
balance sheet of Divall Insured Income Properties 2 Limited Partnership (a Wisconsin limited partnership) as of December 31, 2006 and the related statements of income, partners capital, and cash flows for the year then ended. Our audit also
included the 2006 financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Partnerships management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of the Divall Insured Income Properties 2 Limited Partnership at December 31, 2006, and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ MCGLADREY & PULLEN, LLP

Chicago, Illinois

March 28, 2007



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

Partners of

DiVall Insured Income Properties 2 Limited Partnership

We have audited the accompanying balance sheet of DiVall Insured Income Properties 2 Limited Partnership (a Wisconsin limited partnership) as of December
31, 2005, and the related statements of income, partners capital, and cash flows for the years ended December 31, 2005 and 2004. These financial statements are the responsibility of the Partnerships management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the DiVall Insured Income Properties 2 Limited Partnership as of December 31, 2005, and the results of its operations and its cash flows for the years ended December 31, 2005 and .2004,
inconformity with U.S. generally accepted accounting principles.

/s/ ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois

January 20, 2006, except for Note 12

as to which the date is February 15, 2005



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##### Table of Contents

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

BALANCE SHEETS

December 31, 2006 and 2005

ASSETS



|                                            |  |                   |            |   |                   |   |            |  
|------------------------------------------- |  | ----------------- | ---------- | - | ----------------- | - | ---------- | -
|                                            |  | December 31, 2006 |            |   | December 31, 2005 |  
|INVESTMENT PROPERTIES:(Note 3)              |  |                   |            |   |                   |   |            |  
|Land                                        |  | $                 | 4,728,785  |   |                   | $ | 4,970,156  |  
|Buildings                                   |  |                   | 7,576,708  |   |                   |   | 8,419,840  |  
|Accumulated depreciation                    |  |                   | (4,470,221 | ) |                   |   | (4,691,206 | )
|                                            |  |                   |            |   |                   |   |            |  
|Net investment properties                   |  |                   | 7,835,272  |   |                   |   | 8,698,790  |  
|                                            |  |                   |            |   |                   |   |            |  
|OTHER ASSETS:                               |  |                   |            |   |                   |   |            |  
|Cash and cash equivalents                   |  | $                 | 625,592    |   |                   | $ | 2,218,807  |  
|Cash held in Indemnification Trust (Note 8) |  |                   | 417,860    |   |                   |   | 398,699    |  
|Property held for sale (Note 3)             |  |                   | 617,266    |   |                   |   | 0          |  
|Property taxes cash escrow                  |  |                   | 30,197     |   |                   |   | 17,267     |  
|Rents and other receivables                 |  |                   | 432,440    |   |                   |   | 431,118    |  
|Property taxes receivable                   |  |                   | 10,703     |   |                   |   | 6,680      |  
|Deferred rent receivable                    |  |                   | 80,657     |   |                   |   | 98,006     |  
|Prepaid insurance                           |  |                   | 31,626     |   |                   |   | 32,563     |  
|Deferred charges, net                       |  |                   | 243,540    |   |                   |   | 247,399    |  
|                                            |  |                   |            |   |                   |   |            |  
|Total other assets                          |  |                   | 2,489,881  |   |                   |   | 3,450,539  |  
|                                            |  |                   |            |   |                   |   |            |  
|Total assets                                |  | $                 | 10,325,153 |   |                   | $ | 12,149,329 |  
|                                            |  |                   |            |   |                   |   |            |  

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



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##### Table of Contents

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

BALANCE SHEETS

December 31,
2006 and 2005

LIABILITIES AND PARTNERS CAPITAL



|                                                         |  |                   |             |   |                   |   |             |  
|-------------------------------------------------------- |  | ----------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                         |  | December 31, 2006 |             |   | December 31, 2005 |  
|LIABILITIES:                                             |  |                   |             |   |                   |   |             |  
|Accounts payable and accrued expenses                    |  | $                 | 89,318      |   |                   | $ | 58,708      |  
|Property taxes payable                                   |  |                   | 40,900      |   |                   |   | 23,947      |  
|Due to General Partner                                   |  |                   | 2,380       |   |                   |   | 5,249       |  
|Security deposits                                        |  |                   | 104,640     |   |                   |   | 114,585     |  
|Unearned rental income                                   |  |                   | 29,380      |   |                   |   | 26,565      |  
|                                                         |  |                   |             |   |                   |   |             |  
|Total liabilities                                        |  |                   | 266,618     |   |                   |   | 229,054     |  
|                                                         |  |                   |             |   |                   |   |             |  
|CONTINGENT LIABILITIES: (Note 7)                         |  |                   |             |   |                   |   |             |  
|                                                         |  |                  
|PARTNERS CAPITAL: (Notes 1, 4 and 9)                    |  |                   |             |   |                   |   |             |  
|Current General Partner -                                |  |                   |             |   |                   |   |             |  
|Cumulative net income                                    |  |                   | 254,943     |   |                   |   | 242,511     |  
|Cumulative cash distributions                            |  |                   | (104,632    | ) |                   |   | (99,659     | )
|                                                         |  |                   |             |   |                   |   |             |  
|                                                         |  |                   | 150,311     |   |                   |   | 142,852     |  
|                                                         |  |                   |             |   |                   |   |             |  
|Limited Partners (46,280.3 interests outstanding)        |  |                   |             |   |                   |   |             |  
|Capital contributions, net of offering costs             |  |                   | 39,358,468  |   |                   |   | 39,358,468  |  
|Cumulative net income                                    |  |                   | 31,605,253  |   |                   |   | 30,374,452  |  
|Cumulative cash distributions                            |  |                   | (60,215,268 | ) |                   |   | (57,115,268 | )
|Reallocation of former general partners deficit capital |  |                   | (840,229    | ) |                   |   | (840,229    | )
|                                                         |  |                   |             |   |                   |   |             |  
|                                                         |  |                   | 9,908,224   |   |                   |   | 11,777,423  |  
|                                                         |  |                   |             |   |                   |   |             |  
|Total partners capital                                  |  |                   | 10,058,535  |   |                   |   | 11,920,275  |  
|                                                         |  |                   |             |   |                   |   |             |  
|Total liabilities and partners capital                  |  | $                 | 10,325,153  |   |                   | $ | 12,149,329  |  
|                                                         |  |                   |             |   |                   |   |             |  

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



26



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##### Table of Contents

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

STATEMENTS OF INCOME

For the Years Ended December 31, 2006, 2005, and 2004



|                                                                           |  |      |           |      |   |           |  |   |          
|-------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                                           |  | 2006 |           | 2005 |   | 2004     
|OPERATING REVENUES:                                                        |  |      |           |      |   |           |  |   |          
|Rental income (Note 5)                                                     |  | $    | 1,885,064 |      | $ | 1,893,888 |  | $ | 1,939,240
|Property taxes reimbursements and recoveries (Note 3)                      |  |      | 0         |      |   | 34,820    |  |   | 129,015  
|                                                                           |  |      |           |      |   |           |  |   |          
|TOTAL OPERATING REVENUES                                                   |  |      | 1,885,064 |      |   | 1,928,708 |  |   | 2,068,255
|                                                                           |  |      |           |      |   |           |  |   |          
|EXPENSES:                                                                  |  |      |           |      |   |           |  |   |          
|Partnership management fees (Note 6)                                       |  |      | 218,523   |      |   | 211,567   |  |   | 206,149  
|Restoration fees (Note 6)                                                  |  |      | 497       |      |   | 509       |  |   | 537      
|Insurance                                                                  |  |      | 62,391    |      |   | 38,900    |  |   | 40,030   
|General and administrative                                                 |  |      | 91,308    |      |   | 101,151   |  |   | 80,891   
|Advisory Board fees and expenses                                           |  |      | 11,375    |      |   | 14,000    |  |   | 14,000   
|Real estate taxes                                                          |  |      | 0         |      |   | 0         |  |   | 67,802   
|Professional services                                                      |  |      | 171,110   |      |   | 158,082   |  |   | 159,860  
|Maintenance and repair expenses                                            |  |      | 2,100     |      |   | 2,110     |  |   | 4,117    
|Personal property taxes                                                    |  |      | 820       |      |   | 820       |  |   | 820      
|Expenses incurred due to default by lessee or vacancy                      |  |      | 0         |      |   | 0         |  |   | 0        
|Settlement expense (Note 10)                                               |  |      | 25,000    |      |   | 0         |  |   | 0        
|Depreciation                                                               |  |      | 223,446   |      |   | 223,446   |  |   | 223,446  
|Amortization                                                               |  |      | 16,819    |      |   | 12,793    |  |   | 12,794   
|Provision for non-collectible rents and other receivables                  |  |      | 0         |      |   | 0         |  |   | 0        
|Other expenses                                                             |  |      | 2,704     |      |   | 2,603     |  |   | 8,705    
|                                                                           |  |      |           |      |   |           |  |   |          
|TOTAL OPERATING EXPENSES                                                   |  |      | 826,093   |      |   | 765,981   |  |   | 819,151  
|                                                                           |  |      |           |      |   |           |  |   |          
|OTHER INCOME                                                               |  |      |           |      |   |           |  |   |          
|Interest income                                                            |  |      | 32,347    |      |   | 18,538    |  |   | 10,512   
|Judgment claim (Note 3)                                                    |  |      | 25,000    |      |   | 0         |  |   | 0        
|Bankruptcy claim (Note 10)                                                 |  |      | 0         |      |   | 0         |  |   | 24,271   
|Other income                                                               |  |      | 2,878     |      |   | 6,000     |  |   | 660      
|Recovery of amounts previously written off (Note 2)                        |  |      | 12,429    |      |   | 12,723    |  |   | 13,429   
|                                                                           |  |      |           |      |   |           |  |   |          
|TOTAL OTHER INCOME                                                         |  |      | 72,654    |      |   | 37,261    |  |   | 48,872   
|                                                                           |  |      |           |      |   |           |  |   |          
|INCOME FROM CONTINUING OPERATIONS                                          |  |      | 1,131,625 |      |   | 1,199,988 |  |   | 1,297,976
|INCOME FROM DISCONTINUED OPERATIONS (Note 3)                               |  |      | 111,608   |      |   | 921,203   |  |   | 494,697  
|                                                                           |  |      |           |      |   |           |  |   |          
|NET INCOME                                                                 |  | $    | 1,243,233 |      | $ | 2,121,191 |  | $ | 1,792,673
|                                                                           |  |      |           |      |   |           |  |   |          
|NET INCOME- CURRENT GENERAL PARTNER                                        |  | $    | 12,432    |      | $ | 21,212    |  | $ | 17,927   
|NET INCOME- LIMITED PARTNERS                                               |  |      | 1,230,801 |      |   | 2,099,979 |  |   | 1,774,746
|                                                                           |  |      |           |      |   |           |  |   |          
|                                                                           |  | $    | 1,243,233 |      | $ | 2,121,191 |  | $ | 1,792,673
|                                                                           |  |      |           |      |   |           |  |   |          
|PER LIMITED PARTNERSHIP INTEREST, Based on 46,280.3 interests outstanding: |  |      |           |      |   |           |  |   |          
|INCOME FROM CONTINUING OPERATIONS                                          |  | $    | 24.21     |      | $ | 25.67     |  | $ | 27.77    
|INCOME FROM DISCONTINUED OPERATIONS                                        |  |      | 2.38      |      |   | 19.71     |  |   | 10.58    
|                                                                           |  |      |           |      |   |           |  |   |          
|NET INCOME PER LIMITED PARTNERSHIP INTEREST                                |  | $    | 26.59     |      | $ | 45.38     |  | $ | 38.35    
|                                                                           |  |      |           |      |   |           |  |   |          

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



27



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##### Table of Contents

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

STATEMENTS OF PARTNERS CAPITAL

For the years ended December 31, 2006, 2005 and 2004



|                                                             |  |                         |         |                               |                  |          |       |  |   |                                              |   |                       |   |                              |  |   |              |  |   |             |   |  |   |          |   |  |   |            |  
|------------------------------------------------------------ |  | ----------------------- | ------- | ----------------------------- | ---------------- | -------- | ----- |  | - | -------------------------------------------- | - | --------------------- | - | ---------------------------- |  | - | ------------ |  | - | ----------- | - |  | - | -------- | - |  | - | ---------- | -
|                                                             |  | Current General Partner |         |                               | Limited Partners |         
|                                                             |  | Cumulative Net Income   |         | Cumulative Cash Distributions |                  |          | Total |  |   | Capital Contributions, Net of
Offering Costs |   | Cumulative Net Income |   | Cumulative Cash Distribution |  |   | Reallocation |  |   | Total       |  
|BALANCE AT DECEMBER 31, 2003                                 |  | $                       | 203,372 |                               | $                | (84,004  | )     |  | $ | 119,368                                      |   |                       | $ | 39,358,468                   |  | $ | 26,499,727   |  | $ | (53,080,268 | ) |  | $ | (840,229 | ) |  | $ | 11,937,698 |  
|Cash Distributions ($49.81 per limited partnership interest) |  |                         |         |                               |                  | (7,171   | )     |  |   | (7,171                                       | ) |                       |   |                              |  |   |              |  |   | (2,305,000  | ) |  |   |          |   |  |   | (2,305,000 | )
|Net Income                                                   |  |                         | 17,927  |                               |                  |          |       |  |   | 17,927                                       |   |                       |   |                              |  |   | 1,774,746    |  |   |             |   |  |   |          |   |  |   | 1,774,746  |  
|                                                             |  |                         |         |                               |                  |          |       |  |   |                                              |   |                       |   |                              |  |   |              |  |   |             |   |  |   |          |   |  |   |            |  
|BALANCE AT DECEMBER 31, 2004                                 |  | $                       | 221,299 |                               | $                | (91,175  | )     |  | $ | 130,124                                      |   |                       | $ | 39,358,468                   |  | $ | 28,274,473   |  | $ | (55,385,268 | ) |  | $ | (840,229 | ) |  | $ | 11,407,444 |  
|Cash Distributions ($37.38 per limited partnership interest) |  |                         |         |                               |                  | (8,484   | )     |  |   | (8,484                                       | ) |                       |   |                              |  |   |              |  |   | (1,730,000  | ) |  |   |          |   |  |   | (1,730,000 | )
|Net Income                                                   |  |                         | 21,212  |                               |                  |          |       |  |   | 21,212                                       |   |                       |   |                              |  |   | 2,099,979    |  |   |             |   |  |   |          |   |  |   | 2,099,979  |  
|                                                             |  |                         |         |                               |                  |          |       |  |   |                                              |   |                       |   |                              |  |   |              |  |   |             |   |  |   |          |   |  |   |            |  
|BALANCE AT DECEMBER 31, 2005                                 |  | $                       | 242,511 |                               | $                | (99,659  | )     |  | $ | 142,852                                      |   |                       | $ | 39,358,468                   |  | $ | 30,374,452   |  | $ | (57,115,268 | ) |  | $ | (840,229 | ) |  | $ | 11,777,423 |  
|                                                             |  |                         |         |                               |                  |          |       |  |   |                                              |   |                       |   |                              |  |   |              |  |   |             |   |  |   |          |   |  |   |            |  
|Cash Distributions ($66.98 per limited partnership interest) |  |                         |         |                               |                  | (4,973   | )     |  |   | (4,973                                       | ) |                       |   |                              |  |   |              |  |   | (3,100,000  | ) |  |   |          |   |  |   | (3,100,000 | )
|Net Income                                                   |  |                         | 12,432  |                               |                  |          |       |  |   | 12,432                                       |   |                       |   |                              |  |   | 1,230,801    |  |   |             |   |  |   |          |   |  |   | 1,230,801  |  
|                                                             |  |                         |         |                               |                  |          |       |  |   |                                              |   |                       |   |                              |  |   |              |  |   |             |   |  |   |          |   |  |   |            |  
|BALANCE AT DECEMBER 31, 2006                                 |  | $                       | 254,943 |                               | $                | (104,632 | )     |  | $ | 150,311                                      |   |                       | $ | 39,358,468                   |  | $ | 31,605,253   |  | $ | (60,215,268 | ) |  | $ | (840,229 | ) |  | $ | 9,908,224  |  
|                                                             |  |                         |         |                               |                  |          |       |  |   |                                              |   |                       |   |                              |  |   |              |  |   |             |   |  |   |          |   |  |   |            |  

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



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2006, 2005, and 2004



|                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                            |  | 2006 |            |   | 2005 |   |            | 2004 | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                       |  |      |            |   |      |   |            |      |  |   |            |  
|Net income                                                                  |  | $    | 1,243,233  |   |      | $ | 2,121,191  |      |  | $ | 1,792,673  |  
|Adjustments to reconcile net income to net cash from operating activities - |  |      |            |   |      |   |            |      |  |   |            |  
|Depreciation and amortization                                               |  |      | 253,126    |   |      |   | 271,155    |      |  |   | 274,221    |  
|Recovery of amounts previously written off                                  |  |      | (12,429    | ) |      |   | (12,723    | )    |  |   | (13,429    | )
|Provision for non-collectible rents and other receivables                   |  |      | 0          |   |      |   | 0          |      |  |   | 30,359     |  
|Net gain on disposal of assets                                              |  |      | 0          |   |      |   | (668,168   | )    |  |   | (215,554   | )
|Interest applied to Indemnification Trust account                           |  |      | (19,161    | ) |      |   | (11,312    | )    |  |   | (5,065     | )
|(Increase) Decrease in rents and other receivables                          |  |      | (1,322     | ) |      |   | 77,046     |      |  |   | (28,064    | )
|Increase in property taxes cash escrow                                      |  |      | (12,930    | ) |      |   | (8,945     | )    |  |   | (8,322     | )
|Decrease (Increase) in prepaid insurance                                    |  |      | 937        |   |      |   | (176       | )    |  |   | (29,320    | )
|Decrease (Increase) in prepaid fees                                         |  |      | 0          |   |      |   | 19,183     |      |  |   | (19,183    | )
|Decrease in deferred rent receivable                                        |  |      | 17,349     |   |      |   | 6,349      |      |  |   | 850        |  
|Increase in property taxes receivable                                       |  |      | (4,023     | ) |      |   | (1,512     | )    |  |   | (5,168     | )
|(Decrease) Increase in due to current General Partner                       |  |      | (2,869     | ) |      |   | 2,596      |      |  |   | 669        |  
|Increase (Decrease) in accounts payable and other accrued expenses          |  |      | 30,610     |   |      |   | (4,658     | )    |  |   | (29,802    | )
|Decrease in security deposits                                               |  |      | 0          |   |      |   | 0          |      |  |   | (15,000    | )
|Increase (Decrease) in property taxes payable                               |  |      | 16,953     |   |      |   | (24,363    | )    |  |   | (39,338    | )
|Increase (Decrease) in unearned rental income                               |  |      | 2,815      |   |      |   | (11,107    | )    |  |   | 8,292      |  
|                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash from operating activities                                          |  |      | 1,512,289  |   |      |   | 1,754,556  |      |  |   | 1,698,819  |  
|                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES:                             |  |      |            |   |      |   |            |      |  |   |            |  
|Proceeds from sale of investment properties                                 |  |      | 0          |   |      |   | 1,505,426  |      |  |   | 611,367    |  
|Payment of leasing commissions                                              |  |      | (12,960    | ) |      |   | 0          |      |  |   | 0          |  
|Recoveries from former General Partner affiliates                           |  |      | 12,429     |   |      |   | 12,723     |      |  |   | 13,429     |  
|                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash (used in) from investing activities                                |  |      | (531       | ) |      |   | 1,518,149  |      |  |   | 624,796    |  
|                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|CASH FLOWS USED IN FINANCING ACTIVITIES:                                    |  |      |            |   |      |   |            |      |  |   |            |  
|Cash distributions to Limited Partners                                      |  |      | (3,100,000 | ) |      |   | (1,730,000 | )    |  |   | (2,305,000 | )
|Cash distributions to current General Partner                               |  |      | (4,973     | ) |      |   | (8,484     | )    |  |   | (7,171     | )
|                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash used in financing activities                                       |  |      | (3,104,973 | ) |      |   | (1,738,484 | )    |  |   | (2,312,171 | )
|                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                        |  |      | (1,593,215 | ) |      |   | 1,534,221  |      |  |   | 11,444     |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                              |  |      | 2,218,807  |   |      |   | 684,586    |      |  |   | 673,142    |  
|                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                    |  | $    | 625,592    |   |      | $ | 2,218,807  |      |  | $ | 684,586    |  
|                                                                            |  |      |            |   |      |   |            |      |  |   |            |  

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



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2006, 2005 AND 2004

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:

DiVall Insured Income Properties 2 Limited Partnership
was formed on November 18, 1987, pursuant to the Uniform Limited Partnership Act of the State of Wisconsin. The initial capital, contributed during 1987, consisted of $300, representing aggregate capital contributions of $200 by the former
general partners and $100 by the Initial Limited Partner. The minimum offering requirements were met and escrowed subscription funds were released to the Partnership as of April 7, 1988. On January 23, 1989, the former general partners
exercised their option to increase the offering from 25,000 interests to 50,000 interests and to extend the offering period to a date no later than August 22, 1989. On June 30, 1989, the general partners exercised their option to extend
the offering period to a date no later than February 22, 1990. The offering closed on February 22, 1990, at which point 46,280.3 interests had been sold, resulting in total offering proceeds, net of underwriting compensation and other
offering costs, of $39,358,468.

The Partnership is currently engaged in the business of owning and operating its investment portfolio of commercial real
estate properties (the Properties.) The Properties are leased on a triple net basis to, and operated by, franchisors or franchisees of national, regional, and local retail chains under long-term leases. The lessees are primarily fast
food, family style, and casual/theme restaurants, but also include a video rental store and a pre-school. At December 31, 2006, the Partnership owned 19 properties with specialty leasehold improvements in six (6) of these properties.

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

Tenant accounts receivable are comprised of billed but uncollected
amounts due for monthly rents and other charges, and amounts due for scheduled rent increases for which rentals have been earned and will be collected in the future under the terms of the leases. Receivables are recorded at managements
estimate of the amounts that will be collected.

As of December 31, 2006 and 2005, there were no recorded values for allowance for doubtful accounts
based on an analysis of specific accounts and historical experience.

The Partnership considers its operations to be in only one segment, the operation of
a portfolio of commercial real estate leased on a triple net basis, and therefore no segment disclosure is made.

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

Deferred
charges represent leasing commissions paid when properties are leased and upon the negotiated extension of a lease. Leasing commissions are capitalized and amortized over the term of the lease.



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Property taxes, insurance and ground rent 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. Such taxes, insurance and ground rent are accrued
in the period in which the liability is incurred. The Partnership owns one (1) restaurant, which is located on a parcel of land where it has entered into a long-term ground lease. The tenant, Kentucky Fried Chicken, is responsible for the
$3,400 per month ground lease payment.

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

Financial instruments that potentially subject the Partnership to significant concentrations of
credit risk consist principally of cash investments. The Partnership generally maintains cash and cash equivalents in federally insured accounts.

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.

Assets disposed of or deemed to be classified as held for sale require the reclassification of current and previous years operations to discontinued operations in
accordance with Statement of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144).

In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations, an interpretation of SFAS No. 143,
which clarifies that a liability for the performance of an asset retirement activity should be recorded if the obligation to perform such activity is unconditional, whether or not the timing or method of settlement may be conditional on a future
event. FIN 47 was effective no later than the end of the fiscal year ending after December 15, 2005. FIN 47 did not have a significant impact on the Partnerships financial statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Partnership does not expect the adoption of FIN 48 to have a material impact on its financial statements.

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 is recognized, if any.



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During 2006, 2005 and 2004, the Partnership recognized income from discontinued operations of approximately $112,000,
$921,000 and $495,000, respectively. The 2006 income from discontinued operations is attributable to the reclassification of the Sunrise Preschool- Phoenix, AZ property to property held for sale in the Second Quarter of 2006. The 2005 and 2004
income from discontinued operations is attributable to the reclassification of the Sunrise Preschool- Phoenix, AZ property in the Second Quarter of 2006 and the Hooters restaurant property (which was sold in December 2005). The 2004 income
from discontinued operations is also attributed to the Miami Subs property (which was sold in June 2004).

The components of property held for sale in the
condensed balance sheets as of December 31, 2006 and 2005 are outlined below.



|                       |  |      |         |   |      |   |  
|---------------------- |  | ---- | ------- | - | ---- | - | -
|                       |  | 2006 |         |   | 2005
|Balance Sheet:         |  |      |         |   |      |   |  
|Land                   |  | $    | 241,371 |   |      | $ | 0
|Buildings              |  |      | 385,840 |   |      |   | 0
|Security deposits      |  |      | (9,945  | ) |      |   | 0
|                       |  |      |         |   |      |   |  
|Property held for sale |  | $    | 617,266 |   |      | $ | 0
|                       |  |      |         |   |      |   |  

The components of discontinued operations included in the statements of income for the years ended
December 31, 2006, 2005 and 2004 are outlined below.



|                                                          |  |      |         |      |   |         |  |   |        
|--------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                                          |  | 2006 |         | 2005 |   | 2004   
|Revenues                                                  |  |      |         |      |   |         |  |   |        
|Rental Income                                             |  | $    | 127,665 |      | $ | 291,451 |  | $ | 347,483
|                                                          |  |      |         |      |   |         |  |   |        
|Total Revenues                                            |  |      | 127,665 |      |   | 291,451 |  |   | 347,483
|                                                          |  |      |         |      |   |         |  |   |        
|Expenses                                                  |  |      |         |      |   |         |  |   |        
|Depreciation                                              |  |      | 12,861  |      |   | 34,916  |  |   | 37,981 
|Professional services                                     |  |      | 3,196   |      |   | 3,500   |  |   | 0      
|Provision for non-collectible rents and other receivables |  |      | 0       |      |   | 0       |  |   | 30,359 
|                                                          |  |      |         |      |   |         |  |   |        
|Total Expenses                                            |  |      | 16,057  |      |   | 38,416  |  |   | 68,340 
|                                                          |  |      |         |      |   |         |  |   |        
|Net gain on sale of properties                            |  |      | 0       |      |   | 668,168 |  |   | 215,554
|                                                          |  |      |         |      |   |         |  |   |        
|Income from Discontinued Operations                       |  | $    | 111,608 |      | $ | 921,203 |  | $ | 494,697
|                                                          |  |      |         |      |   |         |  |   |        

The Partnership will be dissolved on November 30, 2010, or earlier upon the prior occurrence of any of the
following events: (a) the disposition of all properties of the Partnership; (b) the written determination by



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the General Partner that the Partnerships assets may constitute plan assets for purposes of ERISA; (c) the agreement of Limited
Partners owning a majority of the outstanding interests to dissolve the Partnership; or (d) the dissolution, bankruptcy, death, withdrawal, or incapacity of the last remaining General Partner, unless an additional General Partner is elected
previously by a majority of the Limited Partners. During the Second Quarters of 2001, 2003 and 2005, consent solicitations were circulated (the 2001, 2003 and 2005 Consents, respectively), which if approved would have authorized the sale
of the Partnerships assets and dissolution of the Partnership. A majority of the Limited Partners did not vote in favor of either the 2001, 2003 or 2005 Consents. Therefore, the Partnership continued to operate as a going concern. The
bi-annual consent solicitation is scheduled to be mailed in May of 2007, which if approved would authorize the sale of the Partnerships assets and dissolution of the Partnership.

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, 2006, the tax basis of the
Partnerships assets exceeded the amounts reported in the accompanying financial statements by approximately $6,862,000.

The following represents an
unaudited reconciliation of net income as stated on the Partnership statements of income to net income for tax reporting purposes:



|                                          |  |      |           |   |      |   |           |      |  |   |           |  
|----------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                          |  | 2006 |           |   | 2005 |   |           | 2004 | 
|Net income, per statements of income      |  | $    | 1,243,233 |   |      | $ | 2,121,191 |      |  | $ | 1,792,673 |  
|Book to tax depreciation difference       |  |      | (37,070   | ) |      |   | (33,560   | )    |  |   | (34,084   | )
|Book over tax gain from asset disposition |  |      | 0         |   |      |   | (59,817   | )    |  |   | (219,126  | )
|Straight line rent adjustment             |  |      | 17,349    |   |      |   | 6,350     |      |  |   | 850       |  
|Prepaid rent                              |  |      | 2,816     |   |      |   | (11,107   | )    |  |   | 8,291     |  
|Bad debt reserve/expense                  |  |      | 0         |   |      |   | 0         |      |  |   | (155,822  | )
|Other, net                                |  |      | 0         |   |      |   | 13        |      |  |   | 13        |  
|                                          |  |      |           |   |      |   |           |      |  |   |           |  
|Net income for tax reporting purposes     |  | $    | 1,226,328 |   |      | $ | 2,023,070 |      |  | $ | 1,392,795 |  
|                                          |  |      |           |   |      |   |           |      |  |   |           |  

2. REGULATORY INVESTIGATION:

A preliminary investigation during 1992 by the Office of Commissioner of Securities for the State of Wisconsin and the Securities and Exchange Commission (the
Investigation) revealed that during at least the four 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 limited partnerships, DiVall Insured Income Fund Limited Partnership (DiVall 1) and DiVall Income Properties 3 Limited Partnership (DiVall 3)
(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.



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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, and restoration
costs and recoveries have been allocated based on the same percentage. Through December 31, 2006, $5,861,000 of recoveries have been received which exceeded the original estimate of $3 million. As a result, from January 1, 1996 through
December 31, 2006, the Partnership has recognized a total of $1,173,000 as income, 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 and specialty leasehold improvements includes the original purchase price plus acquisition fees and other capitalized costs paid to an affiliate of the former general
partners.

As of December 31, 2006, the Partnership owned properties containing17 fully constructed fast-food restaurants, a video store, and a
preschool (all of which are owned and operated by entities unaffiliated with the Partnership). The 19 properties are composed of the following: ten (10) Wendys restaurants, one (1) Dennys restaurant, one
(1) Applebees restaurant, one (1) Popeyes Famous Fried Chicken restaurant, one (1) Kentucky Fried Chicken restaurant, one (1) Chinese Super Buffet restaurant, one (1) Blockbuster Video, one (1) Sunrise
Preschool (classified as property held for sale in June of 2006), one (1) Panda Buffet restaurant, and one (1) Daytonas- All Sports Café. The 19 properties are located in a total of nine (9) states.

On January 1, 2002, the Partnership adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement requires
current and historical results from operations for disposed properties and assets classified as held for sale that occur subsequent to January 1, 2002 to be reclassified separately as discontinued operations.

Income from discontinued operations was approximately $112,000, $921,000 and $495,000 for the years ended December 31, 2006, 2005, and 2004, respectively. The 2006
income from discontinued operations is attributable to the reclassification of the Sunrise Preschool- Phoenix, AZ property to property held for sale in the Second Quarter of 2006. The 2005 and 2004 income from discontinued operations is attributable
to the reclassification of the Sunrise Preschool- Phoenix, AZ property in the Second Quarter of 2006 and the sale of the Hooterss- Richland Hills, TX property in December of 2005. The 2004 income from discontinued operations is also
attributable to the sale of the Miami Subs- Palm Beach, FL property



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in June of 2004. The 2005 income from discontinued operations included a Fourth Quarter net gain on the sale of the Hooters restaurant property of
approximately $668,000. The 2004 income from discontinued operations included a Second Quarter net gain on the sale of the Miami Subs property of approximately $211,000, a Third Quarter net gain on the sale of a parcel of land located adjacent to
the former vacant Twin Falls, ID property of $5,000 (the land had no recorded value), and Second and Fourth Quarter provisions for non-collectible rents and other receivables related to the Miami Subs property.

The following summarizes significant developments, by property, for properties with such developments.

Sunrise Preschool- Phoenix, AZ Property

A listing agreement for the sale of the property was executed in June 2006. In early January 2007, a sales contract was executed for the sale of the property for $1.6 million. Per notice from the Partnership, tenant, Borg Holdings, Inc.
(Borg), had 30 days from January 16, 2007, to act upon their right of first refusal to purchase the Phoenix property, since a separate buyer entered into a real estate contract for the purchase of the property. On January 29,
2007, Borg informed the Partnership that they would be exercising their right to accept the terms of the contract for the sale of the Phoenix, AZ property. Closing is anticipated to be during the summer of 2007 and commissions totaling 6%, which
includes 2% to a General Partner affiliate, are expected to be paid. The net book value of the property at December 31, 2006, classified as property held for sale, was approximately $617,000, which included $241,000 related to land, $386,000
related to buildings and improvements, and $10,000 related to security deposits.

Ogden, UT property

The Blockbuster lease on the current 6,000 square foot space expired on January 31, 2006. During lease renewal negotiations with Management, the tenant maintained
possession of the property and paid the Partnership holdover rent for February and March 2006. In April 2006, Management executed a two-year renewal lease agreement with the tenant, retroactive to February 1, 2006. The first base year rent will
total $108,000. Leasing commissions related to the lease renewal execution totaled approximately $13,000, ($6,500 paid to a non-affiliated broker and $6,500 paid to a General Partner affiliate).

Grand Forks, ND Property

On
January 24, 2006, the owners of the Panda Buffet Restaurant in Grand Forks, ND gave notice to Management that they intended to exercise their purchase option in relation to the property. A sales contract was executed on February 27, 2006
for the sale of the Grand Forks, ND property at a sales price of $525,000. Although closing was anticipated to be in the First Quarter of 2006, the sale was not consummated and the sales contract expired in late March 2006. The original lease, which
is set to expire in 2013, remains effective and includes the tenants option to purchase the property.

Popeyes- Park Forest, IL

As of December 31, 2006, Popeyes is delinquent on its April and May 2006 rent obligations and
property taxes escrow payments totaling approximately $13,000 and $10,000, respectively. These unpaid amounts are accrued for at December 31, 2006. As of December 31, 2006, the tenant has a property tax escrow cash balance held with the
Partnership of approximately $12,000. The Partnership received the required June through December 2006 rent and property taxes escrow payments.



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In the Second Quarter of 2006, Management defaulted Popeyes for failure to meet its lease obligations, and filed
for possession of the Park Forest property in the Cook County Judicial Court. The Partnership continues the pursuit of all legal remedies available to recover possession and terminate the Lease. Popeyes remains responsible for monthly rent
obligations and property taxes through the remainder of its Lease (expires December 31, 2009).

A Release and Settlement Agreement was executed with
Popeyes in November 2004. In settlement of all claims and disputes the following significant items were agreed to: (i) Popeyes is to make monthly escrow property taxes payments applicable to 2004 and for future property taxes
installments due throughout the remaining lease term obligation; (ii) Popeyes gross sales breakpoint was increased to $1,000,000 and therefore, percentage rent shall be an amount equal to 8% of gross sales in excess of $1,000,000, and
(iii) Popeyes delinquent percentage rents were waived.

During 2004, property taxes escrow charges applicable to 2004 property taxes were
reflected in the financial statements as escrow payments were actually received, and were recorded as a reversal of 2004 property taxes expense equal to the amount of payment received. The Partnership recognized property taxes recovery income of
approximately $129,000 during 2004, which related to Popeyes reimbursement to the Partnership of defaulted property taxes and penalties that had been previously expensed and paid by the Partnership. During 2005, property taxes escrow charges
applicable to property taxes previously accrued and expensed in 2004, were reflected in the financial statements as escrow payments were actually received, and were recorded as property taxes recovery income equal to the amount of payment received.
Property taxes recovery income during 2005 totaled approximately $35,000. Due to Popeyes full reimbursement to the Partnership for past property taxes paid on the tenants behalf, and Popeyes agreement to meet billing and escrow
obligations, the 2005 and 2006 estimated property taxes were not expensed and accrued as of December 31, 2005 and 2006, respectively.

4785 Merle Hay Road- Des Moines, IA

In September 2005, the Partnership paid Daytonas- All Sports Cafés
(Daytonas) first installment of its 2004 property taxes, which amounted to approximately $10,000. Daytonas reimbursed the Partnership in the Fourth Quarter of 2005. Beginning in December 2005, Management requested that
Daytonas escrow its future property taxes liabilities with the Partnership on a monthly basis. Daytonas remains current on its property tax escrow obligations. As of December 31, 2006, escrow payments held by the Partnership totaled
approximately $18,000.

Former Miami Subs- Palm Beach, FL Property

The Palm Beach, FL property was sold in June 2004. At the time of closing the former tenant, DiFede Finance Group (DiFede), was delinquent $17,000 in past
rent (after the application of a $15,000 security deposit). The former tenant also owed the Partnership approximately $13,360 in property taxes as the Partnership paid the propertys delinquent 2003 property taxes in June 2004. Management
continued to pursue legal remedies to collect the former tenants total past due balances. Due to the uncertainty of collection, fifty percent (50 %) of the total outstanding receivable balance was reserved in June 2004.

In November 2004, a Settlement Agreement (DiFede Agreement) was executed with DiFede. Per the DiFede Agreement the former tenant agreed to pay the
Partnership by December 31, 2004 approximately $36,000 in past due rent, late charges, related attorney and court fees and other miscellaneous items. However, the settlement payment per the DiFede Agreement was not received by the Partnership.
Further



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legal action was taken by the Partnership and the Circuit Court in Broward County, Florida entered a final judgment (the Judgment) against DiFede
in early January 2005, awarding approximately $42,000 in damages to the Partnership. Due to the uncertainty of collection, the remaining fifty percent (50 %) of the total outstanding receivable balance was written-off. The receivable balance and
applicable allowance were removed from the balance sheet at December 31, 2004. Throughout 2005, Management continued their pursuit of legal action to collect the Judgment. In satisfaction of the Judgment (which was recorded in the Circuit Court
in March 2006), the Partnership received $25,000 from Difede in the First Quarter of 2006.

Former Hooters-
Richland Hills, TX

A sales contract was executed in October of 2005 for the sale of the property in the Fourth Quarter of 2005 at a sales price of
$1,575,000. The closing date on the sale of the property was December 2005 and the net sales proceeds totaled approximately $1,505,000. A net gain on the sale of $668,000 was recognized in the Fourth Quarter of 2005. Closing and other sale related
costs amounted to $70,000, which included a sales commission paid to a General Partner affiliate totaling $47,250.

Former Twin Falls, ID property

In August 2004, the Partnership sold a piece of land adjacent to the former Twin Falls property for $5,000.
The land had no recorded value.

Other Investment in Properties Information

According to the Partnership Agreement, the former general partners were to commit 80% of the original offering proceeds to investment in properties. Upon the close of
the offering, approximately 75% of the original proceeds were invested in the Partnerships properties.

At December 31, 2005, the tenant of the
Panda Buffet property had an option to purchase the property at a price, which (i) exceeded the original cost of the property less accumulated depreciation and (ii) was not less than the fair market value of the property at the time the
option was granted. On January 24, 2006, the owners of the Panda Buffet Restaurant in Grand Forks, ND gave notice to Management that they intended to exercise their purchase option in relation to the property, but the proposed sale was not
consummated. (For further discussion see Grand Forks, ND Property above.) The original lease, which is set to expire in 2013, remains effective and includes the tenants option to purchase the property. The General Partner is not
aware of any unfavorable purchase options in relation to the original cost or fair market value of the property at the time the option was granted, contained in any of the Partnerships existing leases.

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 general partners. The Partnership Agreement
also provided for quarterly cash distributions from Net Cash Receipts, as defined, within 60 days after the last day of the first full calendar quarter following the date of release of the subscription funds from escrow, and each calendar quarter
thereafter, in which such funds were available for distribution with respect to such quarter. Such distributions were to be made 90% to Limited Partners and 10% to the former general partners, provided, however, that quarterly distributions were to
be cumulative and were not to be made to the former general



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partners unless and until each Limited Partner had 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.

Net Proceeds, as originally defined, were 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
13.5% per annum, cumulative simple return on Adjusted Original Capital from the Return Calculation date including in the calculation of such return all prior distributions of Net Cash Receipts and any prior distributions of Net Proceeds under
this clause; and (c) then, to Limited Partners, 90% and to the General Partners, 10%, of the remaining Net Proceeds available for distribution.

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 Limited Partners and 1% to the current General Partner, provided that quarterly distributions are cumulative and are not to be made to the current 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
resulting from allocated income. Subsequent to the filing of the General Partners income tax returns, a true up with actual distributions is made.

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 13.5% 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 it 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, 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 is 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 in 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



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to the extent necessary for the General Partner to pay its federal and state income taxes on Partnership income allocated to the General Partner. Because
these amendments do not adversely affect the rights of the Limited Partners, pursuant to section 10.2 of the Partnership Agreement, the General Partner made the amendments without a vote of the Limited Partners.

5. LEASES:

Original lease
terms for the majority of the investment properties are generally 10 - 20 years from their inception. The leases generally 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 its 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 on a straight-line basis and the cost of the property, excluding the cost of the land, is depreciated over its estimated useful life.

As of
December 31, 2006, the aggregate minimum operating lease payments to be received under the current operating leases for the Partnerships properties are as follows (does not include the Sunrise Preschool- Phoenix, AZ property which was
classified as property held for sale in the Second Quarter of 2006):



|                         |  |   |           
|------------------------ |  | - | ----------
|Year ending December 31, |  |   |           
|2007                     |  | $ | 1,453,007 
|2008                     |  |   | 1,246,340 
|2009                     |  |   | 1,204,210 
|2010                     |  |   | 1,014,780 
|2011                     |  |   | 1,015,780 
|Thereafter               |  |   | 4,605,797 
|                         |  |   |           
|                         |  | $ | 10,539,914
|                         |  |   |           

Percentage rentals included in rental income from operations in 2006, 2005, and 2004 (the 2005 and 2004 percentage
rentals do not include income from the Hooters restaurant property sold in December 2005) were approximately $438,000, $444,000, and $493,000, respectively. The variance is due to the fluctuation of tenant sales. At December 31, 2006,
rents and other receivables included $18,000 of billed and $399,000 of unbilled percentage rents. At December 31, 2005, rents and other receivables included $430,000 of unbilled percentage rents.

Ten (10) of the properties are leased to Wencoast Restaurants, Inc. (Wencoast), a franchisee of Wendys restaurants. Wencoast base rents accounted
for 58% of the total 2006 operating base rents (does not include properties held for sale during 2006).

6. TRANSACTIONS WITH CURRENT GENERAL PARTNER
AND ITS AFFILIATES:

The current General Partner was to receive a management fee (Base Fee) for managing the three original affiliated
Partnerships equal to 4% of gross receipts, subject to a minimum of $300,000 annually, and a maximum annual reimbursement for office rent and related office overhead (Expense) of $25,000, as



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provided in the Permanent Manager Agreement (PMA). The Base Fee and the Expense reimbursement are subject to increases due to increases in the
Consumer Price Index. The current General Partner receives a Base Fee for managing the Partnership equal to 4% of gross receipts and the Partnership is only responsible for its allocable share of such minimum and maximum annual amounts as indicated
above (originally $159,000 minimum annual Base Fee and $13,250 Expense reimbursement). Effective March 1, 2006, the minimum annual Base Fee and the maximum Expense reimbursement increased by 3.39%, which represents the allowable annual Consumer
Price Index adjustment per the PMA. Therefore, as of March 1, 2006, the minimum monthly Base Fee paid by the Partnership was raised to $18,352 and the maximum monthly Expense reimbursement was raised to $1,481.

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 $57,402 to date on the amounts recovered, which includes 2006, 2005 and 2004 fees of $497, $509 and $537, respectively. The fees received from the Partnership on the amounts
recovered reduce the 4% minimum fee by that same amount.

Amounts paid and or accrued to the current General Partner and its affiliates for the years ended
December 31, 2006, 2005, and 2004, are as follows. (Management fees and overhead allowances included eleven and thirteen months, respectively, for the years ended December 31, 2005 and 2004, as January of 2005 fees were prepaid in December
of 2004.):



|                                         |  |                                              |         |                                               |   |                                               |  |   |        
|---------------------------------------- |  | -------------------------------------------- | ------- | --------------------------------------------- | - | --------------------------------------------- |  | - | -------
|Current General Partner                  |  | Incurred for the Year endedDecember 31, 2006 |         | Incurred for the Year ended December 31, 2005 |   | Incurred for the Year ended December 31, 2004
|Management fees                          |  | $                                            | 218,523 |                                               | $ | 194,279                                       |  | $ | 223,437
|Restoration fees                         |  |                                              | 497     |                                               |   | 509                                           |  |   | 537    
|Overhead allowance                       |  |                                              | 17,670  |                                               |   | 15,716                                        |  |   | 18,071 
|Sales commission                         |  |                                              | 0       |                                               |   | 47,250                                        |  |   | 19,500 
|Leasing commissions                      |  |                                              | 6,480   |                                               |   | 0                                             |  |   | 0      
|Reimbursement for out-of-pocket expenses |  |                                              | 6,832   |                                               |   | 9,324                                         |  |   | 8,032  
|Cash distribution                        |  |                                              | 4,973   |                                               |   | 8,484                                         |  |   | 7,171  
|                                         |  |                                              |         |                                               |   |                                               |  |   |        
|                                         |  | $                                            | 254,975 |                                               | $ | 275,562                                       |  | $ | 276,748
|                                         |  |                                              |         |                                               |   |                                               |  |   |        

7. CONTINGENT LIABILITIES:

According to the Partnership Agreement, as amended, the current General Partner may receive a disposition fee not to exceed 3% of the contract price of the sale of investment properties. Fifty percent (50%) of
all such disposition fees earned by the current General Partner is to be escrowed until the aggregate amount of recovery of the funds misappropriated from the Partnerships by the former general partners is greater than $4,500,000. Upon reaching such
recovery level, full disposition fees will thereafter be payable and fifty percent (50%) of the previously escrowed amounts will be paid to the current General Partner. At such time as the recovery exceeds $6,000,000 in the aggregate, the
remaining escrowed disposition fees will be paid to the current General Partner. If such levels of recovery are not achieved, the current General Partner will contribute the amounts escrowed toward the recovery. In lieu of an escrow, 50% of all such
disposition fees have been paid directly to a restoration account and then distributed



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among the three original Partnerships. Fifty percent (50%) of the total amount paid to the recovery was refunded to the current General Partner during
March 1996 after exceeding the recovery level of $4,500,000. The General Partner does not expect any future refunds, as the possibility of achieving 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 December 31, 2006. Funds are invested in U.S.
Treasury securities. In addition, $167,860 of earnings has been credited to the Trust as of December 31, 2006. The rights of the Permanent Manager to the Trust will be terminated upon the earliest to occur of the following events: (i) the
written release by the Permanent Manager of any and all interest in the Trust; (ii) the expiration of the longest statute of limitations relating to a potential claim which might be brought against the Permanent Manager and which is subject to
indemnification; or (iii) a determination by a court of competent jurisdiction that the Permanent Manager shall have no liability to any person with respect to a claim which is subject to indemnification under the PMA. At such time as the
indemnity provisions expire or the full indemnity is paid, any funds remaining in the Trust will revert back to the general funds of the Partnership.

9. FORMER GENERAL PARTNERS CAPITAL ACCOUNTS:

The capital account balance of the former general partners as of May 26,
1993, the date of their removal as general partners pursuant to the results of a solicitation of written consents from the Limited Partners, was a deficit of $840,229. At December 31, 1993, the former general partners deficit capital
account balance in the amount of $840,229 was reallocated to the Limited Partners.

10. LEGAL PROCEEDINGS:

Phoenix Foods Preference Claim

The
trustee in the Phoenix Foods bankruptcy made a claim seeking to recover from the Partnership alleged preferential payments by Phoenix Foods to the Partnership in the amount of approximately $16,500. The payments the trustee sought to
recover were rent payments received in the ordinary course of business prior to Phoenix Foods bankruptcy. The Partnership did not believe such payments were preferential under the Bankruptcy Code and vigorously contested such characterization.
A verbal settlement of this claim was reached in November 2004 and the Partnership finalized such settlement in April 2005. The settlement called for the bankruptcy trustee to release its preference claims and the Partnership to release its claims
as an unsecured creditor in the Phoenix Foods bankruptcy. Although the Partnership believes its claims are valid, the Partnership determined that the time and cost of pursuing such claims exceeded the likely recovery given the bankrupts lack
of assets from which to satisfy unsecured claims.



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Former South Milwaukee, WI property

The Partnership sold real property and improvements located at 106 N. Chicago Avenue, South Milwaukee, Wisconsin to F2BL, LLC (the Buyer) on
April 17, 2003 pursuant to a Real Estate Purchase Agreement dated October 10, 2002 (the Contract). In October of 2003, the Buyer notified the Partnership that an underground storage tank (UST) and
petroleum release had been discovered on this Property. Since that time, the Buyer removed the UST and remediated the petroleum release. A substantial amount of the costs incurred in such efforts were paid by the Wisconsin Petroleum Environmental
Clean Up Fund (the PECUF). In sporadic correspondence since the Fourth Quarter of 2003, the Buyer claimed, and the Partnership denied, that the Partnership was responsible for payment of those costs not reimbursed by the PECUF.

On January 23, 2006, the Buyer initiated a lawsuit against the Partnership by filing a Complaint with the Milwaukee County Circuit Court. The
Complaint alleged, among other things that (i) the Partnership breached its representation in the Contract that, to the best of the Partnerships knowledge, the Partnership was in compliance with all environmental laws, and (ii) the
Partnership failed to deliver to Buyer a Phase I Environmental Assessment of the Property which had been performed in 1998. The Buyer sought a judgment awarding it damages to be proven at trial, plus its attorneys fees. Prior to filing suit,
the Buyer alleged approximately $100,000 of actual unreimbursed damages incurred in the removal of the UST and remediation of the petroleum release and alleged consequential damages of $190,000. The Court set certain deadlines which included the
completion of discovery and the filing of dispositive motions by February 20, 2007.

In September of 2006, Management and the Buyer entered into a
Mutual Release of All Claims Agreement (F2BL Agreement). It is understood and agreed that the F2BL Agreement is a compromise of a doubtful and disputed claim, and that liability is expressly denied by the parties released. Pursuant to
this F2BL Agreement the Partnership paid the Buyer $25,000 in settlement costs. Management believes that it had meritorious defenses to all of the Buyers claims and did not believe that a material recovery by the Buyer was
probable. However, the Partnership determined that the time and cost to vigorously defend such litigation would exceed the settlement cost achieved.

DeDan bankruptcy

During January 2004, the Partnership received a one-time payment of approximately $25,000 from the
Bankruptcy Court in relation to bankruptcy litigation. In the late 1980s, the Partnership leased properties to DeDan, Inc., and the leases were guaranteed by Dan Fore, the owner of DeDan, Inc. These leases went into default in the early
1990s and the Partnership obtained possession of the properties and re-leased them to various entities. The original lessee, DeDan, Inc. and Dan Fore, filed for bankruptcy and the Partnership filed a claim in the Bankruptcy Court for
damages incurred due to the lease defaults. The payment received was the result of extended litigation in the Bankruptcy Court. No additional payments are anticipated.



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11. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

Quarter Ended



|                                    |  |                |         |               |   |                    |  |                   |         |  |   |        
|----------------------------------- |  | -------------- | ------- | ------------- | - | ------------------ |  | ----------------- | ------- |  | - | -------
|                                    |  | March 31, 2006 |         | June 30, 2006 |   | September 30, 2006 |  | December 31, 2006
|Total Operating Revenues            |  | $              | 367,547 |               | $ | 379,576            |  | $                 | 513,185 |  | $ | 624,756
|                                    |  |                |         |               |   |                    |  |                   |         |  |   |        
|Income from Continuing Operations   |  | $              | 200,451 |               | $ | 168,321            |  | $                 | 313,201 |  | $ | 449,652
|Income From Discontinued Operations |  |                | 24,399  |               |   | 24,399             |  |                   | 30,830  |  |   | 31,980 
|                                    |  |                |         |               |   |                    |  |                   |         |  |   |        
|Net Income                          |  | $              | 224,850 |               | $ | 192,720            |  | $                 | 344,031 |  | $ | 481,632
|                                    |  |                |         |               |   |                    |  |                   |         |  |   |        
|Net Income per Unit                 |  | $              | 4.81    |               | $ | 4.12               |  | $                 | 7.36    |  | $ | 10.30  
|                                    |  |                |         |               |   |                    |  |                   |         |  |   |        

Quarter Ended



|                                    |  |                |         |               |   |                    |  |                   |         |  |   |          
|----------------------------------- |  | -------------- | ------- | ------------- | - | ------------------ |  | ----------------- | ------- |  | - | ---------
|                                    |  | March 31, 2005 |         | June 30, 2005 |   | September 30, 2005 |  | December 31, 2005
|Total Operating Revenues            |  | $              | 375,491 |               | $ | 398,857            |  | $                 | 535,927 |  | $ | 618,433  
|                                    |  |                |         |               |   |                    |  |                   |         |  |   |          
|Income from Continuing Operations   |  | $              | 197,205 |               | $ | 199,556            |  | $                 | 344,307 |  | $ | 458,920  
|Income From Discontinued Operations |  |                | 45,368  |               |   | 47,784             |  |                   | 87,994  |  |   | 740,057  
|                                    |  |                |         |               |   |                    |  |                   |         |  |   |          
|Net Income                          |  | $              | 242,573 |               | $ | 247,340            |  | $                 | 432,301 |  | $ | 1,198,977
|                                    |  |                |         |               |   |                    |  |                   |         |  |   |          
|Net Income per Unit                 |  | $              | 5.19    |               | $ | 5.29               |  | $                 | 9.25    |  | $ | 25.65    
|                                    |  |                |         |               |   |                    |  |                   |         |  |   |          

Quarter Ended



|                                    |  |                |         |               |   |                    |  |                   |         |  |   |        
|----------------------------------- |  | -------------- | ------- | ------------- | - | ------------------ |  | ----------------- | ------- |  | - | -------
|                                    |  | March 31, 2004 |         | June 30, 2004 |   | September 30, 2004 |  | December 31, 2004
|Total Operating Revenues            |  | $              | 366,128 |               | $ | 469,939            |  | $                 | 588,515 |  | $ | 643,673
|                                    |  |                |         |               |   |                    |  |                   |         |  |   |        
|Income from Continuing Operations   |  | $              | 165,855 |               | $ | 255,383            |  | $                 | 403,217 |  | $ | 473,521
|Income from Discontinued Operations |  |                | 62,897  |               |   | 258,305            |  |                   | 97,109  |  |   | 76,386 
|                                    |  |                |         |               |   |                    |  |                   |         |  |   |        
|Net Income                          |  | $              | 228,752 |               | $ | 513,688            |  | $                 | 500,326 |  | $ | 549,907
|                                    |  |                |         |               |   |                    |  |                   |         |  |   |        
|Net Income per Unit                 |  | $              | 4.89    |               | $ | 10.99              |  | $                 | 10.70   |  | $ | 11.77  
|                                    |  |                |         |               |   |                    |  |                   |         |  |   |        



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12. SUBSEQUENT EVENTS:

On February 15, 2007, the Partnership made distributions to the Limited Partners of $370,000 amounting to $7.99 per Interest.



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

On November 15, 2004, the registrant, Divall Insured Income Properties 2 Limited Partnership (the Company), upon approval of the
Companys general partner, The Provo Group, Inc., dismissed Deloitte & Touche LLP (D&T) as its independent auditors.

The
reports of D&T on the financial statements of the Company for the last two fiscal years, prior to November 15, 2004, contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles.

During the Companys two most recent fiscal years prior to 2004 and the subsequent interim period through November 15,
2004, there have been no disagreements with D&T on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of D&T, would have
caused it to make reference to the subject matter of the disagreements in connection with its reports on the financial statements of the Company.

The
Company engaged Altschuler, Melvoin and Glasser LLP (AM&G) as its new independent auditors as of November 15, 2004. During the two most recent fiscal years prior to 2004 and through the interim period ending November 15,
2004, the Company has not consulted with AMG regarding: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Companys financial
statements, and neither a written report nor oral advice was provided to the Company concluding there was an important factor to be considered by the Company in reaching a decision as to an accounting, auditing or financial reporting issue; or
(ii) any matter that was either the subject of a disagreement, or a reportable event with the Partnerships former auditors D&T.

On
November 27, 2006, the Partnership was notified that a majority of the partners of AM&G, the Partnerships auditor, had become partners of McGladrey and Pullen, LLP, (M&P) and, as a consequence, that AM&G was compelled to
resign and would no longer be the auditor of the Partnership. M&P was appointed as the Partnerships new auditors as of November 27, 2006.

The reports of AM&G on the financial statements of the Company for the last two fiscal years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting
principles.

During the two most recent fiscal years prior to 2006 and through the interim period ending November 27, 2006, the Company has not
consulted with M&P regarding: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Companys financial statements, and neither
a written report nor oral advice was provided to the Company concluding there was an important factor to be considered by the Company in reaching a decision as to an accounting, auditing or financial reporting issue; or (ii) any matter that was
either the subject of a disagreement, or a reportable event with the Partnerships former auditor, AM&G.



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Item 9a. Control and Procedures

As of the end of the period covered by this report, the Partnership carried out an evaluation, under the supervision and with the participation of the Partnerships management, including the President, whom is
also the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Companys disclosure controls and procedures. Based on that evaluation the President
concluded that the Partnerships disclosure controls and procedures are effective to ensure that information required to be disclosed by the Partnership in the reports it processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission rules and forms.

There have been no significant changes in the Partnerships internal controls or in other
factors that could significantly affect internal controls subsequent to the date of the evaluation referred to above.



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##### Table of Contents

PART III

Item 10. Directors and Executive Officers of the Registrant

TPG is an Illinois corporation with its principal office at 1100 Main Street, Suite 1830, in Kansas City, Missouri 64105. TPG was elected General Partner by vote of the
Limited Partners effective on May 26, 1993. Prior to such date, TPG had been managing the Partnership since February 8, 1993, under the terms of the Permanent Manager Agreement as amemded (PMA), which remains in effect. See
Items 1 and 13 hereof for additional information about the PMA and the election of TPG as General Partner.

The executive
officers and director of the General Partner who control the affairs of the Partnership are as follows:

Bruce A. Provo, Age 56 -
President, Founder and Director.

Mr. Provo has been involved in the management of real estate and other asset portfolios since
1979. Since he founded the company in 1985, Mr. Provo has been President of TPG. From 1982 to 1986, Mr. Provo served as President and Chief Operating Officer of the North Kansas City Development Company (NKCDC), North Kansas
City, Missouri. NKCDC was founded in 1903 and the assets of the company were sold in December 1985 for $102,500,000. NKCDC owned commercial and industrial properties, including an office park and a retail district, as well as apartment complexes,
motels, recreational facilities, fast food restaurants, and other properties. NKCDCs holdings consisted of over 100 separate properties and constituted approximately 20% of the privately held real property in North Kansas City, Missouri (a
four square mile municipality). Following the sale of the companys real estate, Mr. Provo served as the President, Chief Executive Officer and Liquidating Trustee of NKCDC from 1986 to 1991.

Mr. Provo graduated from Miami University, Oxford, Ohio in 1972 with a B.S. in Accounting. He became a Certified Public Accountant in 1974 and was a
manager in the banking and financial services division of Arthur Andersen LLP prior to joining Rubloff Development Corporation in 1979. From 1979 through 1985, Mr. Provo served as Vice PresidentFinance and then as President of Rubloff
Development Corporation.

The Advisory Board, although its members are not Directors or Executive Officers of the Partnership,
provides advisory oversight to management of the Partnership and consists of:

William Arnold - Investment Broker.Mr. Arnold works as a financial planner, real estate broker, and investment advisor at his company, Arnold & Company. Mr. Arnold graduated with a Masters Degree from the University of Wisconsin and is a Certified
Financial Planner. He serves as a board representative for the brokerage community.

Jesse Small  CPA.Mr. Small
has been a well-known, respected tax and business consultant in Hallandale, FL for more than 30 years. Mr. Small has a Masters Degree in Economics. Mr. Small is a Limited Partner representing DiVall 2. During the past five years
after retiring from the accounting profession, Mr. Small has been developing property on the east and west coast of Florida.



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Albert Kramer - Retired. Mr. Kramer is now retired, but previously worked as Tax
Litigation Manager for Phillips Petroleum Company. His education includes undergraduate and MBA degrees from Harvard and a J.D. Degree from South Texas College of Law. Mr. Kramer is a Limited Partner representing DiVall 2.

Item 11. Executive Compensation

The Partnership has not paid
any executive compensation to the corporate General Partner or to the directors and officers of the General Partner. The General Partners participation in the income of the Partnership is set forth in the Partnership Agreement,
which is filed as Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 hereto. The current General Partner received management fees and expense reimbursements during the year.

See Item 13, below, and Note 6 to the Financial Statements in Item 8 hereof for further discussion of payments by the Partnership to the General Partner and the former general partners.

Item 12. Security Ownership of Certain Beneficial Owners and Management

(a.) As of December 31, 2006, no one person or group is known by the Partnership to own beneficially more than 5% of the outstanding Interests of the Partnership.

(b.) As of December 31, 2006, neither the General Partner nor any of their affiliates owned any Interests in the Partnership.

Item 13. Certain Relationships and Related Transactions

The compensation to be paid to TPG is governed by the Partnership Agreement,
as amended by vote of the Limited Partners to reflect the terms of the PMA. Originally, the PMA was to govern TPGs relationship with the Partnership, DiVall Insured Income Fund Limited Partnership and DiVall Income Properties 3 Limited
Partnership (collectively, The Partnerships). Since both DiVall Insured Income Fund Limited Partnership and DiVall Income Properties 3 Limited Partnership have been dissolved, only the Partnership remains. TPGs compensation
includes a management fee (Base Fee) for managing the Partnership equal to 4% of the Partnerships gross collected receipts. Between the Partnerships, TPG was entitled to an aggregate minimum Base Fee of $300,000 per year. For this
purpose, gross collected receipts means all cash revenues arising from operations and reserves of the Partnerships, including any proceeds recovered with respect to the obligations of the former general partners. The portion of such Base
Fees resulting from recoveries from former general partners is designated as restoration fees. Between the Partnerships, TPG was also entitled to reimbursement for office rent and related office overhead (Expense) in the
maximum amount of $25,000 per year. The Partnership shall only be responsible for its allocable share of such minimum and maximum amounts as indicated above ($159,000 minimum annual Base Fee and $13,250 Expense reimbursement). TPG is entitled to
reimbursement of reasonable direct costs and expenses, such as travel, lodging, overnight delivery and postage, but has no right to be reimbursed for administrative expenses such as payroll, payroll taxes, insurance, retirement and other benefits,
base phone and fax charges, office furniture and equipment, copier rent, and the like. TPG is entitled to an annual increase in the minimum Base Fee and maximum Expense reimbursement in an amount not to exceed the percentage increase in the Consumer
Price Index (CPI) for the immediately preceding calendar year. Effective March 1, 2006, the minimum annual Base Fee and the maximum



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##### Table of Contents

Expense reimbursement increased by 3.39%, which represents the allowable annual Consumer Price Index adjustment per the PMA. Therefore, as of March 1,
2006 the minimum monthly Base Fee paid by the Partnership was raised to $18,352 and the maximum monthly Expense reimbursement was raised to $1,481. Additionally, TPG is allowed up to one-half of the Competitive Real Estate Commission, not to exceed
3% upon the disposition of assets. The payment of a portion of such fees is subordinated to TPGs success at recovering the funds misappropriated by the former general partners.

The PMA had an original expiration date of December 31, 2002, and was extended three years by the General Partner, TPG, in the First Quarter of 2003 to a new expiration date of December 31, 2005. TPG
extended the PMA expiration date an additional three years in the First Quarter of 2006. The new expiration date is December 31, 2008, but could be terminated earlier (a) by a vote at any time by a majority in interest of the Limited
Partners, (b) upon the dissolution and winding up of the Partnership, (c) upon the entry of an order of a court finding that the Permanent Manager has engaged in fraud or other like misconduct or has shown itself to be incompetent in
carrying out its duties under the Partnership Agreement, or (d) upon sixty (60) days written notice from the Permanent Manager to the Limited Partners of the Partnership. Upon termination of the PMA, other than by the voluntary action of
TPG, TPG shall be paid a termination fee of one months Base Fee allocable to the Partnership, subject to a minimum of $13,250. In the event that TPG is terminated by action of a substitute general partner, TPG shall also receive, as part of
this termination fee, 4% of any proceeds recovered with respect to the obligations of the former general partners, whenever such proceeds are collected.

Under the PMA, TPG shall be indemnified by the Partnership, DiVall and Magnuson, and their controlled affiliates, and shall be held harmless from all claims of any party to the Partnership Agreement and from any third party including,
without limitation, the Limited Partners of the Partnership, for any and all liabilities, damages, costs and expenses, including reasonable attorneys fees, arising from or related to claims relating to or arising from the PMA or its status as
Permanent Manager. The indemnification does not extend to claims arising from fraud or criminal misconduct of TPG as established by court findings. To the extent possible, the Partnership is to provide TPG with appropriate errors and omissions,
officers liability or similar insurance coverage, at no cost to TPG. In addition, TPG is granted the right to establish an Indemnification Trust in an original amount, not to exceed $250,000, solely for the purpose of funding such
indemnification obligations. Once a determination has been made that no such claims can or will be made against TPG, the balance of the Trust will become unrestricted property of the Partnership. At December 31, 2006 the Partnership had fully
funded the Trust.

The Partnership paid and/or accrued the following fees and reimbursements to management and its
affiliates in 2006.

The Provo Group, Inc.:



|                           |  |   |        
|-------------------------- |  | - | -------
|Management Fees            |  | $ | 218,523
|Restoration Fees           |  |   | 497    
|Leasing Commission         |  |   | 6,480  
|Office Overhead Allowance  |  |   | 17,670 
|Direct Cost Reimbursements |  |   | 6,832  
|                           |  |   |        
|2006 Total                 |  | $ | 250,002
|                           |  |   |        



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Item 14. Principal Accounting Firm Fees and Services

AM&G had a relationship with American Express Tax and Business Services, Inc. (TBS) from which it leased auditing staff who were full time, permanent employees of TBS
and through which its partners provided non-audit services. As a result of this arrangement, AM&G had no full time employees and therefore, none of the audit services performed were provided by permanent full-time employees of AM&G.
Effective October 1, 2005, TBS was acquired by RSM McGladrey, Inc. (RSM) and AM&Gs relationship with TBS was replaced with a similar relationship with RSM. AM&G managed and supervised the audit and audit staff, and was exclusively
responsible for the opinion rendered in connection with its examination. Effective November 27, 2006, the Partnership was notified that a majority of the partners of AM&G, the Partnerships auditor, had become partners of McGladrey and
Pullen, LLP, (M&P) and, as a consequence, that AM&G was compelled to resign and would no longer be the auditor of the Partnership. M&P was appointed as the Partnerships new auditors as of November 27, 2006.

Aggregate fees for audit services provided by the Partnerships principal accounting firm, M&P, to the Partnership for the year ended December 31, 2006,
amounted to $36,000.

Aggregate fees for interim review services provided by the Partnerships previous principal accounting firm, AM&G, to the
Partnership for the year ended December 31, 2006, amounted to $11,550. Aggregate fees for audit and interim review services provided by the Partnerships previous principal accounting firm, AM&G, to the Partnership for the year ended
December 31, 2005, amounted to $44,385.

Tax compliance services for 2006 and 2005 were provided by RSM, for which fees amounted to $21,000 and
$22,600, respectively.

For the years ended December 31, 2005, AM&G, RSM and TBS did not perform any management consulting services for the
Partnership. For the year ended December 31, 2006, M&P, AM&G and RSM did not perform any management consulting services for the Partnership.

Aggregate fees for audit and/or interim review services provided by the Partnerships previous principal accounting firm, D&T, to the Partnership for the years ended December 31, 2006 and 2005 amounted to $2,000 and $1,500
(both years represented the fee for the 2003 opinion reissue.)



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##### Table of Contents

PART IV

Item 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K



|(a) | 1.      Financial Statements
|--- | ----------------------------

The following financial statements of DiVall Insured Income Properties 2 Limited Partnership are included in Part II, Item 8:

Report of Independent Registered Public Accounting Firm

Independent Auditors Report

Balance Sheets, December 31, 2006 and 2005

Statements of Income for the Years Ended December 31, 2006, 2005, and 2004

Statements of Partners Capital for the Years
Ended December 31, 2006, 2005, and 2004

Statements of Cash Flows for the Years Ended December 31, 2006, 2005, and 2004

Notes to Financial Statements



| | 2. | Financial Statement Schedule
| | -- | ----------------------------

Schedule III - Real Estate
and Accumulated Depreciation, December 31, 2006



| | All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instruction or
are inapplicable and, therefore, have been omitted.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Listing of Exhibits
| | -- | -------------------



| | 3.1 | Agreement of Limited Partnership dated as of November 18, 1987, amended as of November 25, 1987, and February 20, 1988, filed as Exhibit 3A to Amendment No. 1 to
the Partnerships Registration Statement on Form S-11 as filed on February 22, 1988, and incorporated herein by reference.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3.2 | Amendments to Amended Agreement of Limited Partnership dated as of June 21, 1988, included as part of Supplement dated August 15, 1988, filed under Rule 424(b)(3),
incorporated herein by reference.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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| | 3.4 | Amendment to Amended Agreement of Limited Partnership dated as of May 26, 1993, filed as Exhibit 3.4 to the Partnerships 10-K for the year ended December 31, 1993,
and incorporated herein by reference.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| | 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 February 15, 2007 regarding the Fourth Quarter 2006 distribution.
| | ---- | --------------------------------------------------------------------------------------------------------------



| | 99.1 | Audited Financial Statements of Wencoast Restaurants, Inc. for the fiscal years
| | ---- | -------------------------------------------------------------------------------

Ended January 2, 2005 and January 1, 2006, prepared by Thompson Dunavant PLC.



|(b) | Reports 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.

The Registrant filed Form 8-K on January 6, 2003.

The Registrant filed Form 8-K/A on January 17, 2003.

The Registrant filed Form 8-K on
November 19, 2004

The Registrant filed Form 8-K/A on December 2, 2004

The Registrant filed Form 8-K on November 30, 2006

The Registrant filed Form 8-K/A on December 21, 2006



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION

DECEMBER 31, 2006



|                              |  |              |   |                             |   |                           |  |                                              |           |      |   |                           |  |       |           |                                                                                |   |                      |  |               |            |  |   |           |  |      |  |          |  |     
|----------------------------- |  | ------------ | - | --------------------------- | - | ------------------------- |  | -------------------------------------------- | --------- | ---- | - | ------------------------- |  | ----- | --------- | ------------------------------------------------------------------------------ | - | -------------------- |  | ------------- | ---------- |  | - | --------- |  | ---- |  | -------- |  | ----
|                              |  |              |   | Initial Cost to Partnership |   |                           |  | Gross Amount at which Carried at End of Year |           |      |   |                           |  |       |           | Life on which Depreciationin lateststatement of operations is computed (years)
|Property                      |  | Encumbrances |   | Land                        |   | Building and Improvements |  | Costs Capitalized Subsequent
to Acquisitions |           | Land |   | Building and Improvements |  | Total |           | Accumulated Depreciation                                                       |   | Date of Construction |  | Date Acquired |           
|Phoenix, Arizona              |  |              |  |                             | $ | 444,224                   |  | $                                            | 421,676   |      |   |                          |  | $     | 444,224   |                                                                                | $ | 421,676              |  | $             | 865,900    |  | $ | 274,512   |  |     |  | 6/15/88  |  | 31.5
|Phoenix, Arizona (1)          |  |              |  |                             |   | 482,383                   |  |                                              | 490,343   |      |   |                          |  |       | 453,433   |                                                                                |   | 428,676              |  |               | 882,109    |  |   | 277,530   |  |     |  | 8/15/88  |  | 31.5
|Santa Fe, New Mexico          |  |              |  |                             |   |                          |  |                                              | 451,230   |      |   |                          |  |       |          |                                                                                |   | 451,230              |  |               | 451,230    |  |   | 261,552   |  |     |  | 10/10/88 |  | 31.5
|Augusta, Georgia (2)          |  |              |  |                             |   | 215,416                   |  |                                              | 434,178   |      |   |                          |  |       | 213,226   |                                                                                |   | 434,177              |  |               | 647,403    |  |   | 259,364   |  |     |  | 12/22/88 |  | 31.5
|Charleston, South Carolina    |  |              |  |                             |   | 273,619                   |  |                                              | 323,162   |      |   |                          |  |       | 273,619   |                                                                                |   | 323,162              |  |               | 596,781    |  |   | 193,047   |  |     |  | 12/22/88 |  | 31.5
|Park Forest, Illinois         |  |              |  |                             |   | 187,900                   |  |                                              | 393,038   |      |   |                          |  |       | 187,900   |                                                                                |   | 393,038              |  |               | 580,938    |  |   | 234,788   |  |     |  | 12/22/88 |  | 31.5
|Aiken, South Carolina         |  |              |  |                             |   | 402,549                   |  |                                              | 373,795   |      |   |                          |  |       | 402,549   |                                                                                |   | 373,795              |  |               | 776,344    |  |   | 222,066   |  |     |  | 2/21/89  |  | 31.5
|Augusta, Georgia              |  |              |  |                             |   | 332,154                   |  |                                              | 396,659   |      |   |                          |  |       | 332,154   |                                                                                |   | 396,659              |  |               | 728,813    |  |   | 235,649   |  |     |  | 2/21/89  |  | 31.5
|Mt. Pleasant, South Carolina  |  |              |  |                             |   | 286,060                   |  |                                              | 294,878   |      |   |                          |  |       | 286,060   |                                                                                |   | 294,878              |  |               | 580,938    |  |   | 175,182   |  |     |  | 2/21/89  |  | 31.5
|Charleston, South Carolina    |  |              |  |                             |   | 273,625                   |  |                                              | 254,500   |      |   |                          |  |       | 273,625   |                                                                                |   | 254,500              |  |               | 528,125    |  |   | 151,194   |  |     |  | 2/21/89  |  | 31.5
|Aiken, South Carolina         |  |              |  |                             |   | 178,521                   |  |                                              | 455,229   |      |   |                          |  |       | 178,521   |                                                                                |   | 455,229              |  |               | 633,750    |  |   | 270,444   |  |     |  | 3/14/89  |  | 31.5
|Des Moines, Iowa (1)          |  |              |  |                             |   | 164,096                   |  |                                              | 448,529   |      |   | 287,991                   |  |       | 161,996   |                                                                                |   | 551,057              |  |               | 713,053    |  |   | 350,207   |  | 1989 |  | 8/1/89   |  | 31.5
|North Augusta, South Carolina |  |              |  |                             |   | 250,859                   |  |                                              | 409,297   |      |   |                          |  |       | 250,859   |                                                                                |   | 409,297              |  |               | 660,156    |  |   | 228,235   |  |     |  | 12/29/89 |  | 31.5
|Charleston, South Carolina    |  |              |  |                             |   | 286,068                   |  |                                              | 294,870   |      |   |                          |  |       | 286,068   |                                                                                |   | 294,870              |  |               | 580,938    |  |   | 164,428   |  |     |  | 12/29/89 |  | 31.5
|Martinez, Georgia             |  |              |  |                             |   | 266,175                   |  |                                              | 367,575   |      |   |                          |  |       | 266,175   |                                                                                |   | 367,575              |  |               | 633,750    |  |   | 204,970   |  |     |  | 12/29/89 |  | 31.5
|Grand Forks, North Dakota     |  |              |  |                             |   | 172,701                   |  |                                              | 566,674   |      |   |                          |  |       | 172,701   |                                                                                |   | 566,674              |  |               | 739,375    |  |   | 315,993   |  |     |  | 12/28/89 |  | 31.5
|Ogden, Utah (3)               |  |              |  |                             |   | 194,350                   |  |                                              | 452,075   |      |   |                          |  |       | 194,350   |                                                                                |   | 452,075              |  |               | 646,425    |  |   | 268,052   |  |     |  | 1/31/90  |  | 31.5
|Columbus, Ohio                |  |              |  |                             |   | 351,325                   |  |                                              | 708,141   |      |   |                          |  |       | 351,325   |                                                                                |   | 708,140              |  |               | 1,059,465  |  |   | 383,008   |  |     |  | 6/1/90   |  | 31.5
|                              |  |              |   |                             |   |                           |  |                                              |           |      |   |                           |  |       |           |                                                                                |   |                      |  |               |            |  |   |           |  |      |  |          |  |     
|                              |  | $            | 0 |                             | $ | 4,762,025                 |  | $                                            | 7,535,849 |      | $ | 287,991                   |  | $     | 4,728,785 |                                                                                | $ | 7,576,708            |  | $             | 12,305,493 |  | $ | 4,470,221 |  |      |  |          |  |     
|                              |  |              |   |                             |   |                           |  |                                              |           |      |   |                           |  |       |           |                                                                                |   |                      |  |               |            |  |   |           |  |      |  |          |  |     

---

|(1) | This property was written down to its estimated net realizable value at December 31, 1998
|--- | -----------------------------------------------------------------------------------------

|(2) | In the Fourth Quarter of 2001 a portion of the land was purchased from the Partnership by the County Commission for utility and maintenance easement.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | In January 2007, a listing agreement was executed for the sale of the property.
|--- | -------------------------------------------------------------------------------



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2006

(B) Reconciliation of Real Estate and Accumulated Depreciation:



|                                                           |  |                              |            |   |                              |   |            |                          |  |                                                 |  |   |                              |   |  |   |           |  
|---------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---------------------------- | - | ---------- | ------------------------ |  | ----------------------------------------------- |  | - | ---------------------------- | - |  | - | --------- | -
|Investment in Real Estate                                  |  | Year Ended December 31, 2006 |            |   | Year Ended December 31, 2005 |   |            | Accumulated Depreciation |  | Year Ended December 31, 2006                    |  |   | Year Ended December 31, 2005 |  
|Balance at beginning of year                               |  | $                            | 13,389,996 |   |                              | $ | 14,532,699 |                          |  | Balance at beginning of year                    |  | $ | 4,691,206                    |   |  | $ | 4,738,289 |  
|Additions:                                                 |  |                              |            |   |                              |   |            |                          |  | Additions charged to costs and expenses         |  |   | 236,307                      |   |  |   | 258,362   |  
|Deletions: Sunrise Preschool- Phoenix, AZ Reclassified (1) |  |                              | (1,084,503 | ) |                              |   |            |                          |  | Sunrise Preschool- Phoenix, AZ Reclassified (1) |  |   | (457,292                     | ) |  |   |           |  
|Hooters- N. Richland Hills, Texas Disposal (2)            |  |                              |            |   |                              |   | (1,142,703 | )                        |  | Hooters- N. Richland Hills, Texas Disposal (2) |  |   |                              |   |  |   | (305,445  | )
|                                                           |  |                              |            |   |                              |   |            |                          |  |                                                 |  |   |                              |   |  |   |           |  
|Balance at end of year                                     |  | $                            | 12,305,493 |   |                              | $ | 13,389,996 |                          |  | Balance at end of year                          |  | $ | 4,470,221                    |   |  | $ | 4,691,206 |  
|                                                           |  |                              |            |   |                              |   |            |                          |  |                                                 |  |   |                              |   |  |   |           |  

---

|(1) | This property was classified as property held for sale in the Second Quarter of 2006.
|--- | -------------------------------------------------------------------------------------

|(2) | This property was sold in December of 2005.
|--- | -------------------------------------------



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SIGNATURES

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

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



|                     |  |                                       
|-------------------- |  | --------------------------------------
|By:                  |  | The Provo Group, Inc., General Partner
|                     | 
|By:                  |  | /s/ Bruce A. Provo                    
|                     |  | Bruce A. Provo, President             
|                    
|Date: March 28, 2007

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



|                     |  |                                                                               
|-------------------- |  | ------------------------------------------------------------------------------
|By:                  |  | The Provo Group, Inc., General Partner                                        
|                     | 
|By:                  |  | /s/ Bruce A. Provo                                                            
|                     |  | Bruce A. Provo, President, Chief Executive Officer
and Chief Financial Officer
|                    
|Date: March 28, 2007



55