<PAGE>

                                   FORM 10-K
               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 quarterly period ended         December 31, 1999
                                    ---------------------------------------

                                      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

            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
            (Exact name of registrant as specified in its charter)


                     Wisconsin                        39-1606834
          (State or other jurisdiction of          (I.R.S. Employer
          incorporation or organization)           Identification No.)


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

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



     Securities registered pursuant to Section 12(b) of the Act:  None
     Securities registered pursuant to Section 12(g) of the Act: Limited
     Partnership Interests

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

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

                  Index to Exhibits located on page: 31 - 32
                                                     -------
<PAGE>

                                    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, 1999, the Partnership consisted
of one General Partner and 2,509 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 (the "Properties") of commercial real estate. 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 consist of primarily fast-food, family style, and
casual/theme restaurants, but also include an auto tag agency, a video rental
store and a child care center. At December 31, 1999, the Partnership owned 28
properties with specialty leasehold improvements in 12 of these properties, as
more fully discussed in Item 2. During the Second Quarter of 1998, the General
Partner received the written consent of a majority of the Partners to liquidate
the Partnership's assets and dissolve the Partnership. No buyer has been
identified for the Partnership's assets, and Management will continue normal
operations for the foreseeable future.

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, among other factors, 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 and equipment
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

                                       2
<PAGE>

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 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
leaseholders; and failure or withdrawal of any of the national franchises held
by the Partnership's tenant. Each of these events, alone or in combination,
would affect the liquidity level of leaseholders resulting in possible default
by the 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 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 PMA was entered into on February 8, 1993, between the Partnership, DiVall 1
(which was dissolved in December 1998), DiVall 3, 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.

Advisory Board
--------------

The concept of the Advisory Board was first introduced by TPG during the
solicitation of written consents for the Partnerships 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. The three person Advisory Board is empowered to, among other
functions, review operational policies and practices, review extraordinary
transactions, and advise and serve as an audit committee to the Partnership and
the General Partner. The Advisory Board does not have the authority to direct
management decisions or policies of the Partnership or remove the General
Partner. The powers of the Advisory Board are advisory only. The Advisory Board
has full and free access to the Partnership's books

                                       3
<PAGE>

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 $3,000 annually and $1,200 for each quarterly
meeting attended.

The Advisory Board currently consists of a broker dealer representative, Steven
Carson of First Albany Corporation; and a Limited Partner from each of the two
remaining Partnerships: Richard Otte from the Partnership, and Albert Gerritz
from DiVall 3. 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 2. Properties

The Partnership's Properties are leased under long-term leases, generally with
terms of approximately 20 years. 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 (3% 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) as of December 31, 1999:

<TABLE>
<CAPTION>
                                                                                          Lease
Acquisi-           Property Name                                Purchase    Rental Per  Expiration  Renewal
tion Date            & Address                  Lessee         Price (1)      Annum        Date     Options
---------  -----------------------------  ------------------  ------------  ----------  ----------  --------
<C>        <S>                            <C>                 <C>           <C>         <C>         <C>
 03/11/88  Miami Subs                     QSR, Inc.             743,625         39,000  03-31-2016    None
           US-1 Near PGA Blvd
           Palm Beach, FL
 06/15/88  Denny's                        DenAmerica, Inc.    1,087,137(2)     115,200  08-20-2009     (3)
           8801 N 7th St
           Phoenix, AZ
 06/15/88  Denny's (4)                    DenAmerica, Inc.      520,126(2)      93,000  01-30-1998     (3)
           2201 W Camelback
           Phoenix, AZ
 07/15/88  Hooter's                       TWI X, Inc.         1,346,719         95,000  07-14-2008    None
           7669 Grapevine Hwy
           N Richland Hills, TX
 08/01/88  Hardee's                       Hardee's Food       1,091,190(2)      64,000  10-31-2001     (3)
           106 N Chicago Ave              Systems, Inc.
           S Milwaukee, WI
 08/15/88  Denny's                        First Foods, Inc.   1,155,965(2)      65,000  10-31-2007     (3)
           2360 W Northern Ave
           Phoenix, AZ
 10/10/88  Kentucky Fried Chicken (5)     KFC National          451,230         60,000  06-30-2018     None
           1014 S St Francis Dr           Management Co.
           Santa Fe, NM
 12/22/88  Wendy's                        WenSouth Or-          596,781         76,920  12-31-2008     None
           1721 Sam Rittenburg Blvd       lando, Ltd.
           Charleston, SC
 12/22/88  Wendy's                        WenSouth Or-          649,594         86,160  12-31-2008     None
           3013 Peach Orchard Rd          lando, Ltd.
           Augusta, GA
</TABLE>

                                       4
<PAGE>

<TABLE>
<CAPTION>
                                                                                      Lease
Acquisi-   Property Name                                  Purchase       Rental Per   Expiration    Renewal
tion Date  & Address                  Lessee              Price (1)      Annum        Date          Options
---------  ---------                  ------              ---------      ----------   ----------    --------
<C>        <S>                        <C>                 <C>            <C>          <C>           <C>
 12/29/88  Popeye's                   Stillman Mgmt.        580,938       77,280      12-31-2009      None
           2562 Western Ave           Co., Inc.
           Park Forest, IL

 02/21/89  Wendy's                    WenSouth-             776,344       96,780      01-31-2009      None
           1901 Whiskey Rd            Orlando, Ltd.
           Aiken, SC

 02/21/89  Wendy's                    WenSouth Or-          728,813       96,780      01-31-2009      None
           1730 Walton Way            lando, Ltd.
           Augusta, GA

 02/21/89  Wendy's                    WenSouth Or-          528,125       70,200      01-31-2009      None
           347 Folly Rd               lando, Ltd.
           Charleston, SC

 02/21/89  Wendy's                    WenSouth Or-          580,938       77,280      01-31-2009      None
           361 Hwy 17 Bypass          lando, Ltd.
           Mount Pleasant, SC

 03/14/89  Wendy's                    WenSouth Or-          633,750       90,480      01-31-2009      None
           1004 Richland Ave          lando, Ltd.
           Aiken, SC

 04/20/89  Hostetlers, BBQ            Hickory Park, Inc.    897,813(2)    55,584      12-31-2002       (3)
           4875 Merle Hay
           Des Moines, IA

 04/28/89  Hardee's                   Hardee's Food         686,563       64,000      04-30-2009      None
           1570 E Sumner St           Systems, Inc.
           Hartford, WI

 10/18/89  Hardee's                   Hardee's Food       1,421,983(2)    76,000      04-30-2009      None
           4000 S 27th St             Systems, Inc.
           Milwaukee, WI

 12/28/89  Village Inn                Columbia VI,          845,000(2)    84,000      11-30-2009      None
           2451 Columbia Rd           L.L.C.
           Grand Forks, ND

 12/29/89  Wendy's                    WenSouth Or-          660,156       87,780      12-31-2009      None
           1717 Martintown Rd         lando, Ltd.
           N Augusta, SC

 12/29/89  Wendy's                    WenSouth Or-          580,938       77,280      12-31-2009      None
           1515 Savannah Hwy          lando, Ltd.
           Charleston, SC

 12/29/89  Wendy's                    WenSouth Or-          633,750       84,120      12-31-2009      None
           3869 Washington Rd         lando, Ltd.
           Martinez, GA

 01/01/90  Sunrise Preschool          Sunrise             1,182,735(2)   127,920      05-31-2009      None
           4111 E Ray Rd              Preschools, Inc.
           Phoenix, AZ

 01/05/90  Hardee's                   Hardee's Food       1,140,236(2)    88,000     11-30-2009      None
           20 N Pioneer Rd            Systems, Inc.
           Fond du lac, WI

 01/31/90  Blockbuster Video          Blockbuster Vid-      646,425      100,554     01-31-2001       (3)
           336 E 12th St              eos, Inc.
           Ogden, UT
</TABLE>
                5

<PAGE>

<TABLE>
<CAPTION>
                                                                                        Lease
Acquisi-   Property Name                                   Purchase       Rental Per    Expiration  Renewal
tion Date  & Address                   Lessee              Price (1)      Annum         Date        Options
---------  ---------                   ------              ---------      ----------    ----------  --------
<C>        <S>                         <C>                 <C>            <C>           <C>         <C>
03/21/90   Denny's                     DenAmerica, Inc.    1,179,501(2)       83,200    04-30-2012       (3)
           688 N Blue Lakes Blvd
           Twin Falls, ID

05/02/90   Mr. Munchies (4)            Mr. Munchies,         514,259(2)       50,800    05-30-2008
           3752 E Ind School           Inc.
           Phoenix, AZ

05/31/90   Applebee's                  Thomas & King,                                   10-31-2009      None
           2770 Brice Rd               Inc.                1,434,434(2)      135,780
           Columbus, OH                                    ------------      -------

                                                            $23,295,068   $2,318,098
                                                            ===========   ==========
</TABLE>


Footnotes:

(1)  Purchase price includes all costs incurred to acquire the property.
(2)  Purchase price includes cost of specialty leasehold improvements.
(3)  Renewal option available.
(4)  Ownership of lessee's interest under a ground lease.  The Partnership is
     responsible for payment of all rent obligations under the ground lease.
(5)  Ownership of lessee's interest under a ground lease.  The tenant is
     responsible for payment of all rent obligations under the ground lease.

In connection with the proposed liquidation of the Partnership during 1998,
Management received appraisals on each of the Properties. Six of the Properties
were written down to their estimated net realizable values, based on the
appraisal amounts received. The write-downs approximated $685,000.

The tenant of the Red Apple Restaurant in Cedar Rapids, Iowa, vacated the
property during 1998 and ceased paying rent. The uncollected rent was written
off, because the tenant could not be located. During the Fourth Quarter of 1999,
the property was sold for $450,000.

The tenant of the Hostetler's Barbeque in Des Moines, Iowa, vacated the property
during 1998 and has leased the property to a sub-tenant. The tenant continues to
make rental payments as required under the lease.

DenAmerica, Inc., the tenant of the Denny's restaurant in Twin Falls, Idaho,
vacated the property, but is continuing to make rental payments. During 1997,
the deferred rental income and remaining equipment lease balances were written
off, due to uncertainty regarding their collectibility. However, the amounts due
during 1998 and 1999 were collected. DenAmerica re-leased the property to a sub-
tenant during the Fourth Quarter of 1998. DenAmerica remains liable to the
Partnership for all amounts due under the lease.

DenAmerica did not renew its lease on the Denny's property on Indian School Road
in Phoenix, Arizona, when it expired on May 31, 1998. Management entered into a
lease on the property with a new tenant, Mr. Munchies, during the Third Quarter
of 1999.

DenAmerica did not formally extend its lease on the Denny's property on
Camelback Road in Phoenix, Arizona, when it expired on January 30, 1998, but
continued to operate the restaurant and pay rent through December 31, 1999.
During January 2000, DenAmerica notified Management that it had vacated the
premises and ceased paying rent. Management is currently seeking a new tenant
for the property.

                                       6
<PAGE>

Item 3.   Legal Proceedings

None.

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

None.


                                    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, 1999 there were 2,509 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 1999 and 1998,
     $2,575,000 and $4,585,000, respectively, were distributed in the aggregate
     to the Limited Partners. The General Partner received aggregate
     distributions of $8,190 and $8,838 in 1999 and 1998, respectively.

                                       7
<PAGE>

Item 6.   Selected Financial Data

        DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
                       (a Wisconsin limited partnership)

                 December 31, 1999, 1998, 1997, 1996, and 1995
                 (not covered by Independent Auditor's Report)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
                              1999         1998         1997         1996         1995
------------------------------------------------------------------------------------------
<S>                        <C>          <C>          <C>          <C>          <C>
Total Revenue              $ 3,024,407  $ 3,622,550  $ 3,448,300  $ 5,316,853  $ 3,932,498
------------------------------------------------------------------------------------------
Net Income                   2,047,520    1,524,131    2,183,977    3,277,512    1,782,105
------------------------------------------------------------------------------------------
Net Income per Lim-
 ited Partner Interest           43.80        32.60        46.72        70.11        38.12

------------------------------------------------------------------------------------------
Total Assets                17,125,388   17,693,852   20,894,198   23,379,356   27,134,604
------------------------------------------------------------------------------------------
Total Partners' Capital     16,873,744   17,409,414   20,479,121   22,903,880   26,464,478
------------------------------------------------------------------------------------------
Cash Distributions per
 Limited Partnership
 Interest                        55.64        99.07        99.39       147.47        74.11
------------------------------------------------------------------------------------------
</TABLE>


The above selected financial data should be read in conjunction with the
financial statements and the related notes appearing elsewhere in this annual
report.

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, including equipment held by the Partnership at December 31,
1999, were originally purchased at a price, including acquisition costs, of
approximately $23,295,000.

The tenant of the Red Apple Restaurant in Cedar Rapids, Iowa, vacated the
property during 1998 and ceased paying rent. Management sold the property during
the Fourth Quarter of 1999 for $450,000.

DenAmerica, Inc., the tenant of the Denny's restaurant in Twin Falls, Idaho,
vacated the property, but is continuing to make rental payments. During 1997,
the deferred rental income and remaining equipment lease balances were written
off, due to uncertainty regarding their collectibility. However, all amounts due
under the lease have been paid to date. DenAmerica sublet the property to Fiesta
Time during 1998, but remains liable to the Partnership for all amounts due
under the lease.

The tenant of the Hostetler's Barbeque in Des Moines, Iowa vacated the property
during 1998 and has leased the property to a sub-tenant. The tenant continues to
make rental payments as required under the lease.

                                       8
<PAGE>

DenAmerica did not formally extend its lease on the Denny's property on
Camelback Road in Phoenix, Arizona, when it expired on January 30, 1998, but
continued to operate the restaurant and pay rent through December 31, 1999.
During January 2000, DenAmerica notified Management that it had vacated the
premises and ceased paying rent. Management is currently seeking a new tenant
for the property.

Other Assets
------------

Cash and cash equivalents, including cash restricted for real estate taxes held
by the Partnership, was approximately $1,387,000 at December 31, 1999, compared
to $1,260,000 at December 31, 1998. The Partnership designated cash of $985,000
to fund the Fourth Quarter 1999 distributions to Limited Partners paid in
February 2000, $134,000 for the payment of year-end accounts payable and accrued
expenses, and the remainder represents reserves 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.

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 the financial statements included in Item 8 of this
report.

Liabilities
-----------

Accounts payable and accrued expenses at December 31, 1999, in the amount of
$50,000, primarily represented the year-end accruals of legal and auditing fees.

Due to the Current General Partner amounted to $2,000 at December 31, 1999,
representing the General Partner's portion of the Fourth Quarter distribution.

Real estate taxes payable decreased from $73,000 at December 31, 1998 to $0 at
December 31, 1999, due to the sale or re-lease of all vacant properties during
the year.

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 the 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 1999 of $2,575,000 and $8,190, respectively, have also been in accordance
with the Partnership Agreement. The Fourth Quarter 1999 distribution of $985,000
was paid to the Limited Partners on February 15, 2000.

Results of Operations:
----------------------

The Partnership reported net income for the year ended December 31, 1999, in the
amount of $2,048,000 compared to net income for the years ended December 31,
1998 and 1997, of $1,524,000 and $2,184,000, respectively. Results for all three
years were different than would be expected from "normal" operations, primarily
because of tenant defaults, non-cash write-offs, property write-downs, real
estate taxes on vacant properties, and property valuation costs. Results were
also impacted by gains on the sales of properties and the reversal of a portion
of the former general partner receivable write-off.

                                       9
<PAGE>

Revenues
--------

Total revenues were $3,024,000, $3,623,000, and $3,448,000, for the years ended
December 31, 1999, 1998, and 1997, respectively. A decrease in fixed rents
resulted from tenant turnover, property sales, and modified leases. During 1997,
a $106,000 gain was recognized on the sales of four Hardee's restaurants and a
$245,000 recovery of amounts previously written off was recorded. During 1998,
gains totaling $639,000 were recorded on the sales of two Denny's restaurants
and a Cash-A-Check store. Recoveries of receivables which had been previously
written off totaled $41,000 during 1998. During 1999, a gain of $26,000 was
recorded on the sale of the Red Apple Restaurant property, and recoveries
totaled $85,000.

Total revenues should approximate $2,700,000 annually based on leases currently
in place. Future revenues may decrease with tenant defaults and/or sales of
Properties. 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, 1999, 1998, and 1997, cash expenses amounted to
approximately 19%, 24%, and 19%, of total revenues, respectively. Total
expenses, including non-cash items, amounted to approximately 32%, 58% and 37%,
of total revenues for the years ended December 31, 1999, 1998, and 1997,
respectively. Items negatively impacting expenses during the last three years
include expenses incurred primarily in relation to non-cash write-offs, property
write-downs, real estate taxes and equipment losses. In addition, during 1998,
the Partnership incurred legal fees, appraisal fees, and fees for land title
surveys and environmental inspections in connection with the proposed
liquidation of the Partnership.

Charge-offs of uncollectible rent, losses on equipment leases, write-downs of
property to their estimated net realizable values, depreciation, and
amortization are non-cash items and do not affect current operating cash flow of
the Partnership or distributions to the Limited Partners.

Write-offs for uncollectible rents and receivables amounted to $3,400, $123,000,
and $67,000 at December 31, 1999, 1998, and 1997, respectively. The write-offs
are the result of defaults as well as modifications to several property leases
since inception of the Partnership. The 1997 write-off is primarily a result of
an allowance recorded for deferred rent on the Denny's in Twin Falls, Idaho. The
tenant of the property, DenAmerica, Inc., has vacated the property and future
collectibility was uncertain. However, the tenant has continued to make all
required rent payments. The 1998 write-off related to certain unpaid rent and
notes receivable from DenAmerica.

During 1998, six properties were written down to their appraised value,
resulting in a non-cash charge of $685,000.

During 1997, remaining equipment lease payments of $61,000 on the Twin Falls,
Idaho, lease were written off. The tenant had vacated the property and future
collectibility was uncertain. However, the tenant continued to make the required
payments during 1998 and 1999, which were recorded as recoveries of amounts
previously written-off.

Disposition fees incurred during 1997 were a result of the sales of four
Hardee's properties. Fees incurred during 1998 were a result of the sales of two
Denny's properties and the Cash-A-Check property to the tenants. The 1999
selling commission was a result of the sale of the Red Apple Restaurant
property.

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

                                       10
<PAGE>

percentage rent clauses, revenues from percentage rents represented only 17% of
rental income for 1999. If inflation causes operating margins to deteriorate for
lessees, if expenses grow faster than revenues, then, inflation may well
negatively impact the portfolio through tenant defaults.

It would be misleading to associate inflation with asset appreciation for real
estate, in general, and the Partnership's portfolio, specifically. Due to the
"triple net" nature of the property leases, asset values generally move
inversely with interest rates.

Year 2000:
----------

Management of the Partnership took steps to ensure that all software and systems
were Year 2000 compliant, including evaluating the preparedness of its tenants
and vendors. The move to the Year 2000 had no impact on the Partnership's
operations or those of its tenants. The amount spent by the Partnership on Year
2000 compliance was immaterial.

Item 7A.  Quantitative and Qualitative Disclosure About Market Risk

None.

                                      11
<PAGE>

Item 8. Financial Statements and Supplementary Data


            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
            ------------------------------------------------------

                       (a Wisconsin limited partnership)
                       ---------------------------------

                  INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
                  -------------------------------------------
<TABLE>
<CAPTION>
                                                                     Page
                                                                     ----
<S>                                                                  <C>

     Report of Independent Public Accountants......................  13

     Balance Sheets, December 31, 1999 and 1998....................  14 - 15

     Statements of Income for the Years
     Ended December 31, 1999, 1998, and 1997.......................  16

     Statements of Partners' Capital for the
     Years Ended December 31, 1999, 1998, and 1997.................  17

     Statements of Cash Flows for the Years
     Ended December 31, 1999, 1998, and 1997.......................  18 - 19

     Notes to Financial Statements.................................  20 - 27

     Schedule III--Real Estate and Accumulated
     Depreciation..................................................  33 - 34
</TABLE>

                                       12
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



  To the Partners of
  Divall Insured Income Properties 2 Limited Partnership:

  We have audited the accompanying balance sheets of Divall Insured Income
  Properties 2 Limited Partnership (the Partnership), as of December 31, 1999
  and 1998, and the related statements of income, partners' capital and cash
  flows for each of the three years in the period ended December 31, 1999.
  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 auditing standards generally
  accepted in the 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 Divall Insured Income
  Properties 2 Limited Partnership, as of December 31, 1999 and 1998, and the
  results of its operations and its cash flows for each of the three years in
  the period ended December 31, 1999, in conformity with accounting principles
  generally accepted in the United States.

  Our audit was made for the purpose of forming an opinion on the basic
  financial statements taken as a whole.  The schedule listed in the index of
  financial statements is presented for purposes of complying with the
  Securities and Exchange Commission's rules and is not part of the basic
  financial statements.  This schedule has been subjected to the auditing
  procedures applied in the audit of the basic financial statements and, in our
  opinion, fairly states in all material respects the financial data required to
  be set forth therein in relation to the basic financial statements taken as a
  whole.

                                         ARTHUR ANDERSEN LLP



  Chicago, Illinois
  January 28, 2000

                                       13
<PAGE>

            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP


                                BALANCE SHEETS

                          December 31, 1999 and 1998
                          --------------------------

                                    ASSETS

<TABLE>
<CAPTION>
                                                                      December 31,      December 31,
                                                                          1999              1998
                                                                      ------------      ------------
INVESTMENT PROPERTIES AND EQUIPMENT:(Note 3)
<S>                                                                   <C>               <C>
     Land                                                              $ 7,298,596       $ 7,406,721
     Buildings                                                          12,198,213        12,736,444
     Equipment                                                             669,778           707,378
     Accumulated depreciation                                           (5,487,177)       (5,356,448)
                                                                       -----------       -----------

          Net investment properties and equipment                       14,679,410        15,494,095
                                                                       -----------       -----------

OTHER ASSETS:

     Cash and cash equivalents                                           1,387,306         1,256,165
     Cash restricted for real estate taxes                                       0             4,404
     Cash held in Indemnification Trust (Note 8)                           335,845           321,207
     Rents and other receivables (Net of allowance of $44,802 in
       1999 and $41,475 in 1998)                                           489,412           369,715

     Deferred rent receivable                                              134,063           134,899
     Prepaid insurance                                                      14,392            19,892
     Deferred charges                                                       84,960            91,158
     Unsecured notes receivable from lessees (Net of allowance of
       $50,000 in 1999 and $136,863 in 1998)                                     0             2,317
                                                                       -----------       -----------

          Total other assets                                             2,445,978         2,199,757
                                                                       -----------       -----------

          Total assets                                                 $17,125,388       $17,693,852
                                                                       ===========       ===========
</TABLE>

       The accompanying notes are an integral part of these statements.


                                       14
<PAGE>

            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                                BALANCE SHEETS

                          December 31, 1999 and 1998
                          --------------------------

                       LIABILITIES AND PARTNERS' CAPITAL

<TABLE>
<CAPTION>
                                                                         December 31,      December 31,
                                                                             1999              1998
                                                                         ------------      ------------
LIABILITIES:
<S>                                                                      <C>               <C>
     Accounts payable and accrued expenses                               $     50,286      $     45,050
     Due to current General Partner                                             1,968             2,723
     Security deposits                                                        117,850           102,017
     Unearned rental income                                                    81,540            61,179
     Real estate taxes payable                                                      0            73,469
                                                                         ------------      ------------

                 Total liabilities                                            251,644           284,438
                                                                         ------------      ------------

CONTINGENT LIABILITIES: (Note 7)

PARTNERS' CAPITAL: (Notes 1, 4 and 9)
     Current General Partner -
             Cumulative net income                                            137,620           117,145
             Cumulative cash distributions                                    (57,119)          (48,929)
                                                                         ------------      ------------
                                                                               80,501            68,216
                                                                         ------------      ------------
     Limited Partners (46,280.3 interests outstanding)
             Capital contributions, net of offering costs                  39,358,468        39,358,468
             Cumulative net income                                         19,990,272        17,963,227
             Cumulative cash distributions                                (41,715,268)      (39,140,268)
             Reallocation of former general partners' deficit capital        (840,229)         (840,229)
                                                                         ------------      ------------

                                                                           16,793,243        17,341,198
                                                                         ------------      ------------

                 Total partners' capital                                   16,873,744        17,409,414
                                                                         ------------      ------------

                 Total liabilities and partners' capital                 $ 17,125,388      $ 17,693,852
                                                                         ============      ============
</TABLE>

       The accompanying notes are an integral part of these statements.


                                      15
<PAGE>

            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                              STATEMENTS OF INCOME

             For the Years Ended December 31, 1999, 1998, and 1997
             -----------------------------------------------------

<TABLE>
<CAPTION>
                                                                    1999        1998        1997
                                                                 ----------  ----------  ----------
REVENUES:
<S>                                                              <C>         <C>         <C>
   Rental income (Note 5)                                        $2,768,242  $2,764,028  $2,951,174
   Interest income on direct financing leases                             0           0      10,384
   Other interest income                                             56,938     123,478      73,223
   Net other income                                                  88,139      55,142      63,349
   Recovery of amount previously written off (Note 2)                85,380      41,015     244,561
   Net gain on disposal of assets                                    25,708     638,887     105,609
                                                                 ----------  ----------  ----------
                                                                  3,024,407   3,622,550   3,448,300
                                                                 ----------  ----------  ----------
EXPENSES:
   Partnership management fees (Note 6)                             183,074     180,450     167,350
   Disposition fees (Note 6)                                              0      75,750      52,166
   Restoration fees (Note 6)                                            260           0       9,782
   Appraisal fees                                                         0      58,575       6,410
   Environmental inspections                                              0      48,250           0
   Land title surveys                                                     0      66,150           0
   Insurance                                                         22,770      23,319      26,130
   General and administrative                                        71,574     108,569     107,992
   Advisory Board fees and expenses                                  11,425      15,766      14,018
   Selling Commissions - Non-affiliate                               15,750           0           0
   Loss on sale of equipment                                         12,699           0           0
   Real estate taxes                                                 10,032       9,323      12,172
   Ground lease payments (Note 3)                                   125,840     126,541     125,209
   Expenses incurred due to default by lessee                         8,995       3,403       8,398
   Professional services                                            101,440     150,639      99,481
   Professional services related to Investigation                         0       1,279      32,618
   Loss on equipment lease                                                0           0      61,404
   Depreciation                                                     369,989     412,950     464,596
   Amortization                                                      39,639       9,252       9,186
   Provision for uncollectible rents and other receivables            3,400     122,860      67,411
   Write down of properties to net realizable value (Note 3)              0     685,343           0
                                                                 ----------  ----------  ----------
                                                                    976,887   2,098,419   1,264,323
                                                                 ----------  ----------  ----------
NET INCOME                                                       $2,047,520  $1,524,131  $2,183,977
                                                                 ==========  ==========  ==========
NET INCOME - CURRENT GENERAL PARTNER                             $   20,475  $   15,241  $   21,840
NET INCOME - LIMITED PARTNERS                                     2,027,045   1,508,890   2,162,137
                                                                 ----------  ----------  ----------
                                                                 $2,047,520  $1,524,131  $2,183,977
                                                                 ==========  ==========  ==========
NET INCOME PER LIMITED PARTNERSHIP
  INTEREST, based on 46,280.3 Interests outstanding              $    43.80  $    32.60  $    46.72
                                                                 ==========  ==========  ==========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       16
<PAGE>

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                        STATEMENTS OF PARTNERS' CAPITAL

              For the years ended December 31, 1999, 1998 and 1997
              ----------------------------------------------------


<TABLE>
<CAPTION>
                                                                           Current General Partner
                                                                     ------------------------------------

                                                                     Cumulative    Cumulative
                                                                        Net          Cash
                                                                       Income    Distributions    Total
                                                                     ----------  --------------  --------
<S>                                                                  <C>         <C>             <C>
BALANCE AT DECEMBER 31, 1996                                           $ 80,064       $(31,355)  $48,709

Cash Distributions
  ($99.39 per limited partnership interest)                                             (8,736)   (8,736)
Net Income                                                               21,840                   21,840
                                                                       --------       --------   -------
BALANCE AT DECEMBER 31, 1997                                           $101,904       $(40,091)  $61,813
Cash Distributions
  ($99.07 per limited partnership interest)                                             (8,838)   (8,838)
Net Income                                                               15,241                   15,241
                                                                       --------       --------   -------
BALANCE AT DECEMBER 31, 1998                                           $117,145       $(48,929)  $68,216
Cash Distributions
  ($55.64 per limited partnership interest)                                             (8,190)   (8,190)
Net Income                                                               20,475                   20,475
                                                                       --------       --------   -------
BALANCE AT DECEMBER 31, 1999                                           $137,620       $(57,119)  $80,501
                                                                       ========       ========   =======
</TABLE>


<TABLE>
<CAPTION>
                                                                             Limited Partners
                                                     -----------------------------------------------------------------
                                                         Capital
                                                     Contributions,                Cumulative
                                                         Net of      Cumulative      Cash
                                                     Offering Costs  Net Income   Distribution    Reallocation    Total
                                                     --------------  -----------  --------------  ------------   ---------
<S>                                                        <C>             <C>          <C>            <C>         <C>
BALANCE AT DECEMBER 31, 1996                          $39,358,468  $14,292,200     $(29,955,268)  $(840,229)    $22,855,171

Cash Distributions
  ($99.39 per limited partnership interest)                                          (4,600,000)                 (4,600,000)
Net Income                                                           2,162,137                                    2,162,137
                                                      -----------  -----------     ------------   ---------     -----------
BALANCE AT DECEMBER 31, 1997                          $39,358,468  $16,454,337     $(34,555,268)  $(840,229)    $20,417,308
Cash Distributions
  ($99.07 per limited partnership interest)                                          (4,585,000)                 (4,585,000)
Net Income                                                           1,508,890                                    1,508,890
                                                      -----------  -----------     ------------   ---------     -----------
BALANCE AT DECEMBER 31, 1998                          $39,358,468  $17,963,227     $(39,140,268)  $(840,229)    $17,341,198
Cash Distributions
  ($55.64 per limited partnership interest)                                          (2,575,000)                 (2,575,000)
Net Income                                                           2,027,045                                    2,027,045
                                                      -----------  -----------     ------------   ---------     -----------
BALANCE AT DECEMBER 31, 1999                          $39,358,468  $19,990,272     $(41,715,268)  $(840,229)    $16,793,243
                                                      ===========  ===========     ============   =========     ===========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       17
<PAGE>

            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
                           STATEMENTS OF CASH FLOWS

             For the Years Ended December 31, 1999, 1998, and 1997
             -----------------------------------------------------

<TABLE>
<CAPTION>

                                                                       1999          1998          1997
                                                                    ----------    ----------    ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                 <C>           <C>           <C>
     Net income                                                     $2,047,520    $1,524,131    $2,183,977
     Adjustments to reconcile net income to net
        cash provided by operating activities -
          Depreciation and amortization                                409,628       422,202       473,782
          Recovery of amount previously written off                    (22,790)      (41,015)     (244,561)
          Provision for uncollectible rents and other receivables        3,400       122,860        67,411
          Property write downs to net realizable value                       0       685,343             0
          Net (gain) on disposal of assets                             (13,009)     (638,887)     (105,609)
          Loss on equipment leases                                           0             0        61,404
          Interest applied to Indemnification Trust account            (14,638)      (16,454)      (15,116)
          (Increase) Decrease in rents and other receivables          (123,097)     (207,412)      (67,112)
          Withdrawals for payment of real estate taxes                   4,404         6,847        99,374
          (Increase) Decrease in prepaids                                5,500          (551)        2,921
          Decrease in deferred rent receivable                             836        47,871         9,145
          Increase (Decrease) in due to current General Partner           (755)          213       (84,217)
          Increase (Decrease) in accounts payable and other              5,236       (24,787)        2,248
          Increase (Decrease) in security deposits                      15,833       (51,095)        8,822
          Increase (Decrease) in real estate taxes payable             (73,469)       15,114       (60,776)
          Increase (Decrease) in unearned rental income                 20,361       (70,084)       73,524
                                                                    ----------    ----------    ----------
                 Net cash from operating activities                  2,264,960     1,774,296     2,405,217
                                                                    ----------    ----------    ----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
     Principal payments received on direct financing leases             16,301        41,015        47,422
     Proceeds from sale of investment properties                       471,505     2,542,725     1,931,182
     Investment in investment properties                               (13,800)            0             0
     Investment in leasing commissions                                 (33,441)      (13,976)      (42,000)
     Recoveries from former G.P. affiliates                              6,489             0       244,561
     Principal receipts from unsecured notes                             2,317        67,409        16,562
                                                                    ----------    ----------    ----------
                 Net cash from investing activities                    449,371     2,637,173     2,197,727
                                                                    ----------    ----------    ----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
     Cash distributions to Limited Partners                         (2,575,000)   (4,585,000)   (4,600,000)
     Cash distributions to current General Partner                      (8,190)       (8,838)       (8,736)
                                                                    ----------    ----------    ----------
                 Net cash (used in) financing activities            (2,583,190)   (4,593,838)   (4,608,736)
                                                                    ----------    ----------    ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                   131,141      (182,369)       (5,792)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                       1,256,165     1,438,534     1,444,326
                                                                    ----------    ----------    ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR                            $1,387,306    $1,256,165    $1,438,534
                                                                    ==========    ==========    ==========

</TABLE>

       The accompanying notes are an integral part of these statements.

                                       18
<PAGE>

           Supplemental Information to the Statements of Cash Flows
           --------------------------------------------------------

The following significant noncash transactions occurred during the three years
affecting the Partnership's financial statements:


     1.   During 1996, the Partnership incurred leasing commissions totaling
          $53,520 which were unpaid at year-end. The amount was paid in full
          during 1997.



       The accompanying notes are an integral part of these statements.

                                       19
<PAGE>

            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                         NOTES TO FINANCIAL STATEMENTS

                       DECEMBER 31, 1999, 1998 AND 1997


1.   ORGANIZATION AND BASIS OF ACCOUNTING:
     -------------------------------------

DiVall Insured Income Properties 2 Limited Partnership (the "Partnership") was
formed on November 18, 1987, pursuant to the Uniform Limited Partnership Act of
the State of Wisconsin. The initial capital which was 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 (the "Properties") of commercial real estate. 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 consist primarily of fast-food, family style, and
casual/theme restaurants, but also include a video rental store and a child care
center. At December 31, 1999, the Partnership owned 28 properties with specialty
leasehold improvements in 12 of these properties.

Rental revenue from investment properties is recognized on the straight-line
basis over the life of the respective lease. Revenue from direct financing
leases is recognized at level rates of return over the term of the lease.
Percentage rents have historically been accrued throughout the year based on the
tenant's actual reported year-to-date sales along with management's estimate of
the tenant's sales for any remaining unreported periods during the year.
However, during 2000, the Partnership adopted SAB101, which requires the
recording of percentage rents only when the tenant has reached the breakpoint
stipulated in the lease.

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

Depreciation of the properties is provided on a straight-line basis over 31.5
years, which is the estimated useful lives of the buildings and improvements.
Equipment is depreciated on a straight-line basis over the estimated useful
lives of 5 to 7 years.

Deferred charges represent leasing commissions paid when properties are leased
to tenants other than the original tenant.  Leasing commissions are capitalized
and amortized over the life of the lease.

                                       20
<PAGE>

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

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

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

The Partnership follows Statement of Financial Accounting Standards No. 121
("SFAS 121"), Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of, which requires that all long-lived assets be
reviewed for impairment in value whenever changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.

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 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 Quarter of 1998, the General
Partner received the consent of the Limited Partners to liquidate the
Partnership's assets and dissolve the Partnership. However, a buyer was not
found for the Partnership's assets, and no current liquidation or dissolution
plans are in effect. Management plans to continue normal operations for the
Partnership for the foreseeable future.

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, 1999, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$8,400,000.

                                       21
<PAGE>

The following represents a reconciliation of net income as stated on the
Partnership statements of income to net income for tax reporting purposes:
<TABLE>
<CAPTION>
                                                    1999         1998         1997
                                                 -----------  -----------  -----------
<S>                                              <C>          <C>          <C>
Net income, per statements of income             $2,047,520   $1,524,131   $2,183,977

Book to tax depreciation difference                 (65,606)     (32,592)     (36,811)
Book over tax gain from asset disposition          (148,113)    (506,943)    (227,315)
Straight line rent adjustment                           836       47,871       10,866
Bad debt reserve/expense                              3,060       41,475       53,666
Book valuation adjustment of real property                0      685,342            0
Book valuation adjustment of equipment leases             0            0       65,690
Other, net                                           20,584      (69,826)      73,865
                                                 ----------   ----------   ----------
   Net income for tax reporting
    purposes                                     $1,858,281   $1,689,458   $2,123,938
                                                 ==========   ==========   ==========
</TABLE>

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
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.

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, 1999, $5,780,000 of recoveries have
been received which exceeded the original estimate of $3 million. As a result,
in 1996, 1997 and 1999, the Partnership has recognized $1,114,000 as income,
which represents its share of the excess recovery. There were no restoration
activities or recoveries in 1998. The current General Partner continues to
pursue recoveries of the misappropriated funds, however, no further significant
recoveries are anticipated.

                                       22
<PAGE>

3.   INVESTMENT PROPERTIES:
     ----------------------

As of December 31, 1999, the Partnership owned 26 fully constructed fast-food
restaurants, a video store, and a preschool. The properties are composed of the
following: ten (10) Wendy's restaurants, four (4) Hardee's restaurants, five (5)
Denny's restaurants, one (1) Applebee's restaurant, one (1) Popeye's Famous
Fried Chicken restaurant, one (1) Hooter's restaurant, one (1) Kentucky Fried
Chicken restaurant, one (1) Hostetler's restaurant, one (1) Miami Subs
restaurant, one (1) Village Inn restaurant, one (1) Blockbuster Video store, and
one (1) Sunrise Preschool. The 28 properties are located in a total of thirteen
(13) states.

The tenant of the Hostetler's Barbeque in Des Moines, Iowa vacated the property
during 1998 and has leased the property to a sub-tenant. The tenant continues to
make rental payments as required under the lease.

DenAmerica, the tenant of the Denny's restaurant in Twin Falls, Idaho, vacated
the property during 1997, but is continuing to make rental payments. During
1997, the deferred rental income and remaining equipment lease balances were
written off due to uncertainty regarding their collectibility. However, the
amounts due during 1998 and 1999 were collected. DenAmerica re-leased the
property to a sub-tenant during the Fourth Quarter of 1998. DenAmerica remains
liable to the Partnership for all amounts due under the lease.

DenAmerica did not renew its lease on the Denny's property on Indian School Road
in Phoenix, Arizona when it expired on May 30, 1998. Management entered into a
lease with a new tenant for the property during the Third Quarter of 1999.

The tenant of the Red Apple Restaurant in Cedar Rapids, Iowa, vacated the
property during 1998 and ceased paying rent. The uncollected rent was written
off as uncollectible, because the tenant could not be located. Management sold
the property during the Fourth Quarter of 1999 for $450,000.

The tenant operating a Denny's restaurant on Camelback Road in Phoenix, Arizona,
did not formally exercise its option to extend its lease which expire on January
30, 1998, but continued to operate the restaurant and pay rent through December
31, 1999. During January 2000, the tenant notified Management that it had
vacated the premises and ceased paying rent. Management is currently seeking a
new tenant for the Property.

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.

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 was
invested in the Partnership's properties.

The current General Partner receives a fee for managing the Partnership equal to
4% of the gross receipts, with a maximum reimbursement for office rent and
related office overhead of $25,000 between the three original affiliated
Partnerships. Effective March 1, 1999, the minimum management fee and the
maximum reimbursement for office rent and overhead increased by 1.6%
representing the allowable annual Consumer Price Index adjustment per the
Permanent Manager Agreement ("PMA"). For purposes of computing the

                                       23
<PAGE>

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 $55,037 to date on the
amounts recovered, which has been offset against the 4% minimum fee.

The Partnership owns three (3) restaurants located on parcels of land where it
has entered into long-term ground leases. One (1) of these leases is paid by the
tenant and two (2) are paid by the Partnership. The leases paid by the
Partnership are considered operating leases and the lease payments are expensed
in the periods to which they apply. The lease terms require aggregate minimum
annual payments of approximately $126,000 and expire in the years 2003 and 2008.

Several of the Partnership's property leases contained purchase option
provisions with stated purchase prices in excess of the original cost of the
properties. The current General Partner is not aware of any unfavorable purchase
options in relation to original cost.

Cypress Restaurants, Inc., the tenant of the Denny's restaurants in New Smyrna
Beach, Florida and Daytona Beach, Florida, negotiated a purchase contract for
their properties in the amount of $1,250,000 and $950,000 respectively, from the
Partnership. The Daytona Beach property, however, was found to have
environmental contamination from an adjoining property, which impacted their
ability to obtain financing. Therefore, the Partnership agreed to finance
$550,000 of the $950,000 purchase price for a period of six months, until the
environmental issues were addressed. The sale of the properties took place in
January 1998, resulting in a gain of $556,000. The Partnership is not liable for
the environmental contamination. The note was repaid in full during the Third
Quarter of 1998.

During the Fourth Quarter of 1998, the tenant of the Cash-A-Check store in
Hallandale, Florida exercised their option to purchase the property for
$325,000, resulting in a gain of approximately $83,000.

In connection with the proposed liquidation of the Partnership during 1998,
Management received appraisals on each of the Properties. Six of the Properties
were written down to their estimated net realizable values, based on the
appraisal amounts received. The write-downs approximated $685,000.

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 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,

                                       24
<PAGE>

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 will be cumulative and will not
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 its attributable to such year; and (c)
then, to Limited Partners, 99%, and to the General Partner, 1%, of remaining Net
Proceeds available for distribution.

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


5.   LEASES:
     -------

Lease terms for the majority of the investment properties are 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

                                       25
<PAGE>

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 and the cost of the
property, excluding the cost of the land, is depreciated over its estimated
useful life.

Aggregate minimum lease payments to be received under the leases for the
Partnership's properties are as follows:
<TABLE>
          <S>             <C>
          Year ending
          December 31,
          2000            $ 2,259,600
          2001              2,161,547
          2002              2,104,680
          2003              2,063,149
          2004              2,064,619
          Thereafter       10,340,927
                          -----------
                          $20,994,522
                          ===========
</TABLE>

Percentage rentals included in rental income in 1999, 1998, and 1997 were
$552,924, $586,429, and $608,915, respectively. The decrease in percentage
rental income is a result of the sale of various properties subject to
percentage rent.

Ten (10) of the properties are leased to Wensouth Orlando, a franchisee of
Wendy's restaurants. Wensouth base rents accounted for 37% of total base rents
for 1999.

6.   TRANSACTIONS WITH CURRENT GENERAL PARTNER:
     ------------------------------------------

Amounts incurred to the current General Partner for the years ended December 31,
1999, 1998, and 1997, are as follows:

<TABLE>
<CAPTION>
                                              Incurred            Incurred            Incurred
                                         for the year ended  for the year ended  for the year ended
Current General Partner                  December 31, 1999   December 31, 1998   December 31, 1997
----------------------                   ------------------  ------------------  ------------------

<S>                                      <C>                 <C>                 <C>
Management fees                                    $183,074            $180,450            $167,350
Disposition fees                                          0              75,750              52,166
Restoration fees                                        260                   0               9,782
Overhead allowance                                   14,791              14,558              14,367
Leasing Commissions                                   6,319              13,976               6,000
Reimbursement for out-of-pocket
expenses                                              8,119              28,906              21,605
Cash distribution                                     8,190               8,838               8,736
                                                   --------            --------            --------
                                                   $220,753            $322,478            $280,006
                                                   ========            ========            ========
</TABLE>

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

                                       26
<PAGE>

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 shall be paid to the current General Partner. If such levels of
recovery are not achieved, the current General Partner will contribute the
amounts escrowed towards the recovery. In lieu of an escrow, 50% of all such
disposition fees have been paid directly to a restoration account and then
distributed among the three Partnerships. Fifty percent (50%) of the total
amount paid to the recovery was refunded to the current General Partner during
1996 after exceeding the recovery level of $4,500,000. The remaining amount
allocated to the Partnership may be owed to the current General Partner if the
$6,000,000 recovery level is met. As of December 31, 1999, the Partnership may
owe the current General Partner $16,296, which has been reflected as a recovery,
if the $6,000,000 recovery level is achieved. Management believes it is unlikely
that such a recovery level will be achieved.

8.   PMA INDEMNIFICATION TRUST:
     --------------------------

The Permanent Manager Agreement ("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, 1999. Funds are invested in U.S. Treasury
securities. In addition, $85,845 of earnings have been credited to the Trust as
of December 31, 1999. The rights of the Permanent Manager to the Trust shall be
terminated upon the earliest to occur of the following events: (i) the written
release by the Permanent Manager of any and all interest in the Trust; (ii) the
expiration of the longest statute of limitations relating to a potential claim
which might be brought against the Permanent Manager and which is subject to
indemnification; or (iii) a determination by a court of competent jurisdiction
that the Permanent Manager shall have no liability to any person with respect to
a claim which is subject to indemnification under the PMA. At such time as 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.  SUBSEQUENT EVENTS:
     ------------------

On February 15, 2000, the Partnership made distributions to the Limited Partners
of $985,000 amounting to $21.28 per Interest.

                                       27
<PAGE>

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

None

                                   PART III

Item 10.  Directors and Executive Officers of the Registrant

TPG is an Illinois corporation with its principal office at 101 West 11th
Street, Suite 1110, 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 ("PMA"), which remains in effect. TPG also
serves as the corporate general partner for DiVall 3. 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 49 - 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. Mr. Provo has previously
     served on the Board of Directors of the National Realty committee, a
     legislative "watchdog" organization for the commercial real estate industry
     headquartered in Washington, DC.

     Kristin J. Atkinson, Age 37 - Vice President - Finance and Administration.
     Ms. Atkinson joined TPG in September 1994 to provide management expertise
     in the areas of financial controls and management accounting services for
     four limited partnerships managed by TPG. Prior to joining TPG, Ms.
     Atkinson was Manager of Financial

                                       28
<PAGE>

     Reporting for Farm & Home Savings Association (a $4 billion savings and
     loan association) for nine years where she was responsible for supervision
     of the preparation of internal and external financial documentation,
     including regulatory filings for the savings association and its parent
     company. Ms. Atkinson graduated Magna Cum Laude with a B.S. in Accounting
     from Missouri Southern State College in Joplin, Missouri and worked as an
     accountant for James P. Arthur and Company for one year before joining Farm
     & Home Savings Association.

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:

     Steven Carson - Self-Employed Investment Advisor. Mr. Carson's primary
     client concentration includes labor union, pension, and annuity funds. Mr.
     Carson worked for First Albany Corporation for 11 years. He began his
     career as a retail broker at E.F Hutton & Company and served as Vice
     President, Shearson American Express from 1980-1986. Mr. Carson attended
     Northrup University in Los Angeles, California. He has served as Board
     Member and President on various Civic Boards in Syracuse, New York. Mr.
     Carson represents the broker-dealer community.

     Richard W. Otte - Editorial Writer. Mr. Otte is in his seventh year as an
     Editorial Board Member and editorial writer for The Volusion, a DeLand,
     Florida, subsidiary of the News-Journal Corporation in Daytona Beach,
     Florida. Mr. Otte retired in 1988 after 34 years with the Dispatch Printing
     Co., serving his last eight years as Managing Editor of the Columbus
     Dispatch and as a member of its Operating Committee. He previously was the
     executive sports editor of the newspaper in Ohio's capital city. Mr. Otte's
     49 years in professional journalism also include news reporting, editing
     and sports assignments with the Daytona Journal Herald and Springfield
     News-Sun. Mr. Otte is a Limited Partner representing DiVall 2.

     Albert Gerritz - Retired, Perinton Volunteer Ambulance Corps. Mr. Gerritz
     has held various offices in Finance and Administration, including
     President. Mr. Gerritz retired in 1986 after 36 years with Eastman Kodak
     Co. where he was Supervisor of Engineering Services, Research Labs. Mr.
     Gerritz was instrumental in identifying the need and pursuing the
     development of a unique research complex for Kodak, which became the case
     study for his consulting activities on research facilities nationwide. Mr.
     Gerritz also worked for forty years in the Bushnell's Basin Fire Department
     and served five years as Chief. Mr. Gerritz has a life membership in
     National Society of Professional Engineers. Mr. Gerritz is a Limited
     Partner representing DiVall 3.

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.

                                       29
<PAGE>

Item 12.  Security Ownership of Certain Beneficial Owners and Management

(a) As of December 31, 1999, 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, 1999, 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. TPG's
compensation includes a base fee equal to 4% of the Partnership's gross
collected receipts, subject to a minimum of $159,000 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 fee
resulting from recoveries from former general partners is designated as
restoration fees. TPG is also entitled to reimbursement for office rent and
utilities not to exceed $13,250 per year. 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. Between the Partnerships, TPG is entitled to an aggregate
minimum base management fee of $300,000 per year and reimbursement for office
rent 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 base fee and $13,250 maximum rent
reimbursement). TPG is entitled to an annual increase in the minimum base
management fee and maximum office overhead reimbursement in an amount not to
exceed the percentage increase in the Consumer Price Index ("CPI") for the
immediately preceding calendar year. Effective March 1, 1999, the minimum
management fee and the maximum reimbursement for office rent and overhead
increased by 1.6% representing the allowable annual CPI adjustments.
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 has an expiration date of December 31, 2002, but may 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

                                       30
<PAGE>

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, officers
liability or similar insurance coverage, at no cost to TPG. In addition, TPG is
granted the right to establish the Trust in an 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 cash of the Partnership. At
December 31, 1999 the Partnership had fully funded the Trust.

The following fees and reimbursements from the Partnership were incurred to
management in 1999:

<TABLE>
<CAPTION>
     The Provo Group, Inc.
     ---------------------
     <S>                                        <C>
     Management Fees                            $183,074
     Restoration Fees                                260
     Leasing Commissions                           6,319
     Office Overhead Allowance                    14,791
     Direct Cost Reimbursements                    8,119
                                                --------

     1999 Total                                 $212,563
                                                ========
</TABLE>


                                    PART IV


Item 14.  Exhibits, Financial Statement Schedules, 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 Public Accountants

          Balance Sheets, December 31, 1999 and 1998

          Statements of Income for the Years Ended December 31, 1999, 1998, and
          1997

          Statements of Partners' Capital for the Years Ended December 31, 1999,
          1998, and 1997

          Statements of Cash Flows for the Years Ended December 31, 1999, 1998,
          and 1997

          Notes to Financial Statements

     2.   Financial Statement Schedules

                                       31
<PAGE>

          Schedule III - Real Estate and Accumulated Depreciation

     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 Amend ment 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.

          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.

          99.0 Correspondence to the Limited Partners dated February 15, 2000
               regarding the Fourth Quarter 1999 distribution.

(b)  Reports on Form 8-K:

     The Registrant filed no reports on Form 8-K during the fourth quarter of
     fiscal year 1999.

                                       32
<PAGE>

            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
            SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                               DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                                                                                     Gross amount at which
                                      Initial cost to Partnership                                  carried at end of year (A)
                                  ------------------------------------                      ----------------------------------------
                                                                               Costs
                                                             Building       capitalized
                                                               and           subsequent                  Building and
        Property               Encumbrances     Land      Improvements    to acquisitions      Land      Improvements       Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>          <C>           <C>             <C>               <C>          <C>            <C>
Palm Gardens, Florida (1)         $   -     $  495,237     $   248,388        $    -        $  325,487    $   163,258   $   488,745
Phoenix, Arizona                      -        444,224         421,676             -           444,224        421,676       865,900
Phoenix, Arizona                      -            -           295,750             -               -          295,750       295,750
N. Richland Hills, Texas (2)          -        762,580         584,139             -           662,580        480,123     1,142,703
South Milwaukee, Wisconsin            -        274,749         454,064          79,219         274,749        533,283       808,032
Phoenix, Arizona (2)                  -        482,383         490,343             -           453,433        428,676       882,109
Santa Fe, New Mexico                  -            -           451,230             -               -          451,230       451,230
Augusta, Georgia                      -        215,416         434,178             -           215,416        434,178       649,594
Charleston, South Carolina            -        273,619         323,162             -           273,619        323,162       596,781
Park Forest, Illinois                 -        187,900         393,038             -           187,900        393,038       580,938
Aiken, South Carolina                 -        402,549         373,795             -           402,549        373,795       776,344
Augusta, Georgia                      -        332,154         396,659             -           332,154        396,659       728,813
Mt. Pleasant, South Carolina          -        286,060         294,878             -           286,060        294,878       580,938
Charleston, South Carolina            -        273,625         254,500             -           273,625        254,500       528,125
Aiken, South Carolina                 -        178,521         455,229             -           178,521        455,229       633,750
Des Moines, Iowa (2)                  -        164,096         448,529         287,991         161,996        551,056       713,052
Hartford, Wisconsin                   -        201,603         484,960             -           201,603        484,960       686,563
Milwaukee, Wisconsin (2)              -        409,143         600,902             -           409,143        573,871       983,014
North Augusta, Georgia                -        250,859         409,297             -           250,859        409,297       660,156
Charleston, South Carolina            -        286,068         294,870             -           286,068        294,870       580,938
Martinez, Georgia                     -        266,175         367,575             -           266,175        367,575       633,750
Grand Forks, North Dakota             -        172,701         566,674             -           172,701        566,674       739,375
Phoenix, Arizona (2)                  -            -           725,000          13,800             -          341,157       341,157
Phoenix, Arizona                      -        241,371         843,132             -           241,371        843,132     1,084,503
Ogden, Utah                           -        194,350         452,075             -           194,350        452,075       646,425
Fond du Lac, Wisconsin                -        297,418         552,349             -           297,418        552,349       849,767
Twin Falls, Idaho (2)                 -        155,269         483,763          60,000         155,269        353,622       508,891
Columbus, Ohio                        -        351,325         708,141             -           351,326        708,140     1,059,466
                           ---------------------------------------------------------------------------------------------------------
                                  $   0     $7,599,395     $12,808,296        $441,010      $7,298,596    $12,198,213   $19,496,809
                           =========================================================================================================
<CAPTION>
                                                                                               Life on which
                                                                                              depreciation in
                                                                                            in latest statement
                                                                                               of operations
                                          Accumulated        Date of          Date              is computed
         Property                        depreciation     construction      acquired               (Years)
---------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>              <C>               <C>             <C>
Palm Gardens, Florida (1)                 $  101,377             -           3/11/88                 31.5
Phoenix, Arizona                             194,758             -           6/15/88                 31.5
Phoenix, Arizona                             136,597             -           6/15/88                 31.5
N. Richland Hills, Texas (2)                 234,961             -           7/15/88                 31.5
South Milwaukee, Wisconsin                   216,847           1986           8/1/88                 31.5
Phoenix, Arizona (2)                         196,662             -           8/15/88                 31.5
Santa Fe, New Mexico                         161,971             -          10/10/88                 31.5
Augusta, Georgia                             168,720             -          12/22/88                 31.5
Charleston, South Carolina                   125,779             -          12/22/88                 31.5
Park Forest, Illinois                        152,773             -          12/22/88                 31.5
Aiken, South Carolina                        143,874             -           2/21/89                 31.5
Augusta, Georgia                             152,675             -           2/21/89                 31.5
Mt. Pleasant, South Carolina                 113,499             -           2/21/89                 31.5
Charleston, South Carolina                    98,157             -           2/21/89                 31.5
Aiken, South Carolina                        175,218             -           3/14/89                 31.5
Des Moines, Iowa (2)                         248,571           1989           8/1/89                 31.5
Hartford, Wisconsin                          181,276             -           4/28/89                 31.5
Milwaukee, Wisconsin (2)                     220,931             -            8/2/89                 31.5
North Augusta, Georgia                       140,826             -          12/29/89                 31.5
Charleston, South Carolina                   101,455             -          12/29/89                 31.5
Martinez, Georgia                            126,470             -          12/29/89                 31.5
Grand Forks, North Dakota                    194,974             -          12/28/89                 31.5
Phoenix, Arizona (2)                         169,524             -            1/1/90                 31.5
Phoenix, Arizona                             290,095             -            1/1/90                 31.5
Ogden, Utah                                  179,721             -           1/31/90                 31.5
Fond du Lac, Wisconsin                       192,045             -            1/5/90                 31.5
Twin Falls, Idaho (2)                        167,289             -           3/21/90                 31.5
Columbus, Ohio                               230,434             -            6/1/90                 31.5
                           ------------------------------------------------------------------------------------------------------
                                          $4,817.399
                           ======================================================================================================
</TABLE>

(1) This property was written down to its estimated net realizable value of
    $400,000 at December 31, 1995.
(2) This property was written down to its estimated net realizable value at
    December 31, 1998

(A) Represents aggregate costs for federal income tax purposes.

                                       33
<PAGE>

            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

            SHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

                               DECEMBER 31, 1999


(B) Reconciliation of "Real Estate and Accumulated Depreciation":


<TABLE>
<CAPTION>
                                  Year Ended     Year Ended                                      Year Ended    Year Ended
                                 December 31,   December 31,                                    December 31,  December 31,
Investment in Real Estate            1999           1998          Accumulated Depreciation          1999          1998
-------------------------------  -------------  -------------  -------------------------------  ------------  ------------
<S>                              <C>            <C>            <C>                              <C>           <C>
Balance at beginning of year      $20,143,165    $23,261,255   Balance at beginning of year       $4,671,630    $4,795,109
                                                               Additions charged to costs and
Additions                              13,800              0   expenses                              364,349       405,430

Deletions:

  Due to disposition                 (660,156)    (2,432,747)  Deletion due to real estate
                                                               disposition                          (218,580)     (528,909)


  Due to property write-downs               0       (685,343)
                                  -----------    -----------                                      ----------    ----------
Balance at end of year            $19,496,809    $20,143,165   Balance at end of year             $4,817,399    $4,671,630
                                  ===========    ===========                                      ==========    ==========
</TABLE>

                                       34
<PAGE>

                                   SIGNATURES

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


DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP


By:  The Provo Group, Inc., General Partner



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


Date:  March 26, 2000


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


By:  The Provo Group, Inc., General Partner



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


Date:  March 26, 2000



By:  /s/Kristin J. Atkinson
     -------------------------------------------------------
     Kristin J. Atkinson
     Vice President - Finance and Administration


Date:  March 26, 2000

                                       35