<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, 2000
                                        ---------------------------------------

                                      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: 28-29
                                                     -------
<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, 2000, the Partnership consisted
of one General Partner and 2,447 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 a video rental store and a child care
center. At December 31, 2000, the Partnership owned 27 properties with specialty
leasehold improvements in 11 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
the loss of expected lease income for the Partnership. Management will use its
best efforts to vigorously

                                       2
<PAGE>

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 four 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 and records, and individual
Advisory Board members have the right to communicate directly with the

                                       3
<PAGE>

Limited Partners concerning Partnership business. Members of the Advisory Board
are compensated $1,500 annually and $500 for each quarterly meeting attended.

The Advisory Board currently consists of a broker dealer representative, William
Arnold; and Limited Partners from each of the two remaining Partnerships:
Richard Otte and Jesse Small from the Partnership, and Albert Kramer 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, 2000:

<TABLE>
<CAPTION>
                                                                                                   Lease
Acquisi-       Property Name                                         Purchase         Rental Per   Expiration        Renewal
tion Date      & Address                         Lessee              Price (1)        Annum        Date              Options
---------      ---------                         ------              ---------        -----        ----              -------
<S>            <C>                               <C>                 <C>              <C>          <C>               <C>
03/11/88       Miami Subs                        QSR, Inc.               $743,625      $54,000    03-30-2016         None
               US-1 Near PGA Blvd
               Palm Beach, FL

06/15/88       Denny's                           DenAmerica, Inc.       1,087,137(2)    90,000    08-31-2009           (3)
               8801 N 7th St
               Phoenix, AZ

07/15/88       Hooter's                          TWI X, Inc.            1,346,719       95,000    07-15-2008         None
               7669 Grapevine Hwy
               N Richland Hills, TX

08/01/88       Hardee's                          Hardee's Food          1,091,190(2)    58,667    11-30-2001           (3)
               106 N Chicago Ave                 Systems, Inc.
               S Milwaukee, WI

08/15/88       Denny's                           First Foods, Inc.      1,155,965(2)    65,000    12-31-2008         None
               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 Orlando,        596,781       76,920     11-6-2016         None
               1721 Sam Rittenburg Blvd          Ltd.
               Charleston, SC

12/22/88       Wendy's                           WenSouth Orlando,        649,594       86,160     11-6-2016         None
               3013 Peach Orchard Rd             Ltd.
               Augusta, GA

12/29/88       Popeye's                          Stillman Mgmt.           580,938       77,280    12-31-2009         None
               2562 Western Ave                  Co., Inc.
               Park Forest, IL
</TABLE>

                                       4
<PAGE>

<TABLE>
<CAPTION>
                                                                                                       Lease
Acquisi-       Property Name                                            Purchase          Rental Per   Expiration          Renewal
tion Date      & Address                         Lessee                 Price (1)         Annum        Date                Options
---------      ---------                         ------                 ---------         -----        ----                -------
<S>            <C>                               <C>                    <C>               <C>          <C>                 <C>
02/21/89       Wendy's                           WenSouth Orlando,        776,344          96,780        11-6-2016         None
               1901 Whiskey Rd                   Ltd.
               Aiken, SC

02/21/89       Wendy's                           WenSouth Orlando,        728,813          96,780        11-6-2016         None
               1730 Walton Way                   Ltd.
               Augusta, GA

02/21/89       Wendy's                           WenSouth Orlando,        528,125          70,200        11-6-2016         None
               347 Folly Rd                      Ltd.
               Charleston, SC

02/21/89       Wendy's                           WenSouth Orlando,        580,938          77,280        11-6-2016         None
               361 Hwy 17 Bypass                 Ltd.
               Mount Pleasant, SC

03/14/89       Wendy's                           WenSouth Orlando,        633,750          90,480        11-6-2016         None
               1004 Richland Ave                 Ltd.
               Aiken, SC

04/20/89       Hostetlers, BBQ                   Hickory Park, Inc.       897,813(2)       60,000        7-15-2008           (3)
               4875 Merle Hay
               Des Moines, IA

04/28/89       Hardee's                          Hardee's Food            686,563          64,000       04-30-2009           (3)
               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           (3)
               4000 S 27th St                    Systems, Inc.
               Milwaukee, WI

12/28/89       Village Inn                       Columbia VI,             845,000(2)       60,000       11-30-2009           (3)
               2451 Columbia Rd                   L.L.C.
               Grand Forks, ND

12/29/89       Wendy's                           WenSouth Orlando,        660,156          87,780        11-6-2016         None
               1717 Martintown Rd                Ltd.
               N Augusta, SC

12/29/89       Wendy's                           WenSouth Orlando,        580,938          77,280        11-6-2016         None
               1515 Savannah Hwy                 Ltd.
               Charleston, SC

12/29/89       Wendy's                           WenSouth Orlando,        633,750          84,120        11-6-2016         None
               3869 Washington Rd                Ltd.
               Martinez, GA

01/01/90       Sunrise Preschool                 Sunrise                1,182,735(2)      134,136       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           (3)
               20 N Pioneer Rd                   Systems, Inc.
               Fond du lac, WI

01/31/90       Blockbuster Video                 Blockbuster              646,425           9,920       01-31-2001           (6)
               336 E 12th St                     Videos, Inc.
               Ogden, UT

03/21/90       Fiesta Time                       DenAmerica, Inc.       1,179,501(2)       85,800       04-30-2012           (3)
               688 N Blue Lakes Blvd
               Twin Falls, ID
</TABLE>

                                       5
<PAGE>

<TABLE>
<CAPTION>
                                                                                       Lease
Acquisi-       Property Name                                            Purchase       Rental Per       Expiration         Renewal
tion Date      & Address                         Lessee                 Price (1)      Annum            Date               Options
---------      ---------                         ------                 ---------      -----            ----               -------
<S>            <C>                               <C>                  <C>              <C>              <C>                <C>
05/02/90       Mulberry Street Grill (4)         Mr. Munchies, Inc.       514,259(2)       61,200       05-30-2008         None
               3752 E Ind School
               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
                                                                      $22,774,942      $2,118,563
                                                                      ===========      ==========
</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.

          (6)  Lease renewal negotiations have been finalized with Blockbuster,
               however, the lease amendment has not been formally executed. The
               lease will be extended to January 31, 2006 with two(2) five year
               options.

          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 at a gain
          of approximately $26,000.

          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
          entered into a termination agreement with the ground lessor for this
          property during 2000, which resulted in a one-time payment of $90,000
          in exchange for a release of all future obligations. Possession of the
          property was returned to the ground lessor, resulting in a $153,000
          loss.

          During the Fourth Quarter of 2000, Management negotiated the extension
          of the leases on the ten (10) Wendy's restaurants from original
          expirations ranging from 2008 to 2009, to new expiration dates of
          November 2016. In connection with these extensions, a commission of
          $190,000 was paid to an affiliate of the General Partner.

          Item 3.  Legal Proceedings

          None.

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

          None.

                                       6
<PAGE>

                                     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, 2000 there were 2,447 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 2000 and 1999,
     $2,635,000 and $2,575,000, respectively, were distributed in the aggregate
     to the Limited Partners. The General Partner received aggregate
     distributions of $6,887 and $8,190 in 2000 and 1999, respectively.

Item 6.   Selected Financial Data

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

<TABLE>
<CAPTION>
                     December 31, 2000, 1999, 1998, 1997, and 1996
                      (not covered by Independent Auditor's Report)

-------------------------------------------------------------------------------------------------------------------
                                   2000             1999               1998              1997              1996
-------------------------------------------------------------------------------------------------------------------
<S>                             <C>               <C>                <C>               <C>               <C>
Total Revenue                   $2,853,286        $3,024,407         $3,622,550        $3,448,300        $5,316,853
-------------------------------------------------------------------------------------------------------------------
Net Income                       1,721,791         2,047,520          1,524,131         2,183,977         3,277,512
-------------------------------------------------------------------------------------------------------------------

Net Income per Limited
Partner
Interest                             36.83             43.80              32.60             46.72             70.11
-------------------------------------------------------------------------------------------------------------------
Total Assets                    16,199,631        17,125,388         17,693,852        20,894,198        23,379,356
-------------------------------------------------------------------------------------------------------------------
Total Partners' Capital         15,953,648        16,873,744         17,409,414        20,479,121        22,903,880
-------------------------------------------------------------------------------------------------------------------
Cash Distributions per
Limited Partnership
Interest                             56.94             55.64              99.07             99.39            147.47
-------------------------------------------------------------------------------------------------------------------
</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

                                       7
<PAGE>

Liquidity and Capital Resources:
-------------------------------

Investment Properties and Net Investment in Direct Financing Leases
-------------------------------------------------------------------

The Properties, including equipment held by the Partnership at December 31,
2000, were originally purchased at a price, including acquisition costs, of
approximately $22,775,000.

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 at a gain of approximately $26,000.

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 entered into a termination agreement
with the ground lessor of the property during 2000, which resulted in a one-time
payment of $90,000 in exchange for a release of all future obligations.
Possession of the property was returned to the ground lessor, resulting in a
$153,000 loss.

During the Fourth Quarter of 2000, Management negotiated the extension of the
leases on the ten (10) Wendy's restaurants from original expirations ranging
from 2008 to 2009, to new expiration dates of November 2016.

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

Cash and cash equivalents, held by the Partnership, totaled approximately
$752,000 at December 31, 2000, compared to $1,387,000 at December 31, 1999. The
Partnership designated cash of $575,000 to fund the Fourth Quarter 2000
distributions to Limited Partners paid in February 2001, $128,000 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.

Deferred charges totaled approximately $263,000 and $85,000, net of
amortization, at December 31, 2000 and 1999, respectively. Deferred charges
represent leasing commissions paid when properties are leased or upon the
negotiated extension of a lease. Leasing commissions are capitalized and
amortized over the life of the lease. During 2000, a commission of $190,000 was
paid to an affiliate of the General Partner upon the negotiated extension of the
leases on the ten(10) Wendy's restaurants.

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

Accounts payable and accrued expenses at December 31, 2000, in the amount of
$40,000, primarily represented the year-end accruals of legal and auditing fees.

                                       8
<PAGE>

Due to the Current General Partner amounted to $3,000 at December 31, 2000,
representing the General Partner's portion of the Fourth Quarter distribution.

Partners' Capital:
-----------------

Net income for the year was allocated between the General Partner and the
Limited Partners, 1% and 99%, respectively, as provided in the Partnership
Agreement as discussed more fully in Note 4 of the financial statements included
in Item 8 of this report. The former general partners' deficit capital account
balance was reallocated to the Limited Partners at December 31, 1993. Refer to
Note 9 to 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 2000 of $2,635,000 and $6,887, respectively, have also been in accordance
with the Partnership Agreement. The Fourth Quarter 2000 distribution of $575,000
was paid to the Limited Partners on February 15, 2001.

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

The Partnership reported net income for the year ended December 31, 2000, in the
amount of $1,722,000 compared to net income for the years ended December 31,
1999 and 1998, of $2,048,000 and $1,524,000, 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 or losses on the disposition of properties and the
reversal of a portion of the former general partner receivable write-off.

Revenues
--------

Total revenues were $2,853,000, $3,024,000, and $3,623,000, for the years ended
December 31, 2000, 1999, and 1998, respectively. A decrease in fixed rents
resulted from tenant turnover, property sales, and modified leases. 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. Recoveries received during 2000 totaled $4,000.

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, 2000, 1999, and 1998, cash expenses amounted to
approximately 21%, 18%, and 24%, of total revenues, respectively. Total
expenses, including non-cash items, amounted to approximately 40%, 32% and 58%,
of total revenues for the years ended December 31, 2000, 1999, and 1998,
respectively. Items negatively impacting expenses during the last three years
include expenses incurred primarily in relation to non-cash write-offs, property
write-downs and real estate taxes. 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. Also during 2000, the Partnership paid a one-time $90,000 fee to
terminate a ground lease. In connection with the termination, the property was
returned to the ground lessor, resulting in a $153,000 loss.

Charge-offs of uncollectible rent, 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.

                                       9
<PAGE>

Write-offs for uncollectible rents and receivables amounted to $6,800, $3,400,
and $123,000 at December 31, 2000, 1999, and 1998, respectively. The write-offs
are the result of defaults as well as modifications to several property leases
since inception of the Partnership. The 1998 write-off related to certain unpaid
rent and notes receivable from DenAmerica, Inc. a tenant of two of the
Partnership's Denny's properties.

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

Disposition 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.

Selected Quarterly Financial Information (unaudited)
----------------------------------------------------

                                           Quarter Ended
                    March 31,       June 30,     September 30,     December 31,
                      2000             2000          2000             2000
                      ----             ----          ----             ----
Revenues            $583,668        $613,248       $775,092         $881,278

Net Income          $353,265        $355,572       $346,275         $ 66,679
Net Income Per Unit $   7.56        $   7.61       $   7.41         $  14.25

                                           Quarter Ended
                    March 31,       June 30,     September 30,     December 31,
                      1999            1999           1999             1999
                      ----            ----           ----             ----

Revenues            $722,032        $795,374       $693,925         $813,076

Net Income          $493,858        $577,056       $461,666         $514,940
Net Income Per Unit $  10.56        $  12.34       $   9.88         $  11.02

Percentage rent revenues were recognized evenly throughout the year during 1999.
However, during 2000, recognition of percentage rents did not occur until the
tenant actually reached their breakpoint specified in their lease as required by
SAB 101.

Inflation:
---------

Inflation has a minimal effect on operating earnings and related cash flows from
a portfolio of triple net leases. By their nature, such leases actually fix
revenues and are not impacted by rising costs of maintenance, insurance, or real
estate taxes. Although the majority of the Partnership's leases have percentage
rent clauses, revenues from percentage rents represented only 19% of rental
income for 2000. 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.

Item 7A.  Quantitative and Qualitative Disclosure About Market Risk

None.

                                       10
<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             . . . . . . . . . . . . . . . . .         12

        Balance Sheets, December 31, 2000 and 1999           . . . . . . . . . . . . . . . . .         13 - 14

        Statements of Income for the Years
        Ended December 31, 2000, 1999, and 1998              . . . . . . . . . . . . . . . . .         15

        Statements of Partners' Capital for the
        Years Ended December 31, 2000, 1999, and 1998        . . . . . . . . . . . . . . . . .         16

        Statements of Cash Flows for the Years
        Ended December 31, 2000, 1999, and 1998              . . . . . . . . . . . . . . . . .         17

        Notes to Financial Statements                        . . . . . . . . . . . . . . . . .         18 - 25

        Schedule III--Real Estate and Accumulated
        Depreciation                                          . . . . . . . . . . . . . . . . .        31 - 32
</TABLE>

                                       11
<PAGE>

                                                          [LOGO ARTHUR ANDERSEN]

                   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, 2000
and 1999, and the related statements of income, partners' capital and cash
flows for each of the three years in the period ended December 31, 2000.
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, 2000 and 1999, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 2000, 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.


/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP


Chicago, Illinois
January 12, 2001
<PAGE>

            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                                BALANCE SHEETS

                          December 31, 2000 and 1999
                          --------------------------

<TABLE>
<CAPTION>
                                    ASSETS

                                                                           December 31,           December 31,
                                                                               2000                   1999
                                                                           ------------           ------------
<S>                                                                        <C>                    <C>
INVESTMENT PROPERTIES AND EQUIPMENT:(Note 3)

         Land                                                               $ 7,298,596            $ 7,298,596
         Buildings                                                           11,902,463             12,198,213
         Equipment                                                              669,778                669,778
         Accumulated depreciation                                            (5,694,980)            (5,487,177)
                                                                            -----------            -----------

                  Net investment properties and equipment                    14,175,857             14,679,410
                                                                            -----------            -----------

OTHER ASSETS:

         Cash and cash equivalents                                              752,060              1,387,306
         Cash held in Indemnification Trust (Note 8)                            356,153                335,845
         Rents and other receivables (Net of allowance of $44,802 in 1999)      530,379                489,412
         Deferred rent receivable                                               105,684                134,063
         Prepaid insurance                                                       16,091                 14,392
         Deferred charges                                                       263,407                 84,960
         Unsecured notes receivable from lessees (Net of allowance of
           $50,000 in 2000 and 1999)                                                  0                      0
                                                                            -----------            -----------

                  Total other assets                                          2,023,774              2,445,978
                                                                            -----------            -----------

                  Total assets                                              $16,199,631            $17,125,388
                                                                            ===========            ===========
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       13
<PAGE>

            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                                BALANCE SHEETS

                          December 31, 2000 and 1999
                          --------------------------

                       LIABILITIES AND PARTNERS' CAPITAL

<TABLE>
<CAPTION>
                                                                            December 31,    December 31,
                                                                                2000            1999
                                                                            -------------   ------------
<S>                                                                         <C>             <C>
LIABILITIES:
         Accounts payable and accrued expenses                               $     40,059    $    50,286
         Due to current General Partner                                             2,667          1,968
         Security deposits                                                        117,850        117,850
         Unearned rental income                                                    85,407         81,540
                                                                             ------------    -----------

                              Total liabilities                                   245,983         251,644
                                                                             ------------    -----------

CONTINGENT LIABILITIES: (Note 7)

PARTNERS' CAPITAL: (Notes 1, 4 and 9)
         Current General Partner -
                  Cumulative net income                                           154,838         137,620
                  Cumulative cash distributions                                   (64,006)        (57,119)
                                                                             ------------    -----------
                                                                                   90,832          80,501
                                                                             ------------    -----------
         Limited Partners (46,280.3 interests outstanding)
                  Capital contributions, net of offering costs                 39,358,468      39,358,468
                  Cumulative net income                                        21,694,845      19,990,272
                  Cumulative cash distributions                               (44,350,268)    (41,715,268)
                  Reallocation of former general partners' deficit capital       (840,229)       (840,229)
                                                                             ------------    -----------

                                                                               15,862,816      16,793,243
                                                                             ------------    -----------

                           Total partners' capital                             15,953,648      16,873,744
                                                                             ------------    -----------

                           Total liabilities and partners' capital           $ 16,199,631    $ 17,125,388
                                                                             ============    ============
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       14
<PAGE>

            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                             STATEMENTS OF INCOME

             For the Years Ended December 31, 2000, 1999, and 1998
             -----------------------------------------------------

<TABLE>
<CAPTION>
                                                                               2000             1999              1998
                                                                               -----            -----             ----
<S>                                                                         <C>               <C>               <C>
REVENUES:
   Rental income (Note 5)                                                   $2,786,584        $2,768,242        $2,764,028
   Interest income                                                              61,221            56,938           123,478
   Net other income                                                              1,773            88,139            55,142
   Recovery of amounts previously written off (Note 2)                           3,708            85,380            41,015
   Net gain on disposal of assets                                                    0            25,708           638,887
                                                                            ----------        ----------        ----------
                                                                             2,853,286         3,024,407         3,622,550
                                                                            ----------        ----------        ----------
EXPENSES:
   Partnership management fees (Note 6)                                        187,038           183,074           180,450
   Disposition fees (Note 6)                                                         0                 0            75,750
   Restoration fees (Note 6)                                                       148               260                 0
   Appraisal fees                                                                    0                 0            58,575
   Environmental inspections                                                         0                 0            48,250
   Land title surveys                                                                0                 0            66,150
   Insurance                                                                    17,864            22,770            23,319
   General and administrative                                                   81,814            71,574           108,569
   Advisory Board fees and expenses                                             12,360            11,425            15,766
   Selling Commissions - Non-affiliate                                               0            15,750                 0
   Loss on Disposal of property (Note 3)                                       153,159            12,699                 0
   Real estate taxes                                                                 0            10,032             9,323
   Ground lease payments (Note 3)                                               92,182           125,840           126,541
   Expenses incurred due to default by lessee                                    2,520             8,995             3,403
   Professional services                                                       125,497           101,440           150,639
   Professional services related to Investigation                                    0                 0             1,279
   Ground lease termination fee (Note 3)                                        90,000                 0                 0
   Depreciation                                                                350,394           369,989           412,950
   Amortization                                                                 11,709            39,639             9,252
   Provision for uncollectible rents and other receivables                       6,810             3,400           122,860
   Write down of properties to net realizable value (Note 3)                         0                 0           685,343
                                                                            ----------        ----------        ----------
                                                                             1,131,495           976,887         2,098,419
                                                                             ---------        ----------        ----------
NET INCOME                                                                  $1,721,791        $2,047,520        $1,524,131
                                                                            ==========        ==========        ==========
NET INCOME - CURRENT GENERAL PARTNER                                        $   17,218        $   20,475        $   15,241
NET INCOME - LIMITED PARTNERS                                                1,704,573         2,027,045         1,508,890
                                                                            ----------        ----------        ----------
                                                                            $1,721,791        $2,047,520        $1,524,131
                                                                            ==========        ==========        ==========
NET INCOME PER LIMITED PARTNERSHIP
  INTEREST, based on 46,280.3 Interests outstanding                         $    36.83        $    43.80        $    32.60
                                                                            ==========        ==========        ==========
</TABLE>



        The accompanying notes are an integral part of these statements.

                                       15
<PAGE>

            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                        STATEMENTS OF PARTNERS' CAPITAL

             For the years ended December 31, 2000, 1999 and 1998
             ----------------------------------------------------

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

                                                  Cumulative    Cumulative
                                                     Net           Cash
                                                   Income      Distributions       Total
                                                   -------     -------------       -----
<S>                                               <C>          <C>                <C>
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
                                                  ========          ========      =======
Cash Distributions
 ($56.94 per limited partnership interest)                            (6,887)      (6,887)
Net Income                                          17,218                         17,218
                                                  --------          --------      -------
BALANCE AT DECEMBER 31, 2000                      $154,838          $(64,006)     $90,832
                                                  ========          ========      =======

<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, 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
                                                        ===========     ===========    ============     =========   ===========
Cash Distributions
 ($56.94 per limited partnership interest)                                               (2,635,000)                 (2,635,000)
Net Income                                                                1,704,573                                   1,704,573
                                                        -----------     -----------    ------------     ---------   -----------
BALANCE AT DECEMBER 31, 2000                            $39,358,468     $21,694,845    $(44,350,268)    $(840,229)  $15,862,816
                                                        ===========     ===========    ============     =========   ===========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       16
<PAGE>

            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
                           STATEMENTS OF CASH FLOWS

             For the Years Ended December 31, 2000, 1999, and 1998
             -----------------------------------------------------

<TABLE>
<CAPTION>
                                                                                  2000           1999            1998
                                                                                  ----           ----            ----
<S>                                                                            <C>            <C>            <C>
CASH FLOWS FROM (USED) IN OPERATING ACTIVITIES:
     Net income (loss)                                                         $ 1,721,791    $ 2,047,520    $ 1,524,131
     Adjustments to reconcile net income loss to net
           cash from (used in) operating activities -
                Depreciation and amortization                                      362,103        409,628        422,202
                Recovery of amount previously written off                           (3,708)       (22,790)       (41,015)
                Provision for uncollectible rents and other receivables              6,810          3,400        122,860
                Property write downs to net realizable value                             0              0        685,343
                Net (gain) loss on disposal of assets                              153,159        (13,009)      (638,887)
                Interest applied to Indemnification Trust account                  (20,308)       (14,638)       (16,454)
                (Increase) in rents and other receivables                          (47,777)      (123,097)      (207,412)
                Withdrawals for payment of real estate taxes                             0          4,404          6,847
                (Increase) Decrease in prepaids                                     (1,699)         5,500           (551)
                Decrease in deferred rent receivable                                28,379            836         47,871
                Increase (Decrease) in due to current General Partner                  699           (755)           213
                Increase (Decrease) in accounts payable and other                  (10,227)         5,236        (24,787)
                Increase (Decrease) in security deposits                                 0         15,833        (51,095)
                Increase (Decrease) in real estate taxes payable                         0        (73,469)        15,114
                Increase (Decrease) in unearned rental income                        3,867         20,361        (70,084)
                                                                               -----------    -----------    -----------

                          Net cash from (used in) operating activities           2,193,089      2,264,960      1,774,296
                                                                               -----------    -----------    -----------


CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
     Principal payments received on direct financing leases                              0         16,301         41,015
     Proceeds from sale of investment properties                                         0        471,505      2,542,725
     Investment in investment properties                                                 0        (13,800)             0
     Payment of leasing commissions                                               (190,156)       (33,441)       (13,976)
     Recoveries from former G.P. affiliates                                          3,708          6,489              0
     Principal receipts from unsecured notes                                             0          2,317         67,409
                                                                               -----------    -----------    -----------

                          Net cash from (used in) investing activities            (186,448)       449,371      2,637,173
                                                                               -----------    -----------    -----------

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
     Cash distributions to Limited Partners                                     (2,635,000)    (2,575,000)    (4,585,000)
     Cash distributions to current General Partner                                  (6,887)        (8,190)        (8,838)
                                                                               -----------    -----------    -----------

                          Net cash from (used in) financing activities          (2,641,887)    (2,583,190)    (4,593,838)
                                                                               -----------    -----------    -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              (635,246)       131,141       (182,369)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                   1,387,306      1,256,165      1,438,534
                                                                               -----------    -----------    -----------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                       $   752,060    $ 1,387,306    $ 1,256,165
                                                                               ===========    ===========    ===========
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       17
<PAGE>

            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                         NOTES TO FINANCIAL STATEMENTS

                       DECEMBER 31, 2000, 1999 AND 1998


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, 2000, the Partnership owned 27 properties with specialty
leasehold improvements in 11 of these properties.

Rental revenue from investment properties is recognized on the straight-line
basis over the life of the respective 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.

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

                                       18
<PAGE>

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, 2000, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$8,317,680.

                                       19
<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>
                                                                   2000                1999                1998
                                                                   ----                ----                ----
<S>                                                               <C>                 <C>                <C>
Net income, per statements of income                              $1,721,791          $2,047,520         $1,524,131

Book to tax depreciation difference                                  (43,538)            (65,606)           (32,592)
Book over tax gain from asset disposition                            (30,231)           (148,113)          (506,943)
Straight line rent adjustment                                         28,379                 836             47,871
Bad debt reserve/expense                                             (44,535)              3,060             41,475
Book valuation adjustment of real property                                 0                   0            685,342
Book valuation adjustment of equipment leases                              0                   0                  0
Other, net                                                             3,879              20,584            (69,826)
                                                                       -----              ------           --------
   Net income for tax reporting
    purposes                                                      $1,635,745          $1,858,281         $1,689,458
                                                                  ==========          ==========         ==========
</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, 2000, $5,788,000 of recoveries have
been received which exceeded the original estimate of $3 million. As a result,
in 1996, 1997, 1999 and 2000, the Partnership has recognized $1,117,000 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.

                                       20
<PAGE>

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

As of December 31, 2000, the Partnership owned 25 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, two (2)
Denny's restaurants, one (1) Fiesta Time restaurant, one (1) Mulberry Street
Grill restaurant, 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 27 properties are located in a total of thirteen (13) states.

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 at a gain of
approximately $26,000.

The tenant operating a Denny's restaurant on Camelback Road in Phoenix, Arizona,
did not formally exercise its option to extend its lease which expired 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 entered into a
termination agreement with the ground lessor of the property during 2000, which
resulted in a one-time payment of $90,000 in exchange for a release of all
future obligations. Possession of the property was returned to the ground
lessor, resulting in a $153,000 loss.

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, 2000, the minimum management fee and the
maximum reimbursement for office rent and overhead increased by 2.2%
representing the allowable annual Consumer Price Index adjustment per the
Permanent Manager Agreement ("PMA"). For purposes of computing the 4% overall
fee, gross receipts includes amounts recovered in connection with the
misappropriation of assets by the former general partners and their affiliates.
TPG has received fees from the Partnership totaling $55,185 to date on the
amounts recovered, which has been offset against the 4% minimum fee.

The Partnership owns two (2) restaurants, Kentucky Fried Chicken and Mulberry
Street Grill restaurant, which are located on parcels of land where it has
entered into long-term ground leases. One (1) of these leases is paid by the
tenant, Kentucky Fried Chicken, and one (1) is paid by the Partnership. The
lease paid by the Partnership is considered an operating lease and the lease
payments are expensed in the periods to which they apply. The lease terms
require aggregate minimum annual payments of approximately $66,000 and expires
in the year 2008.

                                       21
<PAGE>

During the Fourth Quarter of 2000, Management negotiated the extension of the
leases on the ten(10) Wendy's restaurants from original expirations ranging from
2008 to 2009, to new expiration dates of November 2016.

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.

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, 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

                                       22
<PAGE>

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.)

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

5.   LEASES:
     ------

Lease terms for the 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 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:

                                       23
<PAGE>

          Year ending
          December 31,
          2001                               $ 2,118,563
          2002                                 2,098,296
          2003                                 2,050,756
          2004                                 2,074,663
          2005                                 2,085,617
          Thereafter                          15,627,591
                                             -----------
                                             $26,055,486
                                             ===========

Percentage rentals included in rental income in 2000, 1999, and 1998 were
$548,180, $552,924, and $586,429, 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 2000.

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

Amounts incurred to the current General Partner for the years ended December 31,
2000, 1999, and 1998, 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, 2000      December 31, 1999      December 31, 1998
-----------------------                ------------------     ------------------     ------------------
<S>                                    <C>                    <C>                    <C>
Management fees                                 $187,038               $183,074               $180,450
Disposition fees                                       0                      0                 75,750
Restoration fees                                     148                    260                      0
Overhead allowance                                15,102                 14,791                 14,558
Leasing Commissions                              190,156                  6,319                 13,976
Reimbursement for out-of-pocket
expenses                                           9,983                  8,119                 28,906
Cash distribution                                  6,887                  8,190                  8,838
                                                --------               --------               --------

                                                $409,314               $220,753               $322,478
                                                ========               ========               ========
</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 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 original Partnerships. Fifty percent (50%) of the
total amount paid to the

                                       24
<PAGE>

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, 2000, 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, 2000. Funds are invested in U.S. Treasury
securities. In addition, $106,153 of earnings have been credited to the Trust as
of December 31, 2000. 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, 2001, the Partnership made distributions to the Limited Partners
of $575,000 amounting to $12.42 per Interest.

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

None

                                       25
<PAGE>

                                    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 50 - 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.

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

         William Arnold - Investment Broker. Mr. Arnold works as a financial
         planner and investment advisor at his company, Arnold & Company. Mr.
         Arnold graduated with a Master's Degree from the University of
         Wisconsin and is a Certified Financial Planner.

                                       26
<PAGE>

         Jesse Small - Self Employed. Mr. Small is the President of a small
         Accounting Firm. In addition to being a CPA, he has a Master's Degree
         in Economics. Mr. Small is a Limited Partner representing DiVall 2.

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

Item 12.  Security Ownership of Certain Beneficial Owners and Management

(a)  As of December 31, 2000, 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, 2000, 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

                                       27
<PAGE>

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, 2000, the minimum management fee and the maximum
reimbursement for office rent and overhead increased by 2.2% 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 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, 2000 the
Partnership had fully funded the Trust.

The Partnership paid the following fees and reimbursements to management in
2000:

         The Provo Group, Inc.
         ---------------------
         Management Fees                              $187,038
         Restoration Fees                                  148
         Leasing Commissions                           190,156
         Office Overhead Allowance                      15,102
         Direct Cost Reimbursements                      9,983
                                                      --------

         2000 Total                                   $402,427
                                                      ========

                                       28
<PAGE>

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, 2000 and 1999

                  Statements of Income for the Years Ended December 31, 2000,
                  1999, and 1998

                  Statements of Partners' Capital for the Years Ended December
                  31, 2000, 1999, and 1998

                  Statements of Cash Flows for the Years Ended December 31,
                  2000, 1999, and 1998

                  Notes to Financial Statements

         2.       Financial Statement Schedules

                  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 Amendment
                           No. 1 to the Partnership's Registration Statement on
                           Form S-11 as filed on February 22, 1988, and
                           incorporated herein by reference.

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

                                       29
<PAGE>

                  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, 2001 regarding the Fourth Quarter 2000
                           distribution.

(b)      Reports on Form 8-K:

         The Registrant filed no reports on Form 8-K during the fourth quarter
of fiscal year 2000.

                                       30
<PAGE>

            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
            SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                               DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                                                                                  Gross amount at which
                                      Initial cost to Partnership                               carried at end of year (A)
                                     -----------------------------                         ----------------------------------------

                                                                              Costs
                                                                           capitalized
                                                           Building         subsequent
                                                              and               to                       Building and
        Property             Encumbrances       Land      Improvements     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
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   $12,512,546       $  441,010     $ 7,298,596   $11,902,463   $ 19,201,059
                               ====================================================================================================

<CAPTION>

                                                                                            Life on which
                                                                                           depreciation in
                                                                                         in latest statement
                                                                                             of operations
                                   Accumulated          Date of           Date                is computed
                                  depreciation       construction       acquired                (years)
------------------------------------------------------------------------------------------------------------
<S>                               <C>                <C>               <C>              <C>
Palm Gardens, Florida (1)          $   104,487              -            3/11/88                  31.5
Phoenix, Arizona                       206,152              -            6/15/88                  31.5
N. Richland Hills, Texas (2)           247,219              -            7/15/88                  31.5
South Milwaukee, Wisconsin             232,574           1986             8/1/88                  31.5
Phoenix, Arizona (2)                   208,909              -            8/15/88                  31.5
Santa Fe, New Mexico                   176,197              -           10/10/88                  31.5
Augusta, Georgia                       181,669              -           12/22/88                  31.5
Charleston, South Carolina             135,218              -           12/22/88                  31.5
Park Forest, Illinois                  164,445              -           12/22/88                  31.5
Aiken, South Carolina                  155,044              -            2/21/89                  31.5
Augusta, Georgia                       164,528              -            2/21/89                  31.5
Mt. Pleasant, South Carolina           122,311              -            2/21/89                  31.5
Charleston, South Carolina             105,562              -            2/21/89                  31.5
Aiken, South Carolina                  188,822              -            3/14/89                  31.5
Des Moines, Iowa (2)                   263,092           1989             8/1/89                  31.5
Hartford, Wisconsin                    195,853              -            4/28/89                  31.5
Milwaukee, Wisconsin (2)               238,547              -             8/2/89                  31.5
North Augusta, Georgia                 153,313              -           12/29/89                  31.5
Charleston, South Carolina             110,451              -           12/29/89                  31.5
Martinez, Georgia                      137,685              -           12/29/89                  31.5
Grand Forks, North Dakota              212,263              -           12/28/89                  31.5
Phoenix, Arizona (2)                   176,297              -             1/1/90                  31.5
Phoenix, Arizona                       315,817              -             1/1/90                  31.5
Ogden, Utah                            192,339              -            1/31/90                  31.5
Fond du Lac, Wisconsin                 208,515              -             1/5/90                  31.5
Twin Falls, Idaho (2)                  175,664              -            3/21/90                  31.5
Columbus, Ohio                         252,229              -             6/1/90                  31.5
                                   -----------
                                   $ 5,025,202
                                   ===========
</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)  Approximates aggregate costs for federal income tax purposes.

                                      31

<PAGE>

            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

            SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

                               DECEMBER 31, 2000


(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               2000            1999         Accumulated Depreciation              2000            1999
-------------------------               ----            ----         ------------------------              -----        ----------
<S>                                <C>              <C>              <C>                               <C>             <C>
Balance at beginning of year        $19,496,809      $20,143,165     Balance at beginning of year       $4,817,399      $4,671,630

                                                                     Additions charged to costs and
Additions                                     0           13,800     expenses                              350,394         364,349

Deletions:
  Due to disposition                   (295,750)        (660,156)    Deletion due to real estate
                                                                     disposition                          (142,591)       (218,580)

  Due to property write-downs                 0                0
                                    -----------      -----------                                        ----------      ----------

Balance at end of year              $19,201,059      $19,496,809     Balance at end of year             $5,025,202      $4,817,399
                                    ===========      ===========                                        ==========      ==========
</TABLE>

                                       32
<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:      _______________________________________________
         Bruce A. Provo, President


Date:    March 26, 2001


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:      _________________________________________________
         Bruce A. Provo, President


Date:    March 26, 2001




By:      _________________________________________________
         Diane Conley
         Controller

Date:    March 26, 2001

                                       33
<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, 2001


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, 2001



By:      /s/ Diane Conley
         ------------------------------------------------
         Diane Conley
         Controller

Date:    March 26, 2001

                                       34