##### Table of Contents

---

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 fiscal year ended December 31, 2004



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 incorporation or organization) |  | (I.R.S. Employer Identification No.)



1100 Main Street,
Suite 1830 Kansas City, Missouri 64105

(Address of principal executive offices, including zip code)



(816) 421-7444

(Registrants telephone number, including area code)



---



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



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



---



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



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act).    Yes ̈No  x



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



Index to Exhibits located on page: 58 -59



---



---

##### Table of Contents

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, 2004, the Partnership consisted of
one General Partner (Management) and 2,105 Limited Partners owning an aggregate of 46,280.3 Limited Partnership Interests (the Interests) acquired at a public offering price of $1,000 per Interest before volume discounts. The Interests
were sold commencing February 23, 1988, pursuant to a Registration Statement on Form S-11 filed under the Securities Act of 1933 (Registration 33-18794) as amended. On June 30, 1989, the former general partners exercised their option to extend the
offering period to a date no later than February 22, 1990. On February 22, 1990, the Partnership closed the offering at 46,280.3 Interests ($46,280,300), providing net proceeds to the Partnership after volume discounts and offering costs of
$39,358,468.



The Partnership is currently engaged in the business of owning
and operating its investment portfolio of commercial real estate properties (the Properties.) The Properties are leased on a triple net basis to, and operated by, primarily franchisors or franchisees of national, regional and local
retail chains under long-term leases. The lessees are predominantly fast food, family style, and casual/theme restaurants, but also include a video rental store and a child-care center. At December 31, 2004, the Partnership owned 20 properties with
specialty leasehold improvements in six (6) of these properties, as noted in Item 2- Properties. During the Second Quarter of 2001, a consent solicitation was circulated, which if approved would have authorized the sale of the Partnerships
assets and dissolution of the Partnership (the 2001 Consent). A majority of the Limited Partners did not vote in favor of the 2001 Consent. Another consent solicitation was circulated during the Second Quarter of 2003, which if approved
would have authorized the sale of the Partnerships assets and dissolution of the Partnership (the 2003 Consent). A majority of the Limited Partners did not vote in favor of the 2003 Consent. Therefore, the Partnership continues to
operate as a going concern.



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



2



---

##### Table of Contents

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 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 lessees; and failure or withdrawal of any of the national franchises held by the Partnerships tenants. Each of these events, alone or in combination, would affect the liquidity level
of the lessees resulting in possible default by a tenant. Since the information regarding plans for future liquidity and expansion of closely held organizations, which are tenants of the Partnership, tend to be of a private and proprietary nature,
anticipation of individual liquidity problems is difficult, and prediction of future events is nearly impossible.



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



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



The Permanent Manager Agreement



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



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



3



---

##### Table of Contents

The PMA had an original expiration date of December 31, 2002, and was extended three years by the General Partner, TPG,
at the end of the original term. The new expiration date is December 31, 2005, but could be terminated earlier (a) by a vote at any time by a majority in interest of the Limited Partners, (b) upon the dissolution and winding up of the Partnership,
(c) upon the entry of an order of a court finding that the Permanent Manager has engaged in fraud or other like misconduct or has shown itself to be incompetent in carrying out its duties under the Partnership Agreement, or (d) upon sixty (60) days
written notice from the Permanent Manager to the Limited Partners of the Partnership.



Advisory Board



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



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



The Partnership has no employees.



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



Item 2. Properties



Original lease terms for the majority of the investment properties are generally 10 - 20 years from their inception. All leases are triple-net which require the tenant to
pay all property operating costs including maintenance, repairs, utilities, property taxes, and insurance. A majority of the leases contain percentage rent provisions, which require the tenant to pay a specified percentage (6% to 8%) of gross sales
above a threshold amount.



The Partnership owned the following Properties
(including specialty leasehold improvements for use in some of these properties) as of December 31, 2004:



|                 |  |                                                  |  |                              |  |                    |     |  |                  |  |                       |  |                
|---------------- |  | ------------------------------------------------ |  | ---------------------------- |  | ------------------ | --- |  | ---------------- |  | --------------------- |  | ---------------
|Acquisition Date |  | Property Name &
Address                          |  | Lessee                       |  | Purchase Price (1) |     |  | Rental Per Annum |  | Lease Expiration Date |  | Renewal Options
|06/15/88         |  | Chinese Super Buffet 8801 N 7th St
Phoenix, AZ   |  | Jun Cheng Pan & Yhen Yan Guo |  | 1,087,137          | (2) |  | 66,000           |  | 12-31-2012            |  | None           
|                 |  |                                                  |  |                              |  |                   
|07/15/88         |  | Hooters 7669 Grapevine Hwy N Richland Hills, TX |  | TWIX, Inc.                   |  | 1,346,719          |     |  | 95,000           |  | 07-15-2008            |  | None           



4



---

##### Table of Contents

|         |  |                                                              |  |                       |  |           |     |  |        |  |            |  |      |  
|-------- |  | ------------------------------------------------------------ |  | --------------------- |  | --------- | --- |  | ------ |  | ---------- |  | ---- | -
|         |  |                                                              |  |                       |  |          
|08/15/88 |  | Dennys 2360 W Northern Ave Phoenix, AZ                      |  | First Foods, Inc.     |  | 1,155,965 | (2) |  | 65,000 |  | 10-31-2007 |  | None |  
|         |  |                                                              |  |                       |  |          
|10/10/88 |  | Kentucky Fried Chicken (4) 1014 S St Francis
Dr Santa Fe, NM |  | Palo Alto, Inc,       |  | 451,230   |     |  | 60,000 |  | 06-30-2018 |  | None |  
|         |  |                                                              |  |                       |  |          
|12/22/88 |  | Wendys 1721 Sam Rittenburg Blvd
Charleston, SC              |  | WenCoast Restaurants  |  | 596,781   |     |  | 76,920 |  | 11-6-2016  |  | None |  
|         |  |                                                              |  |                       |  |          
|12/22/88 |  | Wendys 3013 Peach Orchard Rd Augusta, GA                    |  | WenCoast Restaurants  |  | 649,594   |     |  | 86,160 |  | 11-6-2016  |  | None |  
|         |  |                                                              |  |                       |  |          
|12/29/88 |  | Popeyes 2562 Western Ave Park Forest, IL                    |  | Quality Foods I, LLC. |  | 580,938   |     |  | 77,280 |  | 12-31-2009 |  | None |  
|         |  |                                                              |  |                       |  |          
|02/21/89 |  | Wendys 1901 Whiskey Rd Aiken, SC                            |  | WenCoast Restaurants  |  | 776,344   |     |  | 96,780 |  | 11-6-2016  |  | None |  
|         |  |                                                              |  |                       |  |          
|02/21/89 |  | Wendys 1730 Walton Way Augusta, GA                          |  | WenCoast Restaurants  |  | 728,813   |     |  | 96,780 |  | 11-6-2016  |  | None |  
|         |  |                                                              |  |                       |  |          
|02/21/89 |  | Wendys 347 Folly Rd Charleston, SC                          |  | WenCoast Restaurants  |  | 528,125   |     |  | 70,200 |  | 11-6-2016  |  | None |  
|         |  |                                                              |  |                       |  |          
|02/21/89 |  | Wendys 361 Hwy 17 Bypass Mount Pleasant, SC                 |  | WenCoast Restaurants  |  | 580,938   |     |  | 77,280 |  | 11-6-2016  |  | None |  
|         |  |                                                              |  |                       |  |          
|03/14/89 |  | Wendys 1004 Richland Ave Aiken, SC                          |  | WenCoast Restaurants  |  | 633,750   |     |  | 90,480 |  | 11-6-2016  |  | None |  
|         |  |                                                              |  |                       |  |          
|04/20/89 |  | Daytonas All Sports Café 4875 Merle
Hay Des Moines, IA      |  | Karl Shaen Valderrama |  | 897,813   | (2) |  | 60,000 |  | 02-28-08   |  | None |  
|         |  |                                                              |  |                       |  |          
|12/28/89 |  | Panda Buffet 2451 Columbia Rd Grand Forks, ND                |  | Panda Buffet, Inc.    |  | 845,000   | (2) |  | 34,000 |  | 6-30-2013  |  | (3   | )
|         |  |                                                              |  |                       |  |          
|12/29/89 |  | Wendys 1717 Martintown Rd N Augusta, SC                     |  | WenCoast Restaurants  |  | 660,156   |     |  | 87,780 |  | 11-6-2016  |  | None |  
|         |  |                                                              |  |                       |  |          
|12/29/89 |  | Wendys 1515 Savannah Hwy Charleston, SC                     |  | WenCoast Restaurants  |  | 580,938   |     |  | 77,280 |  | 11-6-2016  |  | None |  
|         |  |                                                              |  |                       |  |          
|12/29/89 |  | Wendys 3869 Washington Rd Martinez, GA                      |  | WenCoast Restaurants  |  | 633,750   |     |  | 84,120 |  | 11-6-2016  |  | None |  



5



---

##### Table of Contents

|         |  |                                             |  |                          |  |   |            |     |  |   |           |  |            |  |      |  
|-------- |  | ------------------------------------------- |  | ------------------------ |  | - | ---------- | --- |  | - | --------- |  | ---------- |  | ---- | -
|01/01/90 |  | Sunrise Preschool 4111 E Ray Rd Phoenix, AZ |  | Borg Holdings, Inc.      |  |   | 1,182,735  | (2) |  |   | 123,318   |  | 05-31-2009 |  | None |  
|         |  |                                             |  |                          |  |  
|01/31/90 |  | Blockbuster Video 336 E 12th St Ogden, UT   |  | Blockbuster Videos, Inc. |  |   | 646,425    |     |  |   | 110,750   |  | 01-31-2006 |  | (3   | )
|         |  |                                             |  |                          |  |  
|05/31/90 |  | Applebees 2770 Brice Rd Columbus, OH       |  | Thomas & King, Inc.      |  |   | 1,434,434  | (2) |  |   | 135,780   |  | 10-31-2009 |  | None |  
|         |  |                                             |  |                          |  |   |            |     |  |   |           |  |            |  |      |  
|         |  |                                             |  |                          |  | $ | 15,997,585 |     |  | $ | 1,670,908 |  |            |  |      |  
|         |  |                                             |  |                          |  |   |            |     |  |   |           |  |            |  |      |  

---

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 at tenants option.
|--- | --------------------------------------------

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



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



Popeyes- Park Forest,
IL



The tenant has remained current on its monthly lease obligations.
However, the tenant was delinquent on its January 2002 percentage rent billing for the year ended December 31, 2001 of $72,000 and its February 2003 percentage rent billing for the year ended December 21, 2002 of $31,500. Management continued to
pursue legal remedies in relation to the collection of the tenants percentage rent past due balance of approximately $103,500, however, due to the uncertainty of collection, the entire amount was fully reserved in the Fourth Quarter of 2003.
In addition, through October 31, 2004 Management had charged Popeyes late fees totaling $93,000 (which includes 2004, 2003 and 2002 late fee charges of $41,000, $35,000 and $17,000, which were not recognized as revenue due to uncertainty of
collection) in relation to the percentage rent balances due. The tenant was delinquent on its reporting of its 2003 monthly sales figures and therefore percentage rents for the year ended December 31, 2003 were not accrued by the Partnership at
December 31, 2003. The delinquent 2003 sales figures were received by Management in June 2004 and Popeyes 2003 percentage rent of approximately $19,000 was then billed in the Third Quarter of 2004. However, due to the uncertainty of collection
it was determined that the amount would not be recognized as revenue for financial statement purposes until such time as the rent was collected. Popeyes did not exceed its gross sales breakpoint in 2004 and therefore percentage rent was not
recorded in 2004 for the tenant.



Per the lease and its amendments
(Lease), Popeyes is to timely pay as they come due all taxes charged to the property. However, the tenant failed to pay the 2002 property taxes of approximately $40,000, which were due and payable to Cook County, Illinois in 2003,
as well as approximately $5,000 in assessed late fees. In the Fourth Quarter of 2003 the Partnership accrued approximately $86,000 in property taxes, which included the 2002 property taxes and associated late fees, as well as the estimated 2003
property taxes that were to be due in 2004. The 2002 property taxes and late fees were paid by the Partnership in January 2004 and the first and second installments for the 2003 taxes were paid in February and September 2004, respectively. In March
2004 Management learned that the tenant had also failed to pay the $31,000 second installment of its 2001 property taxes. The Partnership paid the 2001 delinquent property taxes, as well as approximately $10,000 in assessed late fees, in March 2004.



6



---

##### Table of Contents

A Landlords 10 Day Notice Of Default (Notice), dated February 9, 2004, was sent to Quality Foods I,
LLC., the Popeyes tenant, demanding payment of the amount due for the 2002 property tax balance and unless payment was received by the Partnership on or before the expiration of ten (10) days after the date of service of the Notice, then the
Partnership would pursue all legal remedies available, including an action to recover possession and termination of the Lease. The Notice also stated that until such time the Lease is terminated, the tenants other legal obligations
(outstanding percentage rents and future monthly rents) continue in full.



In
March 2004 the Partnerships legal counsel obtained a court order of possession that stated that Popeyes was to vacate the property by April 2, 2004. In April 2004 Management entered into a verbal agreement with Popeyes that the
tenant: (1) pay $25,000 by wire or certified check per month until the Partnership is reimbursed in full for the approximately $107,000 in delinquent property taxes paid on Popeyes behalf (the Partnership received $25,000 in each April, May,
June, and July 2004 and received the final payment of approximately $7,000 in September 2004); and (2) fund the $22,000 2003 property tax second installment due in the Fourth Quarter 2004 through prorated monthly escrow payments made to the
Partnership from April through September 2004 (the Partnership received approximately $17,000 of the $22,000 in September 2004 and the remaining balance in November 2004). If the tenant adhered to this verbal agreement, Management intended to
re-evaluate outstanding percentage rents relative to appropriate and sustainable occupancy costs and defer any current action for possession.



A Release and Settlement Agreement was executed with Popeyes in November 2004. In settlement of all claims and disputes (Popeyes past due 2001 and 2002
percentage rent balances and the applicable allowances were removed from the balance sheet at November 30, 2004), the following significant items were agreed to: (1) Popeyes is to make monthly escrow property tax payments applicable to 2004
and for future property taxes due through out the remaining lease term obligation; (2) Popeyes gross sales breakpoint was increased to $1,000,000 and therefore, percentage rent shall be an amount equal to 8% of gross sales in excess of
$1,000,000.



Popeyes 2004 estimated property taxes have been prorated and
accrued on a monthly basis by the Partnership. In September 2004 the Partnership began billing Popeyes monthly property tax escrow charges. Escrow payments of approximately $7,400 were received by the Partnership in December 2004 and January
2005 in relation to Popeyes 2004 property taxes due in the year 2005. In 2004 property tax escrow charges were reflected in the financial statements as escrow payments were actually received, and were recorded as a reversal of 2004 property
tax expense equal to the amount of payment received.



Miami Subs- Palm
Beach, FL Property



A sales contract was executed in January 2004 for the
sale of the property in the Second Quarter of 2004 at a sales price of $650,000. The closing date on the sale of the property was June 2004 and the net sales proceeds totaled approximately $606,000. A net gain on the sale of $211,000 was recognized
in the Second Quarter of 2004. Closing and other sale related costs amounted to $44,000, which included sales commissions totaling $39,000, of which $19,500 was paid to a General Partner affiliate and $19,500 was paid to a non-affiliated broker.



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



7



---

##### Table of Contents

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



4785 Merle Hay Road- Des Moines, IA



In July 2004 the Partnership paid Daytonas- All Sports Cafés delinquent
2002 property taxes balance of approximately $15,000. Daytonas reimbursed the Partnership $5,000 in each August, September and October. Due to the property tax default Management requested that Daytonas begin escrowing for their next
property tax installment, which will be due in the First Quarter of 2005, with the Partnership. Escrow payments of approximately $800 were held by the Partnership at December 31, 2004.



The lease on the property in Des Moines, IA expired on December 31, 2002. In October 2002 Hickory Park, Inc. informed Management that they
would not be renewing the property lease. However, in January 2003 Management was notified that the sub-tenant, Daytonas- All Sports Cafe, did not vacate the Des Moines property and was continuing to operate the property as a restaurant.
Management allowed the sub-tenant a holdover lease for two months, and the Partnership received the January and February 2003 rent payments from Daytonas applicable to the holdover lease. In March 2003 Management executed a five (5) year
direct lease with Daytonas, which is set to expire in 2008. The first year base rent was $60,000. A leasing commission of $9,700 was paid to an affiliate of the General Partner in March 2003 upon the execution of the lease.



Twin Falls, ID property



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



In February 2003 Management entered into a purchase and sale agreement to sell
the vacant Twin Falls property at a sales price of $565,000. The closing date on the sale of the property was August 22, 2003 and the net sales proceeds totaled $530,000. A net gain of $215,000 was recognized in the Third Quarter of 2003 upon the
sale. Closing and other sale related costs amounted to $35,000, which included sales commissions of $22,000 to a non-affiliated broker and $11,000 to a General Partner affiliate in the Third Quarter of 2003.



During the Fourth Quarter of 2001, the Bankruptcy court granted the motion of Phoenix
Restaurant Group, Inc. (Phoenix) to reject the lease with the Partnership at the Twin Falls, Idaho location. The lease was terminated and rent income ceased in the Fourth Quarter of 2001. Although Phoenix had rejected the lease, its
subtenant, Fiesta Time, maintained possession of the property. Management, therefore, took legal action to evict Fiesta Time from the Twin Falls property. In the Fourth Quarter of 2002, a judgment was entered in Magistrate Court evicting Fiesta
Time. However, Fiesta Time appealed the action to District Court and the Court upheld the judgment in February 2003. The Partnership then received $30,000 in past rent that the court had required Fiesta Time to escrow during the court
proceedings.



8



---

##### Table of Contents

Hardees property- Fond du Lac, WI



During June 2003, Management entered into a contract to sell the Hardees restaurant in Fond du Lac, WI at a sales price of $720,000.
The closing date on the sale of the property was July 30, 2003 and the net sales proceeds totaled $690,000. A net gain on the sale of $80,000 was recognized in the Third Quarter of 2003. Closing and other sale related costs amounted to $30,000,
which included a sales commission totaling $22,000 paid to a General Partner affiliate in the Third Quarter of 2003.



Milwaukee, WI property



In May 2003 Management entered into a contract to sell the Milwaukee, WI property to the tenant at a sales price of $825,000. The property was being operated as Omega Restaurant. The closing date on the sale of the
property was July 28, 2003, and the net sales proceeds totaled $799,000. A net gain on the sale of $9,000 was recognized in the Third Quarter of 2003. Closing costs amounted to $1,000, and a sales commission of $25,000 was paid to a General Partner
affiliate. In the Second Quarter of 2003 the net asset value of the property was written-down by $15,000 to reflect the net estimated sales price, less costs to sell, of the property of approximately $790,000.



During May 2001, Management negotiated a re-lease of the vacant Milwaukee, Wisconsin property
to Omega Restaurant and rent income commenced in October 2001. Commissions of $50,000 and $9,000 were paid to an unaffiliated leasing agent and to an affiliate of the General Partner, respectively, upon the execution of the new lease in the Second
Quarter of 2001.



During March 2001, Hardees Food Systems, Inc. notified
Management of its intent to close its restaurant in Milwaukee, Wisconsin. The Hardees lease on the Milwaukee property was not set to expire until 2009. In the Second Quarter of 2001, a lease termination agreement was executed and the tenant
ceased the payment of rent as of April 30, 2001. Hardees Food Systems agreed to pay a lease termination fee of approximately two (2) years rent or $157,000. The payment schedule included four (4) equal installments of $39,250. The first
payment was received in May 2001 upon the execution of the agreement and the remaining balance represented a Note receivable of $117,750. The first and second Note receivable installments were received in August and October 2001. The final
installment was received in January 2002.



Grand Forks, ND Property



During February 2003 a new 10-year lease was executed with Panda Buffet, Inc.
in relation to the Grand Forks, ND property, formerly occupied by Village Inn. The lease is set to expire in 2012 and the annual first year base rent is $32,500. Commissions of $18,500 and $3,700 were paid to an unaffiliated leasing agent and to an
affiliate of the General Partner, respectively, in March 2003. HVAC maintenance and repair expenditures of $18,000 were incurred in the First Quarter of 2003 at the property. The Partnership had incurred expenditures of approximately $27,000 to
replace the roof on the property in the Third Quarter of 2002.



During October
2001, the Village Inn Restaurant had notified Management of its intent to close and vacate its restaurant in Grand Forks, ND, prior to the expiration of the lease term in 2009. In February 2002, Management was notified Village Inn had closed and
vacated the restaurant. Rent income was collected from the tenant through December 2001, however, no rent was collected from Village Inn for the period beginning January 1, 2002. The Partnership did not recognize rental revenue in 2003 related to
Village Inn.



9



---

##### Table of Contents

In March 2002 and September 2002, the Partnership paid the propertys first and second installments of 2001 real
estate taxes. The Partnership also paid the 2002 real estate taxes in the Fourth Quarter of 2002. During June 2003 a settlement and lease termination agreement was executed between Management and Village Inn. The Partnership received a $50,000
termination fee from Village Inn. Management had initiated legal action against Village Inn for defaulted rent and real estate taxes, as well as other damages.



South Milwaukee, WI property



In October 2002 Management entered into a contract to sell the vacant South Milwaukee, WI property at a sales price of $450,000. In the Third Quarter of 2002 the net
asset value of the South Milwaukee property was written-down by $98,000 to reflect the estimated fair value of the property at September 30, 2002 of approximately $450,000, shown on the balance sheet as property held for sale at September 30, 2002.
In the First Quarter of 2003 the net asset value of the South Milwaukee property was written-down by an additional $33,000 (to $417,000) to reflect the net estimated sales price, less costs of sale.



The vacant South Milwaukee property was sold in April 2003 and the net proceeds upon the sale
were $417,000. The net asset value of the property at March 31, 2003 was approximately $417,000. Closing costs amounted to $6,000 and sales commissions related to the sale, which were paid to non-affiliated brokers, totaled $27,000.



Hardees property- Hartford, WI



During the Second Quarter of 2002, Management entered into a contract to sell the vacant
Hardees restaurant in Hartford, WI at a sales price of $618,000. During December 2001, Hardees Food Systems, Inc. notified Management that it had vacated its restaurant in Hartford, Wisconsin. Hardees lease on the Hartford property
was set to expire on April 30, 2009 and they continued making rent payments until the closing date of October 2002. The net asset value of the property at closing was approximately $470,000 and the net gain on the sale of the property in October
2002 was approximately $124,000. A sales commission of $18,500 was paid by the Partnership to an affiliate of the General Partner in the Fourth Quarter of 2002.



North 7th Street property- Phoenix, AZ



During the Fourth Quarter of 2001, the Bankruptcy court granted the motion of Lessee, Phoenix Restaurant Group, Inc. (Phoenix), to reject the lease with the
Partnership at the N. 7thStreet, Phoenix, Arizona location. Following the rejection of this lease by Phoenix, the
Mountain Range Restaurants (Phoenixs subtenant) declined the Partnerships offer to lease the property directly to them. Therefore, the property was vacated and rent ceased as of May 31, 2002.



During August 2002, a ten (10) year lease, with annual first year base rent of $64,000, was
negotiated with new tenant, Jun Cheng Pan, at the vacant N. 7thStreet property in Phoenix, Arizona. The new tenant
took possession of the property in August 2002 and rent commenced in January 2003. The restaurant is operated as a Chinese Super Buffet. Commissions of $34,500 and $13,800 were paid to an unaffiliated leasing agent and to an affiliate of the General
Partner, respectively, upon the execution of the new lease in the Third Quarter of 2002.



Former Mulberry Street Grill property- Phoenix, AZ



During April 2001, the sub-tenant AMF Corporation notified Management of its intent to close and vacate its Mulberry Street Grill restaurant in Phoenix, Arizona. Although the lease on the property was not set to
expire until 2007, monthly rental and Common Area Maintenance (CAM) income ceased as of June 1, 2001. The past



10



---

##### Table of Contents

due amount of $10,000 was reserved in the Fourth Quarter of 2001, due to its uncertainty of collection. Management moved forward with all legal remedies to
collect the balances due from AMF, however, Management learned in the Third Quarter of 2002 that AMF had filed for bankruptcy and that the bankruptcy court had released AMF from all of its debts. The Partnership owned the building in Phoenix,
Arizona occupied by the Mulberry Street Grill restaurant, however, the land upon which the building was located was leased (the Ground Lease) to the Partnership by the Ground Lease Landlord, Centre at 38thStreet, L.L.C, (Centre.) During the Second Quarter of 2001 Management returned possession of the property to
Centre and as such the net asset value of the property was written-off in the Fourth Quarter of 2001, resulting in a loss of $157,000.



Beginning in May 2001 and through December 2001 the Partnership accrued but withheld payment of the ground lease obligations to Centre, and on December 31, 2001 the total
ground lease accrual approximated $50,000. In the Second Quarter of 2001, Centre filed suit against the Partnership and TPG (as General Partner) seeking possession of the property and damages for breach of the Ground Lease. In April 2002, an
additional $43,000 was accrued as payable to Centre, due to the Courts granting a summary judgment of $93,000 against the Partnership. In June 2002 the Partnership filed an appeal with respect to this judgment. In September 2002, the
Partnership was required to escrow a $140,000 cash bond at the clerk of the court during the appeal process. A Settlement Agreement and Mutual Release (the Agreement) was made and entered into as of February 1, 2003. According to the
terms of the Agreements the Partnership was required to pay Centre $115,000 (the Settlement) to discharge all claims of Centre against the Partnership and TPG (except for violations of environmental laws.) The court returned the $140,000
cash bond to the Partnership in April 2003. (See Legal Proceedings in Note 10 to Financial Statements and Part I- Item 3.)



Item 3. Legal Proceedings



The Partnership owned the building in Phoenix, Arizona occupied by the Mulberry Street Grill restaurant, which was located on a parcel of land leased to the Partnership
pursuant to a long-term ground lease (the Ground Lease.) The Ground Lease was considered an operating lease and the lease payments were paid by the Partnership and expensed in the periods to which they applied. During the Second Quarter
of 2001, sub-tenant AMF Corporation (AMF) notified Management of its intent to close its Mulberry Street Grill restaurant. Although the sub-lease had not expired, following such notification the Partnership received no rent from the
former tenant and elected to return possession of the Phoenix, Arizona property to the Ground Lease Landlord, Centre at 38thStreet, L.L.C., (Centre.) Beginning in May 2001 and through December 2001 the Partnership accrued but withheld payment of the Ground Lease obligations, and on December 31, 2001 the total Ground Lease accrual approximated
$50,000. On June 12, 2001 Centre leased the property to a new tenant.



On June
18, 2001, Centre filed a lawsuit (the Complaint) in the Maricopa County, Arizona, Superior Court, against the Partnership and TPG. The Complaint alleged that the Partnership was a tenant under a Ground Lease with Centre and that the
Partnership defaulted on its obligations under that lease. The suit named TPG as a defendant because TPG is the Partnerships general partner. The Complaint sought damages for unpaid rent, commissions, improvements, and unspecified other
damages exceeding $120,000.



The Partnership and TPG filed an answer denying
any liability to Centre. In addition, the Partnership filed a third-party complaint against the National Restaurant Group, (National Restaurant), L.L.C., and its sub-tenant AMF. In the third-party complaint, the Partnership alleged that
National Restaurant and AMF were liable to the Partnership for breach of the subleases and any damages for which the Partnership might be held liable pursuant to the Ground Lease. Due to the bankruptcy filing by AMF the Partnership was prevented
from proceeding against them. The Partnership was unable to proceed with the claim against National Restaurant due to the failure to locate such defendant.



11



---

##### Table of Contents

On April 10, 2002 the Maricopa County Superior Court granted Centres motion for summary judgment against the
Partnership and TPG. The Court entered a final judgment (the Judgment) on May 22, 2002, awarding approximately $93,000 in damages to Centre, as well as attorneys fees and court costs in the amount of $16,000. As of December 31,
2001 the Partnership had accrued $50,000 in ground lease obligations payable to Centre and the remaining summary judgment balance of $43,000 was accrued in April 2002.



On June 20, 2002 the Partnership and TPG filed a Notice of Appeal (the Appeal) with respect to such Judgment. Both parties filed
briefs with the Court of Appeals, and the Court set oral argument for March 5, 2003. In order to prevent Centre from enforcing the judgment while the Appeal was pending, in August 2002, the Partnership deposited a $140,000 cashiers check with
the Clerk of the Maricopa County Superior Court to serve as a bond. By law, the amount of the bond must be sufficient to cover the amount of the judgment, plus interest, and any additional costs that may be incurred during the appeal.



In early January 2003, Centre informed the Partnership that the replacement tenant had
vacated the premises. In February 2003 the Partnership made an offer to Centre to settle the lawsuit and terminate the Ground Lease. In February 2003 a Settlement Agreement and Mutual Release (Agreement) was executed between Centre, the
Partnership and TPG. The Agreement included a February 28, 2003 settlement payment of $115,000 (the Settlement) from the Partnership to Centre in satisfaction of any and all obligations the Partnership and TPG has now, or may have in the
future, to Centre, whether in connection with the Complaint, the Judgment, the Ground Lease, or otherwise, except for any liability for violations of environmental law for which the Partnership is liable. In addition, the Agreement included the
termination of the Ground Lease, dismissal of the Partnerships Appeal, and the mutual liability release of all parties relating to or arising out of the Ground Lease, the Complaint, the Judgment, and the Appeal, except for violations of
environmental laws.



Upon filing the Agreement with the Court, the $140,000
cash bond was returned from the clerk of the court to the Partnership in April 2003.



DeDan bankruptcy



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



Phoenix Foods Preference Claim



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



12



---

##### Table of Contents

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



None.



13



---

##### Table of Contents

PART II



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



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



|(b) | As of December 31, 2004 there were 2,105 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 2004 and 2003, $2,305,000 and $4,840,000, respectively, were distributed in
the aggregate to the Limited Partners. The General Partner received aggregate distributions of $7,171 and $6,530 in 2004 and 2003, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 6. Selected Financial Data



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



DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

(A Wisconsin limited partnership)



As of and for the years ended



December 31, 2004, 2003, 2002, 2001, and 2000



|                                                    |  |      |            |      |   |            |  |      |            |      |   |            |  |   |           
|--------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ----------
|                                                    |  | 2004 |            | 2003 |   | 2002       |  | 2001 |            | 2000
|Total Operating Revenue                             |  | $    | 2,383,238  |      | $ | 2,271,241  |  | $    | 2,306,490  |      | $ | 2,302,081  |  | $ | 2,360,784 
|                                                    |  |      |            |      |   |            |  |      |            |      |   |            |  |   |           
|Income from Continuing Operations                   |  | $    | 1,574,978  |      | $ | 1,155,307  |  | $    | 1,314,838  |      | $ | 1,275,516  |  | $ | 1,375,890 
|Income from Discontinued Operations                 |  | $    | 217,695    |      | $ | 429,025    |  | $    | 220,467    |      | $ | 458,263    |  | $ | 345,901   
|                                                    |  |      |            |      |   |            |  |      |            |      |   |            |  |   |           
|Net Income                                          |  | $    | 1,792,673  |      | $ | 1,584,332  |  | $    | 1,535,305  |      | $ | 1,733,779  |  | $ | 1,721,791 
|                                                    |  |      |            |      |   |            |  |      |            |      |   |            |  |   |           
|Net Income per Limited Partner Interest             |  | $    | 38.35      |      | $ | 33.89      |  | $    | 32.84      |      | $ | 37.09      |  | $ | 36.83     
|                                                    |  |      |            |      |   |            |  |      |            |      |   |            |  |   |           
|Total Assets                                        |  | $    | 11,804,154 |      | $ | 12,398,831 |  | $    | 15,746,665 |      | $ | 15,839,599 |  | $ | 16,132,289
|                                                    |  |      |            |      |   |            |  |      |            |      |   |            |  |   |           
|Total Partners Capital                             |  | $    | 11,537,568 |      | $ | 12,057,066 |  | $    | 15,319,264 |      | $ | 15,500,492 |  | $ | 15,953,648
|                                                    |  |      |            |      |   |            |  |      |            |      |   |            |  |   |           
|Cash Distributions per Limited Partnership Interest |  | $    | 49.81      |      | $ | 104.58     |  | $    | 36.95      |      | $ | 47.10      |  | $ | 56.94     



14



---

##### Table of Contents

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



Liquidity and Capital Resources:



Investment Properties and Net Investment in Direct Financing Leases



The Properties, including equipment held by the Partnership and
properties held for sale at December 31, 2004, were originally purchased at a price, including acquisition costs, of approximately $15,997,585.



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



As of December 31, 2004,
the Partnership owned 18 fully constructed fast-food restaurants, a video store, and a preschool. The 20 properties are composed of the following: ten (10) Wendys restaurants, one (1) Dennys restaurant, one (1) Applebees
restaurant, one (1) Popeyes Famous Fried Chicken restaurant, one (1) Hooters restaurant, one (1) Kentucky Fried Chicken restaurant, (1) Chinese Super Buffet restaurant, one (1) Blockbuster Video store, one (1) Sunrise Preschool, one (1)
Panda Buffet Restaurant, and one (1) Daytonas- All Sports Café. The 20 properties are located in a total of ten (10) states.



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



During 2004, 2003 and 2002 the Partnership recognized income from discontinued operations of
$218,000, $429,000, and $220,000, respectively. The 2004, 2003, and 2002 income from discontinued operations is attributable to the Hartford, WI property (which was sold in October 2002), the vacant South Milwaukee, WI property (which was sold in
April 2003), the property in Milwaukee, WI and the Hardees restaurant in Fond du Lac, WI (which were sold in July 2003), the vacant Twin Falls, ID property (which was sold in August 2003) and the reclassification of the Miami Subs restaurant
property to property held for sale in the Fourth Quarter of 2003 (which was sold in June 2004.) The 2004 income from discontinued operations includes a Second Quarter net gain on the sale of the Miami Subs property of approximately $211,000, a Third
Quarter net gain on the sale of a parcel of land located adjacent to the former vacant Twin Falls, ID property of $5,000 (the land had no recorded value), and Second and Fourth Quarter provisions for non-collectible rents and other receivables
related to the Miami Subs property. The 2003 income from discontinued operations includes a First Quarter write-down of $33,000 related to the South Milwaukee property, a Second Quarter property write-down of $15,000 related to the Milwaukee, WI
property, and Third Quarter net gains of $9,000, $80,000 and $215,000, which are related to the sales of the Milwaukee, WI property, Hardees- Fond du Lac and Twin Falls properties, respectively. The 2002 income from discontinued operations
includes a net gain of $124,000 related to the sale of the Hartford property, and a Third Quarter write-down of $98,000 related to the South Milwaukee property.



15



---

##### Table of Contents

The components of property held for sale included in the balance sheet for the year-ended December 31, 2004 and 2003 are
outlined below.



|                         |  |      |   |      |   |          |  
|------------------------ |  | ---- | - | ---- | - | -------- | -
|                         |  | 2004 |   | 2003 |  
|Balance Sheet:           |  |      |   |      |   |          |  
|Land                     |  | $    | 0 |      | $ | 325,487  |  
|Buildings                |  |      | 0 |      |   | 163,257  |  
|Accumulated depreciation |  |      | 0 |      |   | (113,931 | )
|Deferred rent receivable |  |      | 0 |      |   | 16,500   |  
|                         |  |      |   |      |   |          |  
|Property held for sale   |  | $    | 0 |      | $ | 391,313  |  
|                         |  |      |   |      |   |          |  



The components of discontinued
operations included in the statements of income for the years ended December 31, 2004, 2003 and 2002 are outlined below.



|                                          |  |      |         |      |   |         |  |   |        
|----------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                          |  | 2004 |         | 2003 |   | 2002   
|Revenues                                  |  |      |         |      |   |         |  |   |        
|Rental Income                             |  | $    | 32,500  |      | $ | 208,353 |  | $ | 292,840
|Other income                              |  |      | 0       |      |   | 0       |  |   | 479    
|                                          |  |      |         |      |   |         |  |   |        
|Total Revenues                            |  |      | 32,500  |      |   | 208,353 |  |   | 293,319
|                                          |  |      |         |      |   |         |  |   |        
|Expenses                                  |  |      |         |      |   |         |  |   |        
|Property Write-down                       |  |      | 0       |      |   | 48,027  |  |   | 98,000 
|Depreciation                              |  |      | 0       |      |   | 18,578  |  |   | 63,080 
|Amortization                              |  |      | 0       |      |   | 4,261   |  |   | 15,447 
|Real Estate Taxes                         |  |      | 0       |      |   | 4,435   |  |   | 20,566 
|Management Services                       |  |      | 0       |      |   | 8,400   |  |   | 0      
|Provision for non-collectible Receivables |  |      | 30,359  |      |   | 0       |  |   | 158    
|                                          |  |      |         |      |   |         |  |   |        
|Total Expenses                            |  |      | 30,359  |      |   | 83,701  |  |   | 197,251
|                                          |  |      |         |      |   |         |  |   |        
|Net Gain on Sale of Properties            |  |      | 215,554 |      |   | 304,373 |  |   | 124,399
|                                          |  |      |         |      |   |         |  |   |        
|Income from Discontinued Operations       |  | $    | 217,695 |      | $ | 429,025 |  | $ | 220,467
|                                          |  |      |         |      |   |         |  |   |        



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



Popeyes- Park Forest, IL



The tenant has remained
current on its monthly lease obligations. However, the tenant was delinquent on its January 2002 percentage rent billing for the year ended December 31, 2001 of $72,000 and its February 2003



16



---

##### Table of Contents

percentage rent billing for the year ended December 21, 2002 of $31,500. Management continued to pursue legal remedies in relation to the collection of the
tenants percentage rent past due balance of approximately $103,500, however, due to the uncertainty of collection, the entire amount was fully reserved in the Fourth Quarter of 2003. In addition, through October 31, 2004 Management had charged
Popeyes late fees totaling $93,000 (which includes 2004, 2003 and 2002 late fee charges of $41,000, $35,000 and $17,000, which were not recognized as revenue due to uncertainty of collection) in relation to the percentage rent balances due.
The tenant was delinquent on its reporting of its 2003 monthly sales figures and therefore percentage rents for the year ended December 31, 2003 were not accrued by the Partnership at December 31, 2003. The delinquent 2003 sales figures were
received by Management in June 2004 and Popeyes 2003 percentage rent of approximately $19,000 was then billed in the Third Quarter of 2004. However, due to the uncertainty of collection it was determined that the amount would not be recognized
as revenue for financial statement purposes until such time as the rent was collected. Popeyes did not exceed its gross sales breakpoint in 2004 and therefore percentage rent was not recorded in 2004 for the tenant.



Per the lease and its amendments (Lease), Popeyes is to timely pay as they
come due all taxes charged to the property. However, the tenant failed to pay the 2002 property taxes of approximately $40,000, which were due and payable to Cook County, Illinois in 2003, as well as approximately $5,000 in assessed late fees. In
the Fourth Quarter of 2003 the Partnership accrued approximately $86,000 in property taxes, which included the 2002 property taxes and associated late fees, as well as the estimated 2003 property taxes that were to be due in 2004. The 2002 property
taxes and late fees were paid by the Partnership in January 2004 and the first and second installments for the 2003 taxes were paid in February and September 2004, respectively. In March 2004 Management learned that the tenant had also failed to pay
the $31,000 second installment of its 2001 property taxes. The Partnership paid the 2001 delinquent property taxes, as well as approximately $10,000 in assessed late fees, in March 2004.



A Landlords 10 Day Notice Of Default (Notice), dated February 9, 2004, was sent to Quality Foods I, LLC., the
Popeyes tenant, demanding payment of the amount due for the 2002 property tax balance and unless payment was received by the Partnership on or before the expiration of ten (10) days after the date of service of the Notice, then the Partnership
would pursue all legal remedies available, including an action to recover possession and termination of the Lease. The Notice also stated that until such time the Lease is terminated, the tenants other legal obligations (outstanding percentage
rents and future monthly rents) continue in full.



In March 2004 the
Partnerships legal counsel obtained a court order of possession that stated that Popeyes was to vacate the property by April 2, 2004. In April 2004 Management entered into a verbal agreement with Popeyes that the tenant: (1) pay
$25,000 by wire or certified check per month until the Partnership is reimbursed in full for the approximately $107,000 in delinquent property taxes paid on Popeyes behalf (the Partnership received $25,000 in each April, May, June, and July
2004 and received the final payment of approximately $7,000 in September 2004); and (2) fund the $22,000 2003 property tax second installment due in the Fourth Quarter 2004 through prorated monthly escrow payments made to the Partnership from April
through September 2004 (the Partnership received approximately $17,000 of the $22,000 in September 2004 and the remaining balance in November 2004). If the tenant adhered to this verbal agreement, Management intended to re-evaluate outstanding
percentage rents relative to appropriate and sustainable occupancy costs and defer any current action for possession.



A Release and Settlement Agreement was executed with Popeyes in November 2004. In settlement of all claims and disputes (Popeyes past due 2001 and 2002
percentage rent balances and the applicable allowances were removed from the balance sheet at November 30, 2004), the following significant items were agreed to: (1) Popeyes is to make monthly escrow property tax payments applicable to 2004
and for future property taxes due through out the remaining lease term obligation; (2) Popeyes gross sales breakpoint was increased to $1,000,000 and therefore, percentage rent shall be an amount equal to 8% of gross sales in excess of
$1,000,000.



17



---

##### Table of Contents

Popeyes 2004 estimated property taxes have been prorated and accrued on a monthly basis by the Partnership. In
September 2004 the Partnership began billing Popeyes monthly property tax escrow charges. Escrow payments of approximately $7,400 were received by the Partnership in December 2004 and January 2005 in relation to Popeyes 2004 property
taxes due in the year 2005. In 2004 property tax escrow charges were reflected in the financial statements as escrow payments were actually received, and were recorded as a reversal of 2004 property tax expense equal to the amount of payment
received.



Miami Subs- Palm Beach, FL Property



A sales contract was executed in January 2004 for the sale of the property in the Second
Quarter of 2004 at a sales price of $650,000. The closing date on the sale of the property was June 2004 and the net sales proceeds totaled approximately $606,000. A net gain on the sale of $211,000 was recognized in the Second Quarter of 2004.
Closing and other sale related costs amounted to $44,000, which included sales commissions totaling $39,000, of which $19,500 was paid to a General Partner affiliate and $19,500 was paid to a non-affiliated broker.



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



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



4785
Merle Hay Road- Des Moines, IA



In July 2004 the Partnership paid
Daytonas- All Sports Cafés delinquent 2002 property taxes balance of approximately $15,000. Daytonas reimbursed the Partnership $5,000 in each August, September and October. Due to the property tax default Management
requested that Daytonas begin escrowing for their next property tax installment, which will be due in the First Quarter of 2005, with the Partnership. Escrow payments of approximately $800 were held by the Partnership at December 31, 2004.



The lease on the property in Des Moines, IA expired on December 31, 2002. In
October 2002 Hickory Park, Inc. informed Management that they would not be renewing the property lease. However, in January 2003 Management was notified that the sub-tenant, Daytonas- All Sports Cafe, did not vacate the Des Moines property and
was continuing to operate the property as a restaurant. Management allowed the sub-tenant a holdover lease for two months, and the Partnership received the January and February 2003 rent payments from Daytonas applicable to the holdover lease.
In March 2003 Management executed a five (5) year direct lease with Daytonas, which is set to expire in 2008. The first year base rent was $60,000. A leasing commission of $9,700 was paid to an affiliate of the General Partner in March 2003
upon the execution of the lease.



18



---

##### Table of Contents

Twin Falls, ID property



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



In February 2003 Management entered into a purchase and sale agreement to sell the vacant
Twin Falls property at a sales price of $565,000. The closing date on the sale of the property was August 22, 2003 and the net sales proceeds totaled $530,000. A net gain of $215,000 was recognized in the Third Quarter of 2003 upon the sale. Closing
and other sale related costs amounted to $35,000, which included sales commissions of $22,000 to a non-affiliated broker and $11,000 to a General Partner affiliate in the Third Quarter of 2003.



During the Fourth Quarter of 2001, the Bankruptcy court granted the motion of Phoenix
Restaurant Group, Inc. (Phoenix) to reject the lease with the Partnership at the Twin Falls, Idaho location. The lease was terminated and rent income ceased in the Fourth Quarter of 2001. Although Phoenix had rejected the lease, its
subtenant, Fiesta Time, maintained possession of the property. Management, therefore, took legal action to evict Fiesta Time from the Twin Falls property. In the Fourth Quarter of 2002, a judgment was entered in Magistrate Court evicting Fiesta
Time. However, Fiesta Time appealed the action to District Court and the Court upheld the judgment in February 2003. The Partnership then received $30,000 in past rent that the court had required Fiesta Time to escrow during the court
proceedings.



Hardees property- Fond du Lac, WI



During June 2003, Management entered into a contract to sell the Hardees restaurant
in Fond du Lac, WI at a sales price of $720,000. The closing date on the sale of the property was July 30, 2003 and the net sales proceeds totaled $690,000. A net gain on the sale of $80,000 was recognized in the Third Quarter of 2003. Closing and
other sale related costs amounted to $30,000, which included a sales commission totaling $22,000 paid to a General Partner affiliate in the Third Quarter of 2003.



Milwaukee, WI property



In May 2003 Management entered into a contract to sell the Milwaukee, WI property to the tenant at a sales price of $825,000. The property was being operated as Omega
Restaurant. The closing date on the sale of the property was July 28, 2003, and the net sales proceeds totaled $799,000. A net gain on the sale of $9,000 was recognized in the Third Quarter of 2003. Closing costs amounted to $1,000, and a sales
commission of $25,000 was paid to a General Partner affiliate. In the Second Quarter of 2003 the net asset value of the property was written-down by $15,000 to reflect the net estimated sales price, less costs to sell, of the property of
approximately $790,000.



During May 2001, Management negotiated a re-lease of
the vacant Milwaukee, Wisconsin property to Omega Restaurant and rent income commenced in October 2001. Commissions of $50,000 and $9,000 were paid to an unaffiliated leasing agent and to an affiliate of the General Partner, respectively, upon the
execution of the new lease in the Second Quarter of 2001.



During March 2001,
Hardees Food Systems, Inc. notified Management of its intent to close its restaurant in Milwaukee, Wisconsin. The Hardees lease on the Milwaukee property was not set to expire until 2009. In the



19



---

##### Table of Contents

Second Quarter of 2001, a lease termination agreement was executed and the tenant ceased the payment of rent as of April 30, 2001. Hardees Food Systems
agreed to pay a lease termination fee of approximately two (2) years rent or $157,000. The payment schedule included four (4) equal installments of $39,250. The first payment was received in May 2001 upon the execution of the agreement and the
remaining balance represented a Note receivable of $117,750. The first and second Note receivable installments were received in August and October 2001. The final installment was received in January 2002.



Grand Forks, ND Property



During February 2003 a new 10-year lease was executed with Panda Buffet, Inc. in relation to
the Grand Forks, ND property, formerly occupied by Village Inn. The lease is set to expire in 2012 and the annual first year base rent is $32,500. Commissions of $18,500 and $3,700 were paid to an unaffiliated leasing agent and to an affiliate of
the General Partner, respectively, in March 2003. HVAC maintenance and repair expenditures of $18,000 were incurred in the First Quarter of 2003 at the property. The Partnership had incurred expenditures of approximately $27,000 to replace the roof
on the property in the Third Quarter of 2002.



During October 2001, the Village
Inn Restaurant had notified Management of its intent to close and vacate its restaurant in Grand Forks, ND, prior to the expiration of the lease term in 2009. In February 2002, Management was notified Village Inn had closed and vacated the
restaurant. Rent income was collected from the tenant through December 2001, however, no rent was collected from Village Inn for the period beginning January 1, 2002. The Partnership did not recognize rental revenue in 2003 related to Village Inn.



In March 2002 and September 2002, the Partnership paid the propertys
first and second installments of 2001 real estate taxes. The Partnership also paid the 2002 real estate taxes in the Fourth Quarter of 2002. During June 2003 a settlement and lease termination agreement was executed between Management and Village
Inn. The Partnership received a $50,000 termination fee from Village Inn. Management had initiated legal action against Village Inn for defaulted rent and real estate taxes, as well as other damages.



South Milwaukee, WI property



In October 2002 Management entered into a contract to sell the vacant South Milwaukee, WI
property at a sales price of $450,000. In the Third Quarter of 2002 the net asset value of the South Milwaukee property was written-down by $98,000 to reflect the estimated fair value of the property at September 30, 2002 of approximately $450,000,
shown on the balance sheet as property held for sale at September 30, 2002. In the First Quarter of 2003 the net asset value of the South Milwaukee property was written-down by an additional $33,000 (to $417,000) to reflect the net estimated sales
price, less costs of sale.



The vacant South Milwaukee property was sold in
April 2003 and the net proceeds upon the sale were $417,000. The net asset value of the property at March 31, 2003 was approximately $417,000. Closing costs amounted to $6,000 and sales commissions related to the sale, which were paid to
non-affiliated brokers, totaled $27,000.



Hardees property-
Hartford, WI



During the Second Quarter of 2002, Management entered into a
contract to sell the vacant Hardees restaurant in Hartford, WI at a sales price of $618,000. During December 2001, Hardees Food Systems, Inc. notified Management that it had vacated its restaurant in Hartford, Wisconsin. Hardees
lease on the Hartford property was set to expire on April 30, 2009 and they continued making rent payments until the closing date of October 2002. The net asset value of the property at closing was approximately $470,000 and the net gain on the sale
of the property in October 2002 was approximately $124,000. A sales commission of $18,500 was paid by the Partnership to an affiliate of the General Partner in the Fourth Quarter of 2002.



20



---

##### Table of Contents

North 7th Street property- Phoenix, AZ



During the Fourth Quarter of 2001, the Bankruptcy court granted the motion of Lessee, Phoenix Restaurant Group, Inc. (Phoenix),
to reject the lease with the Partnership at the N. 7thStreet, Phoenix, Arizona location. Following the rejection of
this lease by Phoenix, the Mountain Range Restaurants (Phoenixs subtenant) declined the Partnerships offer to lease the property directly to them. Therefore, the property was vacated and rent ceased as of May 31, 2002.



During August 2002, a ten (10) year lease, with annual first year base rent of $64,000, was
negotiated with new tenant, Jun Cheng Pan, at the vacant N. 7thStreet property in Phoenix, Arizona. The new tenant
took possession of the property in August 2002 and rent commenced in January 2003. The restaurant is operated as a Chinese Super Buffet. Commissions of $34,500 and $13,800 were paid to an unaffiliated leasing agent and to an affiliate of the General
Partner, respectively, upon the execution of the new lease in the Third Quarter of 2002.



Former Mulberry Street Grill property- Phoenix, AZ



During April 2001, the sub-tenant AMF Corporation notified Management of its intent to close and vacate its Mulberry Street Grill restaurant in Phoenix, Arizona. Although the lease on the property was not set to
expire until 2007, monthly rental and Common Area Maintenance (CAM) income ceased as of June 1, 2001. The past due amount of $10,000 was reserved in the Fourth Quarter of 2001, due to its uncertainty of collection. Management moved forward with all
legal remedies to collect the balances due from AMF, however, Management learned in the Third Quarter of 2002 that AMF had filed for bankruptcy and that the bankruptcy court had released AMF from all of its debts. The Partnership owned the building
in Phoenix, Arizona occupied by the Mulberry Street Grill restaurant, however, the land upon which the building was located was leased (the Ground Lease) to the Partnership by the Ground Lease Landlord, Centre at 38thStreet, L.L.C, (Centre.) During the Second Quarter of 2001 Management returned possession of the property to
Centre and as such the net asset value of the property was written-off in the Fourth Quarter of 2001, resulting in a loss of $157,000.



Beginning in May 2001 and through December 2001 the Partnership accrued but withheld payment of the ground lease obligations to Centre, and on December 31, 2001 the total
ground lease accrual approximated $50,000. In the Second Quarter of 2001, Centre filed suit against the Partnership and TPG (as General Partner) seeking possession of the property and damages for breach of the Ground Lease. In April 2002, an
additional $43,000 was accrued as payable to Centre, due to the Courts granting a summary judgment of $93,000 against the Partnership. In June 2002 the Partnership filed an appeal with respect to this judgment. In September 2002, the
Partnership was required to escrow a $140,000 cash bond at the clerk of the court during the appeal process. A Settlement Agreement and Mutual Release (the Agreement) was made and entered into as of February 1, 2003. According to the
terms of the Agreements the Partnership was required to pay Centre $115,000 (the Settlement) to discharge all claims of Centre against the Partnership and TPG (except for violations of environmental laws.) The court returned the $140,000
cash bond to the Partnership in April 2003. (See Legal Proceedings in Note 10 to Financial Statements and Part I- Item 3.)



Other Investment in Properties Information



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



21



---

##### Table of Contents

At December 31, 2004 the owners of the Panda Buffet property have an option to purchase the property at a price, which
exceeds the original cost of the property less accumulated depreciation. The General Partner is not aware of any unfavorable purchase options in relation to the original cost contained in any of the Partnerships existing leases.



Other Assets



Property held for sale, which was due to the classification of the Miami Subs property as
held for sale in the Fourth Quarter of 2003, amounted to approximately $391,000 at December 31, 2003 and included $325,000 related to land, $49,000 related to buildings and equipment, and $17,000 related to deferred rent. The closing date on the
property was June 2004.



Cash and cash equivalents held by the Partnership
totaled approximately $685,000 at December 31, 2004, compared to $673,000 at December 31, 2003. Cash of $425,000 is anticipated to be used to fund the Fourth Quarter 2004 distributions to Limited Partners in February 2005, and cash of $114,000 is
anticipated to be used for the payment of year-end accounts payable and accrued expenses, and the remainder represents amounts deemed necessary to allow the Partnership to operate normally.



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



Property tax cash escrow amounted to approximately $8,300 at December 31, 2004. Due to a property tax default Management requested that Daytonas- All Sports Café begin escrowing for their next property
tax installment with the Partnership. A payment of approximately $800 was received by the Partnership from Daytonas in the Fourth Quarter of 2004. (For further disclosure see Investment Properties in Note 3 to Financial Statements, Part I-
Item 2, and Part II- Item 7.) In December 2004 the Partnership received approximately $7,500 from Popeyes in relation to their first 2004 property tax installment due in the First Quarter of 2005. The Partnership recorded the receipt as a
reduction in property tax expense in the income statement, as the Partnership accrued 2004 property taxes on a monthly basis. (For further disclosure see Investment Properties in Note 3 to Financial Statements, Part I- Item 2, and Part II- Item 7.)



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



Rents and other receivables
amounted to $508,000 at December 31, 2004, compared to $510,000 (net of allowance of $104,000) as of December 31, 2003. Prior to the closing on the sale of the Miami Subs property, the former tenant was delinquent $17,000 in past rent (after the
application of a $15,000 security deposit). Management pursued legal remedies to collect Miami Subs past due balance; however, due to the uncertainty of collection half of the outstanding balance ($8,500) was reserved in June 2004. Due to a
default under the November 2004 Settlement Agreement, the former tenants remaining unreserved outstanding receivable balance of $8,500 was written-off and the entire $17,000 and applicable allowances were removed from the balance sheet. (For
further disclosure see Investment Properties in Note 3 to Financial Statements, Part I- Item 2, and Part II- Item 7.) The tenant Popeyes- Park Forest was delinquent on its January 2002 percentage rent billing for 2001 of $72,000 and its
February 2003 percentage rent billing for 2002 of $31,500. Management pursued legal



22



---

##### Table of Contents

remedies in relation to the collection of the tenants percentage rent past due balance of approximately $103,500, however, due to the uncertainty of
collection, the entire amount was fully reserved in the Fourth Quarter of 2003. In addition, Management charged Popeyes late fees totaling $93,000 (which includes 2004, 2003 and 2002 late fee charges of $41,000 $35,000 and $17,000,
respectively, which were not recognized as revenue due to uncertainty of collection) in relation to the percentage rent balances due. A Settlement and Release Agreement was executed in November 2004 with Popeyes and the total percentage rent
receivable balance and related allowance were removed from the balance sheet in the Fourth Quarter of 2004. (For further disclosure see Investment Properties in Note 3 to Financial Statements, Part I- Item 2, and Part II- Item 7.)



Property tax receivable at December 31, 2004 totaled $5,200. The balance primarily
represented property tax escrow charges due from Daytonas- All Sports Café applicable to its 2003 property taxes due in 2005.



Prepaid Insurance amounted to approximately $32,000 at December 31, 2004, which represented ten months of prepaid insurance paid by the Partnership.



Prepaid fees at December 31, 2004 totaled approximately $19,000. The balance primarily
represented January 2005 Management Fees and overhead allowances paid by the Partnership to TPG in December 2004.



Deferred charges totaled approximately $260,000 and $273,000, net of accumulated amortization, at December 31, 2004 and December 31, 2003, 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.



Liabilities



Accounts payable and accrued expenses at December 31, 2004, and December 31, 2003 amounted to approximately $63,000 and $93,000, respectively, and primarily represented
the year-end accruals of auditing, tax and data processing fees.



Property
taxes payable at December 31, 2004, in the amount of $48,000, primarily represented 2004 real estate taxes due for the Popeyes- Park Forest property. Property taxes payable at December 31, 2003, in the amount of $88,000, represented 2003 and
2002 real estate taxes due for the Popeyes- Park Forest property. These taxes were paid in the First and Third Quarters of 2004. (For further disclosure see Investment Properties in Note 3 to Financial Statements, Part I- Item 2, and Part II-
Item 7.)



Due to the Current General Partner amounted to $2,700 at December 31,
2004, and primarily represented the General Partners portion of the Fourth Quarter 2004 distribution.



Security deposits amounted to $115,000 and $130,000 at December 31, 2004 and December 31, 2003, respectively. The variance is due to former tenant, Miami Subs, $15,000 security deposit being netted against its
$32,000 rent receivable balance at the time of the properties sale in June 2004.



Partners Capital



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



23



---

##### Table of Contents

Cash distributions paid to the Limited Partners and to the General Partner during 2004 of $2,305,000 and $7,171,
respectively, have also been made in accordance with the Partnership Agreement. The Fourth Quarter 2004 Limited Partner distributions totaling $425,000 were paid February 15, 2005.



Results of Operations



The Partnership reported income from continuing operations for the year ended December 31, 2004, in the amount of $1,575,000 compared to income from continuing operations
for the years ended December 31, 2003 and 2002 of $1,155,000 and $1,315,000, respectively. The variance in income from continuing operations in 2004 compared to 2003 and 2002 is due primarily to: (i) the Fourth, Third and Second Quarter 2004
collections and revenue recognition of $5,000 $32,000 and $75,000, respectively, in property tax reimbursements from Popeyes; (ii) the Third Quarter 2004 revenue recognition of $17,000 in 2003 property tax expense recovery due to the
collection of an escrow tax payment from Popeyes in relation to its 2003 property tax second installment; (iii) the March 2004 payment of Popeyes 2001 property taxes second installment and related penalties due to tenant default; (iv) a
one-time settlement payment of approximately $25,000 from the Bankruptcy Court in relation to the DeDan bankruptcy litigation was received in January 2004; (v) Popeyes not exceeding its gross sales breakpoint and therefore no percentage rent
was recognized in 2004 in relation to the tenant; (vi) Popeyes 2001 and 2002 percentage rent billing defaults, and the failure of the tenant to report its 2003 sales resulted in no percentage rent being accrued in the Fourth Quarter of 2003 in
relation to the tenant; (vii) the write-off of Popeyes 2002 and 2001 percentage rent billings in the Fourth Quarter of 2003 due to the uncertainty of collection; (viii) The Fourth Quarter 2003 accrual of Popeyes 2003 and 2002 property
taxes due to tenant default; (ix) increased legal expenditures in 2003 and 2002 due to tenant defaults, eviction proceedings at the Twin Falls property, and court proceedings related to the former Mulberry Street Grill property; (x) increased audit
fees in 2003; (xi) increased insurance premiums in 2003 and an insurance premium adjustment in the First Quarter of 2003; (xii) 1989 personal property taxes paid in the First Quarter of 2003 in relation to the Dennys- Phoenix, AZ property;
(viii) increased maintenance expenditures at the Grand Forks, ND property in 2002; (xiv) the Mulberry Street Grill settlement payment in February 2003 and an accrual adjustment in April 2002; and (xv) $50,000 lease termination fee from Village Inn
in the Second Quarter of 2003.



Discontinued Operations



Income from discontinued operations was $218,000, $429,000 and
$220,000 for the years ended December 31, 2004, 2003, and 2002, respectively. In accordance with SFAS 144, discontinued operations represent the operations of properties disposed of or classified as held for sale subsequent to January 1, 2002 as
well as any gain or loss recognized in their disposition. The Hardees- Hartford property was sold in October 2002, the vacant South Milwaukee property was classified as held for sale in the Fourth Quarter of 2002 and sold in April 2003, the
vacant Twin Falls property was classified as held for sale in the First Quarter of 2003 and sold in August 2003, the Hardees- Fond du Lac and Milwaukee, WI properties were classified as held for sale in the Second Quarter of 2003 and sold in
July 2003, and the Miami Subs property was classified as held for sale in the Fourth Quarter of 2003 and sold in June 2004. Therefore the operating results of these properties are reflected as income from discontinued operations for the years ended
December 31, 2004, 2003 and 2002. The 2004 income from discontinued operations includes a Second Quarter net gain on the sale of the Miami Subs property of approximately $211,000, a Third Quarter net gain on the sale of a parcel of land located
adjacent to the former vacant Twin Falls, ID property of $5,000 (the land had no recorded value), and Second and Fourth Quarter provisions for non-collectible rents and other receivables related to the Miami Subs property. The 2003 income from
discontinued operations includes Third Quarter net gains of $9,000, $80,000 and $215,000, which are related to the sale of the Milwaukee, WI, Hardees- Fond du Lac and Twin Falls properties, respectively. The First Quarter 2003 income from
discontinued operations included a $33,000 property write-down of the South



24



---

##### Table of Contents

Milwaukee property to reflect the net estimated sales price, less costs to sell. The Second Quarter 2003 income from discontinued operations included a
$15,000 property write-down of the Milwaukee, WI property to reflect the net estimated sales price, less costs to sell. The 2002 income from discontinued operations includes a Third Quarter $98,000 property write-down of the South Milwaukee property
to reflect its estimated market value, and a Fourth Quarter gain of $124,000 related to the sale of the Hardees- Hartford property.



Revenues



Total operating revenues were $2,383,000, $2,271,000, and $2,306,000, for the years ended December 31, 2004, 2003, and 2002, respectively. During 2004 the Partnership received payments from Popeyes totaling
$129,000 relating to property tax reimbursements and recoveries. During June 2003 the Partnership received a lease termination fee of $50,000 from defaulted former tenant Village Inn upon a settlement and lease termination agreement. (For further
disclosure see Investment Properties in Note 3 to Financial Statements, Part I- Item 2, and Part II- Item 7.)



As of December 31, 2004 total base operating rent revenues (excluding properties held for sale) should approximate $1,671,000 annually based on leases currently in place. Future operating 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 percentage rent to the Partnership.



Expenses



For the years ended December 31, 2004, 2003, and 2002 total operating expenses amounted to approximately 36%, 50% and 44%, of total
operating revenues, respectively.



The variance in operating expenditures are
due to: (i) the March 2004 payment of Popeyes 2001 property taxes second installment and related penalties due to tenant default (ii) increased 2003 and 2002 legal expenditures due to tenant defaults, eviction proceedings at the Twin Falls
property, and court proceedings related to the former Mulberry Street Grill property; (iii) increased 2003 audit fees; (iv) the accrual of Popeyes 2003 and 2002 property taxes due to tenant default in the Fourth Quarter of 2003; (v) higher
insurance premiums in 2003 and an insurance premium adjustment in the First Quarter of 2003; (vi) 1989 personal property taxes paid in the First Quarter of 2003 in relation to Dennys- Phoenix, AZ; (vii) the Mulberry Street Grill settlement
payment in February 2003; (viii) the write-off of Popeyes 2002 and 2001 percentage rent billings in the Fourth Quarter of 2003 due to the uncertainty of collection; (ix) increased maintenance expenditures at the Grand Forks, ND property in
2002; (xi) Mulberry Street Grill additional judgment accrual in the Second Quarter of 2002; and (xii) the write-off of defaulted Village Inns receivable balances in 2002.



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



There were no operating write-offs for non-collectible rents
and receivables for the year ended December 31, 2004. Operating write-offs for non-collectible rents and receivables amounted to $106,100, and $128,600 for the years ended December 31, 2003, and 2002, respectively. The write-offs are the result of
tenant defaults.



Other Income



For the years ended December 31, 2004, 2003, and 2002 the Partnership did generate other
income of approximately $49,000, $20,000 and $30,000, respectively. During January 2004 the Partnership received a one-time settlement payment of approximately $25,000 from the Bankruptcy Court in relation to the DeDan



25



---

##### Table of Contents

bankruptcy litigation. In the late 1980s, the Partnership leased some properties to DeDan, Inc., and the leases were guaranteed by the owner of DeDan,
Dan Fore. These leases went into default in the early 1990s and the Partnership obtained possession of the properties and re-leased them to various entities. The original lessee, DeDan and Dan Fore, filed for bankruptcy and the Partnership
filed a claim in the Bankruptcy Court for damages incurred due to the lease defaults. (See Legal Proceedings in Note 10 to Financial Statements and Part I- Item 3.)



During 2004, 2003 and 2002 revenues were generated from interest earnings and small recoveries from former General Partners. Management
anticipates that such revenue types may continue to be generated until Partnership dissolution.



Inflation



Inflation has
a minimal effect on operating earnings and related cash flows from a portfolio of triple net leases. By their nature, such leases actually fix revenues and are not impacted by rising costs of maintenance, insurance, or real estate taxes. Although
the majority of the Partnerships leases have percentage rent clauses, revenues from percentage rents represented only 25% of operating rental income for 2004. 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.



Critical
Accounting Policies



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



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



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



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



Item 7A. Quantitative and Qualitative Disclosure About Market Risk



The Partnership is not subject to market risk.



26



---

##### Table of Contents

Item 8. Financial Statements and Supplementary Data



DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



(A Wisconsin limited partnership)



INDEX TO FINANCIAL STATEMENTS AND SCHEDULE



|                                                                                      |  |        
|------------------------------------------------------------------------------------- |  | -------
|                                                                                      |  | Page   
|Reports of Independent Registered Public Accounting Firms                             |  | 28 - 29
|                                                                                      | 
|Balance Sheets, December 31, 2004 and 2003                                            |  | 30 - 31
|                                                                                      | 
|Statements of Income for the Years Ended December 31, 2004, 2003, and 2002            |  | 32     
|                                                                                      | 
|Statements of Partners Capital for the Years Ended December 31, 2004, 2003, and 2002 |  | 33     
|                                                                                      | 
|Statements of Cash Flows for the Years Ended December 31, 2004, 2003, and 2002        |  | 34     
|                                                                                      | 
|Notes to Financial Statements                                                         |  | 35 - 52
|                                                                                      | 
|Schedule IIIReal Estate and Accumulated Depreciation, December 31, 2004              |  | 60 - 61



27



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm



Partners of Divall Insured Income Properties 2 Limited Partnership



We
have audited the accompanying balance sheet of Divall Insured Income Properties 2 Limited Partnership (a Wisconsin limited partnership) as of December 31, 2004 and the related statements of income, partners capital, and cash flows for the year
then ended. Our audit also included the 2004 financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Partnerships management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.



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



In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Divall Insured Income Properties 2
Limited Partnership at December 31, 2004, and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the financial statement schedule, when
considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.



ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois

January 18, 2005, except for note 12 as to which the date is February 15, 2005



28



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



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



We have audited the accompanying balance sheet of Divall Insured Income Properties 2 Limited Partnership (a Wisconsin limited partnership) as of December 31, 2003 and the related statements of income, partners capital, and cash flows
for each of the two years in the period then ended. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the
Partnerships management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.



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



In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership at December 31, 2003, and the results of its operations and its cash flows for each of the two years in the period then ended in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.



DELOITTE & TOUCHE LLP

Chicago, Illinois

February 26, 2004



29



---

##### Table of Contents

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



BALANCE SHEETS



December 31, 2004 and 2003



ASSETS



|                                                                                          |  |                   |            |   |                   |   |            |  
|----------------------------------------------------------------------------------------- |  | ----------------- | ---------- | - | ----------------- | - | ---------- | -
|                                                                                          |  | December 31, 2004 |            |   | December 31, 2003 |  
|INVESTMENT PROPERTIES AND EQUIPMENT: (Note 3)                                             |  |                   |            |   |                   |   |            |  
|Land                                                                                      |  | $                 | 5,632,736  |   |                   | $ | 5,632,736  |  
|Buildings                                                                                 |  |                   | 8,899,963  |   |                   |   | 8,899,963  |  
|Equipment                                                                                 |  |                   | 431,143    |   |                   |   | 431,143    |  
|Accumulated depreciation                                                                  |  |                   | (5,169,432 | ) |                   |   | (4,908,005 | )
|                                                                                          |  |                   |            |   |                   |   |            |  
|Net investment properties and equipment                                                   |  |                   | 9,794,410  |   |                   |   | 10,055,837 |  
|                                                                                          |  |                   |            |   |                   |   |            |  
|OTHER ASSETS:                                                                             |  |                   |            |   |                   |   |            |  
|Property held for sale (Note 3)                                                           |  |                   | 0          |   |                   |   | 391,313    |  
|Cash and cash equivalents                                                                 |  |                   | 684,586    |   |                   |   | 673,142    |  
|Cash held in Indemnification Trust (Note 8)                                               |  |                   | 387,387    |   |                   |   | 382,322    |  
|Property tax cash escrow                                                                  |  |                   | 8,322      |   |                   |   | 0          |  
|                                                                                          |  |                  
|Rents and other receivables (Net of allowance of $103,509 in 2004 and 2003, respectively) |  |                   | 508,164    |   |                   |   | 510,459    |  
|Property tax receivable                                                                   |  |                   | 5,168      |   |                   |   | 0          |  
|Deferred rent receivable                                                                  |  |                   | 104,355    |   |                   |   | 109,705    |  
|Prepaid insurance                                                                         |  |                   | 32,387     |   |                   |   | 3,067      |  
|Prepaid Fees                                                                              |  |                   | 19,183     |   |                   |   | 0          |  
|Deferred charges, net                                                                     |  |                   | 260,192    |   |                   |   | 272,986    |  
|                                                                                          |  |                   |            |   |                   |   |            |  
|Total other assets                                                                        |  |                   | 2,009,744  |   |                   |   | 2,342,994  |  
|                                                                                          |  |                   |            |   |                   |   |            |  
|Total assets                                                                              |  | $                 | 11,804,154 |   |                   | $ | 12,398,831 |  
|                                                                                          |  |                   |            |   |                   |   |            |  



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



30



---

##### Table of Contents

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



BALANCE SHEETS



December 31, 2004 and 2003



LIABILITIES AND PARTNERS CAPITAL



|                                                         |  |                   |             |   |                   |   |             |  
|-------------------------------------------------------- |  | ----------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                         |  | December 31, 2004 |             |   | December 31, 2003 |  
|LIABILITIES:                                             |  |                   |             |   |                   |   |             |  
|Accounts payable and accrued expenses                    |  | $                 | 63,366      |   |                   | $ | 93,168      |  
|Property taxes payable                                   |  |                   | 48,310      |   |                   |   | 87,648      |  
|Due to General Partner                                   |  |                   | 2,653       |   |                   |   | 1,984       |  
|Security deposits                                        |  |                   | 114,585     |   |                   |   | 129,585     |  
|Unearned rental income                                   |  |                   | 37,672      |   |                   |   | 29,380      |  
|                                                         |  |                   |             |   |                   |   |             |  
|Total liabilities                                        |  |                   | 266,586     |   |                   |   | 341,765     |  
|                                                         |  |                   |             |   |                   |   |             |  
|CONTINGENT LIABILITIES: (Note 7)                         |  |                   |             |   |                   |   |             |  
|                                                         |  |                  
|PARTNERS CAPITAL: (Notes 1, 4 and 9)                    |  |                   |             |   |                   |   |             |  
|Current General Partner -                                |  |                   |             |   |                   |   |             |  
|Cumulative net income                                    |  |                   | 221,299     |   |                   |   | 203,372     |  
|Cumulative cash distributions                            |  |                   | (91,175     | ) |                   |   | (84,004     | )
|                                                         |  |                   |             |   |                   |   |             |  
|                                                         |  |                   | 130,124     |   |                   |   | 119,368     |  
|                                                         |  |                   |             |   |                   |   |             |  
|Limited Partners (46,280.3 interests outstanding)        |  |                   |             |   |                   |   |             |  
|Capital contributions, net of offering costs             |  |                   | 39,358,468  |   |                   |   | 39,358,468  |  
|Cumulative net income                                    |  |                   | 28,274,473  |   |                   |   | 26,499,727  |  
|Cumulative cash distributions                            |  |                   | (55,385,268 | ) |                   |   | (53,080,268 | )
|Reallocation of former general partners deficit capital |  |                   | (840,229    | ) |                   |   | (840,229    | )
|                                                         |  |                   |             |   |                   |   |             |  
|                                                         |  |                   | 11,407,444  |   |                   |   | 11,937,698  |  
|                                                         |  |                   |             |   |                   |   |             |  
|Total partners capital                                  |  |                   | 11,537,568  |   |                   |   | 12,057,066  |  
|                                                         |  |                   |             |   |                   |   |             |  
|Total liabilities and partners capital                  |  | $                 | 11,804,154  |   |                   | $ | 12,398,831  |  
|                                                         |  |                   |             |   |                   |   |             |  



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



31



---

##### Table of Contents

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



STATEMENTS OF INCOME



For the Years Ended December 31, 2004, 2003, and 2002



|                                                                           |  |      |           |      |   |           |  |   |          
|-------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                                           |  | 2004 |           | 2003 |   | 2002     
|OPERATING REVENUES:                                                        |  |      |           |      |   |           |  |   |          
|                                                                           |  |      |          
|Rental income (Note 5)                                                     |  | $    | 2,254,223 |      | $ | 2,221,241 |  | $ | 2,306,490
|Property tax reimbursements and recoveries (Note 3)                        |  |      | 129,015   |      |   | 0         |  |   | 0        
|Lease Termination Fee (Note 3)                                             |  |      | 0         |      |   | 50,000    |  |   | 0        
|                                                                           |  |      |           |      |   |           |  |   |          
|TOTAL OPERATING REVENUES                                                   |  |      | 2,383,238 |      |   | 2,271,241 |  |   | 2,306,490
|                                                                           |  |      |           |      |   |           |  |   |          
|EXPENSES:                                                                  |  |      |           |      |   |           |  |   |          
|Partnership management fees (Note 6)                                       |  |      | 206,149   |      |   | 202,049   |  |   | 198,639  
|Restoration fees (Note 6)                                                  |  |      | 537       |      |   | 261       |  |   | 135      
|Insurance                                                                  |  |      | 40,030    |      |   | 44,656    |  |   | 27,823   
|General and administrative                                                 |  |      | 80,891    |      |   | 74,067    |  |   | 79,583   
|Advisory Board fees and expenses                                           |  |      | 14,000    |      |   | 10,215    |  |   | 9,799    
|Real estate taxes                                                          |  |      | 67,802    |      |   | 82,716    |  |   | 1,961    
|Professional services                                                      |  |      | 159,860   |      |   | 270,390   |  |   | 207,463  
|Maintenance and repair expenses                                            |  |      | 4,117     |      |   | 25,330    |  |   | 43,619   
|Personal property taxes                                                    |  |      | 820       |      |   | 15,316    |  |   | 0        
|Expenses incurred due to default by lessee or vacancy                      |  |      | 0         |      |   | 4,704     |  |   | 11,738   
|Settlement expense (Note 3)                                                |  |      | 0         |      |   | 22,134    |  |   | 0        
|Judgment expense (Note 3)                                                  |  |      | 0         |      |   | 0         |  |   | 45,128   
|Depreciation                                                               |  |      | 261,427   |      |   | 261,427   |  |   | 261,426  
|Amortization                                                               |  |      | 12,794    |      |   | 12,100    |  |   | 5,800    
|Provision for non-collectible rents and other receivables                  |  |      | 0         |      |   | 106,104   |  |   | 128,597  
|Other expenses                                                             |  |      | 8,705     |      |   | 4,932     |  |   | 0        
|                                                                           |  |      |           |      |   |           |  |   |          
|TOTAL OPERATING EXPENSES                                                   |  |      | 857,132   |      |   | 1,136,401 |  |   | 1,021,711
|                                                                           |  |      |           |      |   |           |  |   |          
|OTHER INCOME                                                               |  |      |           |      |   |           |  |   |          
|Interest income                                                            |  |      | 10,512    |      |   | 13,908    |  |   | 18,208   
|Bankruptcy claim (Note 10)                                                 |  |      | 24,271    |      |   | 0         |  |   | 0        
|Other income                                                               |  |      | 660       |      |   | 45        |  |   | 8,474    
|Recovery of amounts previously written off (Note 2)                        |  |      | 13,429    |      |   | 6,514     |  |   | 3,377    
|                                                                           |  |      |           |      |   |           |  |   |          
|TOTAL OTHER INCOME                                                         |  |      | 48,872    |      |   | 20,467    |  |   | 30,059   
|                                                                           |  |      |           |      |   |           |  |   |          
|INCOME FROM CONTINUING OPERATIONS                                          |  |      | 1,574,978 |      |   | 1,155,307 |  |   | 1,314,838
|                                                                           |  |      |          
|INCOME FROM DISCONTINUED OPERATIONS                                        |  |      | 217,695   |      |   | 429,025   |  |   | 220,467  
|                                                                           |  |      |           |      |   |           |  |   |          
|NET INCOME                                                                 |  | $    | 1,792,673 |      | $ | 1,584,332 |  | $ | 1,535,305
|                                                                           |  |      |           |      |   |           |  |   |          
|NET INCOME- CURRENT GENERAL PARTNER                                        |  | $    | 17,927    |      | $ | 15,843    |  | $ | 15,353   
|NET INCOME- LIMITED PARTNERS                                               |  |      | 1,774,746 |      |   | 1,568,489 |  |   | 1,519,952
|                                                                           |  |      |           |      |   |           |  |   |          
|                                                                           |  | $    | 1,792,673 |      | $ | 1,584,332 |  | $ | 1,535,305
|                                                                           |  |      |           |      |   |           |  |   |          
|PER LIMITED PARTNERSHIP INTEREST, based on 46,280.3 Interests outstanding: |  |      |           |      |   |           |  |   |          
|                                                                           |  |      |          
|INCOME FROM CONTINUING OPERATIONS                                          |  | $    | 33.69     |      | $ | 24.71     |  | $ | 28.12    
|INCOME FROM DISCONTINUED OPERATIONS                                        |  |      | 4.66      |      |   | 9.18      |  |   | 4.72     
|                                                                           |  |      |           |      |   |           |  |   |          
|NET INCOME PER LIMITED PARTNERSHIP INTEREST                                |  | $    | 38.35     |      | $ | 33.89     |  | $ | 32.84    
|                                                                           |  |      |           |      |   |           |  |   |          



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



32



---

##### Table of Contents

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



STATEMENTS OF PARTNERS CAPITAL



For the years ended December 31, 2004, 2003 and 2002



|                                                              |  |                         |         |                               |                  |         |       |  |   |                                              |   |                       |   |                              |  |   |              |  |   |             |   |  |   |          |   |  |   |            |  
|------------------------------------------------------------- |  | ----------------------- | ------- | ----------------------------- | ---------------- | ------- | ----- |  | - | -------------------------------------------- | - | --------------------- | - | ---------------------------- |  | - | ------------ |  | - | ----------- | - |  | - | -------- | - |  | - | ---------- | -
|                                                              |  | Current General Partner |         |                               | Limited Partners |        
|                                                              |  | Cumulative Net Income   |         | Cumulative Cash Distributions |                  |         | Total |  |   | Capital Contributions, Net of Offering Costs |   | Cumulative Net Income |   | Cumulative Cash Distribution |  |   | Reallocation |  |   | Total       |  
|BALANCE AT DECEMBER 31, 2001                                  |  | $                       | 172,176 |                               | $                | (70,941 | )     |  | $ | 101,235                                      |   |                       | $ | 39,358,468                   |  | $ | 23,411,286   |  | $ | (46,530,268 | ) |  | $ | (840,229 | ) |  | $ | 15,399,257 |  
|Cash Distributions ($36.95 per limited partnership interest)  |  |                         |         |                               |                  | (6,533  | )     |  |   | (6,533                                       | ) |                       |   |                              |  |   |              |  |   | (1,710,000  | ) |  |   |          |   |  |   | (1,710,000 | )
|Net Income                                                    |  |                         | 15,353  |                               |                  |         |       |  |   | 15,353                                       |   |                       |   |                              |  |   | 1,519,952    |  |   |             |   |  |   |          |   |  |   | 1,519,952  |  
|                                                              |  |                         |         |                               |                  |         |       |  |   |                                              |   |                       |   |                              |  |   |              |  |   |             |   |  |   |          |   |  |   |            |  
|BALANCE AT DECEMBER 31, 2002                                  |  | $                       | 187,529 |                               | $                | (77,474 | )     |  | $ | 110,055                                      |   |                       | $ | 39,358,468                   |  | $ | 24,931,238   |  | $ | (48,240,268 | ) |  | $ | (840,229 | ) |  | $ | 15,209,209 |  
|Cash Distributions ($104.58 per limited partnership interest) |  |                         |         |                               |                  | (6,530  | )     |  |   | (6,530                                       | ) |                       |   |                              |  |   |              |  |   | (4,840,000  | ) |  |   |          |   |  |   | (4,840,000 | )
|Net Income                                                    |  |                         | 15,843  |                               |                  |         |       |  |   | 15,843                                       |   |                       |   |                              |  |   | 1,568,489    |  |   |             |   |  |   |          |   |  |   | 1,568,489  |  
|                                                              |  |                         |         |                               |                  |         |       |  |   |                                              |   |                       |   |                              |  |   |              |  |   |             |   |  |   |          |   |  |   |            |  
|BALANCE AT DECEMBER 31, 2003                                  |  | $                       | 203,372 |                               | $                | (84,004 | )     |  | $ | 119,368                                      |   |                       | $ | 39,358,468                   |  | $ | 26,499,727   |  | $ | (53,080,268 | ) |  | $ | (840,229 | ) |  | $ | 11,937,698 |  
|Cash Distributions ($49.81 per limited partnership interest)  |  |                         |         |                               |                  | (7,171  | )     |  |   | (7,171                                       | ) |                       |   |                              |  |   |              |  |   | (2,305,000  | ) |  |   |          |   |  |   | (2,305,000 | )
|Net Income                                                    |  |                         | 17,927  |                               |                  |         |       |  |   | 17,927                                       |   |                       |   |                              |  |   | 1,774,746    |  |   |             |   |  |   |          |   |  |   | 1,774,746  |  
|                                                              |  |                         |         |                               |                  |         |       |  |   |                                              |   |                       |   |                              |  |   |              |  |   |             |   |  |   |          |   |  |   |            |  
|BALANCE AT DECEMBER 31, 2004                                  |  | $                       | 221,299 |                               | $                | (91,175 | )     |  | $ | 130,124                                      |   |                       | $ | 39,358,468                   |  | $ | 28,274,473   |  | $ | (55,385,268 | ) |  | $ | (840,229 | ) |  | $ | 11,407,444 |  
|                                                              |  |                         |         |                               |                  |         |       |  |   |                                              |   |                       |   |                              |  |   |              |  |   |             |   |  |   |          |   |  |   |            |  



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



33



---

##### Table of Contents

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



STATEMENTS OF CASH FLOWS



For the Years Ended December 31, 2004, 2003, and 2002



|                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                            |  | 2004 |            |   | 2003 |   |            | 2002 | 
|CASH FLOWS FROM (USED) IN OPERATING ACTIVITIES:                             |  |      |            |   |      |   |            |      |  |   |            |  
|Net income                                                                  |  | $    | 1,792,673  |   |      | $ | 1,584,332  |      |  | $ | 1,535,305  |  
|Adjustments to reconcile net income to net cash from operating activities - |  |      |            |   |      |   |            |      |  |   |            |  
|Depreciation and amortization                                               |  |      | 274,221    |   |      |   | 296,366    |      |  |   | 345,753    |  
|Recovery of amount previously written off                                   |  |      | (13,429    | ) |      |   | (6,514     | )    |  |   | (3,377     | )
|Provision for non-collectible rents and other receivables                   |  |      | 30,359     |   |      |   | 106,104    |      |  |   | 128,755    |  
|Property write-down                                                         |  |      | 0          |   |      |   | 48,027     |      |  |   | 98,000     |  
|Net (gain) on disposal of assets                                            |  |      | (215,554   | ) |      |   | (304,373   | )    |  |   | (124,399   | )
|Interest applied to Indemnification Trust account                           |  |      | (5,065     | ) |      |   | (3,597     | )    |  |   | (6,558     | )
|Decrease (Increase) Deposit- Clerk of the Court                             |  |      | 0          |   |      |   | 140,000    |      |  |   | (140,000   | )
|(Increase) in rents and other receivables                                   |  |      | (28,064    | ) |      |   | (15,530    | )    |  |   | (212,828   | )
|(Increase) Decrease in deposits for payment of real estate taxes            |  |      | (8,322     | ) |      |   | 0          |      |  |   | 7,875      |  
|(Increase) Decrease in prepaid expenses                                     |  |      | (29,320    | ) |      |   | 25,872     |      |  |   | (6,904     | )
|(Increase) in prepaid fees                                                  |  |      | (19,183    | ) |      |   | 0          |      |  |   | 0          |  
|Decrease (Increase) in deferred rent receivable                             |  |      | 850        |   |      |   | (47,850    | )    |  |   | (27,384    | )
|(Increase) Decrease in Property Tax receivable                              |  |      | (5,168     | ) |      |   | 2,595      |      |  |   | (4,143     | )
|Increase (Decrease) in due to current General Partner                       |  |      | 669        |   |      |   | (1,085     | )    |  |   | 1,274      |  
|(Decrease) Increase in accounts payable and other                           |  |      | (29,802    | ) |      |   | (64,980    | )    |  |   | 65,346     |  
|(Decrease) Increase in security deposits                                    |  |      | (15,000    | ) |      |   | (7,000     | )    |  |   | 27,568     |  
|(Decrease) Increase in property taxes payable                               |  |      | (39,338    | ) |      |   | 70,809     |      |  |   | (8,266     | )
|Increase (Decrease) in unearned rental income                               |  |      | 8,292      |   |      |   | (83,380    | )    |  |   | 2,372      |  
|                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash from operating activities                                          |  |      | 1,698,819  |   |      |   | 1,739,796  |      |  |   | 1,678,389  |  
|                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:                             |  |      |            |   |      |   |            |      |  |   |            |  
|Principal payments received on note receivable                              |  |      | 0          |   |      |   | 0          |      |  |   | 39,250     |  
|Proceeds from sale of investment properties                                 |  |      | 611,367    |   |      |   | 2,436,034  |      |  |   | 594,459    |  
|Payment of leasing commissions                                              |  |      | 0          |   |      |   | (31,920    | )    |  |   | (48,300    | )
|Recoveries from former General Partner affiliates                           |  |      | 13,429     |   |      |   | 6,514      |      |  |   | 3,377      |  
|                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash from investing activities                                          |  |      | 624,796    |   |      |   | 2,410,628  |      |  |   | 588,786    |  
|                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|CASH FLOWS USED IN FINANCING ACTIVITIES:                                    |  |      |            |   |      |   |            |      |  |   |            |  
|Cash distributions to Limited Partners                                      |  |      | (2,305,000 | ) |      |   | (4,840,000 | )    |  |   | (1,710,000 | )
|                                                                            |  |      |           
|Cash distributions to current General Partner                               |  |      | (7,171     | ) |      |   | (6,530     | )    |  |   | (6,533     | )
|                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash used in financing activities                                       |  |      | (2,312,171 | ) |      |   | (4,846,530 | )    |  |   | (1,716,533 | )
|                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                        |  |      | 11,444     |   |      |   | (696,106   | )    |  |   | 550,642    |  
|                                                                            |  |      |           
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                              |  |      | 673,142    |   |      |   | 1,369,248  |      |  |   | 818,606    |  
|                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                    |  | $    | 684,586    |   |      | $ | 673,142    |      |  | $ | 1,369,248  |  
|                                                                            |  |      |            |   |      |   |            |      |  |   |            |  



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



34



---

##### Table of Contents

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



NOTES TO FINANCIAL STATEMENTS



DECEMBER 31, 2004, 2003 AND 2002



1. ORGANIZATION AND
SIGNIFICANT ACCOUNTING POLICIES:



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



The Partnership is currently engaged in the business of owning
and operating its investment portfolio of commercial real estate properties (the Properties.) The Properties are leased on a triple net basis to, and operated by, franchisors or franchisees of national, regional, and local retail chains
under long-term leases. The lessees are primarily fast food, family style, and casual/theme restaurants, but also include a video rental store and a pre-school. At December 31, 2004, the Partnership owned 20 properties with specialty leasehold
improvements in six (6) of these properties.



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



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



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



Depreciation of the properties and improvements are provided on a straight-line basis over 31.5 years, which are the estimated useful lives of the buildings and
improvements. 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 and upon the negotiated extension of a lease. Leasing commissions are capitalized and
amortized over the life of the lease.



Real estate taxes, insurance and ground
rent on the Partnerships investment properties are the responsibility of the tenant. However, when a tenant fails to make the required tax payments or when a



35



---

##### Table of Contents

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



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



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



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



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



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



During 2004, 2003 and 2002 the Partnership recognized income from discontinued operations of $218,000, $429,000 and $220,000, respectively.
The 2004, 2003 and 2002 income from discontinued operations is attributable to the Hartford, WI property (which was sold in October 2002), the vacant South Milwaukee, WI property (which was sold in April 2003), the property in Milwaukee, WI and the
Hardees restaurant in Fond du Lac, WI (which were sold in July 2003), the vacant Twin Falls, ID property (which was sold in August 2003) and the reclassification of the Miami Subs restaurant property to property held for sale in the Fourth
Quarter of 2003 ( which was sold in June 2004).



36



---

##### Table of Contents

The components of property held for sale included in the balance sheet for the year-ended December 31, 2004 and 2003 are
outlined below.



|                         |  |      |   |      |   |          |  
|------------------------ |  | ---- | - | ---- | - | -------- | -
|                         |  | 2004 |   | 2003 |  
|Balance Sheet:           |  |      |   |      |   |          |  
|Land                     |  | $    | 0 |      | $ | 325,487  |  
|Buildings                |  |      | 0 |      |   | 163,257  |  
|Accumulated depreciation |  |      | 0 |      |   | (113,931 | )
|Deferred rent receivable |  |      | 0 |      |   | 16,500   |  
|                         |  |      |   |      |   |          |  
|Property held for sale   |  | $    | 0 |      | $ | 391,313  |  
|                         |  |      |   |      |   |          |  



The components of discontinued
operations included in the statements of income for the years ended December 31, 2004, 2003 and 2002 are outlined below.



|                                          |  |      |         |      |   |         |  |   |        
|----------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                          |  | 2004 |         | 2003 |   | 2002   
|Revenues                                  |  |      |         |      |   |         |  |   |        
|Rental Income                             |  | $    | 32,500  |      | $ | 208,353 |  | $ | 292,840
|Other income                              |  |      | 0       |      |   | 0       |  |   | 479    
|                                          |  |      |         |      |   |         |  |   |        
|Total Revenues                            |  |      | 32,500  |      |   | 208,353 |  |   | 293,319
|                                          |  |      |         |      |   |         |  |   |        
|Expenses                                  |  |      |         |      |   |         |  |   |        
|Property Write-down                       |  |      | 0       |      |   | 48,027  |  |   | 98,000 
|Depreciation                              |  |      | 0       |      |   | 18,578  |  |   | 63,080 
|Amortization                              |  |      | 0       |      |   | 4,261   |  |   | 15,447 
|Real Estate Taxes                         |  |      | 0       |      |   | 4,435   |  |   | 20,566 
|Management Services                       |  |      | 0       |      |   | 8,400   |  |   | 0      
|Provision for non-collectible Receivables |  |      | 30,359  |      |   | 0       |  |   | 158    
|                                          |  |      |         |      |   |         |  |   |        
|Total Expenses                            |  |      | 30,359  |      |   | 83,701  |  |   | 197,251
|                                          |  |      |         |      |   |         |  |   |        
|Net Gain on Sale of Properties            |  |      | 215,554 |      |   | 304,373 |  |   | 124,399
|                                          |  |      |         |      |   |         |  |   |        
|Income from Discontinued Operations       |  | $    | 217,695 |      | $ | 429,025 |  | $ | 220,467
|                                          |  |      |         |      |   |         |  |   |        



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



37



---

##### Table of Contents

Partners. During the Second Quarter of 2001, a consent solicitation was circulated, which if approved would have authorized the sale of the
Partnerships assets and dissolution of the Partnership (the 2001 Consent). A majority of the Limited Partners did not vote in favor of the 2001 Consent. Another consent solicitation was circulated during the Second Quarter of 2003,
which if approved would have authorized the sale of the Partnerships assets and dissolution of the Partnership (the 2003 Consent). A majority of the Limited Partners did not vote in favor of the 2003 Consent. Therefore, the
Partnership continues to operate as a going concern.



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, 2004, the tax basis of the Partnerships assets exceeded the amounts reported in the accompanying
financial statements by approximately $6,959,000. .



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



|                                          |  |      |           |   |      |   |           |      |  |   |           |  
|----------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                          |  | 2004 |           |   | 2003 |   |           | 2002 | 
|Net income, per statements of income      |  | $    | 1,792,673 |   |      | $ | 1,584,332 |      |  | $ | 1,535,305 |  
|Book to tax depreciation difference       |  |      | (34,084   | ) |      |   | (37,618   | )    |  |   | (38,193   | )
|Book over tax gain from asset disposition |  |      | (219,126  | ) |      |   | (261,355  | )    |  |   | (8,661    | )
|Straight line rent adjustment             |  |      | 850       |   |      |   | (47,850   | )    |  |   | (27,384   | )
|Prepaid rent                              |  |      | 8,291     |   |      |   | (147,163  | )    |  |   | 3,820     |  
|Bad debt reserve/expense                  |  |      | (155,822  | ) |      |   | (30,589   | )    |  |   | 146,776   |  
|Book valuation of property write-downs    |  |      | 0         |   |      |   | 48,027    |      |  |   | 98,000    |  
|Accrued judgment payable                  |  |      | 0         |   |      |   | (92,866   | )    |  |   | 45,128    |  
|Penalties                                 |  |      | 0         |   |      |   | 4,932     |      |  |   | 0         |  
|Other, net                                |  |      | 13        |   |      |   | 64        |      |  |   | 115       |  
|                                          |  |      |           |   |      |   |           |      |  |   |           |  
|Net income for tax reporting purposes     |  | $    | 1,392,795 |   |      | $ | 1,019,914 |      |  | $ | 1,754,906 |  
|                                          |  |      |           |   |      |   |           |      |  |   |           |  



2. REGULATORY INVESTIGATION:



A preliminary investigation during 1992 by the Office of Commissioner of
Securities for the State of Wisconsin and the Securities and Exchange Commission (the Investigation) revealed that during at least the four years ended December 31, 1992, the former general partners of the Partnership, Gary J. DiVall
(DiVall) and Paul E. Magnuson (Magnuson) had transferred substantial cash assets of the Partnership and two affiliated publicly registered limited partnerships, DiVall Insured Income Fund Limited



38



---

##### Table of Contents

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, 2004, $5,836,000 of
recoveries have been received which exceeded the original estimate of $3 million. As a result, From January 1, 1996 through December 31, 2004 the Partnership has recognized a total of $1,148,000 as income, which represents its share of the excess
recovery. The current General Partner continues to pursue recoveries of the misappropriated funds, however, no further significant recoveries are anticipated.



3. INVESTMENT PROPERTIES:



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



As of December 31, 2004,
the Partnership owned 18 fully constructed fast-food restaurants, a video store, and a preschool. The 20 properties are composed of the following: ten (10) Wendys restaurants, one (1) Dennys restaurant, one (1) Applebees
restaurant, one (1) Popeyes Famous Fried Chicken restaurant, one (1) Hooters restaurant, one (1) Kentucky Fried Chicken restaurant, one (1) Chinese Super Buffet restaurant, one (1) Blockbuster Video store, one (1) Sunrise Preschool, one
(1) Panda Buffet Restaurant, and one (1) Daytonas- All Sports Café. The 20 properties are located in a total of ten (10) states.



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



During 2004, 2003, and 2002 the Partnership recognized income from discontinued operations of
$218,000, $429,000, and $220,000, respectively. The 2004, 2003, and 2002 income from discontinued operations is attributable to the Hartford, WI property (which was sold in October 2002), the vacant South Milwaukee, WI property (which was sold in
April 2003), the property in Milwaukee, WI and the Hardees restaurant in Fond du Lac, WI (which were sold in July 2003), the vacant Twin Falls, ID property (which was sold in August 2003) and the reclassification of the Miami Subs restaurant
property to property held for sale in the Fourth Quarter of 2003 (which was sold in June 2004). The 2004 income from discontinued



39



---

##### Table of Contents

operations includes a Second Quarter net gain on the sale of the Miami Subs property of approximately $211,000, a Third Quarter net gain on the sale of a
parcel of land located adjacent to the former vacant Twin Falls, ID property of $5,000 (the land had no recorded value), and Second and Fourth Quarter provisions for non-collectible rents and other receivables related to the Miami Subs property. The
2003 income from discontinued operations includes a First Quarter write-down of $33,000 related to the South Milwaukee property, a Second Quarter property write-down of $15,000 related to the Milwaukee, WI property, and Third Quarter net gains of
$9,000, $80,000 and $215,000, which are related to the sales of the Milwaukee, WI property, Hardees- Fond du Lac and Twin Falls properties, respectively. The 2002 income from discontinued operations includes a net gain of $124,000 related to
the sale of the Hartford property, and a Third Quarter write-down of $98,000 related to the South Milwaukee property.



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



Popeyes- Park Forest, IL



The tenant has remained current on its monthly lease obligations. However, the tenant was delinquent on its January 2002 percentage rent billing for the year ended
December 31, 2001 of $72,000 and its February 2003 percentage rent billing for the year ended December 21, 2002 of $31,500. Management continued to pursue legal remedies in relation to the collection of the tenants percentage rent past due
balance of approximately $103,500, however, due to the uncertainty of collection, the entire amount was fully reserved in the Fourth Quarter of 2003. In addition, through October 31, 2004 Management had charged Popeyes late fees totaling
$93,000 (which includes 2004, 2003 and 2002 late fee charges of $41,000, $35,000 and $17,000, which were not recognized as revenue due to uncertainty of collection) in relation to the percentage rent balances due. The tenant was delinquent on its
reporting of its 2003 monthly sales figures and therefore percentage rents for the year ended December 31, 2003 were not accrued by the Partnership at December 31, 2003. The delinquent 2003 sales figures were received by Management in June 2004 and
Popeyes 2003 percentage rent of approximately $19,000 was then billed in the Third Quarter of 2004. However, due to the uncertainty of collection it was determined that the amount would not be recognized as revenue for financial statement
purposes until such time as the rent was collected. Popeyes did not exceed its gross sales breakpoint in 2004 and therefore percentage rent was not recorded in 2004 for the tenant.



Per the lease and its amendments (Lease), Popeyes is to timely pay as they come due all taxes charged to the property.
However, the tenant failed to pay the 2002 property taxes of approximately $40,000, which were due and payable to Cook County, Illinois in 2003, as well as approximately $5,000 in assessed late fees. In the Fourth Quarter of 2003 the Partnership
accrued approximately $86,000 in property taxes, which included the 2002 property taxes and associated late fees, as well as the estimated 2003 property taxes that were to be due in 2004. The 2002 property taxes and late fees were paid by the
Partnership in January 2004 and the first and second installments for the 2003 taxes were paid in February and September 2004, respectively. In March 2004 Management learned that the tenant had also failed to pay the $31,000 second installment of
its 2001 property taxes. The Partnership paid the 2001 delinquent property taxes, as well as approximately $10,000 in assessed late fees, in March 2004.



A Landlords 10 Day Notice Of Default (Notice), dated February 9, 2004, was sent to Quality Foods I, LLC., the Popeyes tenant, demanding payment of
the amount due for the 2002 property tax balance and unless payment was received by the Partnership on or before the expiration of ten (10) days after the date of service of the Notice, then the Partnership would pursue all legal remedies available,
including an action to recover possession and termination of the Lease. The Notice also stated that until such time the Lease is terminated, the tenants other legal obligations (outstanding percentage rents and future monthly rents) continue
in full.



40



---

##### Table of Contents

In March 2004 the Partnerships legal counsel obtained a court order of possession that stated that Popeyes
was to vacate the property by April 2, 2004. In April 2004 Management entered into a verbal agreement with Popeyes that the tenant: (1) pay $25,000 by wire or certified check per month until the Partnership is reimbursed in full for the
approximately $107,000 in delinquent property taxes paid on Popeyes behalf (the Partnership received $25,000 in each April, May, June, and July 2004 and received the final payment of approximately $7,000 in September 2004); and (2) fund the
$22,000 2003 property tax second installment due in the Fourth Quarter 2004 through prorated monthly escrow payments made to the Partnership from April through September 2004 (the Partnership received approximately $17,000 of the $22,000 in
September 2004 and the remaining balance in November 2004). If the tenant adhered to this verbal agreement, Management intended to re-evaluate outstanding percentage rents relative to appropriate and sustainable occupancy costs and defer any current
action for possession.



A Release and Settlement Agreement was executed with
Popeyes in November 2004. In settlement of all claims and disputes (Popeyes past due 2001 and 2002 percentage rent balances and the applicable allowances were removed from the balance sheet at November 30, 2004), the following
significant items were agreed to: (1) Popeyes is to make monthly escrow property tax payments applicable to 2004 and for future property taxes due through out the remaining lease term obligation; (2) Popeyes gross sales breakpoint was
increased to $1,000,000 and therefore, percentage rent shall be an amount equal to 8% of gross sales in excess of $1,000,000.



Popeyes 2004 estimated property taxes have been prorated and accrued on a monthly basis by the Partnership. In September 2004 the Partnership began billing
Popeyes monthly property tax escrow charges. Escrow payments of approximately $7,400 were received by the Partnership in December 2004 and January 2005 in relation to Popeyes 2004 property taxes due in the year 2005. In 2004 property tax
escrow charges were reflected in the financial statements as escrow payments were actually received, and were recorded as a reversal of 2004 property tax expense equal to the amount of payment received.



Miami Subs- Palm Beach, FL Property



A sales contract was executed in January 2004 for the sale of the property in the Second
Quarter of 2004 at a sales price of $650,000. The closing date on the sale of the property was June 2004 and the net sales proceeds totaled approximately $606,000. A net gain on the sale of $211,000 was recognized in the Second Quarter of 2004.
Closing and other sale related costs amounted to $44,000, which included sales commissions totaling $39,000, of which $19,500 was paid to a General Partner affiliate and $19,500 was paid to a non-affiliated broker.



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



In November 2004 a Settlement Agreement (Agreement) was
executed with DiFede. Per the Agreement the former tenant agreed to pay the Partnership by December 31, 2004 approximately $36,000 in past due



41



---

##### Table of Contents

rent, late charges, related attorney and court fees and other miscellaneous items. However, the settlement payment per the Agreement has not been received by
the Partnership. Further legal action was taken by the Partnership and the Circuit Court in Broward County, Florida entered a final judgment (the Judgment) against DiFede in early January 2005, awarding approximately $42,000 in damages
to the Partnership. Due to the uncertainty of collection, the remaining fifty percent (50 %) of the total outstanding receivable balance was written-off. The receivable balance and applicable allowance were removed from the balance sheet at December
31, 2004.



4785 Merle Hay Road- Des Moines,
IA



In July 2004 the Partnership paid Daytonas- All Sports
Cafés delinquent 2002 property taxes balance of approximately $15,000. Daytonas reimbursed the Partnership $5,000 in each August, September and October. Due to the property tax default Management requested that Daytonas
begin escrowing for their next property tax installment, which will be due in the First Quarter of 2005, with the Partnership. Escrow payments of approximately $800 were held by the Partnership at December 31, 2004.



The lease on the property in Des Moines, IA expired on December 31, 2002. In October 2002
Hickory Park, Inc. informed Management that they would not be renewing the property lease. However, in January 2003 Management was notified that the sub-tenant, Daytonas- All Sports Cafe, did not vacate the Des Moines property and was
continuing to operate the property as a restaurant. Management allowed the sub-tenant a holdover lease for two months, and the Partnership received the January and February 2003 rent payments from Daytonas applicable to the holdover lease. In
March 2003 Management executed a five (5) year direct lease with Daytonas, which is set to expire in 2008. The first year base rent was $60,000. A leasing commission of $9,700 was paid to an affiliate of the General Partner in March 2003 upon
the execution of the lease.



Twin Falls, ID
property



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



In
February 2003 Management entered into a purchase and sale agreement to sell the vacant Twin Falls property at a sales price of $565,000. The closing date on the sale of the property was August 22, 2003 and the net sales proceeds totaled $530,000. A
net gain of $215,000 was recognized in the Third Quarter of 2003 upon the sale. Closing and other sale related costs amounted to $35,000, which included sales commissions of $22,000 to a non-affiliated broker and $11,000 to a General Partner
affiliate in the Third Quarter of 2003.



During the Fourth Quarter of 2001, the
Bankruptcy court granted the motion of Phoenix Restaurant Group, Inc. (Phoenix) to reject the lease with the Partnership at the Twin Falls, Idaho location. The lease was terminated and rent income ceased in the Fourth Quarter of 2001.
Although Phoenix had rejected the lease, its subtenant, Fiesta Time, maintained possession of the property. Management, therefore, took legal action to evict Fiesta Time from the Twin Falls property. In the Fourth Quarter of 2002, a judgment was
entered in Magistrate Court evicting Fiesta Time. However, Fiesta Time appealed the action to District Court and the Court upheld the judgment in February 2003. The Partnership then received $30,000 in past rent that the court had required Fiesta
Time to escrow during the court proceedings.



42



---

##### Table of Contents

Hardees property- Fond du Lac, WI



During June 2003, Management entered into a contract to sell the Hardees restaurant in
Fond du Lac, WI at a sales price of $720,000. The closing date on the sale of the property was July 30, 2003 and the net sales proceeds totaled $690,000. A net gain on the sale of $80,000 was recognized in the Third Quarter of 2003. Closing and
other sale related costs amounted to $30,000, which included a sales commission totaling $22,000 paid to a General Partner affiliate in the Third Quarter of 2003.



Milwaukee, WI property



In May 2003 Management entered into a contract to sell the Milwaukee, WI property to the tenant at a sales price of $825,000. The property
was being operated as Omega Restaurant. The closing date on the sale of the property was July 28, 2003, and the net sales proceeds totaled $799,000. A net gain on the sale of $9,000 was recognized in the Third Quarter of 2003. Closing costs amounted
to $1,000, and a sales commission of $25,000 was paid to a General Partner affiliate. In the Second Quarter of 2003 the net asset value of the property was written-down by $15,000 to reflect the net estimated sales price, less costs to sell, of the
property of approximately $790,000.



During May 2001, Management negotiated a
re-lease of the vacant Milwaukee, Wisconsin property to Omega Restaurant and rent income commenced in October 2001. Commissions of $50,000 and $9,000 were paid to an unaffiliated leasing agent and to an affiliate of the General Partner,
respectively, upon the execution of the new lease in the Second Quarter of 2001.



During March 2001, Hardees Food Systems, Inc. notified Management of its intent to close its restaurant in Milwaukee, Wisconsin. The Hardees lease on the Milwaukee property was not set to expire until 2009. In the Second Quarter
of 2001, a lease termination agreement was executed and the tenant ceased the payment of rent as of April 30, 2001. Hardees Food Systems agreed to pay a lease termination fee of approximately two (2) years rent or $157,000. The payment
schedule included four (4) equal installments of $39,250. The first payment was received in May 2001 upon the execution of the agreement and the remaining balance represented a Note receivable of $117,750. The first and second Note receivable
installments were received in August and October 2001. The final installment was received in January 2002.



Grand Forks, ND Property



During February 2003 a new 10-year lease was executed with Panda Buffet, Inc. in relation to the Grand Forks, ND property, formerly occupied by Village Inn. The lease is
set to expire in 2012 and the annual first year base rent is $32,500. Commissions of $18,500 and $3,700 were paid to an unaffiliated leasing agent and to an affiliate of the General Partner, respectively, in March 2003. HVAC maintenance and repair
expenditures of $18,000 were incurred in the First Quarter of 2003 at the property. The Partnership had incurred expenditures of approximately $27,000 to replace the roof on the property in the Third Quarter of 2002.



During October 2001, the Village Inn Restaurant had notified Management of its intent to
close and vacate its restaurant in Grand Forks, ND, prior to the expiration of the lease term in 2009. In February 2002, Management was notified Village Inn had closed and vacated the restaurant. Rent income was collected from the tenant through
December 2001, however, no rent was collected from Village Inn for the period beginning January 1, 2002. The Partnership did not recognize rental revenue in 2003 related to Village Inn.



43



---

##### Table of Contents

In March 2002 and September 2002, the Partnership paid the propertys first and second installments of 2001 real
estate taxes. The Partnership also paid the 2002 real estate taxes in the Fourth Quarter of 2002. During June 2003 a settlement and lease termination agreement was executed between Management and Village Inn. The Partnership received a $50,000
termination fee from Village Inn. Management had initiated legal action against Village Inn for defaulted rent and real estate taxes, as well as other damages.



South Milwaukee, WI property



In October 2002 Management entered into a contract to sell the vacant South Milwaukee, WI property at a sales price of $450,000. In the Third Quarter of 2002 the net
asset value of the South Milwaukee property was written-down by $98,000 to reflect the estimated fair value of the property at September 30, 2002 of approximately $450,000, shown on the balance sheet as property held for sale at September 30, 2002.
In the First Quarter of 2003 the net asset value of the South Milwaukee property was written-down by an additional $33,000 (to $417,000) to reflect the net estimated sales price, less costs of sale.



The vacant South Milwaukee property was sold in April 2003 and the net proceeds upon the sale
were $417,000. The net asset value of the property at March 31, 2003 was approximately $417,000. Closing costs amounted to $6,000 and sales commissions related to the sale, which were paid to non-affiliated brokers, totaled $27,000.



Hardees property- Hartford, WI



During the Second Quarter of 2002, Management entered into a contract to sell
the vacant Hardees restaurant in Hartford, WI at a sales price of $618,000. During December 2001, Hardees Food Systems, Inc. notified Management that it had vacated its restaurant in Hartford, Wisconsin. Hardees lease on the
Hartford property was set to expire on April 30, 2009 and they continued making rent payments until the closing date of October 2002. The net asset value of the property at closing was approximately $470,000 and the net gain on the sale of the
property in October 2002 was approximately $124,000. A sales commission of $18,500 was paid by the Partnership to an affiliate of the General Partner in the Fourth Quarter of 2002.



North 7th Street property- Phoenix, AZ



During the Fourth Quarter of 2001, the Bankruptcy court granted the motion of Lessee,
Phoenix Restaurant Group, Inc. (Phoenix), to reject the lease with the Partnership at the N. 7thStreet,
Phoenix, Arizona location. Following the rejection of this lease by Phoenix, the Mountain Range Restaurants (Phoenixs subtenant) declined the Partnerships offer to lease the property directly to them. Therefore, the property was vacated
and rent ceased as of May 31, 2002.



During August 2002, a ten (10) year lease,
with annual first year base rent of $64,000, was negotiated with new tenant, Jun Cheng Pan, at the vacant N. 7thStreet property in Phoenix, Arizona. The new tenant took possession of the property in August 2002 and rent commenced in January 2003. The restaurant is operated as a Chinese Super Buffet. Commissions of $34,500 and $13,800 were paid to an
unaffiliated leasing agent and to an affiliate of the General Partner, respectively, upon the execution of the new lease in the Third Quarter of 2002.



44



---

##### Table of Contents

Former Mulberry Street Grill property- Phoenix, AZ



During April 2001, the sub-tenant AMF Corporation notified Management of its intent to close
and vacate its Mulberry Street Grill restaurant in Phoenix, Arizona. Although the lease on the property was not set to expire until 2007, monthly rental and Common Area Maintenance (CAM) income ceased as of June 1, 2001. The past due amount of
$10,000 was reserved in the Fourth Quarter of 2001, due to its uncertainty of collection. Management moved forward with all legal remedies to collect the balances due from AMF, however, Management learned in the Third Quarter of 2002 that AMF had
filed for bankruptcy and that the bankruptcy court had released AMF from all of its debts. The Partnership owned the building in Phoenix, Arizona occupied by the Mulberry Street Grill restaurant, however, the land upon which the building was located
was leased (the Ground Lease) to the Partnership by the Ground Lease Landlord, Centre at 38thStreet,
L.L.C, (Centre.) During the Second Quarter of 2001 Management returned possession of the property to Centre and as such the net asset value of the property was written-off in the Fourth Quarter of 2001, resulting in a loss of $157,000.



Beginning in May 2001 and through December 2001 the Partnership accrued but
withheld payment of the ground lease obligations to Centre, and on December 31, 2001 the total ground lease accrual approximated $50,000. In the Second Quarter of 2001, Centre filed suit against the Partnership and TPG (as General Partner) seeking
possession of the property and damages for breach of the Ground Lease. In April 2002, an additional $43,000 was accrued as payable to Centre, due to the Courts granting a summary judgment of $93,000 against the Partnership. In June 2002 the
Partnership filed an appeal with respect to this judgment. In September 2002, the Partnership was required to escrow a $140,000 cash bond at the clerk of the court during the appeal process. A Settlement Agreement and Mutual Release (the
Agreement) was made and entered into as of February 1, 2003. According to the terms of the Agreements the Partnership was required to pay Centre $115,000 (the Settlement) to discharge all claims of Centre against the
Partnership and TPG (except for violations of environmental laws.) The court returned the $140,000 cash bond to the Partnership in April 2003. (See Legal Proceedings in Note 10 to Financial Statements and Part I- Item 3.)



Other Investment In Properties Information



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



As of December 31, 2002 two of the Partnerships property leases, where the Partnership
is the lessor, contained purchase option provisions. The owner of the Omega Restaurant in Milwaukee, WI exercised his purchase option and entered into a purchase agreement to buy the Milwaukee, WI property for $825,000 which was in excess of the
original cost of the property less accumulated depreciation. Closing on the property was in July 2003. At December 31, 2004 the owners of the Panda Buffet property have an option to purchase the property at a price, which exceeds the original cost
of the property less accumulated depreciation. The General Partner is not aware of any unfavorable purchase options in relation to the original cost.



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



45



---

##### Table of Contents

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 are cumulative and are not to be made to the current
General Partner unless and until each Limited Partner has received a distribution from Net Cash Receipts in an amount equal to 10% per annum, cumulative simple return on his or her Adjusted Original Capital, as defined, from the Return Calculation
Date, as defined, except to the extent needed by the General Partner to pay its federal and state income taxes on the income allocated to it attributable to such year. Distributions paid to the General Partner are based on the estimated tax
liability resulting from allocated income. Subsequent to the filing of the General Partners income tax returns, a true up with actual distributions is made.



The provisions regarding distribution of Net Proceeds, as defined, were also amended to provide that Net Proceeds are to be distributed as
follows: (a) to the Limited Partners, an amount equal to 100% of their Adjusted Original Capital; (b) then, to the Limited Partners, an amount necessary to provide each Limited Partner a Liquidation Preference equal to a 13.5% per annum, cumulative
simple return on Adjusted Original Capital from the Return Calculation Date including in the calculation of such return on all prior distributions of Net Cash Receipts and any prior distributions of Net Proceeds under this clause, except to the
extent needed by the General Partner to pay its federal and state income tax on the income allocated to it attributable to such year; and (c) then, to Limited Partners, 99%, and to the General Partner, 1%, of remaining Net Proceeds available for
distribution.



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



46



---

##### Table of Contents

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 General Partner made the amendments without a vote of the Limited Partners.



5. LEASES:



Original lease terms
for the majority of the investment properties are generally 1020 years from their inception. The leases generally provide for minimum rents and additional rents based upon percentages of gross sales in excess of specified breakpoints. The
lessee is responsible for occupancy costs such as maintenance, insurance, real estate taxes, and utilities. Accordingly, these amounts are not reflected in the statements of income except in circumstances where, in managements opinion, the
Partnership will be required to pay such costs to preserve its assets (i.e., payment of past-due real estate taxes). Management has determined that the leases are properly classified as operating leases; therefore, rental income is reported when
earned on a straight-line basis and the cost of the property, excluding the cost of the land, is depreciated over its estimated useful life.



As of December 31, 2004 the aggregate minimum operating lease payments to be received under the leases for the Partnerships properties are as follows:



|                         |  |   |           
|------------------------ |  | - | ----------
|Year ending December 31,
|2005                     |  | $ | 1,670,908 
|2006                     |  |   | 1,580,408 
|2007                     |  |   | 1,563,325 
|2008                     |  |   | 1,416,575 
|2009                     |  |   | 1,255,593 
|Thereafter               |  |   | 6,632,580 
|                         |  |   |           
|                         |  | $ | 14,119,389
|                         |  |   |           



Percentage rentals included in rental
income in 2004, 2003, and 2002 were $589,629, $565,095, and $599,591, respectively. A variance in percentage rental income in 2004 and 2003 as compared to 2002 is a result of no percentage rent accrual at December 31, 2004 for Popeyes due to
an amendment to its lease increasing its gross sales breakpoint, and no percentage rent recognition in 2003 for Popeyes due to its 2002 and 2001 percentage rent billing defaults and the tenants failure to report its 2003 sales figures in
a timely manner. (For further disclosure see Note 3 to Financial Statements, Part I- Item 2 and Part II- Item 7.)



Ten (10) of the properties are leased to WenCoast Restaurants, a franchisee of Wendys restaurants. WenCoast base rents accounted for 51% of total operating base
rents for 2004.



47



---

##### Table of Contents

6. TRANSACTIONS WITH CURRENT GENERAL PARTNER AND ITS AFFILIATES:



The current General Partner was to receive a management fee (Base Fee) for
managing the three original affiliated Partnerships equal to 4% of gross receipts, subject to a minimum of $300,000 annually, and a maximum annual reimbursement for office rent and related office overhead (Expense) of $25,000, as
provided in the Permanent Manager Agreement (PMA). The Base Fee and the Expense reimbursement are subject to increases due to increases in the Consumer Price Index. The current General Partner receives a Base Fee for managing the
Partnership equal to 4% of gross receipts and the Partnership is only responsible for its allocable share of such minimum and maximum annual amounts as indicated above (originally $159,000 minimum annual Base Fee and $13,250 Expense reimbursement).
Effective March 1, 2004 the minimum annual Base Fee and the maximum Expense reimbursement increased by 2.28%, which represents the allowable annual Consumer Price Index adjustment per the PMA. Therefore, as of March 1, 2004 the minimum monthly Base
Fee paid by the Partnership was raised to $17,288 and the maximum monthly Expense reimbursement was raised to $1,395.



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 $56,396 to date on the amounts recovered, which includes 2004, 2003 and 2002 fees of $537, $261 and $135, respectively. The fees received from the Partnership on the amounts
recovered reduce the 4% minimum fee by that same amount.



Amounts paid and or
accrued to the current General Partner and its affiliates for the years ended December 31, 2004, 2003, and 2002, are as follows. (Management fees and overhead allowances included January 2005 fees which were prepaid in December 2004 for the year
ended December 31, 2004.):



|                                         |  |                                              |         |                                              |   |                                               |  |   |        
|---------------------------------------- |  | -------------------------------------------- | ------- | -------------------------------------------- | - | --------------------------------------------- |  | - | -------
|Current General Partner                  |  | Incurred for the Year endedDecember 31, 2004 |         | Incurred for the Year endedDecember 31, 2003 |   | Incurred for the Year ended December 31, 2002
|Management fees                          |  | $                                            | 223,437 |                                              | $ | 202,049                                       |  | $ | 198,639
|Restoration fees                         |  |                                              | 537     |                                              |   | 261                                           |  |   | 135    
|Overhead allowance                       |  |                                              | 18,071  |                                              |   | 16,322                                        |  |   | 16,037 
|Sales commission                         |  |                                              | 19,500  |                                              |   | 58,000                                        |  |   | 18,540 
|Leasing commissions                      |  |                                              | 0       |                                              |   | 13,420                                        |  |   | 13,800 
|Reimbursement for out-of-pocket expenses |  |                                              | 8,032   |                                              |   | 5,920                                         |  |   | 7,726  
|Cash distribution                        |  |                                              | 7,171   |                                              |   | 6,530                                         |  |   | 6,533  
|                                         |  |                                              |         |                                              |   |                                               |  |   |        
|                                         |  | $                                            | 276,748 |                                              | $ | 302,502                                       |  | $ | 261,410
|                                         |  |                                              |         |                                              |   |                                               |  |   |        



7. CONTINGENT LIABILITIES:



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



48



---

##### Table of Contents

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 recovery was refunded to the current General Partner during March 1996 after exceeding the recovery
level of $4,500,000. The General Partner does not expect any future refunds, as the possibility of achieving the $6,000,000 recovery threshold appears remote.



8. PMA INDEMNIFICATION TRUST:



The PMA provides that the Permanent Manager will be indemnified from any claims or expenses arising out of or relating to the Permanent Manager serving in such capacity
or as substitute general partner, so long as such claims do not arise from fraudulent or criminal misconduct by the Permanent Manager. The PMA provides that the Partnership fund this indemnification obligation by establishing a reserve of up to
$250,000 of Partnership assets which would not be subject to the claims of the Partnerships creditors. An Indemnification Trust (Trust) serving such purposes has been established at United Missouri Bank, N.A. The Trust has been
fully funded with Partnership assets as of December 31, 2004. Funds are invested in U.S. Treasury securities. In addition, $137,387 of earnings has been credited to the Trust as of December 31, 2004. The rights of the Permanent Manager to the Trust
will be terminated upon the earliest to occur of the following events: (i) the written release by the Permanent Manager of any and all interest in the Trust; (ii) the expiration of the longest statute of limitations relating to a potential claim
which might be brought against the Permanent Manager and which is subject to indemnification; or (iii) a determination by a court of competent jurisdiction that the Permanent Manager shall have no liability to any person with respect to a claim
which is subject to indemnification under the PMA. At such time as the indemnity provisions expire or the full indemnity is paid, any funds remaining in the Trust will revert back to the general funds of the Partnership.



9. FORMER GENERAL PARTNERS CAPITAL ACCOUNTS:



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



10. LEGAL
PROCEEDINGS:



The Partnership owned the building in Phoenix, Arizona
occupied by the Mulberry Street Grill restaurant, which was located on a parcel of land leased to the Partnership pursuant to a long-term ground lease (the Ground Lease.) The Ground Lease was considered an operating lease and the lease
payments were paid by the Partnership and expensed in the periods to which they applied. During the Second Quarter of 2001, sub-tenant AMF Corporation (AMF) notified Management of its intent to close its Mulberry Street Grill restaurant.
Although the sub-lease had not expired, since such notification the Partnership had received no rent from the former tenant and had returned possession of the Phoenix, Arizona property to the Ground Lease Landlord, Centre at 38thStreet, L.L.C., (Centre.) Beginning in May 2001 and through December 2001 the Partnership accrued but withheld
payment of the ground lease obligations, and on December 31, 2001 the total ground lease accrual approximated $50,000. On June 12, 2001 Centre leased the property to a new tenant.



49



---

##### Table of Contents

On June 18, 2001, Centre filed a lawsuit (the Complaint) in the Maricopa County, Arizona, Superior Court,
against the Partnership and TPG. The Complaint alleged that the Partnership was a tenant under a Ground Lease with Centre and that the Partnership defaulted on its obligations under that lease. The suit named TPG as a defendant because TPG is the
Partnerships general partner. The Complaint sought damages for unpaid rent, commissions, improvements, and unspecified other damages exceeding $120,000.



The Partnership and TPG filed an answer denying any liability to Centre. In addition, the Partnership filed a third-party complaint against the National Restaurant
Group, (National Restaurant), L.L.C., and its sub-tenant AMF. In the third-party complaint, the Partnership alleged that National Restaurant and AMF are liable to the Partnership for breach of the subleases and any damages for which the
Partnership may be held liable pursuant to the Ground Lease. Due to the bankruptcy filing by AMF the Partnership was prevented from proceeding against them. Although the Partnership had difficulty locating National Restaurant, the lawsuit against
them continues.



On April 10, 2002 the Maricopa County Superior Court granted
Centres motion for summary judgment against the Partnership and TPG. The Court entered a final judgment (the Judgment) on May 22, 2002, awarding approximately $93,000 in damages to Centre, as well as attorneys fees and court
costs in the amount of $16,000. As of December 31, 2001 the Partnership had accrued $50,000 in ground lease obligations payable to Centre and the remaining summary judgment balance of $43,000 was accrued in April 2002.



On June 20, 2002 the Partnership and TPG filed a Notice of Appeal (the Appeal)
with respect to such Judgment. Both parties filed briefs with the Court of Appeals, and the Court set oral argument for March 5, 2003. In order to prevent Centre from enforcing the judgment while the Appeal was pending, in August 2002, the
Partnership deposited a $140,000 cashiers check with the Clerk of the Maricopa County Superior Court to serve as a bond. By law, the amount of the bond must be sufficient to cover the amount of the judgment, plus interest, and any additional
costs that may be incurred during the appeal.



In early January 2003, Centre
informed the Partnership that the replacement tenant had vacated the premises. In February 2003 the Partnership made an offer to Centre to settle the lawsuit and terminate the Ground Lease. In February 2003 a Settlement Agreement and Mutual Release
(Agreement) was executed between Centre, the Partnership and TPG. The Agreement included a February 28, 2003 settlement payment of $115,000 (the Settlement) from the Partnership to Centre in satisfaction of any and all
obligations the Partnership and TPG has now, or may have in the future, to Centre, whether in connection with the Complaint, the Judgment, the Ground Lease, or otherwise, except for any liability for violations of environmental law for which the
Partnership is liable. In addition, the Agreement includes the termination of the Ground Lease, dismissal of the Partnerships Appeal, and the mutual liability release of all parties relating to or arising out of the Ground Lease, the
Complaint, the Judgment, and the Appeal, except for violations of environmental laws.



Upon filing the Agreement with the Court, the $140,000 cash bond was returned from the clerk of the court to the Partnership in April 2003.



DeDan bankruptcy



During January 2004 the Partnership received a one-time payment of approximately $25,000 from the Bankruptcy Court in relation to bankruptcy litigation. In the late 1980s, the Partnership leased properties



50



---

##### Table of Contents

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



Phoenix Foods Preference Claim



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



11. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED):



Quarter Ended



|                                           |  |                |         |               |   |                    |  |                   |         |  |   |         |  
|------------------------------------------ |  | -------------- | ------- | ------------- | - | ------------------ |  | ----------------- | ------- |  | - | ------- | -
|                                           |  | March 31, 2004 |         | June 30, 2004 |   | September 30, 2004 |  | December 31, 2004 |        
|Total Operating Revenues                   |  | $              | 421,270 |               | $ | 527,115            |  | $                 | 690,119 |  | $ | 744,734 |  
|                                           |  |                |         |               |   |                    |  |                   |         |  |   |         |  
|Income from Continuing Operations          |  | $              | 211,502 |               | $ | 303,063            |  | $                 | 495,326 |  | $ | 565,087 |  
|Income (Loss) From Discontinued Operations |  | $              | 17,250  |               | $ | 210,625            |  | $                 | 5,000   |  | $ | (15,180 | )
|                                           |  |                |         |               |   |                    |  |                   |         |  |   |         |  
|Net Income                                 |  | $              | 228,752 |               | $ | 513,688            |  | $                 | 500,326 |  | $ | 549,907 |  
|                                           |  |                |         |               |   |                    |  |                   |         |  |   |         |  
|Net Income per Unit                        |  | $              | 4.89    |               | $ | 10.99              |  | $                 | 10.70   |  | $ | 11.77   |  



51



---

##### Table of Contents

Quarter Ended



|                                           |  |                |         |               |   |                    |  |                   |         |  |   |        
|------------------------------------------ |  | -------------- | ------- | ------------- | - | ------------------ |  | ----------------- | ------- |  | - | -------
|                                           |  | March 31, 2003 |         | June 30, 2003 |   | September 30, 2003 |  | December 31, 2003
|Total Operating Revenues                   |  | $              | 411,157 |               | $ | 460,994            |  | $                 | 668,432 |  | $ | 730,658
|                                           |  |                |         |               |   |                    |  |                   |         |  |   |        
|Income from Continuing Operations          |  | $              | 69,888  |               | $ | 224,783            |  | $                 | 494,414 |  | $ | 366,222
|Income (Loss) From Discontinued Operations |  | $              | 44,882  |               | $ | 38,434             |  | $                 | 329,246 |  | $ | 16,463 
|                                           |  |                |         |               |   |                    |  |                   |         |  |   |        
|Net Income                                 |  | $              | 114,770 |               | $ | 263,217            |  | $                 | 823,660 |  | $ | 382,685
|                                           |  |                |         |               |   |                    |  |                   |         |  |   |        
|Net Income per Unit                        |  | $              | 2.45    |               | $ | 5.63               |  | $                 | 17.62   |  | $ | 8.19   



Quarter Ended



|                                           |  |                |         |               |   |                    |  |   |                   |   |  |   |        
|------------------------------------------ |  | -------------- | ------- | ------------- | - | ------------------ |  | - | ----------------- | - |  | - | -------
|                                           |  | March 31, 2002 |         | June 30, 2002 |   | September 30, 2002 |  |   | December 31, 2002
|Total Operating Revenues                   |  | $              | 428,986 |               | $ | 450,124            |  | $ | 670,254           |   |  | $ | 757,126
|                                           |  |                |         |               |   |                    |  |   |                   |   |  |   |        
|Income from Continuing Operations          |  | $              | 241,576 |               | $ | 153,389            |  | $ | 413,144           |   |  | $ | 506,729
|Income (Loss) from Discontinued Operations |  | $              | 56,417  |               | $ | 57,632             |  | $ | (40,771           | ) |  | $ | 147,189
|                                           |  |                |         |               |   |                    |  |   |                   |   |  |   |        
|Net Income                                 |  | $              | 297,993 |               | $ | 211,021            |  | $ | 372,373           |   |  | $ | 653,918
|                                           |  |                |         |               |   |                    |  |   |                   |   |  |   |        
|Net Income per Unit                        |  | $              | 6.37    |               | $ | 4.51               |  | $ | 7.97              |   |  | $ | 13.99  



12. SUBSEQUENT EVENTS:



On February 15, 2005, the Partnership made distributions to the Limited
Partners of $425,000 amounting to $9.18 per Interest.



52



---

##### Table of Contents

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



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



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



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



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



Item 9a. Control and Procedures



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



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



53



---

##### Table of Contents

PART III



Item 10. Directors and Executive Officers of the Registrant



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



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



Bruce A. Provo, Age 54 - President, Founder and Director.



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



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



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



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



Jesse Small  CPA.Mr. Small has been a
well-known, respected tax and business consultant in Hallandale, FL for more than 30 years. Mr. Small has a Masters Degree in Economics. Two years ago he merged his highly personalized service with Bianchi & Company, P.A. of Boca Raton, to
form the firm of Small & Bianchi P.A., with its corporate office remaining in Hallandale. Mr. Small is a Limited Partner representing DiVall 2.



54



---

##### Table of Contents

Richard W. Otte - Retired. 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 53 years in professional journalism also include news reporting, editing and sports assignments with the Dayton, (OH)- Journal Herald and Springfield News-Sun and as an editorial writer for the Daytona Beach (FL)
News- Journal Corporation. 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 2.



Item 11. Executive Compensation



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



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



Item 12. Security
Ownership of Certain Beneficial Owners and Management



(a.) As of December
31, 2004, 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, 2004, neither the General Partner nor any of their affiliates owned any Interests in the Partnership.



Item 13. Certain Relationships and Related Transactions



The compensation to be paid to TPG is governed by the Partnership Agreement, as amended by
vote of the Limited Partners to reflect the terms of the PMA. Originally, the PMA was to govern TPGs relationship with the Partnership, DiVall Insured Income Fund Limited Partnership and DiVall Income Properties 3 Limited Partnership
(collectively, The Partnerships). Since both DiVall Insured Income Fund Limited Partnership and DiVall Income Properties 3 Limited Partnership have been dissolved, only the Partnership remains. TPGs compensation includes a
management fee (Base Fee) for managing the Partnership equal to 4% of the Partnerships gross collected receipts. Between the Partnerships, TPG was entitled to an aggregate minimum Base Fee of $300,000 per year. For this purpose,
gross collected receipts means all cash revenues arising from operations and reserves of the Partnerships, including any proceeds recovered with respect to the obligations of the former general partners. The portion of such Base Fees
resulting from recoveries from former general partners is designated as restoration fees. Between the Partnerships, TPG was also entitled to reimbursement for



55



---

##### Table of Contents

office rent and related office overhead (Expense) in the maximum amount of $25,000 per year. The Partnership shall only be responsible for its
allocable share of such minimum and maximum amounts as indicated above ($159,000 minimum annual Base Fee and $13,250 Expense reimbursement). TPG is entitled to reimbursement of reasonable direct costs and expenses, such as travel, lodging, overnight
delivery and postage, but has no right to be reimbursed for administrative expenses such as payroll, payroll taxes, insurance, retirement and other benefits, base phone and fax charges, office furniture and equipment, copier rent, and the like. TPG
is entitled to an annual increase in the minimum Base Fee and maximum Expense reimbursement in an amount not to exceed the percentage increase in the Consumer Price Index (CPI) for the immediately preceding calendar year. Effective March
1, 2004, the minimum annual Base Fee and the maximum Expense reimbursement increased by 2.28%, which represents the allowable annual Consumer Price Index adjustment per the PMA. Therefore, as of March 1, 2004 the minimum monthly Base Fee paid by the
Partnership was raised to $17,288 and the maximum monthly Expense reimbursement was raised to $1,395. Additionally, TPG is allowed up to one-half of the Competitive Real Estate Commission, not to exceed 3% upon the disposition of assets. The payment
of a portion of such fees is subordinated to TPGs success at recovering the funds misappropriated by the former general partners.



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



Under the PMA, TPG shall be indemnified by the Partnership,
DiVall and Magnuson, and their controlled affiliates, and shall be held harmless from all claims of any party to the Partnership Agreement and from any third party including, without limitation, the Limited Partners of the Partnership, for any and
all liabilities, damages, costs and expenses, including reasonable attorneys fees, arising from or related to claims relating to or arising from the PMA or its status as Permanent Manager. The indemnification does not extend to claims arising
from fraud or criminal misconduct of TPG as established by court findings. To the extent possible, the Partnership is to provide TPG with appropriate errors and omissions, officers liability or similar insurance coverage, at no cost to TPG. In
addition, TPG is granted the right to establish an Indemnification Trust in an original amount, not to exceed $250,000, solely for the purpose of funding such indemnification obligations. Once a determination has been made that no such claims
can or will be made against TPG, the balance of the Trust will become unrestricted property of the Partnership. At December 31, 2004 the Partnership had fully funded the Trust.



56



---

##### Table of Contents

The Partnership paid and/or accrued the following fees and reimbursements to management and its affiliates in 2004.
(Management fees and overhead allowances included January 2005 fees which were prepaid in December 2004.):



The Provo Group, Inc.:



|                           |  |   |        
|-------------------------- |  | - | -------
|Management Fees            |  | $ | 223,437
|Restoration Fees           |  |   | 537    
|Sales Commission           |  |   | 19,500 
|Office Overhead Allowance  |  |   | 18,071 
|Direct Cost Reimbursements |  |   | 8,032  
|                           |  |   |        
|2004 Total                 |  | $ | 269,577
|                           |  |   |        



Item 14. Principal Accounting Firm
Fees and Services



Aggregate fees billed (represents first installment
billing of 2004 audit fees) to the Partnership for the year ended December 31, 2004 by the Partnerships principal accounting firm, Altshculer, Melvoin & Glasser LLP (AMG) were as follows:



|           |  |      |       
|---------- |  | ---- | ------
|           |  | 2004
|Audit Fees |  | $    | 10,000
|Tax Fees   |  |      | 0     
|           |  |      |       
|Total Fees |  | $    | 10,000
|           |  |      |       



AMG has a continuing relationship with
American Express Tax and Business Services, Inc. (TBS) from which it leases auditing staff who are full-time, permanent employees of TBS and through which its partners provide non-audit services. As a result of this arrangement, AMG has
no full-time employees, and therefore, none of the audit services performed were provided by full-time, permanent employees of AMG. AMG manages and supervises the audit and the audit staff, and is exclusively responsible for the opinion rendered in
connection with this examination.



Aggregate fees billed to the Partnership for
the years ended December 31, 2004 and 2003 by the Partnerships previous principal accounting firm, Deloitte & Touche LLP were as follows:



|           |  |      |        |      |   |        
|---------- |  | ---- | ------ | ---- | - | -------
|           |  | 2004 |        | 2003
|Audit Fees |  | $    | 64,249 |      | $ | 94,905 
|Tax Fees   |  |      | 27,680 |      |   | 14,250 
|           |  |      |        |      |   |        
|Total Fees |  | $    | 91,929 |      | $ | 109,155
|           |  |      |        |      |   |        



57



---

##### Table of Contents

PART IV



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



|                                                                                                                                                                                                                                       |  |    |  |                                                                                                                               |  |                                                                                                                                                                                                                                                                                             
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)                                                                                                                                                                                                                                    |  | 1. |  | Financial Statements                                                                                                         
|                                                                                                                                                                                                                                       |  |   
|                                                                                                                                                                                                                                       |  |    |  | The following financial statements of DiVall Insured Income Properties 2 Limited Partnership are included in Part II, Item 8:
|                                                                                                                                                                                                                                       |  |   
|                                                                                                                                                                                                                                       |  |    |  | Report of Independent Registered Public Accounting Firm                                                                      
|                                                                                                                                                                                                                                       |  |   
|                                                                                                                                                                                                                                       |  |    |  | Independent Auditors Report                                                                                                 
|                                                                                                                                                                                                                                       |  |   
|                                                                                                                                                                                                                                       |  |    |  | Balance Sheets, December 31, 2004 and 2003                                                                                   
|                                                                                                                                                                                                                                       |  |   
|                                                                                                                                                                                                                                       |  |    |  | Statements of Income for the Years Ended December 31, 2004, 2003, and 2002                                                   
|                                                                                                                                                                                                                                       |  |   
|                                                                                                                                                                                                                                       |  |    |  | Statements of Partners Capital for the Years Ended December 31, 2004, 2003, and 2002                                        
|                                                                                                                                                                                                                                       |  |   
|                                                                                                                                                                                                                                       |  |    |  | Statements of Cash Flows for the Years Ended December 31, 2004, 2003, and 2002                                               
|                                                                                                                                                                                                                                       |  |   
|                                                                                                                                                                                                                                       |  |    |  | Notes to Financial Statements                                                                                                
|                                                                                                                                                                                                                                       |  |   
|                                                                                                                                                                                                                                       |  | 2. |  | Financial Statement Schedule                                                                                                 
|                                                                                                                                                                                                                                       |  |   
|                                                                                                                                                                                                                                       |  |    |  | Schedule III - Real Estate and Accumulated Depreciation, December 31, 2004                                                   
|                                                                                                                                                                                                                                      
|All other schedules for which provision is made in the applicable accounting regulation of the Securities and ExchangeCommission are not required under the related instruction or
are inapplicable and, therefore, have been omitted.
|                                                                                                                                                                                                                                       |  |   
|                                                                                                                                                                                                                                       |  | 3. |  | Listing of Exhibits                                                                                                          
|                                                                                                                                                                                                                                       |  |    | 
|                                                                                                                                                                                                                                       |  |    |  | 3.1                                                                                                                           |  | Agreement of Limited Partnership dated as of November 18, 1987, amended as of November 25, 1987, and February 20, 1988, filed as Exhibit 3A to Amendment No. 1 to the Partnerships
Registration Statement on Form S-11 as filed on February 22, 1988, and incorporated herein by reference.
|                                                                                                                                                                                                                                       |  |    | 
|                                                                                                                                                                                                                                       |  |    |  | 3.2                                                                                                                           |  | Amendments to Amended Agreement of Limited Partnership dated as of June 21, 1988, included as part of Supplement dated August 15, 1988, filed under Rule 424(b)(3), incorporated herein by
reference.                                                                                       
|                                                                                                                                                                                                                                       |  |    | 
|                                                                                                                                                                                                                                       |  |    |  | 3.3.                                                                                                                          |  | Amendment to Amended Agreement of Limited Partnership dated as of February 8, 1993, filed as Exhibit 3.3 to the Partnerships 10-K for the year ended December 31, 1992, and incorporated
herein by reference.                                                                              



58



---

##### Table of Contents

|    |  |  |  |                                                      |  |                                                                                                                                                                                                           
|--- |  |  |  | ---------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |  |  | 3.4                                                  |  | Amendment to Amended Agreement of Limited Partnership dated as of May 26, 1993, filed as Exhibit 3.4 to the Partnerships 10-K for the year ended December 31, 1993, and incorporated herein
by reference.
|    |  |  | 
|    |  |  |  | 3.5                                                  |  | Amendment to Amended Agreement of Limited Partnership dated as of June 30, 1994, filed as Exhibit 3.5 to the Partnerships 10-K for the year ended December 31, 1994 and incorporated
herein by reference.
|    |  |  | 
|    |  |  |  | 10.0                                                 |  | Permanent Manager Agreement filed as an exhibit to the Current Report on Form 8-K dated January 22, 1993, incorporated herein by reference.                                                               
|    |  |  | 
|    |  |  |  | 31.1                                                 |  | 302 Certifications.                                                                                                                                                                                       
|    |  |  | 
|    |  |  |  | 32.1                                                 |  | Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350                                                                                                                             
|    |  | 
|(b) |  |  |  | Reports on Form 8-K:                                
|    |  | 
|    |  |  |  | The Registrant filed Form 8-K on August 14, 2002.   
|    |  | 
|    |  |  |  | The Registrant filed Form 8-K/A on August 27, 2002. 
|    |  | 
|    |  |  |  | The Registrant filed Form 8-K on January 6, 2003.   
|    |  | 
|    |  |  |  | The Registrant filed Form 8-K/A on January 17, 2003.
|    |  | 
|    |  |  |  | The Registrant filed Form 8-K on November 19, 2004  
|    |  | 
|    |  |  |  | The Registrant filed Form 8-K/A on December 2, 2004 



59



---

##### Table of Contents

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION

DECEMBER 31, 2004



|                              |  |              |   |                             |   |                                              |      |                                              |                           |                          |       |                      |  |               |           |                                                                               |   |           |  |   |            |  |   |           |  |      |  |          |  |     
|----------------------------- |  | ------------ | - | --------------------------- | - | -------------------------------------------- | ---- | -------------------------------------------- | ------------------------- | ------------------------ | ----- | -------------------- |  | ------------- | --------- | ----------------------------------------------------------------------------- | - | --------- |  | - | ---------- |  | - | --------- |  | ---- |  | -------- |  | ----
|Property                      |  | Encumbrances |   | Initial Cost to Partnership |   | Costs Capitalized Subsequent to Acquisitions |      | Gross Amount at which Carried at End of Year |                           | Accumulated Depreciation |       | Date of Construction |  | Date Acquired |           | Life on whichDepreciation in latest statementof operations is computed(years)
|                              |  | Land         |   | Building and Improvements   |   |                                              | Land |                                              | Building and Improvements |                          | Total |                      |  |               |          
|Phoenix, Arizona              |  |              |  |                             |   | 444,224                                      |      |                                              | 421,676                   |                          |       |                     |  |               | 444,224   |                                                                               |   | 421,676   |  |   | 865,900    |  |   | 251,725   |  |     |  | 6/15/88  |  | 31.5
|N. Richland Hills, Texas (1)  |  |              |  |                             |   | 762,580                                      |      |                                              | 584,139                   |                          |       |                     |  |               | 662,580   |                                                                               |   | 480,123   |  |   | 1,142,703  |  |   | 296,252   |  |     |  | 7/15/88  |  | 31.5
|Phoenix, Arizona (1)          |  |              |  |                             |   | 482,383                                      |      |                                              | 490,343                   |                          |       |                     |  |               | 453,433   |                                                                               |   | 428,676   |  |   | 882,109    |  |   | 254,425   |  |     |  | 8/15/88  |  | 31.5
|Santa Fe, New Mexico          |  |              |  |                             |   |                                             |      |                                              | 451,230                   |                          |       |                     |  |               |          |                                                                               |   | 451,230   |  |   | 451,230    |  |   | 233,101   |  |     |  | 10/10/88 |  | 31.5
|Augusta, Georgia (2)          |  |              |  |                             |   | 215,416                                      |      |                                              | 434,178                   |                          |       |                     |  |               | 213,226   |                                                                               |   | 434,177   |  |   | 647,403    |  |   | 233,466   |  |     |  | 12/22/88 |  | 31.5
|Charleston, South Carolina    |  |              |  |                             |   | 273,619                                      |      |                                              | 323,162                   |                          |       |                     |  |               | 273,619   |                                                                               |   | 323,162   |  |   | 596,781    |  |   | 173,770   |  |     |  | 12/22/88 |  | 31.5
|Park Forest, Illinois         |  |              |  |                             |   | 187,900                                      |      |                                              | 393,038                   |                          |       |                     |  |               | 187,900   |                                                                               |   | 393,038   |  |   | 580,938    |  |   | 211,344   |  |     |  | 12/22/88 |  | 31.5
|Aiken, South Carolina         |  |              |  |                             |   | 402,549                                      |      |                                              | 373,795                   |                          |       |                     |  |               | 402,549   |                                                                               |   | 373,795   |  |   | 776,344    |  |   | 199,725   |  |     |  | 2/21/89  |  | 31.5
|Augusta, Georgia              |  |              |  |                             |   | 332,154                                      |      |                                              | 396,659                   |                          |       |                     |  |               | 332,154   |                                                                               |   | 396,659   |  |   | 728,813    |  |   | 211,942   |  |     |  | 2/21/89  |  | 31.5
|Mt. Pleasant, South Carolina  |  |              |  |                             |   | 286,060                                      |      |                                              | 294,878                   |                          |       |                     |  |               | 286,060   |                                                                               |   | 294,878   |  |   | 580,938    |  |   | 157,558   |  |     |  | 2/21/89  |  | 31.5
|Charleston, South Carolina    |  |              |  |                             |   | 273,625                                      |      |                                              | 254,500                   |                          |       |                     |  |               | 273,625   |                                                                               |   | 254,500   |  |   | 528,125    |  |   | 135,984   |  |     |  | 2/21/89  |  | 31.5
|Aiken, South Carolina         |  |              |  |                             |   | 178,521                                      |      |                                              | 455,229                   |                          |       |                     |  |               | 178,521   |                                                                               |   | 455,229   |  |   | 633,750    |  |   | 243,237   |  |     |  | 3/14/89  |  | 31.5
|Des Moines, Iowa (1)          |  |              |  |                             |   | 164,096                                      |      |                                              | 448,529                   |                          |       | 287,991              |  |               | 161,996   |                                                                               |   | 551,056   |  |   | 713,052    |  |   | 321,168   |  | 1989 |  | 8/1/89   |  | 31.5
|North Augusta, South Carolina |  |              |  |                             |   | 250,859                                      |      |                                              | 409,297                   |                          |       |                     |  |               | 250,859   |                                                                               |   | 409,297   |  |   | 660,156    |  |   | 203,261   |  |     |  | 12/29/89 |  | 31.5
|Charleston, South Carolina    |  |              |  |                             |   | 286,068                                      |      |                                              | 294,870                   |                          |       |                     |  |               | 286,068   |                                                                               |   | 294,870   |  |   | 580,938    |  |   | 146,436   |  |     |  | 12/29/89 |  | 31.5
|Martinez, Georgia             |  |              |  |                             |   | 266,175                                      |      |                                              | 367,575                   |                          |       |                     |  |               | 266,175   |                                                                               |   | 367,575   |  |   | 633,750    |  |   | 182,542   |  |     |  | 12/29/89 |  | 31.5
|Grand Forks, North Dakota     |  |              |  |                             |   | 172,701                                      |      |                                              | 566,674                   |                          |       |                     |  |               | 172,701   |                                                                               |   | 566,674   |  |   | 739,375    |  |   | 281,416   |  |     |  | 12/28/89 |  | 31.5
|Phoenix, Arizona              |  |              |  |                             |   | 241,371                                      |      |                                              | 843,132                   |                          |       |                     |  |               | 241,371   |                                                                               |   | 843,133   |  |   | 1,084,503  |  |   | 418,708   |  |     |  | 1/1/90   |  | 31.5
|Ogden, Utah                   |  |              |  |                             |   | 194,350                                      |      |                                              | 452,075                   |                          |       |                     |  |               | 194,350   |                                                                               |   | 452,075   |  |   | 646,425    |  |   | 242,814   |  |     |  | 1/31/90  |  | 31.5
|Columbus, Ohio                |  |              |  |                             |   | 351,325                                      |      |                                              | 708,141                   |                          |       |                     |  |               | 351,325   |                                                                               |   | 708,140   |  |   | 1,059,466  |  |   | 339,415   |  |     |  | 6/1/90   |  | 31.5
|                              |  |              |   |                             |   |                                              |      |                                              |                           |                          |       |                      |  |               |           |                                                                               |   |           |  |   |            |  |   |           |  |      |  |          |  |     
|                              |  | $            | 0 |                             | $ | 5,765,976                                    |      | $                                            | 8,963,120                 |                          | $     | 287,991              |  | $             | 5,632,736 |                                                                               | $ | 8,899,963 |  | $ | 14,532,699 |  | $ | 4,738,289 |  |      |  |          |  |     
|                              |  |              |   |                             |   |                                              |      |                                              |                           |                          |       |                      |  |               |           |                                                                               |   |           |  |   |            |  |   |           |  |      |  |          |  |     

---

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

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



60



---

##### Table of Contents

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION



DECEMBER 31, 2004

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

|                                        |  |                              |            |                            |   |            |  
|--------------------------------------- |  | ---------------------------- | ---------- | -------------------------- | - | ---------- | -
|Investment in Real Estate               |  | Year Ended December 31, 2004 |            | Year EndedDecember 31,2003 |  
|Balance at beginning of year            |  | $                            | 14,532,699 |                            | $ | 17,363,118 |  
|Additions:                              |  |                              | 0          |                            |   | 0          |  
|Deletions:                              |  |                              |            |                            |   |            |  
|Milwaukee, WI property written-down (1) |  |                              | 0          |                            |   | (15,189    | )
|Sale of Milwaukee, WI property (1)      |  |                              | 0          |                            |   | (967,825   | )
|Sale of Fond du Lac property (2)        |  |                              |            |                            |   | (849,768   | )
|Sale of Twin Falls, ID property (3)     |  |                              | 0          |                            |   | (508,892   | )
|Palm Beach, FL property (4)             |  |                              | 0          |                            |   | (488,745   | )
|                                        |  |                              |            |                            |   |            |  
|                                        |  |                             
|Balance at end of year                  |  | $                            | 14,532,699 |                            | $ | 14,532,699 |  
|                                        |  |                              |            |                            |   |            |  



|                                                 |  |                              |           |                              |   |           |  
|------------------------------------------------ |  | ---------------------------- | --------- | ---------------------------- | - | --------- | -
|Accumulated Depreciation                         |  | Year Ended December 31, 2004 |           | Year Ended December 31, 2003 |  
|Balance at beginning of year                     |  | $                            | 4,476,862 |                              | $ | 5,033,067 |  
|Additions charged to costs and expenses          |  |                              | 261,427   |                              |   | 280,005   |  
|Deletion due to sale of Milwaukee, WI property   |  |                              | 0         |                              |   | (280,826  | )
|Deletion due to sale of Fond du Lac, WI property |  |                              | 0         |                              |   | (247,621  | )
|Deletion due to sale of Twin Falls, ID property  |  |                              | 0         |                              |   | (193,832  | )
|Deletion due to Palm Beach, FL property          |  |                              | 0         |                              |   | (113,931  | )
|                                                 |  |                              |           |                              |   |           |  
|                                                 |  |                             
|Balance at end of year                           |  | $                            | 4,738,289 |                              | $ | 4,476,862 |  
|                                                 |  |                              |           |                              |   |           |  

---

|(1) | This property was written-down to its estimated fair value of $790,000 at June 30, 2003 and was sold in July 2003
|--- | -----------------------------------------------------------------------------------------------------------------

|(2) | This property was sold in July 2003.
|--- | ------------------------------------

|(3) | This property was sold in August 2003.
|--- | --------------------------------------

|(4) | This property was reclassified as held for sale in the Fourth Quarter of 2003 as a contract was executed for the anticipated sale of the property in the First Quarter of 2004. The
property was sold in June 2004 at a sales price of $650,000.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



61



---

##### Table of Contents

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 3, 2005



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



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



Date: March 3, 2005



62