<PAGE>

                                    FORM 10-K
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   (Mark One)

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

                   For the fiscal year ended December 31, 2002

                                       OR

     [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                    For the transition period from________ to

                         Commission file number 0-17686

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

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

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

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

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

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

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

        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: 48- 49

<PAGE>


                                     PART I

ITEM 1.  BUSINESS

BACKGROUND

The Registrant, DiVall Insured Income Properties 2 Limited Partnership (the
"Partnership"), is a limited partnership organized under the Wisconsin Uniform
Limited Partnership Act pursuant to an Agreement of Limited Partnership dated as
of November 18, 1987, and amended as of November 25, 1987, February 20, 1988,
June 21, 1988, February 8, 1993, May 26, 1993 and June 30, 1994 (collectively,
the "Partnership Agreement"). As of December 31, 2002, the Partnership consisted
of one General Partner (Management) and 2,204 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, 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 child-care center. At
December 31, 2002, the Partnership owned 25 properties with specialty leasehold
improvements in 10 of these properties, as more fully discussed in Item 2.
During the Second Quarter of 1998, the General Partner received the written
consent of a majority of the Partners to liquidate the Partnership's assets and
dissolve the Partnership. No buyer was identified for the Partnership's assets,
and Management continued normal operations. During the Second Quarter of 2001,
another consent letter allowing the sale of the Partnership's assets and
dissolution of the Partnership was sent to Limited Partners. The General Partner
did not receive majority approval to sell the assets of the Partnership for
purposes of liquidation. The Partnership, therefore, 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, among other factors, upon the
business success of its lessees. The business success of the Partnership's
individual lessees can be adversely affected on three general levels. First, the
tenants rely heavily on the management contributions of a few key
entrepreneurial owners. The business operations of such entrepreneurial tenants
can be adversely affected by death, disability or divorce of a key owner, or by
such owner's poor business decisions such as an undercapitalized business
expansion. Second, changes in a local market area can adversely affect a
lessee's business operation. A local economy can suffer a downturn with high
unemployment. Socioeconomic neighborhood changes can affect retail demand at
specific sites and traffic patterns may change, or stronger competitors may
enter a market. These and other local market factors can potentially adversely
affect the lessees of Partnership properties. Finally, despite an individual
lessee's solid business plans in a strong local market, the chain concept itself
can suffer reversals or changes in management policy, which in turn can affect
the profitability of operations for Partnership properties. Therefore, there can
be no assurance that any specific lessee will have the ability to pay its rent
over the entire term of its lease with the Partnership.

                                        2

<PAGE>

Since over 80% 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
leases; 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 leases 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 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, 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

<PAGE>

ADVISORY BOARD

The concept of the Advisory Board was first introduced by TPG during the
solicitation of written consents for the Partnerships and is the only type of
oversight body known to exist for similar partnerships at this time. The first
Advisory Board was appointed in October 1993, and held its first meeting in
November 1993. The four persons Advisory Board is empowered to, among other
functions, review operational policies and practices, review extraordinary
transactions, and advise and serve as an audit committee to the Partnership and
the General Partner. The Advisory Board does not have the authority to direct
management decisions or policies of the Partnership or remove the General
Partner. The powers of the Advisory Board are advisory only. The Advisory Board
has full and free access to the Partnership's books and records, and individual
Advisory Board members have the right to communicate directly with the Limited
Partners concerning Partnership business. Members of the Advisory Board are
compensated $1,500 annually and $500 for each quarterly meeting attended.

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

The Partnership has no employees.

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

ITEM 2.  PROPERTIES

The Partnership's Properties are leased under long-term leases, generally with
original initial terms of approximately 20 years. All leases are triple-net
which require the tenant to pay all property operating costs including
maintenance, repairs, utilities, property taxes, and insurance. A majority of
the leases contain percentage rent provisions, which require the tenant to pay a
specified percentage (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, 2002:

<TABLE>
<CAPTION>
                                                                                                       Lease
  Acquisi-           Property Name                                    Purchase        Rental Per     Expiration    Renewal
  tion Date            & Address                   Lessee             Price (1)          Annum          Date       Options
  ---------    --------------------------  -----------------------  -------------    -------------  ------------  ----------
  <S>          <C>                         <C>                      <C>              <C>             <C>             <C>
  03/11/88     Miami Subs                  DiFede Finance Group     $     743,625    $      55,000   10-31-2012      None
               US-1 Near PGA Blvd          Corp.
               Palm Beach, FL

  06/15/88     Chinese Super Buffet        Jun Cheng Pan & Yhen         1,087,137(2)        64,370   12/31/2012      None
               8801 N 7th St               Yan Guo
               Phoenix, AZ

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

  08/01/88     Vacant                      Vacant                       1,091,190(2)             0       NA           NA
               106 N Chicago Ave
               S Milwaukee, WI
</TABLE>

                                        4

<PAGE>

<TABLE>
  <S>          <C>                         <C>                          <C>                 <C>      <C>             <C>
  08/15/88     Denny's                     First Foods, Inc.            1,155,965(2)        65,000   10-31-2007      None
               2360 W Northern Ave
               Phoenix, AZ

  10/10/88     Kentucky Fried Chicken (4)  KFC National                   451,230           60,000   06-30-2018      None
               1014 S St Francis Dr        Management Group
               Santa Fe, NM

  12/22/88     Wendy's                     WenSouth Orlando, Ltd.         596,781           76,920   11-6-2016       None
               1721 Sam Rittenburg Blvd
               Charleston, SC

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

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

  02/21/89     Wendy's                     WenSouth Orlando, Ltd.         776,344           96,780   11-6-2016       None
               1901 Whiskey Rd
               Aiken, SC

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

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

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

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

  04/20/89     Daytona's All Sports Cafe   Karl Shaen Valderrama          897,813(2)        10,000    02-28-03        NA
               (5)
               4875 Merle Hay
               Des Moines, IA

  10/18/89     Omega Restaurant            Paul Bouraxis                1,421,983(2)        88,233   09-30-2011      None
               4000 S 27th St
               Milwaukee, WI

  12/28/89     Village Inn (6)             Columbia VI,                   845,000(2)        96,600   11-30-2009       (3)
               2451 Columbia Rd             L.L.C.
               Grand Forks, ND

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

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

                                        5

<PAGE>

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

  01/01/90     Sunrise Preschool           Sunrise Preschools, Inc.     1,182,735(2)       123,318   05-31-2009      None
               4111 E Ray Rd
               Phoenix, AZ

  01/05/90     Hardee's                    Hardee's Food Systems,       1,140,236(2)        88,000   11-30-2009       (3)
               20 N Pioneer Rd             Inc.
               Fond du lac, WI

  01/31/90     Blockbuster Video           Blockbuster Videos, Inc.       646,425          104,500   01-31-2006       (3)
               336 E 12th St
               Ogden, UT

  03/21/90     Vacant (7)                  Vacant                       1,179,501(2)             0       NA           NA
               688 N Blue Lakes Blvd
               Twin Falls, ID

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

                                                                    $  21,574,120    $   1,906,861
                                                                    =============    =============
</TABLE>

Footnotes:

(1)     Purchase price includes all costs incurred to acquire the property.
(2)     Purchase price includes cost of specialty leasehold improvements.
(3)     Renewal option available 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.
(5)     The lease with Hickory Park, Inc. expired on December 31, 2002.
        Subtenant, Daytona's All Sports Cafe did not vacate the premises and
        Management is negotiating a lease directly with them. (See third
        paragraph below.)
(6)     Village Inn vacated the property in the First Quarter of 2002 and is
        delinquent on its January through December 2002 rent payments.
        Management has taken legal action against Columbia VI, LLC, as the lease
        has not been terminated. (See first and second paragraphs below.)
(7)     In the Fourth Quarter of 2001 the Bankruptcy court rejected Phoenix
        Restaurant Group's property lease at this location, which was set to
        expire in April 2012. The subtenant did not vacate the property and
        Management obtained possession in February 2003 through court
        proceedings. (See eleventh paragraph below.)

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

Village Inn Property- Grand Forks, ND

During February 2003 a new 10-year lease was executed with Panda Buffet, Inc. in
relation to the former Village Inn property in Grand Forks, ND property. The
lease is set to expire in 2012 and the annual first year base rent is $32,500.
Although the tenant took possession of the property upon execution of the lease,
the lease payments are to commence in July 2003. It is anticipated that
commissions of $18,500 and $3,700 will be paid in March 2003 to an unaffiliated
leasing agent and to an affiliate of the General Partner, respectively.

                                        6

<PAGE>

During October 2001, the Columbia VI, LLC, the tenant at the Village Inn
Restaurant had notified Management of its intent to close and vacate its
restaurant in Grand Forks, ND. The lease on the property expires 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, rent income has not been collected for January through December of
2002. In addition, 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.
Management continues legal action in relation to Village Inn's past due balance
of approximately $130,000, as well as future lease and other obligations that
will be determined to be in excess of the lease payments to be received by the
Partnership from the new tenant, Panda Buffet, at the Grand Forks, ND property.
The Partnership incurred expenditures of approximately $27,000 to replace the
roof on the property in the Third Quarter of 2002. Additional maintenance and
repair expenditures may be needed, however the amount is unknown as of December
31, 2002.

4785 Merle Hay Property, Des Moines, IA

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 is continuing to operate the property as a restaurant. Management
allowed the sub-tenant a holdover for two months. The Partnership received the
January and February 2003 rent payments from Daytona's and Management is
negotiating a direct lease with them.

Miami Subs Property- Palm Beach, FL

During the Fourth Quarter of 2002 the Miami Subs lease with QSR, Inc. was
terminated. The lease was set to expire in 2016. A new ten-year lease was
executed in the Fourth Quarter of 2002 with Difede Finance Group Corporation and
is set to expire in 2012. The property will continue to be operated as a Miami
Subs Restaurant.

South Milwaukee, WI Property

In October 2002 Management entered into a contract to sell the vacant Hardee's-
South Milwaukee, WI property at a sales price of $450,000. The South Milwaukee
property closing date is anticipated to be in the Second Quarter of 2003. In the
Third Quarter of 2002 the net asset value of the South Milwaukee property was
written-down by $98,000 to reflect the fair market value of the property at
September 30, 2002 of approximately $450,000 on the balance sheet as property
held for sale. During March 2001, Hardee's Food Systems, Inc. had notified
Management of its intent to close its restaurant in South Milwaukee, Wisconsin.
Hardee's lease on the South Milwaukee property expired on November 30, 2001 and
they continued making rent payments until the lease expiration date.

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. had 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 September 30, 2002 was approximately $470,000 and the net gain on
the sale of the property in October was approximately $124,000. The net gain on
sale of the property includes

                                        7

<PAGE>

an $18,500 sales commission that the Partnership paid to an affiliate of the
General Partner in the Fourth Quarter of 2002.

North 7th Street Property- Phoenix, AZ

During the Second Quarter of 2002, Mountain Range Restaurants, the sub-lessee of
the Denny's- N. 7th Street property in Phoenix, Arizona, notified Management
that it would vacate the property at the end of May 2002. 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 Phoenix, Arizona location. Following the rejection of this lease by Phoenix,
the Mountain Range Restaurants 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 was negotiated with new tenant, Jun
Cheng Pan, at the vacant N. 7th Street property in Phoenix, Arizona. The new
tenant took possession of the property in August 2002 and rent commenced in
January 2003. The restaurant is to be 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.

Milwaukee, WI Property

During March 2001, Hardee's Food Systems, Inc. had 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, which was reflected as a Note receivable on the balance
sheet at December 31, 2001, was received in January 2002.

During May 2001, Management negotiated a re-lease of the vacant Milwaukee,
Wisconsin property to Omega Restaurant and rent income commenced in October
2001. Although the tenant has not begun operating the restaurant, monthly rent
payments continue to be received from the lessee by the Partnership. 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.

Twin Falls, ID Property

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. Although Phoenix's lease on the
Twin Falls property expires on April 30, 2012, due to bankruptcy proceedings of
Phoenix, the lease was terminated and rent income ceased in the Fourth Quarter
of 2001. The remaining balance due the Partnership of approximately $29,000 from
the former tenant has been reserved. This amount is included in the
Partnership's filing for damages in Bankruptcy court of approximately $85,000,
or one year's rent, although it is uncertain whether any portion of the amount
will be collectible. 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. In February
2003 the District

                                        8

<PAGE>

Court upheld the Magistrate Court evicting Fiesta Time. Management then obtained
possession of the property from Fiesta Time and received $30,000 in rent escrow
from the subtenant that had been held by the Court. In late February 2003
Management entered a purchase and sale agreement to sell the Twin Falls property
at a sales price of $550,000. The closing date is anticipated to be in the
Second Quarter of 2003. The net asset value of the property at December 31, 2002
was $316,000.

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 at the Phoenix,
Arizona property. Although the sublease 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 rent amount of $10,000 was reserved. 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 subsequently learned 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 38th Street, L.L.C, ("Centre".) 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.

As of December 31, 2001 the Partnership had withheld the May through December
2001 accrued ground lease obligations totaling approximately $50,000 related to
the property. 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 under the Ground Lease, 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. In February 2003 a Settlement Agreement and Mutual Release (the
"Agreement") was executed. According to the terms of the Agreement the
Partnership was required to pay directly to Centre a settlement ("the
Settlement") payment of $115,000. The clerk of the court is to return the
$140,000 cash bond to the Partnership. (See Legal Proceedings in Part I- Item 3
and Note 10.)

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, since such notification the Partnership has received
no rent from the former tenant and has returned possession of the Phoenix,
Arizona property to the Ground Lease Landlord, Centre at 38th Street, L.L.C.,
"(Centre"). Beginning in May 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 Superior Court, against the Partnership and TPG. The Complaint alleges
that the Partnership is a tenant under a Ground Lease with Centre and that the
Partnership has defaulted on its obligations under that lease. The suit names
TPG as a defendant

                                        9

<PAGE>

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 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 March 31, 2002 the Partnership had accrued $50,000 in ground
lease obligations payable to Centre and the remaining summary judgment damages
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 the 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 is 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 explored its
options and 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 in any matters 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 will be
returned from the clerk of the court to the Partnership.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

                                       10

<PAGE>

                                     PART II

ITEM 5.  MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
         RELATED STOCKHOLDER MATTERS

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

(b)     As of December 31, 2002 there were 2,204 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 2002 and 2001, $1,710,000 and $2,180,000,
        respectively, were distributed in the aggregate to the Limited Partners.
        The General Partner received aggregate distributions of $6,533 and
        $6,935 in 2002 and 2001, 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, 2002, 2001, 2000, 1999, and 1998

<TABLE>
<CAPTION>
                                          2002           2001           2000           1999           1998
                                      ------------   ------------   ------------   ------------   ------------
<S>                                   <C>            <C>            <C>            <C>            <C>
Total Revenue                         $  2,581,868   $  2,813,964   $  2,725,286   $  2,896,407   $  3,494,550
--------------------------------------------------------------------------------------------------------------
Income from Continuing
 Operations                           $  1,498,993   $  1,644,505   $  1,626,243   $  1,951,972   $  1,428,583
--------------------------------------------------------------------------------------------------------------
Income from Discontinued
 Operations                           $     36,312   $     89,274   $     95,548   $     95,548   $     95,548
--------------------------------------------------------------------------------------------------------------
Net Income                            $  1,535,305   $  1,733,779   $  1,721,791   $  2,047,520   $  1,524,131
--------------------------------------------------------------------------------------------------------------
Net Income per Limited Partner
 Interest                             $      32.84   $      37.09   $      36.83   $      43.80   $      32.60
--------------------------------------------------------------------------------------------------------------
Total Assets                          $ 15,746,665   $ 15,839,599   $ 16,132,289   $ 17,125,388   $ 17,693,852
--------------------------------------------------------------------------------------------------------------
Total Partners' Capital               $ 15,319,264   $ 15,500,492   $ 15,953,648   $ 16,873,744   $ 17,409,414
--------------------------------------------------------------------------------------------------------------
Cash Distributions per Limited
 Partnership Interest                 $      36.95   $      47.10   $      56.94   $      55.64   $      99.07
--------------------------------------------------------------------------------------------------------------
</TABLE>

                                       11

<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES:

INVESTMENT PROPERTIES AND NET INVESTMENT IN DIRECT FINANCING LEASES

The Properties, including equipment held by the Partnership at December 31,
2002, were originally purchased at a price, including acquisition costs, of
approximately $21,574,000.

As of December 31, 2002, the Partnership owned 23 fully constructed fast-food
restaurants, a video store, and a preschool. The 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) Hardee's restaurant, one (1) Miami Subs
restaurant, one (1) Omega restaurant, one (1) Blockbuster Video store, one (1)
Sunrise Preschool, one (1) Village Inn restaurant, one (1) Daytona's All Sports
Cafe and (2) vacant properties, (which were previously operated as a Fiesta Time
restaurant, and a Hardee's restaurant.) The 25 properties are located in a total
of thirteen (13) 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 2002, 2001 and 2000
the Partnership recognized income from discontinued operations of $36,000 and
$89,000, $96,000, respectively. The 2002 income from discontinued operations
included a $124,000 net gain on the sale of the Hardee's- Hartford property in
October 2002 and a $98,000 property write-down to fair market value of the
vacant South Milwaukee property in the Third Quarter of 2002. Other results of
discontinued operations for the years 2002, 2001, and 2000 relate to rental
income and expenditures attributable to the Hartford, WI property and the
reclassification of the vacant South Milwaukee, WI property to property held for
sale in the Fourth Quarter of 2002.

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

Village Inn Property- Grand Forks, ND

During February 2003 a new 10-year lease was executed with Panda Buffet, Inc. in
relation to the former Grand Forks, ND property. The lease is set to expire in
2012 and the annual first year base rent is $32,500. Although the tenant took
possession of the property upon execution of the lease, the lease payments are
to commence in July 2003. In March 2003 it is anticipated that commissions of
$18,500 and $3,700 will be paid to an unaffiliated leasing agent and to an
affiliate of the General Partner, respectively.

During October 2001, Columbia VI, LLC, the tenant of the Village Inn Restaurant
had notified Management of its intent to close and vacate its restaurant in
Grand Forks, ND. The lease on the property expires 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, rent income
has not been collected for January through December of 2002. In addition, 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. Management continues legal
action in relation to Village Inn's past due balance of approximately $130,000,
as well as future lease and other obligations that will be determined to be in
excess of the lease payments received by the Partnership from the new tenant,
Panda Buffet, at the Grand Forks, ND

                                       12

<PAGE>

property. The Partnership incurred expenditures of approximately $27,000 to
replace the roof on the property in the Third Quarter of 2002. Additional
maintenance and repair expenditures may be needed, however the amount is unknown
as of December 31, 2002.

4785 Merle Hay Property, Des Moines, IA

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 is continuing to operate the property as a restaurant. Management
allowed the sub-tenant a holdover for two months. The Partnership received
January and February 2003 rent payments from Dakota's and Management is
negotiating a direct lease with them.

Miami Subs Property- Palm Beach, FL

During the Fourth Quarter of 2002 the Miami Subs lease with QSR, Inc. was
terminated. The lease was set to expire in 2016. A new ten-year lease was
executed in the Fourth Quarter of 2002 with Difede Finance Group Corporation and
is set to expire in 2012. The property will continue to be operated as a Miami
Subs Restaurant.

South Milwaukee, WI Property

In October 2002 Management entered into a contract to sell the vacant Hardee's-
South Milwaukee, WI property at a sales price of $450,000. The South Milwaukee
property closing date is anticipated to be in the Second Quarter of 2003. In the
Third Quarter of 2002 the net asset value of the South Milwaukee property was
written-down by $98,000 to reflect the fair market value of the property at
September 30, 2002 of approximately $450,000 on the balance sheet as property
held for sale. During March 2001, Hardee's Food Systems, Inc. had notified
Management of its intent to close its restaurant in South Milwaukee, Wisconsin.
Hardee's lease on the South Milwaukee property expired on November 30, 2001 and
they continued making rent payments until the lease expiration date.

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. had 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 September 30, 2002 was approximately $470,000 and the net gain on
the sale of the property in October was approximately $124,000. Included in the
net gain on the sale of the property is an $18,500 sales commission the
Partnership paid to an affiliate of the General Partner in the Fourth Quarter of
2002.

North 7th Street Property- Phoenix, AZ

During the Second Quarter of 2002, Mountain Range Restaurants, the sub-lessee of
the Denny's- N. 7th Street property in Phoenix, Arizona, notified Management
that it would vacate the property at the end of May 2002. 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 Phoenix, Arizona location. Following the rejection of this lease by Phoenix,
the Mountain Range Restaurants 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.

                                       13

<PAGE>

During August 2002, a ten (10) year lease was negotiated with new tenant, Jun
Cheng Pan, at the vacant N. 7th Street property in Phoenix, Arizona. The new
tenant took possession of the property in August 2002 and rent is scheduled to
commence in January 2003. The restaurant is to be 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.

Milwaukee, WI Property

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, which is reflected as a Note receivable on the balance
sheet at December 31, 2001, was received in January 2002.

During May 2001, Management negotiated a re-lease of the vacant Milwaukee,
Wisconsin property to Omega Restaurant and rent income commenced in October
2001. Although the tenant has not begun operating the restaurant, monthly rent
payments continue to be received from the tenant by the Partnership. 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.

Blockbuster Video Property- Ogden, UT

The Blockbuster Video Store lease expired on January 31, 2001. However, in the
First Quarter of 2001, Management negotiated a five (5) year lease extension to
January 31, 2006. A commission of $10,000 was paid to an unaffiliated leasing
agent upon the negotiated extension of the lease.

Twin Falls, ID Property

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. Although Phoenix's lease on the
Twin Falls property expires on April 30, 2012, due to bankruptcy proceedings of
Phoenix, the lease was terminated and rent income ceased in the Fourth Quarter
of 2001. The remaining balance due the Partnership of approximately $29,000 from
the former tenant has been reserved. This amount is included in the
Partnership's filing for damages in Bankruptcy court of approximately $85,000,
or one year's rent, although it is uncertain whether any portion of the amount
will be collectible. 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. In February
2003 the District Court upheld the Magistrate Court evicting Fiesta Time.
Management obtained possession of the property from Fiesta Time and received
$30,000 in rent escrow from the subtenant that had been held by the Court. In
late February 2003 Management entered a purchase and sale agreement to sell the
Twin Falls property at a sales price of $550,000. The closing date is
anticipated to be in the Second Quarter of 2003. The net asset value of the
property at December 31, 2002 was $316,000.

                                       14

<PAGE>

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 at the Phoenix,
Arizona property. Although the sublease 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. 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 subsequently learned 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 38th Street, L.L.C, ("Centre".) Management
returned possession of the property to the 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.

As of December 31, 2001 the Partnership had withheld the May through December
2001 accrued ground lease obligations totaling approximately $50,000 related to
the property. 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 under the Ground Lease, 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. In February 2003 a Settlement Agreement and Mutual Release (the
"Agreement") was executed. According to the terms of the Agreement the
Partnership was required to pay directly to Centre a settlement payment of
$115,000 (the "Settlement"). The clerk of the court is to return the $140,000
cash bond to the Partnership. (See Legal Proceedings in Part I- Item 3 and Note
10.)

Former Denny's- Camelback Road Property- Phoenix, AZ

Phoenix Restaurant Group, Inc. ("Phoenix") did not formally extend its lease on
the Denny's property on Camelback Road in Phoenix, Arizona, when it expired on
January 30, 1998, but continued to operate the restaurant and pay rent through
December 31, 1999. During January 2000, Phoenix notified Management that it had
vacated the premises and ceased paying rent. Management entered into a
termination agreement with the ground lessor of the property during 2000, which
resulted in a one-time payment of $90,000 in exchange for a release of all
future obligations. Possession of the property was returned to the ground
lessor, resulting in a $153,000 net loss in the Third Quarter of 2000.

Wendy's Properties

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

OTHER ASSETS

The Hartford property closing date was early October 2002. As of December 31,
2002 the property held for sale amounted to $450,000 and related to the
classification of the vacant South Milwaukee property as held for sale in the
Fourth Quarter of 2002. The South Milwaukee closing date is anticipated to be in
the Second Quarter of 2003.

                                       15

<PAGE>

Cash and cash equivalents held by the Partnership totaled approximately
$1,369,000 at December 31, 2002, compared to $819,000 at December 31, 2001. Cash
of $1,055,000 is anticipated to be used to fund the Fourth Quarter 2002
distributions to Limited Partners in February 2003, and cash of $198,000 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.

Deposit- Clerk of the Court amounted to $140,000 at December 31, 2002. In
September 2002, the Partnership was required to escrow a $140,000 cash bond at
the clerk of the court during the appeal process related to the Phoenix, Arizona
property. (See Legal Proceedings in Part II. - Item 1 and Note 10.)

Rents and other receivables amounted to $598,000 (net of allowance of $156,000)
as of December 31, 2002. Village Inn is currently in default in relation to its
January through December 2002 lease payments. Management continues legal action
to collect these past due payments, however, due to the uncertainty of
collection, these past due rents totaling approximately $97,000 have been fully
reserved. In addition, Management has charged Village Inn late fees totaling
$3,400 in relation to the past due balance. The late fee charges have been fully
reserved as Management is uncertain of collection. The tenant Popeye's- Park
Forest is delinquent on its January 2002 percentage rent billing for 2001.
Management continues to pursue legal remedies in relation to the collection of
the tenant's percentage rent past due balance of approximately $72,000. In
addition, Management has charged Popeye's late fees totaling $17,000 in relation
to the percentage rent balance due. The late fee charges have been fully
reserved as Management is uncertain of collection of these fees.

Property tax escrow at December 31, 2001, in the amount of $7,875 represented
four (4) months of 2001 real estate taxes for the former Hardee's- Milwaukee
location paid by Hardee's Food Systems, Inc. pursuant to the lease termination
agreement with Management. The property taxes were paid by the Partnership in
January 2002.

Property tax receivable at December 31, 2002, totaled $5,000 (net of allowance
of $30,000), and primarily represented 2001 and 2002 property taxes paid by the
Partnership, which are due from the defaulted tenant Village Inn. The $30,000
due from Village Inn has been fully reserved due to uncertainty of collection. A
portion of the amount also represented a property tax receivable due from the
new tenant, Chinese Super Buffet, for its portion of 2002 real estate taxes.

The Note receivable balance at December 31, 2001 was $39,250. In the Second
Quarter of 2001, a lease termination agreement was executed with Hardee's Food
Systems upon the closing of its restaurant in Milwaukee, Wisconsin. 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 of $117,720 represented a
Note Receivable. The first and second Note receivable installments were received
in August and October 2001. The final installment, which is reflected as a Note
receivable on the balance sheet at December 31, 2001, was received in February
2002.

Deferred charges totaled approximately $313,000 and $286,000, net of
amortization, at December 31, 2002 and December 31, 2001, respectively. Deferred
charges represent leasing commissions paid when properties are leased or upon
the negotiated extension of a lease. Leasing commissions are capitalized and
amortized over the life of the lease. During the Third Quarter of 2002,
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

                                       16

<PAGE>

Chinese Super Buffet lease. Deferred charges relating to the Hardee's- Hartford
property were written-off during the Fourth Quarter of 2002 due to the sale of
the Property in October 2002. During the Second Quarter of 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
Omega Restaurant lease. During the First Quarter of 2001, a commission of
$10,000 was paid to an unaffiliated leasing agent upon the negotiated extension
of the lease with Blockbuster Video. During the Fourth Quarter of 2000, a
commission of $190,000 was paid to an affiliate of the General Partner upon the
negotiated extension of the leases on the ten (10) Wendy's restaurants. Also,
during 2001 deferred charges relating to the former Hardee's- Milwaukee and
Mulberry Street Grill properties were written-off.

LIABILITIES

Accounts payable and accrued expenses at December 31, 2002, in the amount of
$65,000, primarily represented the year-end accruals of auditing, tax and data
processing fees.

Judgment Payable at December 31, 2002, in the amount of $93,000 represented the
accrual of the summary judgment against the Partnership in relation to the
former Mulberry Street Grill property. As of December 31, 2001 the Partnership
had withheld the May through December 2001 accrued ground lease obligations
totaling approximately $50,000 related to the property. In the Second Quarter of
2001, the Ground Lease landlord 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
the Ground Lease landlord, due to the Court's granting a summary judgment of
$93,000 against the Partnership.

Property taxes payable at December 31, 2002, in the amount of $17,000,
represented 2002 real estate taxes due for the Chinese Super Buffet property,
and the vacant South Milwaukee, Wisconsin and Twin Falls, Idaho properties.

Due to the Current General Partner amounted to $3,100 at December 31, 2002, and
primarily represented the General Partner's portion of the Fourth Quarter 2002
distribution.

PARTNERS' CAPITAL:

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

Cash distributions paid to the Limited Partners and to the General Partner
during 2002 of $1,710,000 and $6,533, respectively, have also been made in
accordance with the Partnership Agreement. The Fourth Quarter 2002 Limited
Partner distributions totaling $1,055,000 were paid February 15, 2003.

RESULTS OF OPERATIONS:

The Partnership reported income from continuing operations for the year ended
December 31, 2002, in the amount of $1,499,000 compared to income from
continuing operations for the years ended December 31, 2001 and 2000 of
$1,645,000 and $1,626,000, respectively. The decrease in income in 2002 is due
primarily to decreased rental income related to the expired lease of the
Hardee's- South Milwaukee property in the Fourth Quarter of 2001, the bankruptcy
rejections of the Denny's- Twin Falls and North 7th Street leases and the
non-

                                       17

<PAGE>

cash disposal of the former Mulberry Street grill Restaurant in the Fourth
Quarter of 2001 and the non-cash disposal of the Camelback property in the Third
Quarter of 2000. The decrease in 2002 is also due to the summary judgment
related to the former Mulberry Street Grill property in the Third Quarter of
2002, the write-off of non-collectible receivables, increased tenant default
expenditures, and increased legal expenditures due to tenant defaults, eviction
proceedings at the Twin Falls property, and court proceedings related to the
former Mulberry Street Grill property. In addition, income from continuing
operations in 2001 included a $157,000 lease termination fee upon the
termination of the Hardee's -Milwaukee, a $157,000 loss on the disposition of
the former Mulberry Grill Street property and certain administrative
expenditures. Income from continuing operations in 2000 included a $153,000 loss
on the disposition of the Camelback property and a $90,000 ground lease
termination fee paid by the Partnership applicable to the property.

DISCONTINUED OPERATIONS:

Income from discontinued operations was $36,000, $89,000 and $96,000 for the
years ended December 31, 2002, 2001, and 2000, 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 and the vacant South Milwaukee property was
classified as held for sale in the Fourth Quarter of 2002. The income from
discontinued operations for 2002 includes a Fourth Quarter net gain on the sale
of the Hartford property of approximately $124,000 and a Third Quarter $98,000
write-down of the South Milwaukee property.

REVENUES

Total operating revenues were $2,582,000, $2,814,000, and $2,725,000, for the
years ended December 31, 2002, 2001, and 2000, respectively. The decrease in
operating revenue in 2002 is due primarily to decreased rental income, upon the
expired lease of the Hardee's- S. Milwaukee property in the Fourth Quarter of
2001, the bankruptcy rejections of the Denny's- Twin Falls lease and N. 7th
Street leases, and the non-cash disposal of the former Mulberry Street Grill
Restaurant in the Fourth Quarter of 2001. Revenue in 2001 included a $157,0000
lease termination fee upon the termination of the Hardee's- Milwaukee property
lease in the second Quarter of 2001. Recoveries from former general partners
received during 2002, 2001 and 2000, totaled $3,000, $7,000 and $4,000,
respectively.

As of December 31, 2002 total base rent revenues should approximate $1,907,000
annually based on leases currently in place. Future revenues may decrease with
tenant defaults and/or sales of Properties. They may also increase with
additional rents due from tenants, if those tenants experience sales levels
which require the payment of additional rent to the Partnership.

Village Inn is currently in default in relation to its January through December
2002 lease payments. Management continues legal action to collect these past due
payments, however, due to the uncertainty of collection, these past due rents
totaling approximately $97,000 have been fully reserved. Village Inn is
responsible for lease payments until the lease expiration date of 2009, however,
due to the uncertainty of collection, future lease charges will continue to be
reserved until a lease termination agreement is consummated.

EXPENSES

For the years ended December 31, 2002, 2001, and 2000, total operating expenses
amounted to approximately 42%, 36% and 35%, of total operating revenues,
respectively. Operating cash expenses (which do not include non-cash items such
as depreciation, amortization, property write-downs, and write-off of
non-collectible receivables) amounted to approximately 25%, 21%, and 22%, of
total operating revenues, respectively.

                                       18

<PAGE>

The increase in operating expenditures in 2002 is due to the Second Quarter
summary judgment accrual related to the former Mulberry Street grill property,
the write-off of non-collectible receivables, increased tenant default
expenditures, and increased legal expenditures due to tenant defaults, eviction
proceedings at the Twin Falls property, and court proceedings related to the
former Mulberry Street Grill property. During 2001, the Partnership obtained
appraisals of all the Partnership properties at a cost of $63,000. Also during
2001, the Partnership incurred the non-cash write-off of the Mulberry Street
Grill property resulting in a loss of $157,000. During 2000, the Partnership
paid a one-time $90,000 fee to terminate a ground lease applicable to the
Camelback property. Also during 2000, in connection with the termination, the
property was returned to the ground lesser, which resulted in a $153,000 loss,
resulting from the write-off of previously capitalized leasehold improvements.

Charge-offs of non-collectible rents, non-cash disposal of assets, depreciation,
and amortization are non-cash items and do not affect current operating cash
flow of the Partnership or distributions to the Limited Partners.

Write-offs for non-collectible rents and receivables amounted to $129,000,
$53,500, and $6,800, for the year ended December 31, 2002, 2001, and 2000,
respectively. The write-offs are the result of tenant defaults.

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 23% of rental
income for 2002. 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.

NEW ACCOUNTING PRONOUNCEMENT:

In October 2001, Statement of Financial Accounting Standards No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" (FAS 144) was issued. FAS
144 supercedes Statement of Financial Accounting Standards No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" (FAS 121). FAS 144 develops a single accounting model for long-lived assets
to be disposed of, whether previously held and used or newly acquired. The
provisions of FAS 144 were effective for fiscal years beginning after December
15, 2001.

The Company adopted FAS 144 on January 1, 2002, and the result is that assets
disposed of or deemed to be classified as held for sale require the
reclassification of current and previous years' operations to be discontinued
operations.

CRITICAL ACCOUNTING POLICIES:

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

                                       19

<PAGE>

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

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Partnership is not subject to market risk.

                                       20

<PAGE>

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

        Independent Auditors' Report ..................................       22

        Balance Sheets, December 31, 2002 and 2001 ....................  23 - 24

        Statements of Income for the Years
               Ended December 31, 2002, 2001, and 2000 ................       25

        Statements of Partners' Capital for the
               Years Ended December 31, 2002, 2001, and 2000 ..........       26

        Statements of Cash Flows for the Years
               Ended December 31, 2002, 2001, and 2000 ................       27

        Notes to Financial Statements .................................  28 - 42

        Schedule III--Real Estate and Accumulated
               Depreciation, December 31, 2002 ........................  50 - 51

                                       21

<PAGE>

                          INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying balance sheets of Divall Insured Income
Properties 2 Limited Partnership (a Wisconsin limited partnership) as of
December 31, 2002 and 2001, and the related statements of income, partners'
capital, and cash flows for each of the three years in the period ended December
31, 2002. 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 auditing standards generally accepted
in the United States of America. 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, 2002 and
2001, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2002 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.

As discussed in Note 1 to the financial statements, the Partnership changed its
method of accounting for discontinued operations in 2002 as required by
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."

DELOITTE & TOUCHE LLP

Chicago, Illinois
February 28, 2003

                                       22

<PAGE>

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                                 BALANCE SHEETS

                           DECEMBER 31, 2002 AND 2001

                                     ASSETS

<TABLE>
<CAPTION>
                                                                               December 31,      December 31,
                                                                                   2002              2001
                                                                              --------------    --------------
<S>                                                                           <C>               <C>
INVESTMENT PROPERTIES AND EQUIPMENT: (Note 3)

        Land                                                                  $    6,820,054    $    7,296,406
        Buildings                                                                 10,543,064        11,561,307
        Equipment                                                                    669,778           669,778
        Accumulated depreciation                                                  (5,702,845)       (5,854,938)
                                                                              --------------    --------------

               Net investment properties and equipment                            12,330,051        13,672,553
                                                                              --------------    --------------

OTHER ASSETS:

        Property held for sale  (Note 3)                                             449,936                 0
        Cash and cash equivalents                                                  1,369,248           818,606
        Cash held in Indemnification Trust (Note 8)                                  378,725           372,167
        Property tax escrow                                                                0             7,875
        Deposit- Clerk of the Court                                                  140,000                 0
        Rents and other receivables (Net of allowance of $156,483
         and $39,636 in 2002 and 2001)                                               598,438           484,436
        Property tax receivable (Net of allowance of $29,929 in 2002)                  5,191            30,977
        Deferred rent receivable                                                     133,017           105,633
        Prepaid insurance                                                             28,939            22,035
        Deferred charges, net                                                        313,120           286,067
        Note receivable                                                                    0            39,250
                                                                              --------------    --------------

               Total other assets                                                  3,416,614         2,167,046
                                                                              --------------    --------------

               Total assets                                                   $   15,746,665    $   15,839,599
                                                                              ==============    ==============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       23

<PAGE>

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                                 BALANCE SHEETS

                           DECEMBER 31, 2002 AND 2001

                        LIABILITIES AND PARTNERS' CAPITAL

<TABLE>
<CAPTION>
                                                                               December 31,      December 31,
                                                                                   2002              2001
                                                                              --------------    --------------
<S>                                                                           <C>               <C>
LIABILITIES:

        Accounts payable and accrued expenses                                 $       65,282    $       92,802
        Judgment payable                                                              92,866                 0
        Property taxes payable                                                        16,839            25,105
        Due to General Partner                                                         3,069             1,795
        Security deposits                                                            136,585           109,017
        Unearned rental income                                                       112,760           110,388
                                                                              --------------    --------------

                  Total liabilities                                                  427,401           339,107
                                                                              --------------    --------------

CONTINGENT LIABILITIES: (Note 7)

PARTNERS' CAPITAL: (Notes 1, 4 and 9)
        Current General Partner -
               Cumulative net income                                                 187,529           172,176
               Cumulative cash distributions                                         (77,474)          (70,941)
                                                                              --------------    --------------
                                                                                     110,055           101,235
        Limited Partners (46,280.3 interests outstanding)
               Capital contributions, net of offering costs                       39,358,468        39,358,468
               Cumulative net income                                              24,931,238        23,411,286
               Cumulative cash distributions                                     (48,240,268)      (46,530,268)
               Reallocation of former general partners' deficit capital             (840,229)         (840,229)
                                                                              --------------    --------------

                                                                                  15,209,209        15,399,257
                                                                              --------------    --------------

                        Total partners' capital                                   15,319,264        15,500,492
                                                                              --------------    --------------

                        Total liabilities and partners' capital               $   15,746,665    $   15,839,599
                                                                              ==============    ==============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       24

<PAGE>

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                              STATEMENTS OF INCOME

              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

<TABLE>
<CAPTION>
                                                                                  2002           2001            2000
                                                                              ------------   ------------    ------------
<S>                                                                           <C>            <C>             <C>
REVENUES:
        Rental income (Note 5)                                                $  2,551,330   $  2,609,146    $  2,658,584
        Interest income                                                             18,208         40,019          61,221
        Lease Termination Fee (Note 3)                                                   0        157,000               0
        Other income                                                                 8,953            847           1,773
        Recovery of amounts previously written off (Note 2)                          3,377          6,952           3,708
                                                                              ------------   ------------    ------------
                                                                                 2,581,868      2,813,964       2,725,286
                                                                              ------------   ------------    ------------
EXPENSES:
        Partnership management fees (Note 6)                                       198,639        192,902         187,038
        Restoration fees (Note 6)                                                      135            278             148
        Appraisal fees                                                                   0         62,857               0
        Insurance                                                                   27,823         21,418          17,864
        General and administrative                                                  79,583         73,674          81,814
        Advisory Board fees and expenses                                             9,799         10,837          12,360
        Real estate taxes                                                           10,609         13,303               0
        Ground lease expenses (Note 3)                                                   0         71,606          92,182
        Ground lease termination fee                                                     0              0          90,000
        Professional services                                                      207,463        143,223         125,498
        Maintenance and repair expenses                                             43,619          9,883           2,520
        Expenses incurred due to default by lessee or vacancy                       11,738            360               0
        Judgment expense                                                            45,128              0               0
        Depreciation                                                               306,637        314,097         320,090
        Amortization                                                                13,105         44,769           9,560
        Provision for non-collectible rents and other receivables                  128,597         53,538           6,810
                                                                              ------------   ------------    ------------
                                                                                 1,082,875      1,012,745         945,884
                                                                              ------------   ------------    ------------
GAIN (LOSS) ON DISPOSITION OF ASSETS, NET                                                0       (156,714)       (153,159)
                                                                              ------------   ------------    ------------
INCOME FROM CONTINUING OPERATIONS                                                1,498,993      1,644,505       1,626,243

INCOME FROM DISCONTINUED OPERATIONS                                                 36,312         89,274          95,548
                                                                              ------------   ------------    ------------
NET INCOME                                                                    $  1,535,305   $  1,733,779    $  1,721,791
                                                                              ============   ============    ============
NET INCOME- CURRENT GENERAL PARTNER                                           $     15,353   $     17,338    $     17,218
NET INCOME- LIMITED PARTNERS                                                     1,519,952      1,716,441       1,704,573
                                                                              ------------   ------------    ------------
                                                                              $  1,535,305   $  1,733,779    $  1,721,791
                                                                              ============   ============    ============
PER LIMITED PARTNERSHIP INTEREST,
 based on 46,280.3 Interests outstanding:
INCOME FROM CONTINUING OPERATIONS                                             $      32.07   $      35.18    $      34.79

INCOME FROM DISCONTINUED OPERATIONS                                                    .77           1.91            2.04
                                                                              ------------   ------------    ------------

NET INCOME PER LIMITED PARTNERSHIP INTEREST                                   $      32.84   $      37.09    $      36.83
                                                                              ============   ============    ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       25

<PAGE>

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                         STATEMENTS OF PARTNERS' CAPITAL

              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

<TABLE>
<CAPTION>
                                                         Current General Partner
                                   --------------------------------------------------------------------
                                                                                            Capital
                                     Cumulative        Cumulative                        Contributions,
                                         Net              Cash                               Net of
                                       Income         Distributions         Total        Offering Costs
                                   --------------    --------------    --------------    --------------
<S>                                <C>               <C>               <C>               <C>
BALANCE AT DECEMBER 31, 1999       $      137,620    $      (57,119)   $       80,501    $   39,358,468
Cash Distributions
 ($56.94 per limited partnership
 interest)                                                   (6,887)           (6,887)
Net Income                                 17,218                 0            17,218                 0
                                   --------------    --------------    --------------    --------------
BALANCE AT DECEMBER 31, 2000       $      154,838    $      (64,006)   $       90,832    $   39,358,468
Cash Distributions
 ($47.10 per limited partnership
 interest)                                                   (6,935)           (6,935)
Net Income                                 17,338                 0            17,338                 0
                                   --------------    --------------    --------------    --------------
BALANCE AT DECEMBER 31, 2001       $      172,176    $      (70,941)   $      101,235    $   39,358,468
Cash Distributions
 ($36.95 per limited partnership
 interest)                                                   (6,533)           (6,533)
Net Income                                 15,353                 0            15,353                 0
                                   --------------    --------------    --------------    --------------
BALANCE AT DECEMBER 31, 2002       $      187,529    $      (77,474)   $      110,055    $   39,358,468
                                   ==============    ==============    ==============    ==============

<CAPTION>
                                                            Limited Partners
                                   --------------------------------------------------------------------
                                                       Cumulative
                                     Cumulative           Cash
                                     Net Income       Distribution      Reallocation          Total
                                   --------------    --------------    --------------    --------------
<S>                                <C>               <C>               <C>               <C>
BALANCE AT DECEMBER 31, 1999       $   19,990,272    $  (41,715,268)   $     (840,229)   $   16,793,243
Cash Distributions
 ($56.94 per limited partnership
 interest)                                               (2,635,000)                         (2,635,000)
Net Income                              1,704,573                 0                 0         1,704,573
                                   --------------    --------------    --------------    --------------
BALANCE AT DECEMBER 31, 2000       $   21,694,845    $  (44,350,268)   $     (840,229)   $   15,862,816
Cash Distributions
 ($47.10 per limited partnership
 interest)                                               (2,180,000)                         (2,180,000)
Net Income                              1,716,441                 0                 0         1,716,441
                                   --------------    --------------    --------------    --------------
BALANCE AT DECEMBER 31, 2001       $   23,411,286    $  (46,530,268)   $     (840,229)   $   15,399,257
Cash Distributions
 ($36.95 per limited partnership
 interest)                                               (1,710,000)                         (1,710,000)
Net Income                              1,519,952                 0                 0         1,519,952
                                   --------------    --------------    --------------    --------------
BALANCE AT DECEMBER 31, 2002       $   24,931,238    $  (48,240,268)   $     (840,229)   $   15,209,209
                                   ==============    ==============    ==============    ==============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       26

<PAGE>

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

<TABLE>
<CAPTION>
                                                                                  2002            2001            2000
                                                                              ------------    ------------    ------------
<S>                                                                           <C>             <C>             <C>
CASH FLOWS FROM (USED) IN OPERATING ACTIVITIES:
     Net income                                                               $  1,535,305    $  1,733,779    $  1,721,791
     Adjustments to reconcile net income to net
      cash from (used in) operating activities -
             Depreciation and amortization                                         345,753         391,232         362,103
             Recovery of amount previously written off                              (3,377)         (6,952)         (3,708)
             Provision for non-collectible rents and other receivables             128,755          53,538           6,810
             Lease termination fee                                                       0        (117,750)              0
             Property write-down                                                    98,000               0               0
             Net loss (gain) on disposal of assets                                (124,399)        156,714         153,159
             Interest applied to Indemnification Trust account                      (6,558)        (16,014)        (20,308)
             (Increase) Deposit- Clerk of the Court                               (140,000)              0               0
             (Increase) Decrease in rents and other receivables                   (212,828)        (90,770)         19,565
             Deposits for payment of real estate taxes                               7,875          (7,875)              0
             (Increase) Decrease in prepaid expenses                                (6,904)         (5,944)         (1,699)
             (Increase) Decrease in deferred rent receivable                       (27,384)             51          28,379
             (Increase) in Property Tax receivable                                  (4,143)        (30,977)              0
             Increase (Decrease) in due to current General Partner                   1,274            (872)            699
             Increase (Decrease) in accounts payable and other                      65,346          52,743         (10,227)
             Increase in security deposits                                          27,568           7,000               0
             (Decrease) Increase in property taxes payable                          (8,266)         25,105               0
             Increase (Decrease) in unearned rental income                           2,372          92,323         (63,475)
                                                                              ------------    ------------    ------------
             Net cash from operating activities                                  1,678,389       2,235,331       2,193,089
                                                                              ============    ============    ============

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
      Principal payments received on note receivable                                39,250          78,500               0
      Proceeds from sale of investment properties                                  594,459           2,189               0
      Payment of leasing commissions                                               (48,300)        (69,491)       (190,156)
      Recoveries from former General Partner affiliates                              3,377           6,952           3,708
                                                                              ------------    ------------    ------------

                     Net cash from (used in) investing activities                  588,786          18,150        (186,448)
                                                                              ------------    ------------    ------------

CASH FLOWS USED IN FINANCING ACTIVITIES:
      Cash distributions to Limited Partners                                    (1,710,000)     (2,180,000)     (2,635,000)
      Cash distributions to current General Partner                                 (6,533)         (6,935)         (6,887)
                                                                              ------------    ------------    ------------

                     Net cash used in financing activities                      (1,716,533)     (2,186,935)     (2,641,887)
                                                                              ============    ============    ============

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                               550,642          66,546        (635,246)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                     818,606         752,060       1,387,306
                                                                              ------------    ------------    ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                      $  1,369,248    $    818,606    $    752,060
                                                                              ============    ============    ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       27

<PAGE>

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                        DECEMBER 31, 2002, 2001 AND 2000

1.  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:

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

The Partnership is 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 child-care center. At
December 31, 2002, the Partnership owned 25 properties with specialty leasehold
improvements in 10 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 accrued only
when the tenant has reached the breakpoint stipulated in the lease.

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 original lease term.

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

                                       28

<PAGE>

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

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.

In October 2001, Statement of Financial Accounting Standards No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" (FAS 144) was issued. FAS
144 supercedes Statement of Financial Accounting Standards No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" (FAS 121). FAS 144 develops a single accounting model for long-lived assets
to be disposed of, whether previously held and used or newly acquired. The
provisions of FAS 144 became effective for fiscal years beginning after December
15, 2001. The Partnership adopted FAS 144 on January 1, 2002, and the result is
that assets disposed of or deemed to be classified as held for sale will require
the reclassification of current and previous years' operations to discontinued
operations.

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.

The components of discontinued operations for the years ended December 31, 2002
and 2001 are outlined below and include the results of operations through the
date of the sale of the Hardee's Hartford property in the Fourth Quarter of
2002, and the vacant South Milwaukee property, as it was classified as held for
sale as of December 31, 2002.

                                                    2002         2001
                                                 ----------   ----------
        Revenues

          Rental Income                          $   48,000   $  122,667

        Gain on Disposition of Assets, Net          124,399            0

        Expenses

          Property taxes                             11,918        1,027

          Property write-down                        98,000            0

          Depreciation                               17,869       30,304

          Amortization                                8,142        2,062

          Provision for non-collectible rents           158            0
                                                 ----------   ----------

        Income from Discontinued Operations      $   36,312   $   89,274
                                                 ==========   ==========

                                       29

<PAGE>

The Partnership will be dissolved on November 30, 2010, or earlier upon the
prior occurrence of any of the following events: (a) the disposition of all
properties of the Partnership; (b) the written determination by the General
Partner that the Partnership's assets may constitute "plan assets" for purposes
of ERISA; (c) the agreement of Limited Partners owning a majority of the
outstanding interests to dissolve the Partnership; or (d) the dissolution,
bankruptcy, death, withdrawal, or incapacity of the last remaining General
Partner, unless an additional General Partner is elected previously by a
majority of the Limited Partners. During the Second Quarter of 1998, the General
Partner received the consent of the Limited Partners to liquidate the
Partnership's assets and dissolve the Partnership. No buyer was identified for
the Partnership's assets, and Management continued normal operations. During the
Second Quarter of 2001, another consent letter allowing the sale of the
Partnership's assets and dissolution of the Partnership was sent to Limited
Partners. The General Partner did not receive majority approval to sell the
assets of the Partnership for purposes of liquidation. The Partnership,
therefore, 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, 2002, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$8,093,000.

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

<TABLE>
<CAPTION>
                                                    2002            2001            2000
                                                ------------    ------------    ------------
<S>                                             <C>             <C>             <C>
Net income, per statements of income            $  1,535,305    $  1,733,779    $  1,721,791

Book to tax depreciation difference                  (38,193)        (12,338)        (43,538)

Book over tax gain from asset disposition             (8,661)       (142,785)        (30,231)

Straight line rent adjustment                        (27,384)             52          28,379

Prepaid rent                                           3,820          87,316               0

Bad debt reserve/expense                             146,776          39,636         (44,535)

Book valuation of property write-downs                98,000        (172,643)              0

Accrued Judgment payable                              45,128               0               0

Other, net                                               115              (1)          3,879
                                                ------------    ------------    ------------

   Net income for tax reporting purposes        $  1,754,906    $  1,533,016    $  1,635,745
                                                ============    ============    ============
</TABLE>

2.  REGULATORY INVESTIGATION:

A preliminary investigation during 1992 by the Office of Commissioner of
Securities for the State of Wisconsin and the Securities and Exchange Commission
(the "Investigation") revealed that during at least

                                       30

<PAGE>

the four years ended December 31, 1992, the former general partners of the
Partnership, Gary J. DiVall ("DiVall") and Paul E. Magnuson ("Magnuson") had
transferred substantial cash assets of the Partnership and two affiliated
publicly registered partnerships, DiVall Insured Income Fund Limited Partnership
("DiVall 1") and DiVall Income Properties 3 Limited Partnership ("DiVall 3")
(collectively the "Partnerships") to various other entities previously sponsored
by or otherwise affiliated with DiVall and Magnuson. The unauthorized transfers
were in violation of the respective Partnership Agreements and resulted, in
part, from material weaknesses in the internal control system of the
Partnerships.

Subsequent to discovery, and in response to the regulatory inquiries, a
third-party Permanent Manager, The Provo Group, Inc. ("TPG"), was appointed
(effective February 8, 1993) to assume responsibility for daily operations and
assets of the Partnerships as well as to develop and execute a plan of
restoration for the Partnerships. Effective May 26, 1993, the Limited Partners,
by written consent of a majority of interests, elected the Permanent Manager,
TPG, as General Partner. TPG terminated the former general partners by accepting
their tendered resignations.

In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships. At that time, an allowance was established against
amounts due from former general partners and their affiliates reflecting the
estimated $3 million receivable. This net receivable was allocated among the
Partnerships based on each Partnership's pro rata share of the total
misappropriation, and restoration costs and recoveries have been allocated based
on the same percentage, Through December 31, 2002, $5,810,000 of recoveries have
been received which exceeded the original estimate of $3 million. As a result,
in 1996, 1997, 1999, 2000, 2001, and 2002 the Partnership has recognized a total
of $1,128,000 as income, which represents its share of the excess recovery.
There were no restoration activities or recoveries in 1998. The current General
Partner continues to pursue recoveries of the misappropriated funds, however, no
further significant recoveries are anticipated.

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, 2002, the Partnership owned 23 fully constructed fast-food
restaurants, a video store, and a preschool. The properties are composed of the
following: ten (10) Wendy's restaurants, one (1) Hardee's restaurant, 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) Miami Subs restaurant,
one (1) Omega restaurant, one (1) Blockbuster Video store, one (1) Sunrise
Preschool, one (1) Village Inn restaurant, one (1) Daytona's All Sports Cafe and
two (2) vacant properties, (which were previously operated as a Fiesta Time
restaurant, and a Hardee's restaurant.) The 25 properties are located in a total
of thirteen (13) 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 2002, 2001 and 2000
the Partnership recognized income from discontinued operations of $36,000,
$89,000 and $96,000, respectively. The 2002 net income from discontinued
operations included a $124,000 net gain on the sale of the Hardee's- Hartford
property in October 2002 and a $98,000 property write-down to fair market value
of the vacant South Milwaukee

                                       31

<PAGE>

property in the Third Quarter of 2002. Other results of discontinued operations
are attributable to the Hartford, WI property and the reclassification of the
vacant South Milwaukee, WI property to property held for sale in the Fourth
Quarter of 2002.

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

Village Inn Property- Grand Forks, ND

During February 2003 a new 10-year lease was executed with Panda Buffet, Inc. in
relation to the former Grand Forks, ND property. The lease is set to expire in
2012 and the annual first year base rent is $32,500. Although the tenant took
possession of the property upon execution of the lease, the lease payments are
to commence in June 2003. It is anticipated that commissions of $18,500 and
$3,700 will be paid to an unaffiliated leasing agent and to an affiliate of the
General Partner, respectively, in March 2003.

During October 2001, the Village Inn Restaurant had notified Management of its
intent to close and vacate its restaurant in Grand Forks, ND. The lease on the
property expires 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, rent income has not been collected for January
through December of 2002. In addition, 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. Management continues legal action in relation to Village Inn's
past due balance of approximately $130,000, as well as future lease and other
obligations that will be determined to be in excess of the lease payments
received by the Partnership from the new tenant, Panda Buffet, at the Grand
Forks, ND property. The Partnership incurred expenditures of approximately
$27,000 to replace the roof on the property in the Third Quarter of 2002.
Additional maintenance and repair expenditures may be needed, however the amount
is unknown as of December 31, 2002.

4785 Merle Hay Road Property- Des Moines, IA

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 is continuing to operate the property as a restaurant. Management
allowed the sub-tenant a holdover for two- months. The Partnership received the
January and February 2003 rent payments from Daytona's and Management is
negotiating a direct lease with them.

Miami Subs Property- Palm Beach, FL

During the Fourth Quarter of 2002 the Miami Subs lease with QSR, Inc. was
terminated. The lease was set to expire in 2016. A new ten-year lease was
executed in the Fourth Quarter of 2002 with Difede Finance Group Corporation and
is set to expire in 2012. The property will continue to be operated as a Miami
Subs Restaurant.

South Milwaukee, WI Property

In October 2002 Management entered into a contract to sell the vacant Hardee's-
South Milwaukee, WI property at a sales price of $450,000. The South Milwaukee
property closing date is anticipated to be in the Second Quarter of 2003. In the
Third Quarter of 2002 the net asset value of the South Milwaukee

                                       32

<PAGE>

property was written-down by $98,000 to reflect the fair market value of the
property at September 30, 2002 of approximately $450,000, shown on the balance
sheet as property held for sale. During March 2001, Hardee's Food Systems, Inc.
had notified Management of its intent to close its restaurant in South
Milwaukee, Wisconsin. Hardee's lease on the South Milwaukee property expired on
November 30, 2001 and they continued making rent payments until the lease
expiration date.

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. had 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 September 30, 2002 was approximately $470,000 and the net gain on
the sale of the property in October 2002 was approximately $124,000. Included in
the net gain was a Fourth Quarter 2002 sales commission of $18,500, which was
paid by the Partnership to an affiliate of the General Partner.

North 7th Street Property- Phoenix, AZ

During the Second Quarter of 2002, Mountain Range Restaurants, the sub-lessee of
the Denny's- N. 7th Street property in Phoenix, Arizona, notified Management
that it would vacate the property at the end of May 2002. 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 Phoenix, Arizona location. Following the rejection of this lease by Phoenix,
the Mountain Range Restaurants 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 was negotiated with new tenant, Jun
Cheng Pan, at the vacant N. 7th Street property in Phoenix, Arizona. The new
tenant took possession of the property in August 2002 and rent commenced in
January 2003. The restaurant is to be 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.

Milwaukee, WI Property

During March 2001, Hardee's Food Systems, Inc. had 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, which is reflected as a Note receivable on the balance
sheet at December 31, 2001, was received in January 2002.

During May 2001, Management negotiated a re-lease of the vacant Milwaukee,
Wisconsin property to Omega Restaurant and rent income commenced in October
2001. Although the tenant has not begun operating the restaurant, monthly rent
payments continue to be received from the lessee by the Partnership.

                                       33

<PAGE>

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.

Blockbuster Property- Ogden, UT

The Blockbuster Video Store lease expired on January 31, 2001. However, in the
First Quarter of 2001, Management negotiated a five (5) year lease extension to
January 31, 2006. A commission of $10,000 was paid to an unaffiliated leasing
agent upon the negotiated extension of the lease.

Twin Falls, ID Property

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. Although Phoenix's lease on the
Twin Falls property expires on April 30, 2012, due to bankruptcy proceedings of
Phoenix, the lease was terminated and rent income ceased in the Fourth Quarter
of 2001. The remaining balance due the Partnership of approximately $29,000 from
the former tenant has been reserved. This amount is included in the
Partnership's filing for damages in Bankruptcy court of approximately $85,000,
or one year's rent, although it is uncertain whether the amount will be
collectible. 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. In late February 2003 Management entered a
purchase and sale agreement to sell the Twin Falls property at a sales price of
$550,000. The closing date of the sale is anticipated to be in the Second
Quarter of 2003. The net asset value of the property at December 31, 2002 was
$316,000.

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. 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
subsequently learned 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 38th Street, L.L.C, ("Centre".) 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.

As of December 31, 2001 the Partnership had withheld the May through December
2001 accrued ground lease obligations totaling approximately $50,000 related to
the property. 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 under the Ground Lease, 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

                                       34

<PAGE>

into as of February 1, 2003. According to the terms of the Agreement the
Partnership was required to pay the Center the sum of $115,000 (the
"Settlement".) The court will then return the $140,0000 cash bond to the
Partnership at a later date. (See Legal Proceedings in Part I- Item 3 and Note
10.)

Former Denny's- Camelback Property- Phoenix, AZ

Phoenix Restaurant Group, Inc. ("Phoenix") did not formally extend its lease on
the Denny's property on Camelback Road in Phoenix, Arizona, when it expired on
January 30, 1998, but continued to operate the restaurant and pay rent through
December 31, 1999. During January 2000, Phoenix notified Management that it had
vacated the premises and ceased paying rent. Management entered into a
termination agreement with the ground lessor of the property during 2000, which
resulted in a one-time payment of $90,000 in exchange for a release of all
future obligations. Possession of the property was returned to the ground
lessor, resulting in a $153,000 loss in the Third Quarters of 2000.

Wendy's Properties

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

Other 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, contain purchase option provisions with stated
purchase prices in excess of the original cost of the properties. The current
General Partner is not aware of any unfavorable purchase options in relation to
original cost.

4.  PARTNERSHIP AGREEMENT:

The Partnership Agreement, prior to an amendment effective May 26, 1993,
provided that, for financial reporting and income tax purposes, net profits or
losses from operations were allocated 90% to the Limited Partners and 10% to the
general partners. The Partnership Agreement also provided for quarterly cash
distributions from Net Cash Receipts, as defined, within 60 days after the last
day of the first full calendar quarter following the date of release of the
subscription funds from escrow, and each calendar quarter thereafter, in which
such funds were available for distribution with respect to such quarter. Such
distributions were to be made 90% to Limited Partners and 10% to the former
general partners, provided, however, that quarterly distributions were to be
cumulative and were not to be made to the former general partners unless and
until each Limited Partner had received a distribution from Net Cash Receipts in
an amount equal to 10% per annum, cumulative simple return on his or her
Adjusted Original Capital, as defined, from the Return Calculation Date, as
defined.

Net Proceeds, as originally defined, were to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital; (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a Liquidation Preference equal to a 13.5% per annum,

                                       35

<PAGE>

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

On May 26, 1993, pursuant to the results of a solicitation of written consents
from the Limited Partners, the Partnership Agreement was amended to replace the
former general partners and amend various sections of the agreement. The former
general partners were replaced as General Partner by The Provo Group, Inc., an
Illinois corporation. Under the terms of the amendment, net profits or losses
from operations are allocated 99% to the Limited Partners and 1% to the current
General Partner. The amendment also provided for distributions from Net Cash
Receipts to be made 99% to Limited Partners and 1% to the current General
Partner, provided that quarterly distributions will be cumulative and will not
be made to the current General Partner unless and until each Limited Partner has
received a distribution from Net Cash Receipts in an amount equal to 10% per
annum, cumulative simple return on his or her Adjusted Original Capital, as
defined, from the Return Calculation Date, as defined, except to the extent
needed by the General Partner to pay its federal and state income taxes on the
income allocated to it attributable to such year. Distributions paid to the
General Partner are based on the estimated tax liability resulting from
allocated income. Subsequent to the filing of the General Partner's income tax
returns, a true up with actual distributions is made.

The provisions regarding distribution of Net Proceeds, as defined, were also
amended to provide that Net Proceeds are to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital; (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a Liquidation Preference equal to a 13.5% per annum, cumulative
simple return on Adjusted Original Capital from the Return Calculation Date
including in the calculation of such return on all prior distributions of Net
Cash Receipts and any prior distributions of Net Proceeds under this clause,
except to the extent needed by the General Partner to pay its federal and state
income tax on the income allocated to 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 shall be limited to a competitive real estate commission, not to
exceed 6% of the contract price for the sale of the property. The General
Partner may receive up to one-half of the competitive real estate commission,
not to exceed 3%, provided that the General Partner provides a substantial
amount of services in the sales effort. It is further provided that a portion of
the amount of such fees payable to the General Partner is subordinated to its
success in recovering the funds misappropriated by the former general partners.
(See Note 7.)

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

                                       36

<PAGE>

5.  LEASES:

Original lease terms for the majority of the investment properties are generally
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, 2002 aggregate minimum lease payments to be received under
the leases for the Partnership's properties are as follows:

Year ending
December 31,
2003                             $     1,906,861
2004                                   1,910,271
2005                                   1,922,164
2006                                   1,843,349
2007                                   1,827,236
Thereafter                            10,272,407
                                 ---------------
                                 $    19,682,288
                                 ===============

The above minimum lease payments include rent applicable to the Village Inn
property of approximately $97,000 annually. The tenant is currently in default
in relation to its January through December 2002 lease payments. Management has
begun legal action to collect these past due payments, however, due to the
uncertainty of collection, these past due rents totaling approximately $97,000
have been fully reserved. Village Inn is responsible for lease payments until
the lease expiration date of 2009, however, due to the uncertainty of
collection, future lease charges will continue to be reserved until a lease
termination agreements is consummated.

Percentage rentals included in rental income in 2002, 2001, and 2000 were
$599,591, $588,818, and $548,180, respectively. The increase in percentage
rental income is a result of increased tenant sales.

Ten (10) of the properties are leased to Wensouth Orlando, a franchisee of
Wendy's restaurants. Wensouth base rents accounted for 43% of total base rents
for 2002.

6.  TRANSACTIONS WITH CURRENT GENERAL PARTNER AND ITS AFFILIATES:

The current General Partner receives a fee for managing the Partnership 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 of $25,000,
between the three original affiliated Partnerships as provided in the Permanent
Manager Agreement ("PMA"). The Partnership shall only be responsible for its
allocable share of such minimum and maximum amounts as indicated above ($159,000
minimum base fee and $13,250 maximum rent reimbursement). Effective March 1,
2002, the minimum management fee and the maximum annual reimbursement for office
rent and overhead increased by 2.8%, representing the

                                       37

<PAGE>

allowable annual Consumer Price Index adjustment per the PMA.  Therefore,  as of
March 1, 2002 the minimum monthly management fee was raised to $16,640.

For purposes of computing the 4% overall fee, gross receipts includes amounts
recovered in connection with the misappropriation of assets by the former
general partners and their affiliates. TPG has received fees from the
Partnership totaling $55,598 to date on the amounts recovered, which includes
2002 fees of $135. 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, 2002, 2001, and 2000, are as follows:

<TABLE>
<CAPTION>
                                                 Incurred for the     Incurred for the     Incurred for the
                                                    Year ended           Year ended           Year ended
Current General Partner                         December 31, 2002    December 31, 2001    December 31, 2000
----------------------------------------        -----------------    -----------------    -----------------
<S>                                             <C>                  <C>                  <C>
Management fees                                 $        198,639     $         192,902    $         187,038
Restoration fees                                             135                   278                  148
Overhead allowance                                        16,037                15,586               15,102
Sales commission                                          18,540                     0                    0
Leasing commissions                                       13,800                 8,644              190,156
Reimbursement for out-of-pocket expenses                   7,726                 9,690                9,983
Cash distribution                                          6,533                 6,935                6,887
                                                ----------------     -----------------    -----------------
                                                $        261,410     $         234,035    $         409,314
                                                ================     =================    =================
</TABLE>

7.  CONTINGENT LIABILITIES:

According to the Partnership Agreement, as amended, the current General Partner
may receive a disposition fee not to exceed 3% of the contract price of the sale
of investment properties. Fifty percent (50%) of all such disposition fees
earned by the current General Partner is to be escrowed until the aggregate
amount of recovery of the funds misappropriated from the Partnerships by the
former general partners is greater than $4,500,000. Upon reaching such recovery
level, full disposition fees will thereafter be payable and fifty percent (50%)
of the previously escrowed amounts will be paid to the current General Partner.
At such time as the recovery exceeds $6,000,000 in the aggregate, the remaining
escrowed disposition fees shall be paid to the current General Partner. If such
levels of recovery are not achieved, the current General Partner will contribute
the amounts escrowed towards the recovery. In lieu of an escrow, 50% of all such
disposition fees have been paid directly to a restoration account and then
distributed among the three original Partnerships. Fifty percent (50%) of the
total amount paid to the 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 Permanent Manager Agreement ("PMA") provides that the Permanent Manager will
be indemnified from any claims or expenses arising out of or relating to the
Permanent Manager serving in such capacity or as substitute general partner, so
long as such claims do not arise from fraudulent or criminal misconduct by the
Permanent Manager. The PMA provides that the Partnership fund this
indemnification obligation

                                       38

<PAGE>

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, 2002. Funds are invested in U.S. Treasury securities. In addition,
$128,725 of earnings has been credited to the Trust as of December 31, 2002. The
rights of the Permanent Manager to the Trust shall be terminated upon the
earliest to occur of the following events: (i) the written release by the
Permanent Manager of any and all interest in the Trust; (ii) the expiration of
the longest statute of limitations relating to a potential claim which might be
brought against the Permanent Manager and which is subject to indemnification;
or (iii) a determination by a court of competent jurisdiction that the Permanent
Manager shall have no liability to any person with respect to a claim which is
subject to indemnification under the PMA. At such time as 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 has received
no rent from the former tenant and has returned possession of the Phoenix,
Arizona property to the Ground Lease Landlord, Centre at 38th Street, L.L.C.,
("Centre".) Beginning in May and through December 2001 the Partnership accrued
but withheld payment of the ground lease obligations, and on March 31, 2002 and
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 Superior Court, against the Partnership and TPG. The Complaint alleges
that the Partnership is a tenant under a Ground Lease with Centre and that the
Partnership has defaulted on its obligations under that lease. The suit names
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 has 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.

                                       39

<PAGE>

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 is 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 explored its
options and 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 in 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 will be
returned from the clerk of the court to the Partnership.

11. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

<TABLE>
<CAPTION>
                                                              Quarter Ended

                                         March 31,        June 30,       September 30,     December 31,
                                           2002             2002             2002              2002
                                      --------------   --------------   --------------    --------------
<S>                                   <C>              <C>              <C>               <C>
Total Revenues                        $      502,457   $      516,414   $      735,256    $      827,741

Income from Continuing
 Operations                           $      289,846   $      201,660   $      458,582    $      548,905

Income (Loss) From
 Discontinued Operations              $        8,147   $        9,361   $      (86,209)   $      105,013

Net Income                            $      297,993   $      211,021   $      372,373    $      653,918

Net Income per Unit                   $         6.37   $         4.51   $         7.97    $        13.99
</TABLE>

                                       40

<PAGE>

<TABLE>
<CAPTION>
                                                   Quarter Ended

                                  March 31,    June 30,     September 30,       December 31,
                                    2001         2001           2001                2001
                                 ----------   ----------   ---------------   ---------------
<S>                              <C>          <C>          <C>               <C>
Total Revenues                   $  574,621   $  715,753   $       692,089   $       831,501

Income from Continuing
 Operations                      $  301,102   $  476,642   $       435,737   $       431,024

Income from
 Discontinued Operations         $   23,887   $   23,887   $        23,887   $        17,613

Net Income                       $  324,989   $  500,529   $       459,624   $       448,637

Net Income per Unit              $     6.95   $    10.71   $          9.83   $          9.60
</TABLE>

<TABLE>
<CAPTION>
                                                   Quarter Ended

                                  March 31,    June 30,     September 30,      December 31,
                                    2000         2000           2000              2000
                                 ----------   ----------   ---------------   ---------------
<S>                              <C>          <C>          <C>               <C>
Total Revenues                   $  551,668   $  581,248   $       743,092   $       849,278

Income from Continuing
 Operations                      $  329,378   $  331,685   $       322,388   $       642,792

Income From
 Discontinued Operations         $   23,887   $   23,887   $        23,887   $        23,887

Net Income                       $  353,265   $  355,572   $       346,275   $       666,679

Net Income per Unit              $     7.56   $     7.61   $          7.41   $         14.25
</TABLE>

12.  SUBSEQUENT EVENTS:

In late February 2003 a Settlement Agreement and Mutual Release ("Agreement")
was executed between Centre, the Partnership and The Provo Group, Inc. The
Agreement includes a 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 both
parties in any matters relating to or arising our 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 will be
returned from the clerk of the court to the Partnership.

In February 2003 the District Court upheld the Magistrate Court evicting Fiesta
Time. Management then obtained possession of the property from Fiesta Time and
received $30,000 in rent escrow from the subtenant that had been held by the
Court. In late February 2003 Management entered a purchase and sale

                                       41

<PAGE>

agreement to sell the Twin Falls property at a sales price of $550,000. The
closing date is anticipated to be in the Second Quarter of 2003. The net asset
value of the property at December 31, 2002 was $316,000.

During February 2003 a new 10-year lease was executed with Panda Buffet, Inc. in
relation to the former Grand Forks, ND property. The lease is set to expire in
2012 and the annual first year base rent is $32,500. Although the tenant took
possession of the property upon execution of the lease, lease payments are to
commence in June 2003. It is anticipated that commissions of $18,500 and $3,700
will be paid to an unaffiliated leasing agent and to an affiliate of the General
Partner, respectively, in March 2003.

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 is continuing to operate the property as a restaurant. Management
allowed the sub-tenant a holdover for two-months. The Partnership received the
January and February 2003 rent payments from Daytona's and Management is
negotiating a direct lease with them.

On February 15, 2003, the Partnership made distributions to the Limited Partners
of $1,055,000 amounting to $22.80 per Interest.

                                       42

<PAGE>

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE

Although the Partnership's previous independent auditors, Arthur Andersen LLP
("Arthur Andersen"), never informed the Partnership that it was unable to
continue as its independent auditors, as a result of the press reports of the
wind-down of Arthur Andersen's business, the Partnership treated Arthur Andersen
as having constructively resigned. Effective August 26, 2002 the Partnership
dismissed Arthur Andersen as its independent auditors. The dismissal was
disclosed in the Partnership's Form 8-k dated August 14, 2002.

Prior to the wind-down of Arthur Andersen's business, its report on the
Partnership's financial statements for either of the past two-years did not
contain an adverse opinion or a disclaimer opinion, or was qualified or modified
as to uncertainty, audit scope or accounting principles. In addition, during the
Partnership's two most recent fiscal years and the interim period following the
wind-down of Arthur Andersen's business, there were no disagreements with Arthur
Andersen 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 Arthur Andersen, would have caused it to make
reference to the subject matter of the disagreement in connection with the
report.

The Partnership engaged Deloitte & Touche LLP ("D&T") as its new independent
auditors on December 19, 2002. The engagement was disclosed in the Partnership's
Form 8-k dated January 2, 2003.

During the two most recent fiscal years and the interim period up to and
including the date of engagement, neither the Partnership nor anyone on behalf
of the Partnership had consulted with D&T regarding (i) either the application
of accounting principles to a specific transaction, either completed or
proposed; or the type of audit opinion that might be rendered on the
Partnership's financial statements; or (ii) any matter that was either the
subject of a disagreement, or a reportable event, with the Partnership's former
auditors Arthur Andersen.

                                       43

<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

TPG is an Illinois corporation with its principal office at 101 West 11th
Street, Suite 1110, Kansas City, Missouri 64105. TPG was elected General Partner
by vote of the Limited Partners effective on May 26, 1993. Prior to such date,
TPG had been managing the Partnership since February 8, 1993, under the terms of
the Permanent Manager Agreement ("PMA"), which remains in effect. TPG also
serves as the corporate general partner for DiVall 3. See Items 1 and 13 hereof
for additional information about the PMA and the election of TPG as General
Partner.

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

        Bruce A. Provo, Age 52 - President, Founder and Director.
        Mr. Provo has been involved in the management of real estate and other
        asset portfolios since 1979. Since he founded the company in 1985, Mr.
        Provo has been President of TPG. From 1982 to 1986, Mr. Provo served as
        President and Chief Operating Officer of the North Kansas City
        Development Company ("NKCDC"), North Kansas City, Missouri. NKCDC was
        founded in 1903 and the assets of the company were sold in December 1985
        for $102,500,000. NKCDC owned commercial and industrial properties,
        including an office park and a retail district, as well as apartment
        complexes, motels, recreational facilities, fast food restaurants, and
        other properties. NKCDC's holdings consisted of over 100 separate
        properties and constituted approximately 20% of the privately held real
        property in North Kansas City, Missouri (a four square mile
        municipality). Following the sale of the company's real estate, Mr.
        Provo served as the President, Chief Executive Officer and Liquidating
        Trustee of NKCDC from 1986 to 1991.

        Mr. Provo graduated from Miami University, Oxford, Ohio in 1972 with a
        B.S. in Accounting. He became a Certified Public Accountant in 1974 and
        was a manager in the banking and financial services division of Arthur
        Andersen LLP prior to joining Rubloff Development Corporation in 1979.
        From 1979 through 1985, Mr. Provo served as Vice President - Finance and
        then as President of Rubloff Development Corporation. Mr. Provo has
        previously served on the Board of Directors of the National Realty
        committee, a legislative "watchdog" organization for the commercial real
        estate industry headquartered in Washington, DC.

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

        William Arnold - Investment Broker. Mr. Arnold works as a financial
        planner, 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.

        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

                                       44

<PAGE>

        Economics. On the first of this year 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 to remain in Hallandale.
        Mr. Small is a Limited Partner representing DiVall 2.

        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 52 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 and 3.

ITEM 11.  EXECUTIVE COMPENSATION

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

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

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

(a.) As of December 31, 2002, 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, 2002, neither the General Partner nor any of their
affiliates owned any Interests in the Partnership.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The compensation to be paid to TPG is governed by the Partnership Agreement, as
amended by vote of the Limited Partners to reflect the terms of the PMA. TPG's
compensation includes a base fee equal to 4% of the Partnership's gross
collected receipts. Between the Partnerships, TPG is entitled to an aggregate
minimum base management 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 fee resulting
from recoveries from former general partners is designated as restoration fees.
Between the Partnerships, TPG is also entitled to reimbursement for office rent
and utilities in the maximum amount of $25,000 per

                                       45

<PAGE>

year. The Partnership shall only be responsible for its allocable share of such
minimum and maximum amounts as indicated above ($159,000 minimum base fee and
$13,250 maximum rent and utilities 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 management fee and maximum office overhead reimbursement in an amount not
to exceed the percentage increase in the Consumer Price Index ("CPI") for the
immediately preceding calendar year. Effective March 1, 2002 the minimum
management fee and the maximum reimbursement for office rent and overhead
increased by 2.8% representing the allowable annual CPI adjustments. Therefore,
as of March 1, 2002 the minimum monthly management fee was increased to $16,640.
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
the Trust in an amount, not to exceed $250,000, solely for the purpose of
funding such indemnification obligations. Once a determination has been made
that no such claims can or will be made against TPG, the balance of the Trust
will become unrestricted cash of the Partnership. At December 31, 2002 the
Partnership had fully funded the Trust.

                                       46

<PAGE>

The Partnership paid and/or accrued the following fees and reimbursements to
management and its affiliates in 2002:

      The Provo Group, Inc.:
      Management Fees                  $   198,639
      Restoration Fees                         135
      Sales Commission                      18,540
      Leasing Commissions                   13,800
      Office Overhead Allowance             16,037
      Direct Cost Reimbursements             7,726
                                       -----------
            2002 Total                 $   254,877
                                       ===========

ITEM 14.  CONTROL AND PROCEDURES

Within the 90-day period prior to the filing of 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.

                                       47

<PAGE>

                                     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:

                Independent Auditors' Report

                Balance Sheets, December 31, 2002 and 2001

                Statements of Income for the Years Ended December 31, 2002,
                2001, and 2000

                Statements of Partners' Capital for the Years Ended December 31,
                2002, 2001, and 2000

                Statements of Cash Flows for the Years Ended December 31, 2002,
                2001, and 2000

                Notes to Financial Statements

        2.      Financial Statement Schedule

                Schedule III - Real Estate and Accumulated Depreciation,
                December 31, 2002

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

        3.      Listing of Exhibits

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

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

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

                                       48

<PAGE>

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

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

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

                99.0    Correspondence to the Limited Partners dated February
                        15, 2003 regarding the Fourth Quarter 2002 distribution.

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

                99.2    302 Certifications.

(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.

                                       49

<PAGE>

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
             SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 2002

<TABLE>
<CAPTION>
                                                     Initial Cost to Partnership
                                                     ---------------------------
                                                                                       Costs
                                                                      Building      Capitalized
                                                                        and          Subsequent
             Property                Encumbrances        Land       Improvements   to Acquisitions
--------------------------------------------------------------------------------------------------
<S>                                  <C>             <C>            <C>            <C>
Palm Beach, Florida (1)              $          -    $    495,237   $    248,388   $             -
Phoenix, Arizona                                -         444,224        421,676                 -
N. Richland Hills, Texas (2)                    -         762,580        584,139                 -
Phoenix, Arizona (2)                            -         482,383        490,343                 -
Santa Fe, New Mexico                            -               -        451,230                 -
Augusta, Georgia (3)                            -         215,416        434,178                 -
Charleston, South Carolina                      -         273,619        323,162                 -
Park Forest, Illinois                           -         187,900        393,038                 -
Aiken, South Carolina                           -         402,549        373,795                 -
Augusta, Georgia                                -         332,154        396,659                 -
Mt. Pleasant, South Carolina                    -         286,060        294,878                 -
Charleston, South Carolina                      -         273,625        254,500                 -
Aiken, South Carolina                           -         178,521        455,229                 -
Des Moines, Iowa (2)                            -         164,096        448,529           287,991
Milwaukee, Wisconsin (2)                        -         409,143        600,902                 -
North Augusta, South Carolina                   -         250,859        409,297                 -
Charleston, South Carolina                      -         286,068        294,870                 -
Martinez, Georgia                               -         266,175        367,575                 -
Grand Forks, North Dakota                       -         172,701        566,674                 -
Phoenix, Arizona                                -         241,371        843,132                 -
Ogden, Utah                                     -         194,350        452,075                 -
Fond du Lac, Wisconsin                          -         297,418        552,349                 -
Twin Falls, Idaho (2)                           -         155,269        483,763            60,000
Columbus, Ohio                                  -         351,325        708,141                 -
                                     -------------------------------------------------------------
                                     $          0    $  7,123,043   $ 10,848,522   $       347,991
                                     =============================================================

<CAPTION>
                                                Gross Amount at which
                                               Carried at End of Year
                                     ------------------------------------------
                                                    Building and                   Accumulated
             Property                    Land       Improvements      Total       Depreciation
----------------------------------------------------------------------------------------------
<S>                                  <C>            <C>            <C>            <C>
Palm Beach, Florida (1)              $    325,487   $    163,258   $    488,745   $    110,783
Phoenix, Arizona                          444,224        421,676        865,900        228,939
N. Richland Hills, Texas (2)              662,580        480,123      1,142,703        271,735
Phoenix, Arizona (2)                      453,433        428,676        882,109        231,320
Santa Fe, New Mexico                            -        451,230        451,230        204,649
Augusta, Georgia (3)                      213,227        434,178        647,404        207,567
Charleston, South Carolina                273,619        323,162        596,781        154,494
Park Forest, Illinois                     187,900        393,038        580,938        187,900
Aiken, South Carolina                     402,549        373,795        776,344        177,385
Augusta, Georgia                          332,154        396,659        728,813        188,235
Mt. Pleasant, South Carolina              286,060        294,878        580,938        139,935
Charleston, South Carolina                273,625        254,500        528,125        120,773
Aiken, South Carolina                     178,521        455,229        633,750        216,029
Des Moines, Iowa (2)                      161,996        551,056        713,052        292,130
Milwaukee, Wisconsin (2)                  409,143        573,871        983,014        273,815
North Augusta, South Carolina             250,859        409,297        660,156        178,287
Charleston, South Carolina                286,068        294,870        580,938        128,443
Martinez, Georgia                         266,175        367,575        633,750        160,113
Grand Forks, North Dakota                 172,701        566,674        739,375        246,839
Phoenix, Arizona                          241,371        843,133      1,084,503        367,263
Ogden, Utah                               194,350        452,075        646,425        217,577
Fond du Lac, Wisconsin                    297,418        552,349        849,767        240,599
Twin Falls, Idaho (2)                     155,269        353,622        508,891        192,435
Columbus, Ohio                            351,325        708,140      1,059,466        295,822
                                     ---------------------------------------------------------
                                     $  6,820,054   $ 10,543,064   $ 17,363,118   $  5,033,067
                                     =========================================================

<CAPTION>
                                                                    Life on which
                                                                   Depreciation in
                                                                   latest statement
                                                                     of operations
                                          Date of         Date        is computed
             Property                   Construction    Acquired        (years)
-----------------------------------------------------------------------------------
<S>                                        <C>          <C>                 <C>
Palm Beach, Florida (1)                      -           3/11/88            31.5
Phoenix, Arizona                             -           6/15/88            31.5
N. Richland Hills, Texas (2)                 -           7/15/88            31.5
Phoenix, Arizona (2)                         -           8/15/88            31.5
Santa Fe, New Mexico                         -          10/10/88            31.5
Augusta, Georgia (3)                         -          12/22/88            31.5
Charleston, South Carolina                   -          12/22/88            31.5
Park Forest, Illinois                        -          12/22/88            31.5
Aiken, South Carolina                        -           2/21/89            31.5
Augusta, Georgia                             -           2/21/89            31.5
Mt. Pleasant, South Carolina                 -           2/21/89            31.5
Charleston, South Carolina                   -           2/21/89            31.5
Aiken, South Carolina                        -           3/14/89            31.5
Des Moines, Iowa (2)                       1989           8/1/89            31.5
Milwaukee, Wisconsin (2)                     -            8/2/89            31.5
North Augusta, South Carolina                -          12/29/89            31.5
Charleston, South Carolina                   -          12/29/89            31.5
Martinez, Georgia                            -          12/29/89            31.5
Grand Forks, North Dakota                    -          12/28/89            31.5
Phoenix, Arizona                             -           1/1/90             31.5
Ogden, Utah                                  -           1/31/90            31.5
Fond du Lac, Wisconsin                       -           1/5/90             31.5
Twin Falls, Idaho (2)                        -           3/21/90            31.5
Columbus, Ohio                               -           6/1/90             31.5
</TABLE>

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

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

        (3) 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.

                                       50

<PAGE>

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

             SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

                                DECEMBER 31, 2002

        (B) RECONCILIATION OF "REAL ESTATE AND ACCUMULATED DEPRECIATION":

<TABLE>
<CAPTION>
                                          YEAR ENDED     YEAR ENDED                                      YEAR ENDED     YEAR ENDED
                                         DECEMBER 31,   DECEMBER 31,                                    DECEMBER 31,   DECEMBER 31,
      INVESTMENT IN REAL ESTATE              2002           2001          ACCUMULATED DEPRECIATION          2002          2001
--------------------------------------   ------------   ------------   ------------------------------   ------------   ------------
<S>                                      <C>            <C>            <C>                              <C>            <C>
Balance at beginning of year             $ 18,857,713   $ 19,201,059   Balance at beginning of year     $  5,185,160   $  5,025,202

Additions                                           0              0   Additions charged to costs and
                                                                       expenses                              324,506        344,401
Deletions:

South Milwaukee, WI property                  (98,000)             0   Deletion due to South
written-down (1)                                                       Milwaukee, WI property held
                                                                       for sale                             (260,096)             0

South Milwaukee, WI property
held for sale (2)                            (710,032)             0   Deletion due to sale of
                                                                       Hartford, WI property                (216,503)             0

Sale of Hartford, WI property (3)            (686,563)             0

                                                                       Deletion due to Phoenix, AZ
Phoenix, AZ building and                                               building and improvements
improvements disposition                            0       (341,157)  disposition                                 0       (184,443)
                                                                                                        ------------   ------------

Augusta, GA land disposition                        0         (2,189)
                                         ------------   ------------

Balance at end of year                   $ 17,363,118   $ 18,857,713   Balance at end of year           $  5,033,067   $  5,185,160
                                         ============   ============                                    ============   ============
</TABLE>

(1) This property was written-down to its estimated fair value of $450,000 at
September 30, 2002.

(2) This property was reclassified as held for sale in the Fourth Quarter of
2002 as a contract was executed for the anticipated sale of the property in the
First Quarter of 2003.

(3) This property was sold in October 2002.

                                       51

<PAGE>

                                   SIGNATURES

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

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

By:     The Provo Group, Inc., General Partner

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

Date:   May 15, 2003

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:   May 15, 2003

                                       52