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FORM 10-Q



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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



(Mark One)

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



For the quarterly period ended September 30, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|- | -------------------------------------------------------------------

EXCHANGE ACT OF 1934



For the transition period from  to



Commission file number 0-17686



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

(Exact name of
registrant as specified in its charter)



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



1100 Main Street,
Suite 1830, Kansas City, Missouri 64105

(Address of principal executive offices, including zip code)



(816) 421-7444

(Registrants telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:



None



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



Limited Partnership Interests



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



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



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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements



DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



CONDENSED BALANCE SHEETS



September 30, 2005 and December 31, 2004



ASSETS



(Unaudited)



|                                                |  |                    |            |   |                   |   |            |  
|----------------------------------------------- |  | ------------------ | ---------- | - | ----------------- | - | ---------- | -
|                                                |  | September 30, 2005 |            |   | December 31, 2004 |  
|INVESTMENT PROPERTIES AND EQUIPMENT:(Note 3)    |  |                    |            |   |                   |   |            |  
|                                                |  |                   
|Land                                            |  | $                  | 4,970,156  |   |                   | $ | 5,632,736  |  
|Buildings                                       |  |                    | 8,419,840  |   |                   |   | 8,899,963  |  
|Equipment                                       |  |                    | 431,143    |   |                   |   | 431,143    |  
|Accumulated depreciation                        |  |                    | (5,060,057 | ) |                   |   | (5,169,432 | )
|                                                |  |                    |            |   |                   |   |            |  
|Net investment properties and equipment         |  |                    | 8,761,082  |   |                   |   | 9,794,410  |  
|                                                |  |                    |            |   |                   |   |            |  
|OTHER ASSETS:                                   |  |                    |            |   |                   |   |            |  
|                                                |  |                   
|Cash and cash equivalents                       |  |                    | 791,134    |   |                   |   | 684,586    |  
|Property held for sale (Note 1)                 |  |                    | 867,559    |   |                   |   | 0          |  
|Property tax cash escrow                        |  |                    | 25,903     |   |                   |   | 8,322      |  
|Cash held in PMA Indemnification Trust (Note 8) |  |                    | 395,163    |   |                   |   | 387,387    |  
|Rents and other receivables                     |  |                    | 193,041    |   |                   |   | 508,164    |  
|Property tax receivable                         |  |                    | 17,404     |   |                   |   | 5,168      |  
|Deferred rent receivable                        |  |                    | 99,715     |   |                   |   | 104,355    |  
|Prepaid fees                                    |  |                    | 22,457     |   |                   |   | 19,183     |  
|Prepaid insurance                               |  |                    | 3,203      |   |                   |   | 32,387     |  
|Deferred charges                                |  |                    | 250,597    |   |                   |   | 260,192    |  
|                                                |  |                    |            |   |                   |   |            |  
|Total other assets                              |  |                    | 2,666,176  |   |                   |   | 2,009,744  |  
|                                                |  |                    |            |   |                   |   |            |  
|Total assets                                    |  | $                  | 11,427,258 |   |                   | $ | 11,804,154 |  
|                                                |  |                    |            |   |                   |   |            |  



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



2



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



CONDENSED BALANCE SHEETS



SEPTEMBER 30, 2005 and December 31, 2004



LIABILITIES AND PARTNERS CAPITAL

(Unaudited)



|                                                         |  |                    |             |   |                   |   |             |  
|-------------------------------------------------------- |  | ------------------ | ----------- | - | ----------------- | - | ----------- | -
|                                                         |  | September 30, 2005 |             |   | December 31, 2004 |  
|LIABILITIES:                                             |  |                    |             |   |                   |   |             |  
|Accounts payable and accrued expenses                    |  | $                  | 58,914      |   |                   | $ | 63,366      |  
|Property taxes payable                                   |  |                    | 33,103      |   |                   |   | 48,310      |  
|Income taxes payable                                     |  |                    | 21,000      |   |                   |   | 0           |  
|Due to General Partner                                   |  |                    | 2,182       |   |                   |   | 2,653       |  
|Security deposits                                        |  |                    | 114,585     |   |                   |   | 114,585     |  
|Unearned rental income                                   |  |                    | 36,380      |   |                   |   | 37,672      |  
|                                                         |  |                    |             |   |                   |   |             |  
|Total liabilities                                        |  |                    | 266,164     |   |                   |   | 266,586     |  
|                                                         |  |                    |             |   |                   |   |             |  
|CONTINGENT LIABILITIES: (Note 7)                         |  |                    |             |   |                   |   |             |  
|                                                         |  |                   
|PARTNERS CAPITAL: (Notes 1, 4 and 9)                    |  |                    |             |   |                   |   |             |  
|Current General Partner                                  |  |                    |             |   |                   |   |             |  
|Cumulative net income                                    |  |                    | 230,521     |   |                   |   | 221,299     |  
|Cumulative cash distributions                            |  |                    | (94,863     | ) |                   |   | (91,175     | )
|                                                         |  |                    |             |   |                   |   |             |  
|                                                         |  |                    | 135,658     |   |                   |   | 130,124     |  
|                                                         |  |                    |             |   |                   |   |             |  
|Limited Partners (46,280.3 interests outstanding)        |  |                    |             |   |                   |   |             |  
|Capital contributions, net of offering costs             |  |                    | 39,358,468  |   |                   |   | 39,358,468  |  
|Cumulative net income                                    |  |                    | 29187,465   |   |                   |   | 28,274,473  |  
|Cumulative cash distributions                            |  |                    | (56,680,268 | ) |                   |   | (55,385,268 | )
|Reallocation of former general partners deficit capital |  |                    | (840,229    | ) |                   |   | (840,229    | )
|                                                         |  |                    |             |   |                   |   |             |  
|                                                         |  |                    | 11,025,436  |   |                   |   | 11,407,444  |  
|                                                         |  |                    |             |   |                   |   |             |  
|Total partners capital                                  |  |                    | 11,161,094  |   |                   |   | 11,537,568  |  
|                                                         |  |                    |             |   |                   |   |             |  
|Total liabilities and partners capital                  |  | $                  | 11,427,258  |   |                   | $ | 11,804,154  |  
|                                                         |  |                    |             |   |                   |   |             |  



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



3



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



CONDENSED STATEMENTS OF INCOME



For the Three and Nine Month Periods Ended September 30, 2005 and 2004



|                                                                           |  |                                 |         |                                 |   |         |  |      |           |  |   |          
|-------------------------------------------------------------------------- |  | ------------------------------- | ------- | ------------------------------- | - | ------- |  | ---- | --------- |  | - | ---------
|                                                                           |  | Three Months endedSeptember 30, |         | Nine Months ended September 30,
|                                                                           |  | 2005                            |         | 2004                            |   | 2005    |  | 2004
|OPERATING REVENUES:                                                        |  |                                 |         |                                 |   |         |  |      |           |  |   |          
|Rental income (Note 5)                                                     |  | $                               | 560,222 |                                 | $ | 570,660 |  | $    | 1,367,944 |  | $ | 1,393,386
|Property tax recoveries (Note 3)                                           |  |                                 | 6,535   |                                 |   | 48,685  |  |      | 34,820    |  |   | 123,685  
|                                                                           |  |                                 |         |                                 |   |         |  |      |           |  |   |          
|TOTAL OPERATING REVENUES                                                   |  |                                 | 566,757 |                                 |   | 619,345 |  |      | 1,402,764 |  | $ | 1,517,071
|                                                                           |  |                                 |         |                                 |   |         |  |      |           |  |   |          
|OPERATING EXPENSES                                                         |  |                                 |         |                                 |   |         |  |      |           |  |   |          
|Partnership management fees (Note 6)                                       |  |                                 | 53,126  |                                 |   | 51,730  |  |      | 158,431   |  |   | 154,419  
|Restoration fees (Note 6)                                                  |  |                                 | 124     |                                 |   | 134     |  |      | 395       |  |   | 403      
|Insurance                                                                  |  |                                 | 9,728   |                                 |   | 9,580   |  |      | 29,184    |  |   | 30,351   
|General and administrative                                                 |  |                                 | 35,180  |                                 |   | 10,489  |  |      | 91,105    |  |   | 70,419   
|Advisory Board fees and expenses                                           |  |                                 | 3,500   |                                 |   | 3,500   |  |      | 10,500    |  |   | 10,500   
|Professional services                                                      |  |                                 | 40,615  |                                 |   | 45,971  |  |      | 125,503   |  |   | 129,815  
|Maintenance and repair expenses                                            |  |                                 | 780     |                                 |   | 705     |  |      | 1,440     |  |   | 3,427    
|Property taxes                                                             |  |                                 | 0       |                                 |   | 10,200  |  |      | 0         |  |   | 61,670   
|Other property expenses                                                    |  |                                 | 820     |                                 |   | 820     |  |      | 820       |  |   | 4,590    
|Depreciation                                                               |  |                                 | 62,297  |                                 |   | 62,297  |  |      | 186,876   |  |   | 186,876  
|Amortization                                                               |  |                                 | 3,198   |                                 |   | 3,198   |  |      | 9,595     |  |   | 9,595    
|                                                                           |  |                                 |         |                                 |   |         |  |      |           |  |   |          
|TOTAL OPERATING EXPENSES                                                   |  |                                 | 209,363 |                                 |   | 198,619 |  |      | 613,849   |  |   | 662,065  
|                                                                           |  |                                 |         |                                 |   |         |  |      |           |  |   |          
|OTHER INCOME                                                               |  |                                 |         |                                 |   |         |  |      |           |  |   |          
|Interest income                                                            |  |                                 | 4,705   |                                 |   | 3,229   |  |      | 11,984    |  |   | 7,695    
|Bankruptcy claim                                                           |  |                                 | 0       |                                 |   | 0       |  |      | 0         |  |   | 24,271   
|Recovery of amounts previously written off (Note 2)                        |  |                                 | 3,107   |                                 |   | 3,357   |  |      | 9,865     |  |   | 10,071   
|Other income (Note 10)                                                     |  |                                 | 0       |                                 |   | 305     |  |      | 0         |  |   | 609      
|                                                                           |  |                                 |         |                                 |   |         |  |      |           |  |   |          
|TOTAL OTHER INCOME                                                         |  |                                 | 7,812   |                                 |   | 6,891   |  |      | 21,849    |  |   | 42,646   
|                                                                           |  |                                 |         |                                 |   |         |  |      |           |  |   |          
|INCOME FROM CONTINUING OPERATIONS                                          |  |                                 | 365,206 |                                 |   | 427,617 |  |      | 810,764   |  |   | 897,652  
|INCOME FROM DISCONTINUED OPERATIONS (Note 1)                               |  |                                 | 67,095  |                                 |   | 72,709  |  |      | 111,450   |  |   | 345,114  
|                                                                           |  |                                 |         |                                 |   |         |  |      |           |  |   |          
|NET INCOME                                                                 |  | $                               | 432,301 |                                 | $ | 500,326 |  | $    | 922,214   |  | $ | 1,242,766
|                                                                           |  |                                 |         |                                 |   |         |  |      |           |  |   |          
|NET INCOME- CURRENT GENERAL PARTNER                                        |  | $                               | 4,323   |                                 | $ | 5,003   |  | $    | 9,222     |  | $ | 12,428   
|NET INCOME- LIMITED PARTNERS                                               |  |                                 | 427,978 |                                 |   | 495,323 |  |      | 912,992   |  |   | 1,230,338
|                                                                           |  |                                 |         |                                 |   |         |  |      |           |  |   |          
|                                                                           |  | $                               | 432,301 |                                 | $ | 500,326 |  | $    | 922,214   |  | $ | 1,242,766
|                                                                           |  |                                 |         |                                 |   |         |  |      |           |  |   |          
|PER LIMITED PARTNERSHIP INTEREST, Based on 46,280.3 Interests outstanding: |  |                                 |         |                                 |   |         |  |      |           |  |   |          
|INCOME FROM CONTINUING OPERATIONS                                          |  | $                               | 7.81    |                                 | $ | 9.15    |  | $    | 17.34     |  | $ | 19.20    
|INCOME FROM DISCONTINUED OPERATIONS                                        |  |                                 | 1.44    |                                 |   | 1.55    |  |      | 2.39      |  |   | 7.38     
|                                                                           |  |                                 |         |                                 |   |         |  |      |           |  |   |          
|NET INCOME PER LIMITED PARTNERSHIP INTEREST                                |  | $                               | 9.25    |                                 | $ | 10.70   |  | $    | 19.73     |  | $ | 26.58    
|                                                                           |  |                                 |         |                                 |   |         |  |      |           |  |   |          



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



4



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



CONDENSED STATEMENTS OF CASH FLOWS



For the Nine Month Periods Ended September 30, 2005 and 2004

(Unaudited)



|                                                                                                                |  |      |            |   |      |   |            |  
|--------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                |  | 2005 |            |   | 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                           |  |      |            |   |      |   |            |  
|Net income                                                                                                      |  | $    | 922,214    |   |      | $ | 1,242,766  |  
|Adjustments to reconcile net income to net cash flows from operating activities - Depreciation and amortization |  |      | 205,665    |   |      |   | 205,665    |  
|Recovery of amounts previously written off                                                                      |  |      | (9,865     | ) |      |   | (10,071    | )
|Gain on sale of investment property                                                                             |  |      | 0          |   |      |   | (215,554   | )
|Provision for non-collectible rents and other receivables                                                       |  |      | 0          |   |      |   | 15,179     |  
|Interest applied to PMA Indemnification Trust account                                                           |  |      | (7,776     | ) |      |   | (3,426     | )
|Changes in operating accounts:                                                                                  |  |      |            |   |      |   |            |  
|(Increase) in property tax cash escrow                                                                          |  |      | (17,581    | ) |      |   | (20,163    | )
|Decrease in rents and other receivables                                                                         |  |      | 284,822    |   |      |   | 246,086    |  
|Decrease (Increase) in prepaid insurance                                                                        |  |      | 29,184     |   |      |   | (126       | )
|(Increase) in prepaid fees                                                                                      |  |      | (3,274     | ) |      |   | 0          |  
|Decrease (Increase) in deferred rent receivable                                                                 |  |      | 4,640      |   |      |   | (610       | )
|(Increase) in property tax receivable                                                                           |  |      | (12,236    | ) |      |   | (23,325    | )
|(Decrease) Increase in due to General Partner                                                                   |  |      | (471       | ) |      |   | 470        |  
|(Decrease) in accounts payable and accrued expenses                                                             |  |      | (4,452     | ) |      |   | (22,364    | )
|(Decrease) in property taxes payable                                                                            |  |      | (15,207    | ) |      |   | (28,063    | )
|Increase in income taxes payable                                                                                |  |      | 21,000     |   |      |   | 0          |  
|(Decrease) in security deposits                                                                                 |  |      | 0          |   |      |   | (15,000    | )
|(Decrease) in unearned rental income                                                                            |  |      | (1,292     | ) |      |   | (3,023     | )
|                                                                                                                |  |      |            |   |      |   |            |  
|Net cash flows from operating activities                                                                        |  |      | 1,395,371  |   |      |   | 1,368,441  |  
|                                                                                                                |  |      |            |   |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                           |  |      |            |   |      |   |            |  
|Net proceeds from sale of investment property                                                                   |  |      | 0          |   |      |   | 611,367    |  
|Recoveries from former General Partner affiliates                                                               |  |      | 9,865      |   |      |   | 10,071     |  
|                                                                                                                |  |      |            |   |      |   |            |  
|Net cash flows from investing activities                                                                        |  |      | 9,865      |   |      |   | 621,438    |  
|                                                                                                                |  |      |            |   |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                           |  |      |            |   |      |   |            |  
|Cash distributions to Limited Partners                                                                          |  |      | (1,295,000 | ) |      |   | (1,825,000 | )
|Cash distributions to current General Partner                                                                   |  |      | (3,688     | ) |      |   | (4,971     | )
|                                                                                                                |  |      |            |   |      |   |            |  
|Net cash flows from financing activities                                                                        |  |      | (1,298,688 | ) |      |   | (1,829,971 | )
|                                                                                                                |  |      |            |   |      |   |            |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                                                       |  |      | 106,548    |   |      |   | 159,908    |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                                |  |      | 684,586    |   |      |   | 673,142    |  
|                                                                                                                |  |      |            |   |      |   |            |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                                      |  | $    | 791,134    |   |      | $ | 833,050    |  
|                                                                                                                |  |      |            |   |      |   |            |  



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



5



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



NOTES TO CONDENSED FINANCIAL STATEMENTS



These unaudited interim condensed financial statements should be read in conjunction with
DiVall Insured Income Properties 2 Limited Partnerships (the Partnership) 2004 annual audited amended financial statements within Form 10-K/A.



These unaudited condensed financial statements include all adjustments, which are in the opinion of management, necessary to present a fair statement of the
Partnerships financial position as of September 30, 2005, and the statements of income for the three and nine month periods ended September 30, 2005 and 2004, and cash flows for the nine month periods ended September 30, 2005
and 2004.



1. ORGANIZATION AND
SIGNIFICANT ACCOUNTING POLICIES:



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



The Partnership is
currently engaged in the business of owning and operating its investment portfolio of commercial real estate properties (the Properties). The Properties are leased on a triple net basis to, and operated by, franchisors or franchisees of
national, regional, and local retail chains under long-term leases. The lessees are primarily fast food, family style, and casual/theme restaurants, but also include a video rental store and a pre-school. At September 30, 2005, the Partnership
owned 20 properties.



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



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



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



Depreciation of the properties and improvements are provided on a straight-line basis over 31.5 years, which are the estimated useful lives of the buildings and improvements. Equipment is depreciated on a
straight-line basis over the estimated useful lives of 5 to 7 years. Deferred charges represent leasing commissions paid when properties are leased and upon the negotiated extension of a lease. Leasing commissions are capitalized and amortized over
the life of the lease.



6



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



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



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



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



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



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



The Partnership recognized income from discontinued operations of $67,000 and $73,000 in the three month periods ending September 30,
2005 and 2004, respectively. During the nine month periods ended September 30, 2005 and 2004, the Partnership recognized income from discontinued operations of approximately $111,000 and $345,000, respectively. The 2005 and 2004 income from
discontinued operations is attributable to the reclassification of the Hooters restaurant property as property held for sale in the Third Quarter of 2005. The 2004 income from discontinued operations is also attributable to the
reclassification of the Miami Subs restaurant property to property held for sale in the Fourth Quarter of 2003, and the subsequent sale of the property in June 2004. A Third Quarter of 2004 net gain on the sale of a parcel of land located adjacent
to the former Twin Falls, ID property of $5,000 (the land had no recorded land value) is also included in the 2004 income from discontinued operations.



7



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The components of discontinued operations included in the condensed balance sheets as of September 30, 2005 and
December 31, 2004 are outlined below.



|                            |  |      |          |   |      |   |  
|--------------------------- |  | ---- | -------- | - | ---- | - | -
|                            |  | 2005 |          |   | 2004
|Balance Sheet:              |  |      |          |   |      |   |  
|Rents and other receivables |  | $    | 30,301   |   |      | $ | 0
|Land                        |  |      | 662,580  |   |      |   | 0
|Buildings                   |  |      | 480,123  |   |      |   | 0
|Accumulated depreciation    |  |      | (305,445 | ) |      |   | 0
|                            |  |      |          |   |      |   |  
|Property held for sale      |  | $    | 867,559  |   |      | $ | 0
|                            |  |      |          |   |      |   |  



The components of discontinued
operations included in the condensed statements of income for the three and nine month periods ended September 30, 2005 and 2004, are outlined below.



|                                                          |  |                                            |        |                                            |   |                                           |  |                                           |         |  |   |        
|--------------------------------------------------------- |  | ------------------------------------------ | ------ | ------------------------------------------ | - | ----------------------------------------- |  | ----------------------------------------- | ------- |  | - | -------
|                                                          |  | Three month Period ended September 30,2005 |        | Three month Period ended September 30,2004 |   | Nine month Period ended September 30,2005 |  | Nine month Period ended September 30,2004
|Statements of Income:                                     |  |                                            |        |                                            |   |                                           |  |                                           |         |  |   |        
|Revenues:                                                 |  |                                            |        |                                            |   |                                           |  |                                           |         |  |   |        
|Rental Income                                             |  | $                                          | 70,160 |                                            | $ | 70,774                                    |  | $                                         | 120,644 |  | $ | 153,933
|                                                          |  |                                            |        |                                            |   |                                           |  |                                           |         |  |   |        
|Total Revenues                                            |  |                                            | 70,160 |                                            |   | 70,774                                    |  |                                           | 120,644 |  |   | 153,933
|                                                          |  |                                            |        |                                            |   |                                           |  |                                           |         |  |   |        
|Expenses:                                                 |  |                                            |        |                                            |   |                                           |  |                                           |         |  |   |        
|Depreciation                                              |  |                                            | 3,065  |                                            |   | 3,065                                     |  |                                           | 9,194   |  |   | 9,194  
|                                                          |  |                                            |        |                                            |   |                                           |  |                                           |         |  |   |        
|Provision for non-collectible rents and other receivables |  |                                            | 0      |                                            |   | 0                                         |  |                                           | 0       |  |   | 15,179 
|                                                          |  |                                            |        |                                            |   |                                           |  |                                           |         |  |   |        
|Total Expenses                                            |  |                                            | 3,065  |                                            |   | 3,065                                     |  |                                           | 9,194   |  |   | 24,373 
|                                                          |  |                                            |        |                                            |   |                                           |  |                                           |         |  |   |        
|Net Gain on Sale of Properties                            |  |                                            | 0      |                                            |   | 5,000                                     |  |                                           | 0       |  |   | 215,554
|                                                          |  |                                            |        |                                            |   |                                           |  |                                           |         |  |   |        
|Income from Discontinued Operations                       |  | $                                          | 67,095 |                                            | $ | 72,709                                    |  | $                                         | 111,450 |  | $ | 345,114
|                                                          |  |                                            |        |                                            |   |                                           |  |                                           |         |  |   |        



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 2001 and 2003, consent solicitations were circulated (the 2001 and
2003 Consents), which if approved would have authorized the sale of the Partnerships assets and dissolution of the Partnership. A majority of the Limited Partners did not vote in favor of either the 2001 or 2003 Consents. Therefore, the
Partnership continued to operate as a going concern. Another consent solicitation was circulated during the Second Quarter of 2005, which if approved would have authorized the sale of the Partnerships assets and dissolution of the Partnership
(the 2005 Consent). A majority of the Limited Partners did not vote in favor of the 2005 Consent. Therefore, the Partnership continues to operate as a going concern.



8



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No provision for federal income taxes has been made, as any liability for such taxes would be that of the individual
partners rather than the Partnership. At December 31, 2004, the tax basis of the Partnerships assets exceeded the amounts reported in the 2004 financial statements by approximately $6,959,000.



2. REGULATORY INVESTIGATION:



A preliminary investigation during 1992 by the Office of Commissioner of Securities for the
State of Wisconsin and the Securities and Exchange Commission (the Investigation) revealed that during at least the four years ended December 31, 1992, the former general partners of the Partnership, Gary J. DiVall
(DiVall) and Paul E. Magnuson (Magnuson) had transferred substantial cash assets of the Partnership and two affiliated publicly registered partnerships, DiVall Insured Income Fund Limited Partnership (DiVall 1)
and DiVall Income Properties 3 Limited Partnership (DiVall 3) (collectively the Partnerships) to various other entities previously sponsored by or otherwise affiliated with DiVall and Magnuson. The unauthorized transfers were
in violation of the respective Partnership Agreements and resulted, in part, from material weaknesses in the internal control systems 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 September 30, 2005, $5,846,000 of recoveries have been received which exceeded the original estimate of $3 million. As a result,
from January 1, 1996 through September 30, 2005, the Partnership has recognized a total of $1,158,000 as recovery of amounts previously written off in the statements of income, which represents its share of the excess recovery. The current
General Partner continues to pursue recoveries of the misappropriated funds, however, no further significant recoveries are anticipated.



3. INVESTMENT PROPERTIES:



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



As of September 30,
2005, the Partnership owned 18 fully constructed fast-food restaurants, a video store, and a preschool. The 20 properties are composed of the following: ten (10) Wendys restaurants, one (1) Dennys restaurant, one
(1) Applebees restaurant, one (1) Popeyes Famous Fried Chicken restaurant, one (1) Hooters restaurant, one (1) Kentucky Fried Chicken restaurant, (1) Chinese Super Buffet restaurant, one
(1) Blockbuster Video store, one (1) Sunrise Preschool, one (1) Panda Buffet Restaurant, and one (1) Daytonas- All Sports Café. The 20 properties are located in a total of ten (10) states.



9



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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.



The Partnership recognized income from discontinued
operations of $67,000 and $73,000 in the three month periods ending September 30, 2005 and 2004, respectively. During the nine month periods ended September 30, 2005 and 2004, the Partnership recognized income from discontinued operations
of approximately $111,000 and $345,000, respectively. The 2005 and 2004 income from discontinued operations is attributable to the reclassification of the Hooters restaurant property as property held for sale in the Third Quarter of 2005. The
2004 income from discontinued operations is also attributable to the reclassification of the Miami Subs restaurant property to property held for sale in the Fourth Quarter of 2003, and the subsequent sale of the property in June 2004. A Third
Quarter of 2004 net gain on the sale of a parcel of land located adjacent to the former Twin Falls, ID property of $5,000 (the land had no recorded land value) is also included in the 2004 income from discontinued operations.



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



Hooters- Richland Hills, TX



A sales contract was
executed in October of 2005 for the sale of the property in the Fourth Quarter of 2005 at a sales price of $1,575,000. The net book value of the property at September 30, 2005, classified as property held for sale, was approximately $868,000,
which included $663,000 related to land, $175,000 related to buildings and equipment, and $30,000 related to rents and other receivables.



Popeyes- Park Forest, IL



Per the terms of the original lease for the Popeyes location, the tenant (Popeyes) was (i) to timely pay as they come due all taxes charged
to the property, and (ii) required to pay percentage rents equal to 8% of gross sales in excess of $619,449. Popeyes had accrued approximately $123,000 of delinquent percentage rent payments in relation to its sales in 2001 through 2003.
(Due to the uncertainty of collection, $104,000 was fully reserved in the Fourth Quarter of 2003, and $19,000 was not recognized as revenue in the Fourth Quarter of 2003 for financial statement purposes.) In addition, the tenant failed to pay the
2002 property taxes of approximately $40,000, which were due and payable to Cook County, Illinois in 2003, as well as approximately $5,000 in assessed late fees. In the Fourth Quarter of 2003, the Partnership accrued approximately $86,000 in
property taxes, which included the 2002 property taxes and associated late fees, as well as the estimated 2003 property taxes that were to be due in 2004. The 2002 property taxes and late fees were paid by the Partnership in January 2004 and the
first installment for the 2003 taxes was paid in February 2004. In March 2004, Management learned that the tenant had also failed to pay the $31,000 second installment of its 2001 property taxes. The Partnership paid the 2001 delinquent property
taxes, as well as approximately $10,000 in assessed late fees, in March 2004. The Partnership was reimbursed in full for the approximately $107,000 in delinquent property taxes paid by the Partnership on Popeyes behalf (the Partnership
received $25,000 in each April, May, June, and July 2004 and received the final payment of approximately $7,000 in September 2004). The second installment related to 2003 was paid by the Partnership in October 2004 through escrow payments received
by the Partnership from Popeyes in the Third and Fourth Quarters of 2004.



A Release and Settlement Agreement was executed with Popeyes in November 2004. In settlement of all claims and disputes the following significant items were agreed to: (i) Popeyes is to make monthly escrow property tax
payments applicable to 2004 and for future property taxes due throughout the



10



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remaining lease term obligation; (ii) Popeyes gross sales breakpoint was increased to $1,000,000 and
therefore, percentage rent shall be an amount equal to 8% of gross sales in excess of $1,000,000, and (iii) Popeyes delinquent percentage rents were waived. The restructured lease brings Popeyes occupancy costs more in line with
existing market conditions.



Due to past defaults, Popeyes 2004 estimated
property taxes were prorated and accrued on a monthly basis by the Partnership. In September 2004, the Partnership began billing Popeyes monthly property tax escrow charges. Escrow payments of approximately $8,000 and $40,000 were received by
the Partnership in the Fourth Quarter of 2004, and the First through Third Quarters of 2005, respectively. These payments resulted in: (i) full coverage of Popeyes 2004 first installment of property taxes paid by the Partnership to the
taxing authority in February 2005; and (ii) a September 30, 2005 tax escrow cash balance of approximately $26,000 towards the 2004 second installment of approximately $28,000 which was paid by the Partnership in October of 2005.



During 2004, property tax escrow charges applicable to 2004 property taxes
were reflected in the financial statements as escrow payments were actually received, and were recorded as a reversal of 2004 property tax expense equal to the amount of payment received. During 2005, property tax escrow charges applicable to
property taxes previously accrued and expensed in 2004, were reflected in the financial statements as escrow payments were actually received, and were recorded as a property tax recovery income equal to the amount of payment received. Property tax
recovery income during 2005 has totaled approximately $35,000. The 2005 estimated property taxes are not being prorated and accrued on a monthly basis by the Partnership.



Daytonas- All Sports Café- Des Moines, IA



In the Second Quarter of 2005, Daytonas was in default of its 2004 percentage rent
billing of approximately $9,500. Management entered into an agreement with the tenant to accept monthly installments toward the payment of the obligation. As of September 30, 2005 the Partnership has received $7,000 toward the tenants
percentage rent billing.



In July 2004, the Partnership paid Daytonas-
All Sports Cafés delinquent 2002 property taxes balance of approximately $15,000. Daytonas reimbursed the Partnership $5,000 in each of August, September and October of 2004. In the Third Quarter of 2004, due to the property tax
default, Management requested that Daytonas escrow with the Partnership their 2003 property tax installments which were to be due in the Fourth Quarter of 2004 and the First Quarter of 2005. Escrow payments of approximately $800 were held by
the Partnership at December 31, 2004. Daytonas met its final property tax escrow requirement in February 2005 and the Partnership paid the property tax installment in March 2005.



In September 2005, the Partnership paid Daytonas first installment of its 2004 property
taxes, which amounted to approximately $10,000. Management has discussed reimbursement with Daytonas and intends to pursue payment collection procedures, if necessary, to collect the $10,000 plus interest from the tenant. In addition,
Management has requested that Daytonas escrow its future property taxes liabilities with the Partnership on a monthly basis.



Former Miami Subs- Palm Beach, FL Property



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



11



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



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



Former Twin Falls, ID property



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



Other Investment in Properties Information



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



At September 30, 2005 the owners of the Panda Buffet property have an option to purchase the property at a price, which (i) exceeds the original cost of the
property less accumulated depreciation, and (ii) is not less than the fair market value of the property at the time the option was granted. The General Partner is not aware of any unfavorable purchase options in relation to the original
cost or fair market value of the property at the time the option was granted, contained in any of the Partnerships existing leases.



4. PARTNERSHIP AGREEMENT:



The Partnership Agreement, prior to an amendment effective May 26, 1993, provided that, for financial reporting and income tax purposes, net profits or losses from
operations were allocated 90% to the Limited Partners and 10% to the general partners. The Partnership Agreement also provided for quarterly cash distributions from Net Cash Receipts, as defined, within 60 days after the last day of the first full
calendar quarter following the date of release of the subscription funds from escrow, and each calendar quarter thereafter, in which such funds were available for distribution with respect to such quarter. Such distributions were to be made 90% to
Limited Partners and 10% to the former general partners, provided, however, that quarterly distributions were to be cumulative and were not to be made to the former general 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.



12



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Net Proceeds, as originally defined, were to be distributed as follows: (a) to the Limited Partners, an amount equal
to 100% of their Adjusted Original Capital; (b) then, to the Limited Partners, an amount necessary to provide each Limited Partner a Liquidation Preference equal to a 13.5% per annum, cumulative simple return on Adjusted Original Capital
from the Return Calculation date including in the calculation of such return all prior distributions of Net Cash Receipts and any prior distributions of Net Proceeds under this clause; and (c) then, to Limited Partners, 90% and to the General
Partners, 10%, of the remaining Net Proceeds available for distribution.



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



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



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



Effective June 1, 1993, the Partnership Agreement was amended to (i) change the definition of Distribution Quarter to be consistent with calendar
quarters, and (ii) change the distribution provisions to subordinate the General Partners share of distributions from Net Cash Receipts and Net Proceeds, except 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.



13



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5. LEASES:



Original lease terms for the majority of the investment properties are generally 10 - 20 years from their inception. The leases generally provide for minimum rents and
additional rents based upon percentages of gross sales in excess of specified sales 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 September 30, 2005, aggregate minimum operating lease payments to
be received under the leases for the Partnerships properties, excluding property held for sale, are as follows:



|                         |  |   |           
|------------------------ |  | - | ----------
|Year ending December 31, |  |   |           
|2005                     |  | $ | 1,575,908 
|2006                     |  |   | 1,485,408 
|2007                     |  |   | 1,468,325 
|2008                     |  |   | 1,361,158 
|2009                     |  |   | 1,255,593 
|Thereafter               |  |   | 6,632,580 
|                         |  |   |           
|                         |  | $ | 13,778,792
|                         |  |   |           



Percentage rentals included in rental
income, excluding properties sold or held for sale in 2005 and 2004, for the nine months ended September 30, 2005 and 2004 were approximately $188,000 and $216,000.



Ten (10) of the properties are leased to Wencoast Restaurants, Inc. (Wencoast), a franchisee of Wendys
restaurants. Wencoast base rents (excluding properties sold or held for sale in 2005 and 2004) accounted for 54% of total operating base rents for 2004. For the nine month period ended September 30, 2005, Wencoast base rents accounted
for 54% of total operating base rents (excluding property held for sale in 2005). The audited financial statements for the periods ending December 28, 2003 and January 2, 2005 for Wencoast prepared by Thompson Dunavant, PLC, are attached
as Exhibit 99.1 to the December 31, 2004 Amended Annual Report 10-K/A. Such audited financial statements were prepared on behalf of Wencoast and may be considered relevant to an investor because Wencoast leases more than 20% of the
Partnerships properties, both by number and asset value.



6.
TRANSACTIONS WITH CURRENT GENERAL PARTNER AND ITS AFFILIATES:



The
current General Partner was to receive a management fee (Base Fee) for managing the three original affiliated Partnerships equal to 4% of gross receipts, subject to a minimum of $300,000 annually, and a maximum annual reimbursement for
office rent and related office overhead (Expense) of $25,000, as provided in the Permanent Manager Agreement (PMA). The Base Fee and the Expense reimbursement are subject to increases due to increases in the Consumer Price
Index. The current General Partner receives a Base Fee for managing the Partnership equal to 4% of gross receipts and the Partnership is only responsible for its allocable share of such minimum and maximum annual amounts as indicated above
(originally $159,000 minimum annual Base Fee and $13,250 Expense reimbursement). Effective March 1, 2005, the minimum annual Base Fee and the maximum Expense reimbursement



14



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increased by 2.67%, which represents the allowable annual Consumer Price Index adjustment per the PMA. Therefore, as of March 1, 2005, the minimum
monthly Base Fee paid by the Partnership was raised to $17,750 and the maximum monthly Expense reimbursement was raised to $1,432.



For purposes of computing the 4% overall fee, gross receipts includes amounts recovered in connection with the misappropriation of assets by the former general partners
and their affiliates. TPG has received fees from the Partnership totaling $56,530 to date on the amounts recovered, which includes 2005 and 2004 fees of $134 and $537, respectively. The fees received from the Partnership on the amounts recovered
reduce the 4% minimum fee by that same amount.



Amounts paid and/or accrued to
the current General Partner and its affiliates for the three and nine month periods ended September 30, 2005 and 2004, are as follows:



|                                         |  |                                                              |        |                                                              |   |                                                             |  |                                                             |         |  |   |        
|---------------------------------------- |  | ------------------------------------------------------------ | ------ | ------------------------------------------------------------ | - | ----------------------------------------------------------- |  | ----------------------------------------------------------- | ------- |  | - | -------
|Current General Partner                  |  | Incurred for the Three Month Period ended September 30, 2005 |        | Incurred for the Three Month Period ended September 30, 2004 |   | Incurred for the Nine Month Period ended September 30, 2005 |  | Incurred for the Nine Month Period ended September 30, 2004
|Management fees                          |  | $                                                            | 53,126 |                                                              | $ | 51,730                                                      |  | $                                                           | 158,431 |  | $ | 154,419
|Restoration fees                         |  |                                                              | 124    |                                                              |   | 134                                                         |  |                                                             | 395     |  |   | 403    
|Overhead allowance                       |  |                                                              | 4,296  |                                                              |   | 4,184                                                       |  |                                                             | 12,814  |  |   | 12,491 
|Sales commissions                        |  |                                                              | 0      |                                                              |   | 0                                                           |  |                                                             | 0       |  |   | 19,500 
|Reimbursement for out-of-pocket expenses |  |                                                              | 2,388  |                                                              |   | 1,664                                                       |  |                                                             | 7,446   |  |   | 6,480  
|Cash distribution                        |  |                                                              | 1,813  |                                                              |   | 2,001                                                       |  |                                                             | 3,772   |  |   | 4,971  
|                                         |  |                                                              |        |                                                              |   |                                                             |  |                                                             |         |  |   |        
|                                         |  | $                                                            | 61,747 |                                                              | $ | 59,713                                                      |  | $                                                           | 182,858 |  | $ | 198,264
|                                         |  |                                                              |        |                                                              |   |                                                             |  |                                                             |         |  |   |        



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



8. PMA INDEMNIFICATION TRUST:



The PMA provides that the Permanent Manager will be indemnified from any claims or expenses arising out of or relating to the Permanent Manager serving in such capacity or as substitute general partner, so long as such claims do not arise
from fraudulent or criminal misconduct by the Permanent Manager. The



15



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PMA provides that the Partnership fund this indemnification obligation by establishing a reserve of up to $250,000 of Partnership assets which would not be
subject to the claims of the Partnerships creditors. An Indemnification Trust (Trust) serving such purposes has been established at United Missouri Bank, N.A. The corpus of the Trust has been fully funded with Partnership assets
since 1994. Funds are invested in U.S. Treasury securities. In addition, $145,163 of earnings has been credited to the Trust as of September 30, 2005. 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, 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:



DeDan bankruptcy



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



Phoenix Foods Preference Claim



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



16



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11. SUBSEQUENT EVENTS:



On November 15, 2005, the Partnership is scheduled to make distributions to the Limited Partners of $435,000 amounting to $9.40 per
Unit Interest.



Item 2. 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 September 30, 2005, were originally purchased at a price, including acquisition costs, of approximately $15,997,585.



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



As of September 30,
2005, the Partnership owned 18 fully constructed fast-food restaurants, a video store, and a preschool. The 20 properties are composed of the following: ten (10) Wendys restaurants, one (1) Dennys restaurant, one
(1) Applebees restaurant, one (1) Popeyes Famous Fried Chicken restaurant, one (1) Hooters restaurant, one (1) Kentucky Fried Chicken restaurant, (1) Chinese Super Buffet restaurant, one
(1) Blockbuster Video store, one (1) Sunrise Preschool, one (1) Panda Buffet Restaurant, and one (1) Daytonas- All Sports Café. The 20 properties are located in a total of ten (10) states.



Ten (10) of the twenty (20) properties are leased to Wencoast Restaurants, Inc.
(Wencoast). Since more than 20% of the Partnerships properties, both by asset value and number, are leased to a single tenant, the financial status of the tenant may be considered relevant to investors. At the
request of the Partnership, Wencoast provided it with copies of Wencoasts audited financial statements for the periods ended December 28, 2003 and January 2, 2005. Those audited financial statements are attached to the
December 31, 2004 Amended Annual Report 10-K/A as Exhibit 99.1. These financial statements were prepared by Wencoasts auditors. The Partnership has no rights to audit Wencoast and no right to dictate the form of the audited
financials provided by Wencoast. The Partnerships auditors have not audited the financial statements received from Wencoast. The Partnership has no reason to believe the Wencoast financial statements do not accurately reflect the
financial position of Wencoast.



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.



The Partnership recognized income from discontinued operations of $67,000 and $73,000 in the three month periods ending September 30, 2005 and 2004, respectively. During the nine month periods ended
September 30, 2005 and 2004, the Partnership recognized income from discontinued operations of approximately $111,000 and $345,000, respectively. The 2005 and 2004 income from discontinued operations is attributable to the reclassification of
the Hooters restaurant property as property held for sale in the Third Quarter of 2005. The 2004 income from discontinued operations is also attributable to the reclassification of the Miami Subs restaurant property to property held for sale
in the Fourth Quarter



17



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of 2003, and the subsequent sale of the property in June 2004. A Third Quarter of 2004 net gain on the sale of a parcel of land located adjacent to the
former Twin Falls, ID property of $5,000 (the land had no recorded land value) is also included in the 2004 income from discontinued operations. The following summarizes significant developments, by Property, for properties with such developments
(see comments in notes to condensed financial statements).



Hooters-
Richland Hills, TX



A sales contract was executed in October of 2005 for
the sale of the property in the Fourth Quarter of 2005 at a sales price of $1,575,000. The net book value of the property at September 30, 2005, classified as property held for sale, was approximately $868,000, which included $663,000 related
to land, $175,000 related to buildings and equipment, and $30,000 related to rents and other receivables.



Popeyes- Park Forest, IL



Per the
terms of the original lease for the Popeyes location, the tenant (Popeyes) was (i) to timely pay as they come due all taxes charged to the property, and (ii) required to pay percentage rents equal to 8% of gross
sales in excess of $619,449. Popeyes had accrued approximately $123,000 of delinquent percentage rent payments in relation to its sales in 2001 through 2003. (Due to the uncertainty of collection, $104,000 was fully reserved in the Fourth
Quarter of 2003, and $19,000 was not recognized as revenue in the Fourth Quarter of 2003 for financial statement purposes.) In addition, the tenant failed to pay the 2002 property taxes of approximately $40,000, which were due and payable to Cook
County, Illinois in 2003, as well as approximately $5,000 in assessed late fees. In the Fourth Quarter of 2003, the Partnership accrued approximately $86,000 in property taxes, which included the 2002 property taxes and associated late fees, as well
as the estimated 2003 property taxes that were to be due in 2004. The 2002 property taxes and late fees were paid by the Partnership in January 2004 and the first installment for the 2003 taxes was paid in February 2004. In March 2004, Management
learned that the tenant had also failed to pay the $31,000 second installment of its 2001 property taxes. The Partnership paid the 2001 delinquent property taxes, as well as approximately $10,000 in assessed late fees, in March 2004. The Partnership
was reimbursed in full for the approximately $107,000 in delinquent property taxes paid by the Partnership on Popeyes behalf (the Partnership received $25,000 in each April, May, June, and July 2004 and received the final payment of
approximately $7,000 in September 2004). The second installment related to 2003 was paid by the Partnership in October 2004 through escrow payments received by the Partnership from Popeyes in the Third and Fourth Quarters of 2004.



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



Due to past defaults, Popeyes 2004 estimated property taxes were prorated and accrued on a monthly basis by the Partnership. In September 2004, the Partnership
began billing Popeyes monthly property tax escrow charges. Escrow payments of approximately $8,000 and $40,000 were received by the Partnership in the Fourth Quarter of 2004, and the First through Third Quarters of 2005, respectively. These
payments resulted in: (i) full coverage of Popeyes 2004 first installment of property taxes paid by the Partnership to the taxing authority in February 2005; and (ii) a September 30, 2005 tax escrow cash balance of approximately
$26,000 towards the 2004 second installment of approximately $28,000 which was paid by the Partnership in October of 2005.



18



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During 2004, property tax escrow charges applicable to 2004 property taxes were reflected in the financial statements as
escrow payments were actually received, and were recorded as a reversal of 2004 property tax expense equal to the amount of payment received. During 2005, property tax escrow charges applicable to property taxes previously accrued and expensed in
2004, were reflected in the financial statements as escrow payments were actually received, and were recorded as a property tax recovery income equal to the amount of payment received. Property tax recovery income during 2005 has totaled
approximately $35,000. The 2005 estimated property taxes are not being prorated and accrued on a monthly basis by the Partnership.



Daytonas- All Sports Café - Des Moines, IA



In the Second Quarter of 2005, Daytonas was in default of its 2004 percentage rent billing of approximately $9,500. Management entered
into an agreement with the tenant to accept monthly installments toward the payment of the obligation. As of September 30, 2005 the Partnership has received $7,000 toward the tenants percentage rent billing.



In July 2004, the Partnership paid Daytonas- All Sports Cafés delinquent
2002 property taxes balance of approximately $15,000. Daytonas reimbursed the Partnership $5,000 in each of August, September and October of 2004. In the Third Quarter of 2004, due to the property tax default, Management requested that
Daytonas escrow with the Partnership their 2003 property tax installments which were to be due in the Fourth Quarter of 2004 and the First Quarter of 2005. Escrow payments of approximately $800 were held by the Partnership at December 31,
2004. Daytonas met its final property tax escrow requirement in February 2005 and the Partnership paid the property tax installment in March 2005.



In September 2005, the Partnership paid Daytonas first installment of its 2004 property taxes, which amounted to approximately $10,000. Management has discussed
reimbursement with Daytonas and intends to pursue formal collection procedures, if necessary, to collect the $10,000 plus interest from the tenant. In addition, Management has requested that Daytonas escrow its future property taxes
liabilities with the Partnership on a monthly basis.



Former Miami Subs- Palm Beach, FL Property



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



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



19



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



Former
Twin Falls, ID property



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



Other Investment in Properties Information



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



At September, 30, 2005 the owners of the Panda Buffet property have an option to purchase the property at a price, which (i) exceeds the original cost of the
property less accumulated depreciation and (ii) is not less than the fair market value of the property at the time the option was granted. The General Partner is not aware of any unfavorable purchase options in relation to the original
cost or fair market value of the property at the time the option was granted contained in any of the Partnerships existing leases.



Other Assets



Property held for sale, which is due to the classification of the Hooters restaurant property as held for sale in the Third Quarter of 2005, amounted to
approximately $868,000 at September 30, 2005, which included $663,000 related to land, $175,000 related to buildings and equipment, and $30,000 related to rents and other receivables.



Cash and cash equivalents, held by the Partnership, totaled approximately $791,000 at
September 30, 2005 compared to $685,000 at December 31, 2004. Cash of $435,000 is anticipated to be used to fund the Third Quarter 2005 distributions to Limited Partners in November 2005; cash of $59,000 is anticipated to be used for the
payment of 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 funding future liquidity and Limited
Partner distributions.



Property tax cash escrow amounted to approximately
$26,000 and $8,000 at September 30, 2005 and December 31, 2004, respectively. In September 2004, the Partnership began billing Popeyes monthly property tax escrow charges. Escrow payments of approximately $8,000, and $40,000, were
received by the Partnership in the Fourth Quarter of 2004 and in the First through Third Quarters of 2005, respectively. These payments resulted in: (i) full coverage of Popeyes 2004 first installment of property taxes paid by the
Partnership to the taxing authority in February 2005; and (ii) a September 30, 2005 tax



20



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escrow cash balance of approximately $26,000 towards the 2004 second installment of approximately $28,000 paid by the Partnership in October of 2005. The
Partnership has recorded approximately $35,000 of Popeyes 2005 tax escrow payments as property tax expense recoveries in the income statement, as the 2004 estimated property taxes had been prorated monthly and accrued by the Partnership during
2004. (For further discussion see Note 3- Investment Properties.)



The
Partnership established an Indemnification Trust (the Trust) during the Fourth Quarter of 1993, deposited $100,000 in the Trust during 1993 and completed funding of the Trust with $150,000 during 1994. The provision to establish the
Trust was included in the Permanent Manager Agreement for the indemnification of TPG, in the absence of fraud or gross negligence, from any claims or liabilities that may arise from TPG acting as Permanent Manager or substitute general partner. The
Trust is owned by the Partnership. For additional information regarding the Trust refer to Note 8 to the condensed financial statements included in Item 1 of this report.



Rents and other receivables amounted to approximately $193,000 and $507,000 at September 30, 2005 and December 31, 2004,
respectively. The December 31, 2004 balance primarily represented the 2004 percentage rent accruals. The balance at September 30, 2005 primarily represented the Third Quarter of 2005 percentage rent accruals for tenants whom have exceeded
their sales breakpoints as of September 30, 2005.



Property tax receivable
at September 30, 2005 and December 31, 2004 totaled approximately $17,000 and $5,000, respectively. In September 2005, the Partnership paid Daytonas first installment of its 2004 property taxes, which amounted to approximately
$10,000. Management has discussed reimbursement with Daytonas and intends to pursue formal collection procedures, if necessary, to collect the $10,000 plus interest from the tenant. (For further discussion see Note 3- Investment Properties.)



Deferred charges totaled approximately $251,000 and $260,000, net of
accumulated amortization, at September 30, 2005 and December 31, 2004, respectively. Deferred charges represent leasing commissions which are paid when properties are leased or upon the negotiated extension of a lease. Leasing commissions
are capitalized and amortized over the life of the lease.



Liabilities



Accounts
payable and accrued expenses at September 30, 2005, in the amount of $59,000, primarily represented the accruals of auditing, tax and data processing fees.



Property taxes payable at September 30, 2005 and December 31, 2004 amounted to approximately $33,000 and $48,000, respectively. Property taxes payable
primarily represented 2004 real estate taxes due for the Popeyes- Park Forest Property in 2005. The first installment was paid by the Partnership in February 2005, and the second installment was paid in October 2005. In the First through Third
Quarters of 2005, approximately $35,000 in property tax escrow payments received by the Partnership from Popeyes- Park Forest were recognized as property tax recoveries in the income statement. (For further discussion see Note 3- Investment
Properties.)



Income taxes payable at September 30, 2005 amounted to
$21,000. The amount included $15,000 in taxes and $6,000 in penalties and interest due to the City of Columbus, Ohio for the tax years 1999 through 2004.



Due to General Partner amounted to $2,182 at September 30, 2005 and primarily represented the General Partners Third Quarter of 2005 distributions.



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Partners Capital



Net income for the year was allocated between the General Partner and the Limited Partners, 1% and 99%, respectively, as provided for in the
Partnership Agreement as discussed more fully in Note 4 of the condensed financial statements included in Item 1 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 condensed financial statements included in Item 1 of this report for additional information regarding the reallocation.



Cash distributions to the Limited Partners and to the General Partner during 2005 of $1,295,000 and $3,688, respectively, have also been
made in accordance with the Partnership Agreement. The Partnership intends to pay Third Quarter of 2005 distributions of $435,000 on November 15, 2005.



Results of Operations



The Partnership reported income from continuing operations for the three month period ended September 30, 2005, in the amount of $365,000 compared to income from
continuing operations for the three month period ended September 30, 2004 of $428,000. The Partnership reported income from continuing operations for the nine month periods ended September 30, 2005 and 2004, in the amount of $811,000 and
$898,000, respectively. The variance in income from continuing operations in 2005 compared to 2004 is due primarily to: (i) the First through Third Quarter of 2005 collections and revenue recognition of approximately $35,000 in property tax
recoveries from Popeyes, compared to the Second through Third Quarter of 2004 collections and revenue recognition of $124,000 in property tax recoveries from Popeyes (see Note 3- Investment Properties for further discussion);
(ii) lower Second and Third Quarter 2005 percentage rent accruals compared to the Second and Third Quarter of 2004; (iii) decreased legal and accounting expenditures in 2005; (iv) increased general and administrative expenditures
related to investor communication, and increased professional expenditures, due to the 2005 Consent mailing in the Second Quarter of 2005; (v) increased income tax expenditures in the First through Third Quarters of 2005; (vi) the March
2004 payment of Popeyes 2001 property taxes second installment and related penalties due to tenant default; and (vii) a one-time settlement payment of approximately $25,000 from the Bankruptcy Court in relation to the DeDan bankruptcy
litigation was received in January 2004.



Discontinued Operations



The Partnership recognized income from discontinued operations of
$67,000 and $73,000 in the three month periods ending September 30, 2005 and 2004, respectively. During the nine month periods ended September 30, 2005 and 2004, the Partnership recognized income from discontinued operations of
approximately $111,000 and $345,000, respectively. In accordance with Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (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 2005 and 2004 income from discontinued operations is attributable to the
reclassification of the Hooters restaurant property as property held for sale in the Third Quarter of 2005. The 2004 income from discontinued operations is also attributable to the reclassification of the Miami Subs restaurant property to
property held for sale in the Fourth Quarter of 2003, and the subsequent sale of the property in June 2004. A Third Quarter of 2004 net gain on the sale of a parcel of land located adjacent to the former Twin Falls, ID property of $5,000 (the land
had no recorded land value) is also included in the 2004 income from discontinued operations.



22



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Revenues



Total operating revenues amounted to $567,000 and $619,000 for the three month periods ended September 30, 2005 and 2004, respectively. Total operating revenues
amounted to $1,403,000 and $1,517,000 for the nine month periods ended September 30, 2005 and 2004, respectively. Included in operating revenues for 2005 and 2004 was approximately $35,000 and $124,000, respectively, in property tax recoveries
related to the Popeyes- Park Forest property (see Note 3- Investment Properties).



As of September 30, 2005, total base operating rent revenues should approximate $1,378,000, excluding property held for sale, for the year 2005 based on leases currently in place. Future operating rent revenues may decrease with tenant
defaults and/or the reclassification of Properties as held for sale. They may also increase with additional rents due from tenants, if those tenants experience sales levels, which require the payment of additional rent to the Partnership.



Expenses



For the three month periods ended September 30, 2005 and 2004, total operating expenses
amounted to approximately 37% and 32%, of total revenue, respectively. For the nine month periods ended September 30, 2005 and 2004, total operating expenses amounted to approximately 44% and 44%, of total operating revenue, respectively. The
variances between 2005 and 2004 operating expenditures are primarily due to: (i) increased general and administrative expenditures related to investor communication, and increased professional expenditures, due to the 2005 Consent mailing in
the Second Quarter of 2005; (ii) higher income tax expenditures in the First through Third Quarters of 2005 related to the 2004 South Carolina tax return and the 2005 South Carolina estimated tax payments; (iii) a Third Quarter 2005 income
tax liability accrual, payable to the City of Columbus, Ohio for the tax years 1999 through 2004. (iv) decreased legal and accounting expenditures in 2005; (v) the March 2004 payment of Popeyes 2001 property taxes second installment
and related penalties due to tenant default; and (vi) 2004 monthly property tax accruals in relation to Popeyes (property tax accruals related to the property are not being recorded in 2005).



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



For the nine
month period ended September 30, 2005, there were no write-offs for non-collectible rents and receivables. Write-offs for non-collectible rents and receivables amounted to approximately $15,000 for the nine month period ended September 30,
2004. Such write-offs would primarily be the result of tenant defaults.



Other Income



For the three month periods ended
September 30, 2005 and 2004, the Partnership generated other income of approximately $8,000 and $7,000, respectively. For the nine month periods ended September 30, 2005 and 2004, the Partnership generated other income of approximately
$22,000 and $43,000, respectively. During January 2004 the Partnership received a one-time settlement payment of approximately $25,000 from the Bankruptcy Court in relation to the DeDan bankruptcy litigation. In the late 1980s, the Partnership
leased some properties to DeDan, Inc., and the leases were guaranteed by Dan Fore, the owner of DeDan, Inc. These leases went into default in the early 1990s and the Partnership obtained possession of the properties and re-leased them to
various entities. The original lessee, DeDan, Inc. and Dan Fore, filed for bankruptcy and the Partnership filed a claim in the Bankruptcy Court for damages incurred due to the lease defaults. (See Legal Proceedings in Note 10 and Part II-
Item 1.)



23



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Other revenues came primarily from interest earnings and small recoveries from former General Partners. Management anticipates that such revenue types may
continue to be generated until Partnership dissolution.



Inflation



Inflation has a minimal
effect on operating earnings and related cash flows from a portfolio of triple net leases. By their nature, such leases actually fix revenues and are not impacted by rising costs of maintenance, insurance, or real estate taxes. Although the majority
of the Partnerships leases have percentage rent clauses, revenues from percentage rents represented only 25% of operating rental income for the year ended 2004. If inflation causes operating margins to deteriorate for lessees, or if expenses
grow faster than revenues, then, inflation may well negatively impact the portfolio through tenant defaults.



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



Critical
Accounting Policies



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



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



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



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 3. Quantitative and Qualitative Disclosure About Market Risk



The Partnership is not subject to market risk.



Item 4. Controls and Procedures



As of the end of the period covered by this report, the Partnership carried out an
evaluation, under the supervision and with the participation of the Companys management, including the Chief Executive Officer (CEO)/Chief Financial Officer (CFO), of the effectiveness of the design and operation of the
Partnerships disclosure controls and procedures. Based on that evaluation, the CEO/CFO has concluded that the Partnerships disclosure controls and procedures are effective to ensure that information required



24



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to be disclosed by the Partnership in the reports it files under the Securities and Exchange Act of 1934, as amended, is recorded, 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 period covered by this
report referred to above.



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PART II - OTHER INFORMATION



Item 1. Legal Proceedings



DeDan Bankruptcy



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



Phoenix Foods Preference Claim



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



Item 2-5.



None



Item 6. Exhibits and Reports on Form 8-K



|    |  |                                                  |  |                                                                                                                                         |  | 
|--- |  | ------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | 
|(a) |  | Listing of Exhibits                             
|    |  |                                                 
|    |  | 31.1                                             |  | 302 Certifications.                                                                                                                    
|    |  |                                                 
|    |  | 32.1                                             |  | Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350.                                                         
|    |  |                                                 
|    |  | 99.0                                             |  | Correspondence to the Limited Partners which is scheduled to be mailed November 15, 2005 regarding the Third Quarter 2005 distribution.
|    | 
|(b) |  | Report on Form 8-K:                             
|    | 
|    |  | The Registrant has not filed a Form 8-K in 2005.



26



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SIGNATURES



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



DIVALL
INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



|      |  |                                       
|----- |  | --------------------------------------
|By:   |  | The Provo Group, Inc., General Partner
|      | 
|By:   |  | /s/ Bruce A. Provo                    
|      |  | Bruce A. Provo, President             
|      | 
|Date: |  | November 14, 2005                     



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



|      |  |                                                                               
|----- |  | ------------------------------------------------------------------------------
|By:   |  | The Provo Group, Inc., General Partner                                        
|      | 
|By:   |  | /s/ Bruce A. Provo                                                            
|      |  | Bruce A. Provo, President, Chief Executive Officer and Chief Financial Officer
|      | 
|Date: |  | November 14, 2005                                                             



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