<PAGE>

                                    FORM 10-Q

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                For the quarterly period ended September 30, 2002
                                               ------------------

                                       OR

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

                 For the transition period from ____________ to

                         Commission file number 0-17686

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

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

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

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

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

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

                                        1

<PAGE>

                                 BALANCE SHEETS

                    September 30, 2002 and December 31, 2001

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                   (Unaudited)
                                                                                  September 30,       December 31,
                                                                                      2002               2001
                                                                                      ----               ----
<S>                                                                                <C>               <C>
INVESTMENT PROPERTIES AND EQUIPMENT: (Note 3)

         Land                                                                      $  7,264,553      $ 7,296,406
         Buildings                                                                   10,851,597       11,561,307
         Equipment                                                                      669,778          669,778
         Accumulated depreciation                                                    (5,886,282)      (5,854,938)
                                                                                   ------------      -----------

                  Net investment properties and equipment                            12,899,646       13,672,553

OTHER ASSETS:
         Property held for Sale (Note 3)                                                470,060                0
         Cash and cash equivalents                                                      725,380          818,606
         Cash held in Indemnification Trust (Note 8)                                    377,204          372,167
         Due from Clerk of the Court  (Note 10)                                         140,000                0
         Property tax escrow                                                                  0            7,875
         Rents and other receivables (Net of allowance of $140,590                      340,553          546,771
               And $39,636, respectively)
         Property tax receivable                                                         15,449           30,977
         Deferred rent receivable                                                       115,936          105,633
         Prepaid insurance                                                                2,203           22,035
         Deferred charges                                                               324,456          286,067
         Note receivable  (Note 3)                                                            0           39,250
                                                                                   ------------      -----------

                  Total other asset                                                   2,511,241        2,229,381

                  Total assets                                                     $ 15,410,887      $15,901,934
                                                                                   ============      ===========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                        2

<PAGE>

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
                                 BALANCE SHEETS
                    September 30, 2002 and December 31, 2001

                        LIABILITIES AND PARTNERS' CAPITAL

<TABLE>
<CAPTION>
                                                                                  (Unaudited)
                                                                                 September 30,     December 31,
                                                                                      2002             2001
                                                                                 -------------     ------------
<S>                                                                             <C>                <C>
LIABILITIES:
         Accounts payable and accrued expenses                                   $     144,023     $     92,802
         Property taxes payable                                                              0           25,105
         Due to General Partner                                                          2,334            1,795
         Security deposits                                                             127,017          109,017
         Unearned rental income                                                         61,551          172,723
                                                                                 -------------     ------------

            Total liabilities
                                                                                       334,925          401,442

CONTINGENT LIABILITIES: (Note 7)



PARTNERS' CAPITAL: (Notes 1, 4 and 9)
         Current General Partner -                                                     181,420          172,176
            Cumulative net income                                                      (74,858)         (70,941)
                                                                                 -------------     ------------
            Cumulative cash distributions                                              106,562          101,235

         Limited Partners (46,280.3 interests outstanding)
            Capital contributions, net of offering costs                            39,358,468       39,358,468
            Cumulative net income                                                   24,326,429       23,411,286
            Cumulative cash distributions                                          (47,875,268)     (46,530,268)
            Reallocation of former general partners' deficit capital                  (840,229)        (840,229)
                                                                                 -------------     ------------

                                                                                    14,969,400       15,399,257
                                                                                 -------------     ------------

                           Total partners' capital                                  15,075,962       15,500,492
                                                                                 -------------     ------------

                           Total liabilities and partners' capital               $  15,410,887     $ 15,901,934
                                                                                 =============     ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                        3

<PAGE>

                                 DIVALL INSURED
                     INCOME PROPERTIES 2 LIMITED PARTNERSHIP
                              STATEMENTS OF INCOME
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                   Three Months Ended             Nine Months Ended
                                                                   ------------------             -----------------
                                                                      September 30,                 September 30,
                                                                      -------------                 -------------
                                                                   2002           2001           2002           2001
                                                                   ----           ----           ----           ----
<S>                                                              <C>            <C>           <C>            <C>
REVENUES:
        Rental income (Note 5)                                   $728,654       $698,777      $1,730,562     $1,833,903
        Interest income                                             4,403          9,286          13,075         35,043
        Lease termination fee (Note 3)                                  0              0               0        157,000
        Recovery of amount previously written off                   2,031              0           2,263          4,172
        Other income                                                  168             26           8,227            344
                                                                 --------       --------      ----------     ----------
                                                                  735,256        708,089       1,754,127      2,030,462
                                                                 --------       --------      ----------     ----------

EXPENSES:
        Partnership management fees (Note 6)                       49,839         48,561         148,764        144,452
        Insurance                                                   6,611          4,827          19,832         14,482
        General and administrative                                 18,116         20,796          65,681         67,539
        Advisory Board fees and expenses                            1,688          2,188           7,611          8,650
        Write-off non-collectible receivables                      31,306         10,127          89,675         25,688
        Property write-down                                        55,000              0          55,000              0
        Ground lease payments (Note 3)                                  0         17,902               0         53,705
        Expenses incurred due to default by lessee                 39,585          8,208          45,529          9,413
        Professional services                                      49,762         37,484         142,672        167,570
        Restoration fees (Note 6)                                      81              0              90            167
        Judgment expense Note 10)                                       0              .          45,128              0
        Depreciation                                               80,591         86,100         247,847        258,300
        Amortization                                                3,304         28,272           9,911         43,354
                                                                 --------       --------      ----------     ----------
                                                                  335,883        264,465         877,740        793,320
                                                                 --------       --------      ----------     ----------
NET INCOME FROM CONTINUING OPERATIONS BEFORE
DISCONTINUED OPERATIONS                                          $399,373       $443,624      $  876,387     $1,237,142

INCOME FROM DISCONTINUED OPERATIONS                                16,000         16,000          48,000         48,000
                                                                 --------       --------      ----------     ----------

NET INCOME                                                       $415,373       $459,624      $  924,387     $1,285,142
                                                                 --------       --------      ----------     ----------

NET INCOME- CURRENT GENERAL PARTNER                              $  4,154       $  4,596      $    9,244     $   12,851

NET INCOME -LIMITED PARTNERS                                      411,219        455,028         915,143      1,272,291
                                                                 --------       --------      ----------     ----------

                                                                 $415,373       $459,624      $  924,387     $1,285,142
                                                                 ========       ========      ==========     ==========

PER LIMITED PARTNERSHIP INTEREST, based on 46,280.3
Interests outstanding:

NET INCOME FROM CONTINUING OPERATIONS BEFORE
DISCONTINUED OPERATIONS                                          $   8.57       $   9.52      $    18.84     $    26.56

NET INCOME FROM DISCONTINUED OPERATIONS                               .31            .31             .93            .93
                                                                 --------       --------      ----------     ----------

NET INCOME PER LIMITED PARTNERSHIP INTEREST                      $   8.88       $   9.83      $    19.77     $    27.49
                                                                 ========       ========      ==========     ==========

</TABLE>

         The accompanying notes are an integral part of these statements

                                        4

<PAGE>

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
                            STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                     Nine Months Ended September 30,
                                                                                     -------------------------------
                                                                                        2002                 2001
                                                                                        ----                 ----
<S>                                                                                     <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

         Net income
                                                                                        $   924,387      $ 1,285,142
         Adjustments to reconcile net income to net
              cash from operating activities -

                  Depreciation and amortization                                             257,758          301,654
                  Recovery of amounts previously written off                                 (2,263)          (4,172)
                  Provision for non-collectible rents and receivables                        89,675           25,688
                  Interest applied to Indemnification Trust account                          (5,037)         (13,792)
                  Lease termination fee                                                           0         (117,750)
                  Property write-down                                                        55,000                0
                  (Increase) Decrease in due from Clerk of the Court                       (140,000)               0
                  Decrease (Increase) in property tax escrow                                  7,875           (7,875)
                  Decrease in rents and other receivables                                   132,071          238,122
                  Decrease in prepaid assets                                                 19,832           14,482
                  (Increase) Decrease in deferred rent receivable                           (10,303)           1,115
                  Increase (Decrease) in due to current General Partner                         539             (829)
                  Increase in accounts payable and other accrued expenses                    26,116           69,885
                  Increase in security deposits                                              18,000                0
                  (Decrease) in unearned rental income                                     (111,172)         (43,286)
                                                                                        -----------      -----------

                         Net cash from operating activities                               1,262,478        1,755,384
                                                                                        -----------      -----------

CASH FLOWS PROVIDED FROM (USED IN) INVESTING ACTIVITIES:

         Note receivable                                                                     39,250           39,250

         Payment of deferred leasing commission                                             (48,300)         (69,509)

         Recoveries from former affiliates                                                    2,263            4,172
                                                                                        -----------      -----------

                         Net cash provided from (used in) investing activities               (6,787)         (26,087)
                                                                                        -----------      -----------

CASH FLOWS (USED IN) FINANCING ACTIVITIES:

          Cash distributions to Limited Partners                                         (1,345,000)      (1,680,000)
          Cash distributions to current General Partner                                      (3,917)          (5,140)
                                                                                        -----------      -----------

          Net cash (used in) financing activities
                                                                                         (1,348,917)      (1,685,140)
                                                                                        -----------      -----------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                        (93,226)          44,157

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                            818,606          752,060
                                                                                        -----------      -----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                              $   725,380      $   796,217
                                                                                        ===========      ===========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       5

<PAGE>


             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

These unaudited interim financial statements should be read in conjunction with
DiVall Insured Income Properties 2 Limited Partnership' (the "Partnership") 2001
annual audited financial statements within Form 10-K.

These unaudited financial statements include all adjustments, which are, in the
opinion of management, necessary to present a fair statement of financial
position as of September 30, 2002, and the results of operations for the three
and nine-month periods ended September 30, 2002, and 2001, and cash flows for
the nine-month periods ended September 30, 2002 and 2001. Results of operations
for the periods are not necessarily indicative of the results to be expected for
the full year.

1.   ORGANIZATION AND BASIS OF ACCOUNTING:

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

The Partnership is currently engaged in the business of owning and operating its
investment portfolio (the "Properties") of commercial real estate. The
Properties are leased on a triple net basis to, and operated by, franchisers or
franchisees of national, regional, and local retail chains under long-term
leases. The lessees consist primarily of fast-food, family style, and
casual/theme restaurants, but also include a video rental store and a child care
center. At September 30, 2002, the Partnership owned 26 properties with
specialty leasehold improvements in 10 of these properties.

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

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

                                       6

<PAGE>

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.
Equipment is depreciated on a straight-line basis over the estimated useful
lives of 5 to 7 years.

Deferred charges consist of leasing commissions paid when properties are leased
to tenants and the negotiated extension of a lease. Leasing commissions are
capitalized and amortized over the life of the lease.

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

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

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

The Partnership previously followed Statement of Financial Accounting Standards
No.121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", which required that all long-lived assets
be reviewed for impairment in value whenever changes in circumstances indicated
that the carrying amount of an asset may not be recoverable. In October 2001,
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144") was issued. FAS 144
supercedes FAS 121. FAS 144 primarily addresses issues relating to the
implementation of FAS 121 and develops a single accounting model for long-lived
assets to be disposed of, whether previously held and used or newly acquired.
The provisions of FAS 144 became effective for fiscal years beginning after
December 15, 2001. The Company adopted FAS 144 on January 1, 2002 with no impact
on financial statements.

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

No provision for Federal income taxes has been made, as any liability for such
taxes would be that of the individual partners rather than the Partnership. At
December 31, 2001, the tax basis of the Partnership's assets

                                       7

<PAGE>

exceeded the amounts reported in the accompanying financial statements by
approximately $7,859,000.

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")
(dissolved effective December 31, 1998) and DiVall Income Properties 3 Limited
Partnership ("DiVall 3") (collectively the "Partnerships") to various other
entities previously sponsored by or otherwise affiliated with DiVall and
Magnuson. The unauthorized transfers were in violation of the respective
Partnership Agreements and resulted, in part, from material weaknesses in the
internal control system of the Partnerships.

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

In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships. At that time, an allowance was established against
amounts due from former general partners and their affiliates reflecting the
estimated $3 million receivable. This net receivable was allocated among the
Partnerships based on each Partnership's pro rata share of the total
misappropriation. Through September 30, 2002, $5,808,000 of recoveries has been
received which exceeded the original estimate of $3 million. As a result, since
1996, the Partnership has recognized $1,127,000 as income, which represents its
share of the excess recovery. No further significant recoveries are anticipated.

3.   INVESTMENT PROPERTIES:

As of September 30, 2002, the Partnership owned 24 fully constructed fast-food
restaurants, a video store, and a preschool. The properties are composed of the
following: ten (10) Wendy's restaurants, one (1) Denny's restaurant, one (1)
Applebee's restaurant, one (1) Popeye's Famous Fried Chicken restaurant, one (1)
Hooter's restaurant, one (1) Kentucky Fried Chicken restaurant, one (1)
Hostetler's restaurant, one (1) Hardee's restaurant, one (1) Miami Subs
restaurant, one (1) Omega restaurant, one (1) Blockbuster Video store, one (1)
Sunrise Preschool, one (1) Chinese restaurant, and four (4) vacant properties,
(which were previously operated as a Village Inn restaurant, a Fiesta Time
restaurant, and two (2) Hardee's restaurants.) The 26 properties are located in
a total of thirteen (13) states.

On January 1, 2002, the Partnership adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement requires current
and historical results from operations for disposed properties and assets
classified as held for sale that occur subsequent to January 1, 2002 to be
reclassified separately as discontinued operations. During the three and nine
months ended September 30, 2002, the Partnership recognized income (loss) from
discontinued operations of $16,000 and $48,000, respectively.

                                       8

<PAGE>

Results of discontinued operations for the three and nine months ended September
30, 2002, relate to the classification of the Hardee's- Hartford property as
held for sale.

In October 2002 Management entered a contract to sell the vacant Hardee's- South
Milwaukee property at a sales price of $450,000. The South Milwaukee property
closing date is anticipated to be in the First Quarter of 2003. In the Third
Quarter of 2002 the net asset value of the S. Milwaukee property was
written-down by $55,000 to reflect the fair market value of the property at
September 30, 2002 of approximately $450,000.

During the Second Quarter of 2002, Management entered a contract to sell the
vacant Hardee's restaurant in Hartford at a sales price of $618,000. Contrary to
information in our last quarterly report, the Hartford property closing date is
scheduled for early October 2002. The net asset value of the property at
September 30, 2002 was approximately $470,000 and the gain on the sale of the
property in October is anticipated to be approximately $143,000. The Partnership
intends to pay TPG a sales commission in the Fourth Quarter of 2002 amounting to
$18,500. No commissions are to be paid to unaffiliated brokers by the
Partnership.

During the Second Quarter of 2002, Mountain Range Restaurants, the sub-lessee of
the Denny's- N. 7/th/ Street property in Phoenix, Arizona, notified Management
that it would vacate the property at the end of May 2002. During the Fourth
Quarter of 2001, the Bankruptcy court granted the motion of Lessee, Phoenix
Restaurant Group, Inc. ("Phoenix"), to reject the lease with the Partnership at
the Phoenix, Arizona location. Following the rejection of this lease by Phoenix,
the Mountain Range Restaurants declined the Partnership's offer to lease the
property directly to them. Therefore, the property was vacated and rent ceased
as of May 31, 2002.

During August 2002, a ten (10) year lease was negotiated with new tenant, Jun
Cheng Pan, at the vacant N. 7/th/ Street property in Phoenix, Arizona. The new
tenant took possession of the property in August 2002 and rent is scheduled to
commence in January 2003. The restaurant is to be operated as a Chinese buffet.
Commissions of $34,500 and $13,800 were paid to an unaffiliated leasing agent
and to an affiliate of the General Partner, respectively, upon the execution of
the new lease in the Third Quarter of 2002.

Contrary to information in our last quarterly report, the Hardee's- Fond du Lac,
Wisconsin restaurant has not been closed by Hardee's Food Systems, Inc. The
property lease continues to be in good standing.

During March 2001, Hardee's Food Systems, Inc. notified Management of its intent
to close its restaurant in South Milwaukee, Wisconsin. Hardee's lease on the
South Milwaukee property expired on November 30, 2001 and they continued making
rent payments until the lease expiration date. This lease was not renewed, and
therefore, Management continues to market the property for sale or lease to a
new operator.

During March 2001, Hardee's Food Systems, Inc. notified Management of its intent
to close its restaurant in Milwaukee, Wisconsin. The Hardee's lease on the
Milwaukee property was not set to expire until 2009. In the Second Quarter of
2001, a lease termination agreement was executed and the tenant ceased the
payment of rent as of April 30, 2001. Hardee's Food Systems agreed to pay a
lease termination fee of approximately two (2) years rent or $157,000. The
payment schedule included four (4) equal installments of $39,250. The first
payment was received in May 2001 upon the execution of the agreement. The second
and third Note receivable installments were received in August and October 2001.
The final installment, which is reflected as a Note receivable on the balance
sheet at December 31, 2001, was received in January 2002.

                                       9

<PAGE>

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

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

During the Fourth Quarter of 2001, the Bankruptcy court granted the motion of
Phoenix Restaurant Group, Inc. ("Phoenix") to reject the lease with the
Partnership at the Twin Falls, Idaho location. Although Phoenix's lease on the
Twin Falls property expires on April 30, 2012, due to bankruptcy proceedings of
Phoenix, the lease was rejected and rent income ceased in the Fourth Quarter of
2001. The remaining balance due the Partnership of approximately $29,000 from
the former tenant has been reserved. This amount is included in the
Partnership's filing for damages in Bankruptcy court of approximately $85,000,
or one year's rent, although it is uncertain whether the amount will be
collectible. In addition, in Management's opinion, since Phoenix rejected the
lease, its subtenant, Fiesta Time, is not entitled to possession of the
property. Therefore, Management is in the process of evicting and obtaining
possession of the property from Fiesta Time, after which Management intends to
market the property for lease or sale.

During April 2001, the sub-tenant AMF Corporation ("AMF) notified Management of
its intent to close and vacate its Mulberry Street Grill restaurant in Phoenix,
Arizona. Although the lease on the property was not set to expire until 2007,
monthly rental and Common Area Maintenance (CAM) income ceased as of June 1,
2001. The past due rent amount of $10,000 has been reserved. Management moved
forward with all legal remedies to collect the balances due from AMF, however,
Management learned in the Third Quarter of 2002 that AMF has been dissolved. Due
to Management's return of possession of the property to the Ground Lease
landlord, the net asset value of the property was written-off in the Fourth
Quarter of 2001, resulting in a loss of $157,000. As of December 31, 2001 the
Partnership had withheld the May through December 2001 accrued ground lease
obligations totaling approximately $50,000 related to the property. In the
Second Quarter of 2001, the Ground Lease landlord filed suit against the
Partnership and TPG (as General Partner) seeking possession of the property and
damages for breach of the Ground Lease. In April 2002, an additional $43,000 was
accrued as payable to the Ground Lease landlord, due to the Court's granting a
summary judgment of $93,000 against the Partnership. The Partnership is
appealing this judgment. In September 2002, the Partnership was required to
escrow a $140,000 cash bond at the clerk of the court during the appeal process.
(See Legal Proceedings in Part II. - Item 1 and Note 10.)

During October 2001, the Village Inn Restaurant notified Management of its
intent to close and vacate its restaurant in Grand Forks, North Dakota within
the next few months. The lease on the property expires in 2009. In February
2002, Management was notified Village Inn had closed and vacated the restaurant.
Rent income was collected from the tenant through December 2001, however; rent
income has not been collected for January through September of 2002. In
addition, in March 2002 and September 2002, the Partnership paid the properties'
first and second installments of 2001 real estate taxes. Management has begun
legal action in relation to the former tenant's past due balance of
approximately $90,000, as well as future lease and other obligations. Management
is also seeking a new tenant for the vacated property. The Partnership incurred

                                       10

<PAGE>

expenditures of approximately $27,000 to replace the roof on the property in the
Third Quarter of 2002. Other repairs may also be needed, however, specifics and
amounts are not known as of the end of the Third Quarter.

As of September 30, 2002 the Partnership owns one (1) restaurant, Kentucky Fried
Chicken, which is located on a parcel of land where it has entered into a
long-term ground lease. The tenant, Kentucky Fried Chicken, pays the lease
obligations under the ground lease.

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

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

The current General Partner receives a fee for managing the Partnership equal to
4% of gross receipts, with a maximum reimbursement for office rent and related
office overhead of $25,000 between the three original affiliated Partnerships as
provided in the Permanent Manager Agreement ("PMA"). Effective March 1, 2002,
the minimum management fee and the maximum reimbursement for office rent and
overhead increased by 2.8%, representing the allowable annual Consumer Price
Index adjustment per the PMA. Therefore, as of March 1, 2002 the current minimum
monthly management fee is $16,640. For purposes of computing the 4% overall fee,
gross receipts includes amounts recovered in connection with the
misappropriation of assets by the former general partners and their affiliates.
TPG has received fees from the Partnership totaling $55,553 to date on the
amounts recovered, which includes 2002 fees of $90. The fees received from the
Partnership on the amounts recovered reduce the 4% minimum fee by that same
amount.

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

4.   PARTNERSHIP AGREEMENT:

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

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

                                       11

<PAGE>

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

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

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

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

5.   LEASES:

Lease terms for the majority of the investment properties are 20 years from
their inception. The leases generally provide for minimum rents and additional
rents based upon percentages of gross sales in excess of specified breakpoints.
The lessee is responsible for occupancy costs such as maintenance, insurance,
real estate taxes, and utilities. Accordingly, these amounts are not reflected
in the statements of income except in circumstances where, in management's
opinion, the Partnership will be required to pay such costs to preserve its
assets (i.e.,

                                       12

<PAGE>

payment of past-due real estate taxes). Management has determined that the
leases are properly classified as operating leases; therefore, rental income is
reported when earned and the cost of the property, excluding the cost of the
land, is depreciated over its estimated useful life.

As of September 30, 2002 aggregate minimum lease payments to be received under
the leases for the Partnership's properties are as follows:

         Year ending December 31,
         2002                               $ 1,986,098
         2003                                 1,975,463
         2004                                 2,006,311
         2005                                 2,016,603
         2006                                 1,940,133
         Thereafter                          13,338,282
                                            -----------

                                            $23,312,890
                                            ===========

The above aggregate minimum lease payments include rent applicable to the
Village Inn property. The tenant is currently in default in relation to its
January through September 2002 lease payments. Management has begun legal action
to collect these past due payments, however, due to the uncertainty of
collection these past due rents totaling approximately $72,000 have been 100%
reserved. Village Inn is responsible for lease payments until the lease
expiration date of 2009, however, due to the uncertainty of collection future
lease charges will continue to be reserved until a lease termination agreement
is consummated.

Ten (10) of the properties are leased to Wensouth Orlando, a franchisee of
Wendy's restaurants. Wensouth base rents accounted for 40% of total base rents
for 2001.

6.   TRANSACTIONS WITH CURRENT GENERAL PARTNER:

Amounts paid to the current General Partner for the nine-month periods ended
September 30, 2002 and 2001 are as follows.

<TABLE>
<CAPTION>
                                                  Incurred as of           Incurred as of
Current General Partner                         September 30, 2002       September 30, 2001
-----------------------                         ------------------       ------------------
<S>                                             <C>                      <C>
Management fees                                            $148,764                 $144,452
Restoration fees                                                 90                      167
Overhead allowance                                           12,010                   11,668
Reimbursement for out-of-pocket expenses                      6,468                    7,835
Leasing Commissions                                          13,800                    8,644
Cash distribution                                             3,917                    5,140
                                                           --------                 --------
                                                           $185,049                 $177,906
                                                           ========                 ========
</TABLE>

                                       13

<PAGE>

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 in escrow 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 escrow amounts will be paid to the current General Partner. At
such time as the recovery exceeds $6,000,000 in the aggregate, the remaining
escrow 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 in escrow towards the recovery. In lieu of an escrow, 50% of all
such disposition fees have been paid directly to the restoration account and
then distributed among the three Partnerships. Fifty percent (50%) of the total
amount paid to the recovery was refunded to the current General Partner during
March 1996 after surpassing the recovery level of $4,500,000. The remaining
amount allocated to the Partnership may be owed to the current General Partner
if the $6,000,000 recovery level is met. As of September 30, 2002, the
Partnership may owe the current General Partner $16,296, which is currently
reflected as a recovery, if the $6,000,000 recovery level is achieved, which is
considered unlikely.

8.   PMA INDEMNIFICATION TRUST:

The PMA provides that the Permanent Manager will be indemnified from any claims
or expenses arising out of or relating to the Permanent Manager serving in such
capacity or as substitute general partner, so long as such claims do not arise
from fraudulent or criminal misconduct by the Permanent Manager. The PMA
provides that the Partnership fund this indemnification obligation by
establishing a reserve of up to $250,000 of Partnership assets which would not
be subject to the claims of the Partnership's creditors. An Indemnification
Trust ("Trust") serving such purposes has been established at United Missouri
Bank, N.A. The Trust has been fully funded with Partnership assets as of
September 30, 2002. Funds are invested in U.S. Treasury securities. In addition,
$127,204 of earnings has been credited to the Trust as of September 30, 2002.
The rights of the Permanent Manager to the Trust shall be terminated upon the
earliest to occur of the following events: (i) the written release by the
Permanent Manager of any and all interest in the Trust; (ii) the expiration of
the longest statute of limitations relating to a potential claim which might be
brought against the Permanent Manager and which is subject to indemnification;
or (iii) a determination by a court of competent jurisdiction that the Permanent
Manager shall have no liability to any person with respect to a claim which is
subject to indemnification under the PMA. At such time as the indemnity
provisions expire or the full indemnity is paid, any funds remaining in the
Trust will revert back to the general funds of the Partnership.

9.   FORMER GENERAL PARTNERS' CAPITAL ACCOUNTS:

                                       14

<PAGE>

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

10.  LEGAL PROCEEDINGS:

The Partnership owned the building in Phoenix, Arizona occupied by the Mulberry
Street Grill restaurant, which was located on a parcel of land leased to the
Partnership pursuant to a long-term ground lease (the "Ground Lease.") The
Ground Lease was considered an operating lease and the lease payments were paid
by the Partnership and expensed in the periods to which they applied. During the
Second Quarter of 2001, sub-tenant AMF Corporation ("AMF") notified Management
of its intent to close its Mulberry Street Grill restaurant. Although the
sub-lease had not expired, since such notification the Partnership has received
no rent from the former tenant and has returned possession of the Phoenix,
Arizona property to the Ground Lease Landlord, Centre at 38/th/ Street, L.L.C,
("Centre".) Beginning in May and through December 2001 the Partnership accrued
but withheld payment of the ground lease obligations, and on March 31, 2002 and
December 31, 2001 the total ground lease accrual approximated $50,000. Centre
has re-leased the property to a new tenant.

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

The Partnership and TPG filed an answer denying any liability to Centre. In
addition, the Partnership has filed a third-party complaint against the original
tenant, National Restaurant Group, ("National Restaurant"), L.L.C., and its
sub-tenant AMF. In the third-party complaint, the Partnership alleges that
National Restaurant and AMF are liable to the Partnership for breach of the
subleases and any damages for which the Partnership may be held liable pursuant
to the Ground Lease. Currently National Restaurant has filed for bankruptcy and
the Partnership has learned that AMF has been dissolved. Therefore, the
third-party complaint was dropped during the Third Quarter of 2002.

On April 10, 2002 the Maricopa County Superior Court granted the motion for
summary judgment against the Partnership and TPG. The Court awarded damages to
Centre as of April 10, 2002 in the amount of $93,000. As of March 31, 2002 the
Partnership had accrued $50,000 in ground lease obligations payable to Centre
and the remaining summary judgment balance of $43,000 was accrued in April 2002.

On June 20, 2002 the Partnership and TPG filed the Notice of Appeal with respect
to such judgment. In order to prevent Centre from enforcing the judgment, an
approximately $140,000 bond application was filed in July 2002. By law, the
amount of the bond must be sufficient to cover the amount of the judgment, plus
interest, and any additional costs that may be incurred during the appeal.

                                       15

<PAGE>

In September 2002 the Partnership was required to escrow a $140,000 cash bond at
the office of the Clerk of the Court during the appeal process. As of September
30, 2002 the Partnership was waiting for the Court of Appeals to set a court
date for the appeal.

11.  SUBSEQUENT EVENTS:

The Hardee's- Hartford property was sold at a sale price of $618,000 on October
1, 2002. The gain on sale of the property was $143,000. A sales commission of
$18,500 was paid to an affiliate of the General Partner upon the sale in October
2002.

In October 2002 Management entered a contract to sell the vacant Hardee's- South
Milwaukee property at a sales price of $450,000. The South Milwaukee property
closing date is anticipated to be in the First Quarter of 2003. In the Third
Quarter of 2002 the net asset value of the S. Milwaukee property was
written-down by $55,000 to reflect the fair market value of the property at
September 30, 2002 of approximately $450,000.

The lease on the Hostetler's property in Des Moines, Iowa is set to expire on
December 31, 2002. In October 2002 the tenant informed Management that they
would not be renewing the property lease. Management has begun marketing the
property for sale.

On November 15, 2002, the Partnership is scheduled to make distributions to the
Limited Partners for the Third Quarter of 2002 of $365,000 amounting to
approximately $7.89 per limited partnership interest.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Liquidity and Capital Resources:

Investment Properties

The investment properties, including equipment held by the Partnership at
September 30, 2002, were originally purchased at a price, including acquisition
costs, of approximately $22,261,000.

On January 1, 2002, the Partnership adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement requires current
and historical results from operations for disposed properties and assets
classified as held for sale that occur subsequent to January 1, 2002 to be
reclassified separately as discontinued operations. During the three and nine
months ended September 30, 2002, the Partnership recognized income (loss) from
discontinued operations of $16,000 and $48,000, respectively. Results of
discontinued operations for the three and nine months ended September 30, 2002,
relate to the classification of the Hardee's- Hartford property as held for
sale.

                                       16

<PAGE>

In October 2002 Management entered a contract to sell the vacant Hardee's- South
Milwaukee property at a sales price of $450,000. The South Milwaukee property
closing date is anticipated to be in the First Quarter of 2003. In the Third
Quarter of 2002 the net asset value of the S. Milwaukee property was
written-down by $55,000 to reflect the fair market value of the property at
September 30, 2002 of approximately $450,000.

During the Second Quarter of 2002, Management entered a contract to sell the
vacant Hardee's restaurant in Hartford at a sales price of $618,000. Contrary to
information in our last quarterly report, the Hartford property closing date is
scheduled for early October 2002. The net asset value of the property at
September 30, 2002 was approximately $470,000 and the gain on the sale of the
property in October is anticipated to be approximately $143,000. The Partnership
intends to pay TPG a sales commission in the Fourth Quarter of 2002 amounting to
$18,500. No commissions are to be paid to unaffiliated brokers by the
Partnership.

During the Second Quarter of 2002, Mountain Range Restaurants, the sub-lessee of
the Denny's- N. 7/th/ Street property in Phoenix, Arizona, notified Management
that it would vacate the property at the end of May 2002. During the Fourth
Quarter of 2001, the Bankruptcy court granted the motion of Lessee, Phoenix
Restaurant Group, Inc. ("Phoenix"), to reject the lease with the Partnership at
the Phoenix, Arizona location. Following the rejection of this lease by Phoenix,
the Mountain Range Restaurants declined the Partnership's offer to lease the
property directly to them. Therefore, the property was vacated and rent ceased
as of May 31, 2002.

During August 2002, a ten (10) year lease was negotiated with new tenant, Jun
Cheng Pan, at the vacant N. 7/th/ Street property in Phoenix, Arizona. The new
tenant took possession of the property in August 2002 and rent is scheduled to
commence in January 2003. The restaurant is to be operated as a Chinese buffet.
Commissions of $34,500 and $13,800 were paid to an unaffiliated leasing agent
and to an affiliate of the General Partner, respectively, upon the execution of
the new lease in the Third Quarter of 2002.

Contrary to information in our last quarterly report, the Hardee's- Fond du Lac,
Wisconsin restaurant has not been closed by Hardee's Food Systems, Inc. The
property lease continues to be in good standing.

During March 2001, Hardee's Food Systems, Inc. notified Management of its intent
to close its restaurant in South Milwaukee, Wisconsin. Hardee's lease on the
South Milwaukee property expired on November 30, 2001 and they continued making
rent payments until the lease expiration date. This lease was not renewed, and
therefore, Management continues to market the property for sale or lease to a
new operator.

During March 2001, Hardee's Food Systems, Inc. notified Management of its intent
to close its restaurant in Milwaukee, Wisconsin. The Hardee's lease on the
Milwaukee property was not set to expire until 2009. In the Second Quarter of
2001, a lease termination agreement was executed and the tenant ceased the
payment of rent as of April 30, 2001. Hardee's Food Systems agreed to pay a
lease termination fee of approximately two (2) years rent or $157,000. The
payment schedule included four (4) equal installments of $39,250. The first
payment was received in May 2001 upon the execution of the agreement. The second
and third Note receivable installments were received in August and October 2001.
The final installment, which is reflected as a Note receivable on the balance
sheet at December 31, 2001, was received in January 2002.

During May 2001, Management negotiated a re-lease of the vacant Milwaukee,
Wisconsin property to Omega Restaurant in June 2001 and rent income commenced in
October 2001. Commissions of $50,000 and $9,000

                                       17

<PAGE>

were paid to an unaffiliated leasing agent and to an affiliate of the General
Partner, respectively, upon the execution of the new lease in the Second Quarter
of 2001.

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

During the Fourth Quarter of 2001, the Bankruptcy court granted the motion of
Phoenix Restaurant Group, Inc. ("Phoenix") to reject the lease with the
Partnership at the Twin Falls, Idaho location. Although Phoenix's lease on the
Twin Falls property expires on April 30, 2012, due to bankruptcy proceedings of
Phoenix, the lease was rejected and rent income ceased in the Fourth Quarter of
2001. The remaining balance due the Partnership of approximately $29,000 from
the former tenant has been reserved. This amount is included in the
Partnership's filing for damages in Bankruptcy court of approximately $85,000,
or one year's rent, although it is uncertain whether the amount will be
collectible. In addition, in Management's opinion, since Phoenix rejected the
lease, its subtenant, Fiesta Time, is not entitled to possession of the
property. Therefore, Management is in the process of evicting and obtaining
possession of the property from Fiesta Time, after which Management intends to
market the property for lease or sale.

During April 2001, the sub-tenant AMF Corporation ("AMF) notified Management of
its intent to close and vacate its Mulberry Street Grill restaurant in Phoenix,
Arizona. Although the lease on the property was not set to expire until 2007,
monthly rental and Common Area Maintenance (CAM) income ceased as of June 1,
2001. The past due rent amount of $10,000 has been reserved. The past due rent
amount of $10,000 has been reserved. Management moved forward with all legal
remedies to collect the balances due from AMF, however, Management learned in
the Third Quarter of 2002 that AMF has been dissolved. Due to Management's
return of possession of the property to the Ground Lease landlord, the net asset
value of the property was written-off in the Fourth Quarter of 2001, resulting
in a loss of $157,000. As of December 31, 2001 the Partnership had withheld the
May through December 2001 accrued ground lease obligations totaling
approximately $50,000 related to the property. In the Second Quarter of 2001,
the Ground Lease landlord filed suit against the Partnership and TPG (as General
Partner) seeking possession of the property and damages for breach of the Ground
Lease. In April 2002, an additional $43,000 was accrued as payable to the Ground
Lease landlord, due to the Court's granting a summary judgment of $93,000
against the Partnership. The Partnership is appealing this judgment. In
September 2002, the Partnership was required to escrow a $140,000 cash bond at
the clerk of the court during the appeal process. (See Legal Proceedings in Part
II. - Item 1 and Note 10.)

During October 2001, the Village Inn Restaurant notified Management of its
intent to close and vacate its restaurant in Grand Forks, North Dakota within
the next few months. The lease on the property expires in 2009. In February
2002, Management was notified Village Inn had closed and vacated the restaurant.
Rent income was collected from the tenant through December 2001, however; rent
income has not been collected for January through September of 2002. In
addition, in March 2002 and September 2002, the Partnership paid the properties'
first and second installments of 2001 real estate taxes. Management has begun
legal action in relation to the former tenant's past due balance of
approximately $90,000, as well as future lease and other obligations. Management
is also seeking a new tenant for the vacated property. The Partnership incurred

                                       18

<PAGE>

expenditures of approximately $27,000 to replace the roof on the property in the
Third Quarter of 2002. Other repairs may also be needed, however, specifics and
amounts are not known as of the end of the Third Quarter.

Other Assets

Property held for sale amounted to $470,000 as of September 30, 2002 and related
to the classification of the Hardee's- Hartford property as held for sale. The
Hartford property closing date is scheduled for early October 2002. On January
1, 2002, the Partnership adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement requires current and historical
results from operations for disposed properties and assets classified as held
for sale that occur subsequent to January 1, 2002 to be reclassified separately
as discontinued operations. During the three and nine months ended September 30,
2002, the Partnership recognized income (loss) from discontinued operations of
$16,000 and $48,000, respectively. Results of discontinued operations for the
three and nine months ended September 30, 2002, relate to the classification of
the Hardee's- Hartford property as held for sale.

Cash and cash equivalents were approximately $725,000 at September 30, 2002,
compared to $818,606 at December 31, 2001. The Partnership designated cash of
$365,000 to fund the Third Quarter 2002 distributions to Limited Partners,
$306,000 for the payment of accounts payable, accrued expenses, and future
distributions. The remainder represents reserves deemed necessary to allow the
Partnership to operate normally.

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

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

Due from the Clerk of the Court amounted to $140,000 at September 30, 2002. In
September 2002, the Partnership was required to escrow a $140,000 cash bond at
the clerk of the court during the appeal process related to the Phoenix, Arizona
property. (See Legal Proceedings in Part II. - Item 1 and Note 10.)

Rents and other receivables amounted to $341,000 (net of allowance of $141,000)
as of September 30, 2002. Village Inn is currently in default in relation to its
January through September 2002 lease payments. Management has begun legal action
to collect these past due payments, however, due to the uncertainty of
collection these past due rents totaling approximately $72,000 have been 100%
reserved. Village Inn is responsible for lease payments until the lease
expiration date of 2009, however, due to the uncertainty of collection future
lease charges will continue to be reserved until a lease termination agreement
is consummated. In addition, Management has charged Village Inn late fees
totaling $3,000 in relation to the past balance due. The late fee charges have
been 100% reserved as Management is uncertain of collection.

                                       19

<PAGE>

The tenant Popeye's- Park Forest is delinquent on its January 2002 percentage
rent billing for 2001. Management intends to pursue legal remedies in relation
to the collection of the tenant's percentage rent past due balance of
approximately $72,000. In addition, Management has charged Popeye's late fees
totaling $11,000 in relation to the percentage rent balance due. The late fee
charges have been 100% reserved as Management is uncertain of collection of
these fees.

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

Property tax receivable at September 30, 2002, in the amount of $15,500
represented 2001 property taxes paid by the Partnership, which are due from the
tenant of the vacant Village Inn property. Property tax receivable at December
31, 2001, in the amount of $31,000 represented 2001 real estate taxes due from
the tenant of the Hardee's- S. Milwaukee property and new tenant, Omega
Restaurants and 2000 property taxes due from the tenant of the Village Inn
property.

The Note receivable balance at December 31, 2001 was $39,250. In the Second
Quarter of 2001, a lease termination agreement was executed with Hardee's Food
Systems upon the closing of its restaurant in Milwaukee, Wisconsin. Hardee's
Food Systems agreed to pay a lease termination fee of approximately two (2)
years rent or $157,000. The payment schedule included four (4) equal
installments of $39,250. The first payment was received in May 2001 upon the
execution of the agreement. The second and third Note receivable installments
were received in August and October 2001. The final installment, which is
reflected as a Note receivable on the balance sheet at December 31, 2001, was
received in January 2002.

Deferred charges totaled approximately $324,000 and $286,000, net of
amortization, at September 30, 2002 and December 31, 2001, respectively.
Deferred charges represent leasing commissions paid when properties are leased
or upon the negotiated extension of a lease. Leasing commissions are capitalized
and amortized over the life of the lease. During the Third Quarter of 2002,
commissions of $34,500 and $13,800 were paid to an unaffiliated leasing agent
and to an affiliate of the General Partner, respectively, upon the execution of
the new Chinese Buffet lease. During the Second Quarter of 2001, commissions of
$50,000 and $9,000 were paid to an unaffiliated leasing agent and to an
affiliate of the General Partner, respectively, upon the execution of the new
Omega Restaurant lease. During the First Quarter of 2001, a commission of
$10,000 was paid to an unaffiliated leasing agent upon the negotiated extension
of the lease with Blockbuster Video. Also, during the Second Quarter and Fourth
Quarters of 2001 deferred charges relating to the former Hardee's- Milwaukee and
Mulberry Street Grill properties, respectively, were written-off.

Liabilities

Accounts payable and accrued expenses at September 30, 2002, in the amount of
$144,000, primarily represents the accrual of auditing, tax, legal and data
processing fees, and the summary judgment related to the former Mulberry Street
Grill property.

                                       20

<PAGE>

Due to the Current General Partner amounted to $2,334 at September 30, 2002, of
which $1,881 represents the General Partner's Third Quarter 2002 distribution.

Partners' Capital

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

Cash distributions paid to the Limited Partners and to the General Partner
during 2002 of $1,345,000 and $3,917, respectively, havealso been in accordance
with the amended Partnership Agreement. The Third Quarter 2002 Limited Partner
distribution of $365,000 is scheduled for November 15, 2002.

Results of Operations:

The Partnership reported net income for the quarter ended September 30, 2002, in
the amount of $415,000 compared to net income for the quarter ended September
30, 2001, of $460,000. For the nine-months ended September 30, 2002 and 2001,
net income totaled $924,000 and $1,285,000, respectively. The decrease in net
income in 2002 is due primarily to decreased rental income, relating to the
expired lease of the Hardee's- S. Milwaukee property in the Fourth Quarter of
2001, the bankruptcy rejections of the Denny's- Twin Falls and N. 7/th/ Street
leases and the non-cash disposal of the former Mulberry Street Grill Restaurant
in the Fourth Quarter of 2001. The decrease in net income in 2002 is also due to
the property write-down related to the vacant S. Milwaukee property in the Third
Quarter of 2002, the summary judgment related to the former Mulberry Street
Grill property in the Second Quarter of 2002, the write-off of non-collectible
receivables, increased tenant default expenditures, and increased legal
expenditures due to tenant defaults, eviction proceedings at the Twin Falls
property, court proceedings related to the former Mulberry Street Grill
property, and change in auditor issues. In addition, the Partnership received a
lease termination fee of $157,000 in the Second Quarter of 2001 due to the
termination of the Hardee's- Milwaukee lease, which is a non-recurring item.

Income from discontinued operations was $16,000 for the quarters ended September
30, 2002 and 2001. For the nine-months ended September 30, 2002 and 2001 income
from discontinued operations totaled $48,000. In accordance with SFAS 144,
discontinued operations represent the operations of properties disposed of or
classified as held for sale subsequent to January 1, 2002 as well as any gain or
loss recognized in their disposition. One property, Hardee's- Hartford, was
classified for sale as of September 30, 2002, therefore, the operating results
of this property is reflected as income from discontinued operations for the
three and nine month periods ended September 30, 2002 and 2001.

Revenues

Total revenues were $751,000 and $724,000, for the quarters ended September 30,
2002 and 2001, respectively, and were $1,802,000 and $2,078,000, for the
nine-months ended September 30, 2002 and 2001, respectively The decrease in
revenue in 2002 is due primarily to decreased rental income, upon the expired

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lease of the Hardee's- S. Milwaukee property in the Fourth Quarter of 2001, the
bankruptcy rejections of the Denny's- Twin Falls lease and N. 7/th/ Street
leases, and the non-cash disposal of the former Mulberry Street Grill Restaurant
in the Fourth Quarter of 2001. In addition, the Partnership received a lease
termination fee of $157,000 in the Second Quarter of 2001 due to the termination
of the Hardee's- Milwaukee lease, which is a non-recurring item.

As of September 30, 2002 total revenues should approximate $1,950,000, annually,
based on leases currently in place. Future revenues may decrease with tenant
defaults and/or sales of Partnership properties. They may also increase with
additional rents due from tenants, if those tenants experience sales levels,
which require the payment of additional rent to the Partnership.

Village Inn is currently in default in relation to its January through September
2002 lease payments. Management has begun legal action to collect these past due
payments, however, due to the uncertainty of collection these past due rents
totaling approximately $72,000 have been 100% reserved. Village Inn is
responsible for lease payments until the lease expiration date of 2009, however,
due to the uncertainty of collection future lease charges will continue to be
reserved until a lease termination agreement is consummated.

Expenses

For the quarters ended September 30, 2002 and 2001, cash expenses amounted to
approximately 23% and 19%, of total revenues, respectively. For the nine-months
ended September 30, 2002 and 2001, cash expenses totaled 27% and 22%,
respectively. Total expenses, including non-cash items, amounted to
approximately 46% and 37%, of total revenues for the quarters ended September
30, 2002 and 2001, respectively, and totaled 50% and 38% for the nine-months
ended September 30, 2002 and 2001, respectively.

The increase in expenditures in 2002 is due to the Third Quarter 2002 property
write-down of the vacant Hardee's- S. Milwaukee property, the Second Quarter
2002 summary judgment accrual related to the former Mulberry Street Grill
property, the write-off of non-collectible receivables, increased tenant default
expenditures, increased legal expenditures due to tenant defaults, eviction
proceedings at the Twin Falls property, court proceedings related to the former
Mulberry Street Grill property, and change in auditor issues. Total expenditures
in 2001 included non-recurring appraisals, which were performed in the First
Quarter of 2001 on all the Partnership properties, and ground lease obligations
relating to the former Mulberry Street Grill Restaurant.

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. If inflation causes operating margins to deteriorate for lessees
if expenses grow faster than revenues, then, inflation may well negatively
impact the portfolio through tenant defaults.

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

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move inversely with interest rates.

New Accounting Pronouncement:

In October 2001, Statement of Financial Accounting Standards No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" (FAS 144) was issued. The
FAS 144 supercedes Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be disposed of" (FAS 121). FAS 144 primarily addresses issues relating to the
implementation of FAS 121 and develops a single accounting model for long-lived
assets to be disposed of, whether previously held and used or newly acquired.
The provisions of FAS 144 are effective for fiscal years beginning after
December 15, 2001. The Company adopted FAS 144 on January 1, 2002 with no impact
on financial statements.

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 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 to write down the asset to its fair value is recognized, if any.

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

None.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

The Partnership owned the building in Phoenix, Arizona occupied by the Mulberry
Street Grill restaurant, which was located on a parcel of land leased to the
Partnership pursuant to a long-term ground lease ("Ground Lease.") The Ground
Lease was considered an operating lease and the lease payments were paid by the

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Partnership and expensed in the periods to which they applied. During the Second
Quarter of 2001, sub-tenant AMF Corporation ("AMF") notified Management of its
intent to close its Mulberry Street Grill restaurant. Although the sub-lease had
not expired, since such notification the Partnership has received no rent from
the former tenant and has returned possession of the Phoenix, Arizona property
to the Ground Lease Landlord, Centre at 38/th/ Street, L.L.C, ("Centre".)
Beginning in May and through December 2001 the Partnership accrued but withheld
payment of the ground lease obligations, and on March 31, 2002 and December 31,
2001 the total ground lease accrual approximated $50,000. Centre has re-leased
the property to a new tenant.

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

The Partnership and TPG filed an answer denying any liability to Centre. In
addition, the Partnership has filed a third-party complaint against the original
tenant, National Restaurant Group, ("National Restaurant"), Centre, and its
sub-tenant AMF. In the third-party complaint, the Partnership alleges that
National Restaurant and AMF are liable to the Partnership for breach of the
subleases and any damages for which the Partnership may be held liable pursuant
to the Ground Lease. Currently National Restaurant has filed for bankruptcy and
the Partnership has not been successful in locating AMF.

On April 10, 2002 the Maricopa County Superior Court granted the motion for
summary judgment against the Partnership and TPG. The Court awarded damages to
Centre as of April 10, 2002 in the amount of $93,000. As of March 31, 2002 the
Partnership had accrued $50,000 in ground lease obligations payable to Centre
and the remaining summary judgment balance of $43,000 was accrued in April 2002.

In June 2002 the Partnership and TPG filed the Notice of Appeal with respect to
such judgment and are waiting for the Court of Appeals to set a schedule for
filing briefs in support of the appeal. In order to prevent Centre from
enforcing the judgment, an approximately $140,000 bond application was filed in
July 2002. The bond premium was anticipated to approximately $2,600. By law, the
amount of the bond must be sufficient to cover the amount of the judgment, plus
interest, and any additional costs that may be incurred during the appeal.

In August 2002 the Partnership was required to escrow $140,000 at the office of
the Clerk of the Court during the appeal process. The Court of Appeals has not
yet set a court date. Currently National Restaurant has filed for bankruptcy and
the Partnership has learned that AMF has been dissolved.

On April 10, 2002 the Maricopa County Superior Court granted the motion for
summary judgment against the Partnership and TPG. The Court awarded damages to
Centre as of April 10, 2002 in the amount of $93,000. As of March 31, 2002 the
Partnership had accrued $50,000 in ground lease obligations payable to Centre
and the remaining summary judgment balance of $43,000 was accrued in April 2002.

On June 20, 2002 the Partnership and TPG filed the Notice of Appeal with respect
to such judgment. In order to prevent Centre from enforcing the judgment, an
approximately $140,000 bond application was filed in July

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<PAGE>

2002. By law, the amount of the bond must be sufficient to cover the amount of
the judgment, plus interest, and any additional costs that may be incurred
during the appeal.

In September 2002 the Partnership was required to escrow a $140,000 cash bond at
the office of the Clerk of the Court during the appeal process. As of September
30, 2002 the Partnership was waiting for the Court of Appeals to set a court
date for the appeal.

Items 2 - 4.
Not Applicable.

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Item 5.  Other Information

Registrant's interim financial statements in this Form 10-Q have not been
reviewed by an independent public accountant due to the wind-down of Arthur
Andersen's business. See Item 4 to Registrant's Form 8-K and Form 8-K/A filed
August 14, 2002 and August 27, 2002, respectively, and incorporated herein by
reference. Registrant will amend this form 10-Q to contain a review by an
independent public accountant as soon as Registrant engages this accountant.

Item 6.  Exhibits and Reports on Form 8-K and Form 8-K/A

(a)      Listing of Exhibits:

         99.0  Correspondence to the Limited Partners dated November 15, 2002,
               regarding the Third Quarter 2002 distribution.

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

(b)      Reports on Form 8-K:

         The Registrant filed Form 8-K on August 14, 2002.

         The Registrant filed Form 8-K/A on August 27, 2002.

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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, there unto 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 13, 2002



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

By:   The Provo Group, Inc., General Partner



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



Date: November 13, 2002



By:   /s/ Bruce A. Provo
      ------------------
      Bruce A. Provo, Chief Executive Officer and Chief Financial Officer



Date: November 13, 2002

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