<PAGE>

                                    FORM 10-Q
                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 March 31, 2003

                                       OR

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

           For the transition period from ____________ to ____________

                         Commission file number 0-17686

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

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

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

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

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

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

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

                                        1

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                         PART I - FINANCIAL INFORMATION
                          ITEM 1. FINANCIAL STATEMENTS

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                            CONDENSED BALANCE SHEETS

                      MARCH 31, 2003 AND DECEMBER 31, 2002

                                     ASSETS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                  March 31,      December 31,
                                                                                    2003             2002
                                                                                 ------------    ------------
<S>                                                                              <C>             <C>
INVESTMENT PROPERTIES AND EQUIPMENT: (Note 3)

      Land                                                                       $  6,834,534    $  6,820,054
      Buildings                                                                    10,019,689      10,543,064
      Equipment                                                                       669,778         669,778
      Accumulated depreciation                                                     (5,584,973)     (5,702,845)
                                                                                 ------------    ------------

             Net investment properties and equipment                               11,939,028      12,330,051
                                                                                 ------------    ------------

OTHER ASSETS:

      Property held for sale                                                          732,160         449,936
      Cash and cash equivalents                                                       806,151       1,369,248
      Cash held in Indemnification Trust (Note 8)                                     379,918         378,725
      Deposit- Clerk of the Court (Note 10)                                           140,000         140,000
      Rents and other receivables (Net of allowance of $96,600
       and $134,578 in 2003 and 2002)                                                 113,773         598,438
      Property tax  receivable  (Net of allowance of $29,929 in 2003 and 2002)          2,077           5,191
      Deferred rent receivable                                                        159,373         133,017
      Prepaid insurance                                                                20,257          28,939
      Deferred charges, net                                                           340,710         313,120
                                                                                 ------------    ------------

             Total other assets                                                     2,694,419       3,416,614
                                                                                 ------------    ------------

             Total assets                                                        $ 14,633,447    $ 15,746,665
                                                                                 ============    ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                        2

<PAGE>

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                            CONDENSED BALANCE SHEETS

                      MARCH 31, 2003 AND DECEMBER 31, 2002

                        LIABILITIES AND PARTNERS' CAPITAL
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                            March 31,     December 31,
                                                                              2003            2002
                                                                          ------------    ------------
<S>                                                                       <C>             <C>
LIABILITIES:
       Accounts payable and accrued expenses                              $     54,045    $     65,282
       Judgment payable                                                              0          92,866
       Property taxes payable                                                   23,901          16,839
       Due to General Partner                                                    3,659           3,069
       Security deposits                                                       136,585         136,585
       Unearned rental income                                                   36,813         112,760
                                                                          ------------    ------------

                Total liabilities                                              255,003         427,401
                                                                          ------------    ------------

CONTINGENT LIABILITIES: (Note 7)

PARTNERS' CAPITAL: (Notes 1, 4 and 9)
       Current General Partner -
               Cumulative net income                                           188,677         187,529
               Cumulative cash distributions                                   (78,064)        (77,474)
                                                                          ------------    ------------
                                                                               110,613         110,055
       Limited Partners (46,280.3 interests outstanding)
               Capital contributions, net of offering costs                 39,358,468      39,358,468
               Cumulative net income                                        25,044,860      24,931,238
               Cumulative cash distributions                               (49,295,268)    (48,240,268)
               Reallocation of former general partners' deficit capital       (840,229)       (840,229)
                                                                          ------------    ------------

                                                                            14,267,831      15,209,209

                       Total partners' capital                              14,378,444      15,319,264
                                                                          ------------    ------------

                       Total liabilities and partners' capital            $ 14,633,447    $ 15,746,665
                                                                          ============    ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                        3

<PAGE>

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                         CONDENSED STATEMENTS OF INCOME

            FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                   2003          2002
                                                                ----------    ----------
<S>                                                             <C>           <C>
OPERATING REVENUES:
    Rental income (Note 5)                                      $  477,307    $  490,385
                                                                ----------    ----------
       TOTAL OPERATING REVENUES                                    477,307       490,385
                                                                ----------    ----------
OPERATING EXPENSES
    Partnership management fees (Note 6)                            50,130        49,014
    Restoration fees (Note 6)                                           53             0
    Insurance                                                       19,437         6,611
    General and administrative                                      15,347        20,847
    Advisory Board fees and expenses                                 3,653         3,736
    Personal property taxes                                         14,214             0
    Professional services                                          131,706        49,995
    Maintenance and repair expenses                                 22,855           705
    Expenses incurred due to default by lessee or vacancy            1,860             0
    Settlement expense                                              22,134             0
    Depreciation                                                    74,563        74,563
    Amortization                                                     4,331         3,026
    Provision for non-collectible rents and other receivables        2,596         2,017
                                                                ----------    ----------
       TOTAL OPERATING EXPENSES                                    362,879       210,514
                                                                ----------    ----------
OTHER INCOME

    Interest income                                                  3,108         4,013
    Other income                                                       135         8,059
    Recovery of amounts previously written off (Note 2)              1,335             0
                                                                ----------    ----------
       TOTAL OTHER INCOME                                            4,578        12,072
                                                                ----------    ----------
INCOME FROM CONTINUING OPERATIONS                                  119,006       291,943
(LOSS) INCOME FROM DISCONTINUED OPERATIONS                          (4,236)        6,050
                                                                ----------    ----------
NET INCOME                                                      $  114,770    $  297,993
                                                                ==========    ==========

NET INCOME- CURRENT GENERAL PARTNER                             $    1,148    $    2,980
NET INCOME- LIMITED PARTNERS                                       113,622       295,013
                                                                ----------    ----------
                                                                $  114,770    $  297,993
                                                                ==========    ==========
PER LIMITED PARTNERSHIP INTEREST,
 based on 46,280.3 Interests outstanding:

INCOME FROM CONTINUING OPERATIONS                               $     2.55    $     6.24
(LOSS) INCOME FROM DISCONTINUED OPERATIONS                            (.09)          .13
                                                                ----------    ----------
NET INCOME PER LIMITED PARTNERSHIP INTEREST                     $     2.46    $     6.37
                                                                ==========    ==========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       4

<PAGE>

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                       CONDENSED STATEMENTS OF CASH FLOWS

            FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                            2003          2002
                                                                        -----------    -----------
<S>                                                                     <C>            <C>
CASH FLOWS FROM (USED) IN OPERATING ACTIVITIES:
    Net income                                                          $   114,770    $   297,993
    Adjustments to reconcile net income to net
     cash from (used in) operating activities -
            Depreciation and amortization                                    80,292         87,540
            Recovery of amount previously written off                        (1,335)             0
            Provision for non-collectible rents and other receivables         2,596          2,017
            Property write-down                                              32,838              0
            Interest applied to Indemnification Trust account                (1,193)        (1,601)
            Decrease in rents and other receivables                         484,664        450,608
            Deposits for payment of real estate taxes                             0          7,875
            Decrease in prepaid expenses                                      8,682          6,610
            (Increase) in deferred rent receivable                          (26,356)        (1,059)
            Decrease in Property Tax receivable                                 518              0
            Increase in due to current General Partner                          590          1,192
            (Decrease) Increase in accounts payable and other accrued      (104,103)         1,061
            Increase (Decrease) in property taxes payable                     7,062        (21,370)
            (Decrease) in unearned rental income                            (75,947)      (128,563)
                                                                        -----------    -----------

            Net cash from operating activities                              523,078        702,303
                                                                        -----------    -----------

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:

    Principal payments received on note receivable                                0         39,250
    Payment of leasing commissions                                          (31,920)             0
    Recoveries from former General Partner affiliates                         1,335              0
                                                                        -----------    -----------

            Net cash from (used in) investing activities                    (30,585)        39,250
                                                                        -----------    -----------

CASH FLOWS USED IN FINANCING ACTIVITIES:
    Cash distributions to Limited Partners                               (1,055,000)      (485,000)

    Cash distributions to current General Partner                              (590)        (1,192)
                                                                        -----------    -----------

            Net cash used in financing activities                        (1,055,590)      (486,192)
                                                                        -----------    -----------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                       (563,097)       255,361

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                          1,369,248        818,606
                                                                        -----------    -----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                              $   806,151    $ 1,073,967
                                                                        ===========    ===========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                        5

<PAGE>

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                     NOTES TO CONDENSED FINANCIAL STATEMENTS

These unaudited interim financial statements should be read in conjunction with
DiVall Insured Income Properties 2 Limited Partnership's (the "Partnership")
2002 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 the
Partnership's financial position as of March 31, 2003, and the changes in net
assets for the three-month period ended March 31, 2003 and 2002, and cash flows
for the three-month period ended March 31, 2003 and 2002.

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:

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

The Partnership is 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 March
31, 2003, the Partnership owned 25 properties with specialty leasehold
improvements in 10 of these properties.

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

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

Depreciation of the properties and improvements are provided on a straight-line
basis over 31.5 years, which are the estimated useful lives of the buildings and
improvements. Equipment is depreciated on a straight-line basis over the
estimated useful lives of 5 to 7 years.

Deferred charges represent leasing commissions paid when properties are leased
and upon the negotiated extension of a lease. Leasing commissions are
capitalized and amortized over the 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

                                        6

<PAGE>

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 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.

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

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

The 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 solicitation was circulated, which if
approved would have authorized the sale of the Partnership's assets and
dissolution of the Partnership (the "2001 Consent"). A majority of the Limited
Partners did not vote in favor of the 2001 Consent. 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
March 31, 2003, the tax basis of the Partnership's assets exceeded the amounts
reported in the accompanying financial statements by approximately $8,093,000.

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

                                        7

<PAGE>

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

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

In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships. At that time, an allowance was established against
amounts due from former general partners and their affiliates reflecting the
estimated $3 million receivable. This net receivable was allocated among the
Partnerships based on each Partnership's pro rata share of the total
misappropriation, and restoration costs and recoveries have been allocated based
on the same percentage. Through March 31, 2003, $5,813,000 of recoveries have
been received which exceeded the original estimate of $3 million. As a result,
in 1996, 1997, 1999, 2000, 2001, 2002 and 2003 the Partnership has recognized a
total of $1,131,000 as recovery of amounts previously written off in the
statements of income, which represents its share of the excess recovery. There
were no restoration activities or recoveries in 1998. The current General
Partner continues to pursue recoveries of the misappropriated funds, however, no
further significant recoveries are anticipated.

3. INVESTMENT PROPERTIES:

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

As of March 31, 2003, the Partnership owned 21 fully constructed fast-food
restaurants, a video store, a preschool, and two (2) vacant properties. The 25
properties are composed of the following: ten (10) Wendy's restaurants, one (1)
Hardee's restaurant, one (1) Denny's restaurant, one (1) Applebee's restaurant,
one (1) Popeye's Famous Fried Chicken restaurant, one (1) Hooter's restaurant,
one (1) Kentucky Fried Chicken restaurant, (1) Chinese Super Buffet restaurant,
one (1) Miami Subs restaurant, one (1) Omega restaurant, one (1) Blockbuster
Video store, one (1) Sunrise Preschool, one (1) Panda Buffet Restaurant, one (1)
Daytona's- All Sports Cafe, and two (2) vacant properties, (which were
previously operated as a Fiesta Time restaurant and a Hardee's restaurant.) The
25 properties are located in a total of thirteen (13) states.

During the three months ended March 31, 2003 and 2002, the Partnership
recognized (loss) income from discontinued operations of ($4,000) and $6,000,
respectively. The 2003 and 2002 (loss) income from discontinued operations is
attributable to the Hartford, WI property (which was sold in October 2002), and
the reclassifications of the vacant South Milwaukee, WI property to property
held for sale in the Fourth Quarter of 2002 and the Twin Falls property in the
First Quarter of 2003. The First Quarter of 2003 net loss from discontinued
operations includes a $33,000 property write-down of the South Milwaukee
property to reflect the estimated market value of the property at March 31, 2003
of approximately $417,000.

                                        8

<PAGE>

The components of discontinued operations for the three-months ended March 31,
2003 and 2002 are outlined below.

                                          Three months ended  Three months ended
                                            March 31, 2003      March 31, 2002
                                          ------------------  ------------------
Revenues

  Rental Income                                     $ 30,000            $ 16,000

Expenses

  Property Write-down                                 32,838                   0

  Depreciation                                         1,398               9,672

  Amortization                                             0                 278
                                          ------------------  ------------------
(Loss) Income from Discontinued
 Operations                                         $ (4,236)           $  6,050
                                          ==================  ==================

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

Grand Forks, ND Property

During February 2003 a new 10-year lease was executed with Panda Buffet, Inc. in
relation to the Grand Forks, ND property, formerly occupied by Village Inn. The
lease is set to expire in 2012 and the annual first year base rent is $32,000.
Although the tenant took possession of the property upon execution of the lease,
the lease payments are to commence in June 2003. Commissions of $18,500 and
$3,700 were paid to an unaffiliated leasing agent and to an affiliate of the
General Partner, respectively, in March 2003. HVAC maintenance and repair
expenditures of $18,000 were incurred in the First Quarter of 2003 at the
property.

During October 2001, the Village Inn Restaurant had notified Management of its
intent to close and vacate its restaurant in Grand Forks, ND. The lease on the
property expires in 2009. In February 2002, Management was notified Village Inn
had closed and vacated the restaurant. Rent income was collected from the tenant
through December 2001, however; rent income has not been collected for January
2002 through March 2003. The Partnership has not recognized revenue in 2003
related to Village Inn. In March 2002 and September 2002, the Partnership paid
the property's first and second installments of 2001 real estate taxes. The
Partnership also paid the 2002 real estate taxes in the Fourth Quarter of 2002.
Management continues legal action in relation to Village Inn's past due rent and
real estate taxes of approximately $143,000, as well as future lease and other
obligations that will be determined to be in excess of the lease payments
received by the Partnership from the new tenant, Panda Buffet. The Partnership
incurred expenditures of approximately $27,000 to replace the roof on the
property in the Third Quarter of 2002.

4785 Merle Hay Road- Des Moines, IA

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

                                        9

<PAGE>

Miami Subs-Palm Beach, FL

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

South Milwaukee, WI property

In October 2002 Management entered into a contract to sell the vacant Hardee's-
South Milwaukee, WI property at a sales price of $450,000. The South Milwaukee
property closing date is anticipated to be in the Second Quarter of 2003. In the
Third Quarter of 2002 the net asset value of the South Milwaukee property was
written-down by $98,000 to reflect the estimated market value of the property at
September 30, 2002 of approximately $450,000, which included $275,000 related to
land and $175,000 related to buildings and equipment, shown on the balance sheet
as property held for sale at September 30, 2002. In the First Quarter of 2003
the net asset value of the South Milwaukee property was written-down by $33,000
to reflect the estimated market value of the property at March 31, 2003 of
approximately $417,000, which included $275,000 related to land and $142,000
related to buildings and equipment, shown on the balance sheet as property held
for sale at March 31, 2003.

Hardee's property-Hartford, WI

During the Second Quarter of 2002, Management entered a contract to sell the
vacant Hardee's restaurant in Hartford, WI at a sales price of $618,000. During
December 2001, Hardee's Food Systems, Inc. had notified Management that it had
vacated its restaurant in Hartford, Wisconsin. Hardee's lease on the Hartford
property was set to expire on April 30, 2009 and they continued making rent
payments until the closing date of October 2002. The net asset value of the
property at September 30, 2002 was approximately $470,000, which included
$202,000 related to land and $268,000 related to buildings and equipment, and
the net gain on the sale of the property in October 2002 was approximately
$124,000. Included in the net gain was a Fourth Quarter 2002 sales commission of
$18,500, which was paid by the Partnership to an affiliate of the General
Partner.

North 7th Street property-Phoenix, AZ

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

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

Milwaukee, WI property

During March 2001, Hardee's Food Systems, Inc. had notified Management of its
intent to close its restaurant in Milwaukee, Wisconsin. The Hardee's lease on
the Milwaukee property was not set to expire until 2009. In the Second Quarter
of 2001, a lease termination agreement was executed and the tenant ceased the
payment of rent as

                                       10

<PAGE>

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

During May 2001, Management negotiated a ten (10) year lease of the vacant
Milwaukee, Wisconsin property to Omega Restaurant. The first year base rent was
$84,000 and rent commenced in October 2001. Although the tenant has not begun
operating the restaurant, monthly rent payments continue to be received from the
lessee by the Partnership. Commissions of $50,000 and $9,000 were paid to an
unaffiliated leasing agent and to an affiliate of the General Partner,
respectively, upon the execution of the new lease in the Second Quarter of 2001.

Twin Falls, ID property

During the Fourth Quarter of 2001, the Bankruptcy court granted the motion of
Phoenix Restaurant Group, Inc. ("Phoenix") to reject the lease with the
Partnership at the Twin Falls, Idaho location. The lease was terminated and rent
income ceased in the Fourth Quarter of 2001. The remaining balance due the
Partnership for the period prior to the termination of the lease of
approximately $29,000 and its full reserve has been removed from the
Partnership's balance sheet as Management has determined it to be
non-collectible. Although Phoenix had rejected the lease, its subtenant, Fiesta
Time, maintained possession of the property. Management, therefore, took legal
action to evict Fiesta Time from the Twin Falls property. In the Fourth Quarter
of 2002, a judgment was entered in Magistrate Court evicting Fiesta Time.
However, Fiesta Time appealed the action to District Court and the Court upheld
the judgment in February 2003. The Partnership then received $30,000 in past
rent that the court had required Fiesta Time to escrow during the court
proceedings. In late February 2003 Management entered a purchase and sale
agreement to sell the vacant Twin Falls property at a sales price of $550,000.
The closing date of the sale has moved from the Second Quarter to the Third
Quarter of 2003. The net book value of the property at March 31, 2003 was
approximately $315,000, which included $155,000 related to land and $160,000
related to buildings and equipment.

Former Mulberry Street Grill property-Phoenix, AZ

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

Beginning in May 2001 and through December 2001 the Partnership accrued but
withheld payment of the ground lease obligations to Centre, and on December 31,
2001 the total ground lease accrual approximated $50,000. In the Second Quarter
of 2001, Centre filed suit against the Partnership and TPG (as General Partner)
seeking possession of the property and damages for breach of the Ground Lease.
In April 2002, an additional $43,000 was accrued as payable to Centre, due to
the Court's granting a summary judgment of $93,000 against the Partnership. In
June 2002 the Partnership filed an appeal with respect to this judgment. In
September 2002, the Partnership

                                       11

<PAGE>

was required to escrow a $140,000 cash bond at the clerk of the court during the
appeal process. A Settlement Agreement and Mutual Release (the "Agreements") was
made and entered into as of February 1, 2003. According to the terms of the
Agreements the Partnership was required to pay Centre $115,000 (the
"Settlement") to discharge all claims of Centre against the Partnership and TPG
(except for violations of environmental laws.) The court returned the $140,0000
cash bond to the Partnership in April 2003. (See Legal Proceedings in Note 10
and Part II-Item 1.)

Other Investment in Properties Information

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

As of December 31, 2002 two of the Partnership's property leases, where the
Partnership is the lessor, contain purchase option provisions with stated
purchase prices in excess of the original cost of the properties. The current
General Partner is not aware of any unfavorable purchase options in relation to
original cost.

4. PARTNERSHIP AGREEMENT:

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

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

                                       12

<PAGE>

liability resulting from allocated income. Subsequent to the filing of the
General Partner's income tax returns, a true up with actual distributions is
made.

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

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

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

On May 15, 2003, the Partnership intends to make distributions to the Limited
Partners of $510,000, which amounts to $11.02 per Interest.

5. LEASES:

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

                                       13

<PAGE>

As of March 31, 2003 aggregate minimum lease payments to be received under the
leases for the Partnership's properties are as follows:

Year ending
December 31,
2003                             $  1,876,513
2004                                1,846,671
2005                                1,855,942
2006                                1,767,259
2007                                1,752,146
Thereafter                         10,272,457
                                 ------------
                                 $ 19,370,988
                                 ============

Ten (10) of the properties are leased to Wensouth Orlando, a franchisee of
Wendy's restaurants. Wensouth base rents accounted for 45% of total base rents
for 2003.

6. TRANSACTIONS WITH CURRENT GENERAL PARTNER AND ITS AFFILIATES:

The current General Partner was to receive a 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 of $25,000, as provided in the Permanent Manager
Agreement ("PMA"). The current General Partner receives a fee for managing the
Partnership equal to 4% of gross receipts and shall only be responsible for its
allocable share of such minimum and maximum annual amounts as indicated above
($159,000 minimum annual base fee and $13,250 maximum annual rent
reimbursement). Effective March 1, 2003, the minimum annual management fee and
the maximum annual reimbursement for office rent and overhead increased by
1.58%, representing the allowable annual Consumer Price Index adjustment per the
PMA. Therefore, as of March 1, 2003 the minimum monthly management fee was
raised to $16,903.

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 $55,651 to date on the amounts recovered, which includes
2003 fees of $53. 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-month periods ended March 31, 2003 and 2002 are as follows:


                                           Incurred for the    Incurred for the
                                          Three-month Period  Three-month Period
Current General Partner                    ended March, 2003   ended March, 2002
-----------------------                   ------------------  ------------------

Management fees                                     $ 50,130            $ 49,014
Restoration fees                                          53                   0
Overhead allowance                                     4,049               3,954
Leasing commissions                                   13,420                   0
Reimbursement for out-of-pocket expenses               1,318               1,165
Cash distribution                                        590               1,192
                                           -----------------  ------------------
                                                    $ 69,560            $ 55,785
                                           =================  ==================

                                       14

<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 escrowed until the aggregate
amount of recovery of the funds misappropriated from the Partnerships by the
former general partners is greater than $4,500,000. Upon reaching such recovery
level, full disposition fees will thereafter be payable and fifty percent (50%)
of the previously escrowed amounts will be paid to the current General Partner.
At such time as the recovery exceeds $6,000,000 in the aggregate, the remaining
escrowed disposition fees shall be paid to the current General Partner. If such
levels of recovery are not achieved, the current General Partner will contribute
the amounts escrowed towards the recovery. In lieu of an escrow, 50% of all such
disposition fees have been paid directly to a restoration account and then
distributed among the three original Partnerships. Fifty percent (50%) of the
total amount paid to the recovery was refunded to the current General Partner
during March 1996 after exceeding the recovery level of $4,500,000. The General
Partner does not expect any future refunds, as the possibility of achieving the
$6,000,000 recovery threshold appears remote.

8. PMA INDEMNIFICATION TRUST:

The Permanent Manager Agreement ("PMA") provides that the Permanent Manager will
be indemnified from any claims or expenses arising out of or relating to the
Permanent Manager serving in such capacity or as substitute general partner, so
long as such claims do not arise from fraudulent or criminal misconduct by the
Permanent Manager. The PMA provides that the Partnership fund this
indemnification obligation 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 March 31, 2003. Funds are invested in U.S. Treasury
securities. In addition, $129,918 of earnings has been credited to the Trust as
of March 31, 2003. The rights of the Permanent Manager to the Trust shall be
terminated upon the earliest to occur of the following events: (i) the written
release by the Permanent Manager of any and all interest in the Trust; (ii) the
expiration of the longest statute of limitations relating to a potential claim
which might be brought against the Permanent Manager and which is subject to
indemnification; or (iii) a determination by a court of competent jurisdiction
that the Permanent Manager shall have no liability to any person with respect to
a claim which is subject to indemnification under the PMA. At such time as the
indemnity provisions expire or the full indemnity is paid, any funds remaining
in the Trust will revert back to the general funds of the Partnership.

9. FORMER GENERAL PARTNERS' CAPITAL ACCOUNTS:

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

10. LEGAL PROCEEDINGS:

The Partnership owned the building in Phoenix, Arizona occupied by the Mulberry
Street Grill restaurant, which was located on a parcel of land leased to the
Partnership pursuant to a long-term ground lease (the "Ground Lease.") The
Ground Lease was considered an operating lease and the lease payments were paid
by the Partnership and expensed in the periods to which they applied. During the
Second Quarter of 2001, sub-tenant

                                       15

<PAGE>

AMF Corporation ("AMF") notified Management of its intent to close its Mulberry
Street Grill restaurant. Although the sub-lease had not expired, since such
notification the Partnership has received no rent from the former tenant and has
returned possession of the Phoenix, Arizona property to the Ground Lease
Landlord, Centre at 38th Street, L.L.C., ("Centre".) Beginning in May 2001 and
through December 2001 the Partnership accrued but withheld payment of the ground
lease obligations, and on March 31, 2002 and December 31, 2001 the total ground
lease accrual approximated $50,000. On June 12, 2001 Centre leased the property
to a new tenant.

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

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

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

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

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

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

                                       16

<PAGE>

11. SUBSEQUENT EVENTS:

The vacant South Milwaukee property was sold in April 2003 at a sales price of
$450,000. The net asset value of the property at March 31, 2003 was
approximately $417,000, which included $275,000 related to land and $142,000
related to buildings and equipment. Closing costs amounted to $6,000 and sales
commissions related to the sale, which were paid to non-affiliated brokers,
totaled $27,000.

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 and properties held
for sale at March 31, 2003, were originally purchased at a price, including
acquisition costs, of approximately $21,574,000.

As of March 31, 2003, the Partnership owned 21 fully constructed fast-food
restaurants, a video store, a preschool, and two (2) vacant properties. The 25
properties are composed of the following: ten (10) Wendy's restaurants, one (1)
Hardee's restaurant, one (1) Denny's restaurant, one (1) Applebee's restaurant,
one (1) Popeye's Famous Fried Chicken restaurant, one (1) Hooter's restaurant,
one (1) Kentucky Fried Chicken restaurant, (1) Chinese Super Buffet restaurant,
one (1) Miami Subs restaurant, one (1) Omega restaurant, one (1) Blockbuster
Video store, one (1) Sunrise Preschool, one (1) Panda Buffet Restaurant, one (1)
Daytona's- All Sports Cafe, and two (2) vacant properties, (which were
previously operated as a Fiesta Time restaurant and a Hardee's restaurant.) The
25 properties are located in a total of thirteen (13) states.

During the three months ended March 31, 2003 and 2002, the Partnership
recognized (loss) income from discontinued operations of ($4,000) and $6,000,
respectively. The 2003 and 2002 (loss) income from discontinued operations is
attributable to the Hartford, WI property (which was sold in October 2002), and
the reclassifications of the vacant South Milwaukee, WI property to property
held for sale in the Fourth Quarter of 2002 and the Twin Falls property in the
First Quarter of 2003. The First Quarter of 2003 net loss from discontinued
operations includes a $33,000 property write-down of the South Milwaukee
property to reflect the estimated market value of the property at March 31, 2003
of approximately $417,000.

The components of discontinued operations for the three-months ended March 31,
2003 and 2002 are outlined below.

                                          Three months ended  Three months ended
                                            March 31, 2003      March 31, 2002
                                          ------------------  ------------------
Revenues

  Rental Income                                    $  30,000           $  16,000

Expenses

  Property Write-down                                 32,838                   0

  Depreciation                                         1,398               9,672

  Amortization                                             0                 278
                                          ------------------  ------------------
(Loss) Income from Discontinued
 Operations                                        $  (4,236)          $   6,050
                                          ==================  ==================

                                       17

<PAGE>

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

Grand Forks, ND Property

During February 2003 a new 10-year lease was executed with Panda Buffet, Inc. in
relation to the Grand Forks, ND property, formerly occupied by Village Inn. The
lease is set to expire in 2012 and the annual first year base rent is $32,000.
Although the tenant took possession of the property upon execution of the lease,
the lease payments are to commence in June 2003. Commissions of $18,500 and
$3,700 were paid to an unaffiliated leasing agent and to an affiliate of the
General Partner, respectively, in March 2003. HVAC maintenance and repair
expenditures of $18,000 were incurred in the First Quarter of 2003 at the
property.

During October 2001, the Village Inn Restaurant had notified Management of its
intent to close and vacate its restaurant in Grand Forks, ND, formerly occupied
by Village Inn. 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 2002 through March 2003. The Partnership has
not recognized revenue in 2003 related to Village Inn. In March 2002 and
September 2002, the Partnership paid the property's first and second
installments of 2001 real estate taxes. The Partnership also paid the 2002 real
estate taxes in the Fourth Quarter of 2002. Management continues legal action in
relation to Village Inn's past due rent and real estate taxes of approximately
$143,000, as well as future lease and other obligations that will be determined
to be in excess of the lease payments received by the Partnership from the new
tenant, Panda Buffet. The Partnership incurred expenditures of approximately
$27,000 to replace the roof on the property in the Third Quarter of 2002.

4785 Merle Hay Road- Des Moines, IA

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

Miami Subs-Palm Beach, FL

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

South Milwaukee, WI property

In October 2002 Management entered into a contract to sell the vacant Hardee's-
South Milwaukee, WI property at a sales price of $450,000. The South Milwaukee
property closing date is anticipated to be in the Second Quarter of 2003. In the
Third Quarter of 2002 the net asset value of the South Milwaukee property was
written-down by $98,000 to reflect the estimated market value of the property at
September 30, 2002 of approximately $450,000, which included $275,000 related to
land and $175,000 related to buildings and equipment, shown on the balance sheet
as property held for sale at September 30, 2002. In the First Quarter of 2003
the net asset value of the South Milwaukee property was written-down by $33,000
to reflect the estimated market value of the property at March

                                       18

<PAGE>

31, 2003 of approximately $417,000, which included $275,000 related to land and
$142,000 related to buildings and equipment, shown on the balance sheet as
property held for sale at March 31, 2003.

Hardee's property-Hartford, WI

During the Second Quarter of 2002, Management entered a contract to sell the
vacant Hardee's restaurant in Hartford, WI at a sales price of $618,000. During
December 2001, Hardee's Food Systems, Inc. had notified Management that it had
vacated its restaurant in Hartford, Wisconsin. Hardee's lease on the Hartford
property was set to expire on April 30, 2009 and they continued making rent
payments until the closing date of October 2002. The net asset value of the
property at September 30, 2002 was approximately $470,000, which included
$202,000 related to land and $268,000 related to buildings and equipment, and
the net gain on the sale of the property in October 2002 was approximately
$124,000. Included in the net gain was a Fourth Quarter 2002 sales commission of
$18,500, which was paid by the Partnership to an affiliate of the General
Partner.

North 7th Street property-Phoenix, AZ

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

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

Milwaukee, WI property

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

During May 2001, Management negotiated a ten (10) year lease of the vacant
Milwaukee, Wisconsin property to Omega Restaurant. The first year base rent was
$84,000 and rent commenced in October 2001. Although the tenant has not begun
operating the restaurant, monthly rent payments continue to be received from the
lessee by the Partnership. Commissions of $50,000 and $9,000 were paid to an
unaffiliated leasing agent and to an affiliate of the General Partner,
respectively, upon the execution of the new lease in the Second Quarter of 2001.

Twin Falls, ID property

During the Fourth Quarter of 2001, the Bankruptcy court granted the motion of
Phoenix Restaurant Group, Inc. ("Phoenix") to reject the lease with the
Partnership at the Twin Falls, Idaho location. The lease was terminated

                                       19

<PAGE>

and rent income ceased in the Fourth Quarter of 2001. The remaining balance due
the Partnership for the period prior to the termination of the lease of
approximately $29,000 and its full reserve has been removed from the
Partnership's balance sheet as Management has determined it to be
non-collectible. Although Phoenix had rejected the lease, its subtenant, Fiesta
Time, maintained possession of the property. Management, therefore, took legal
action to evict Fiesta Time from the Twin Falls property. In the Fourth Quarter
of 2002, a judgment was entered in Magistrate Court evicting Fiesta Time.
However, Fiesta Time appealed the action to District Court and the Court upheld
the judgment in February 2003. The Partnership then received $30,000 in past
rent that the court had required Fiesta Time to escrow during the court
proceedings. In late February 2003 Management entered a purchase and sale
agreement to sell the vacant Twin Falls property at a sales price of $550,000.
The closing date of the sale has moved from the Second Quarter to the Third
Quarter of 2003. The net book value of the property at March 31, 2003 was
approximately $315,000, which included $155,000 related to land and $160,000
related to buildings and equipment.

Former Mulberry Street Grill property-Phoenix, AZ

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

Beginning in May 2001 and through December 2001 the Partnership accrued but
withheld payment of the ground lease obligations to Centre, and on December 31,
2001 the total ground lease accrual approximated $50,000. In the Second Quarter
of 2001, Centre filed suit against the Partnership and TPG (as General Partner)
seeking possession of the property and damages for breach of the Ground Lease.
In April 2002, an additional $43,000 was accrued as payable to Centre, due to
the Court's granting a summary judgment of $93,000 against the Partnership. In
June 2002 the Partnership filed an appeal with respect to this judgment. In
September 2002, the Partnership was required to escrow a $140,000 cash bond at
the clerk of the court during the appeal process. A Settlement Agreement and
Mutual Release (the "Agreements") was made and entered into as of February 1,
2003. According to the terms of the Agreements the Partnership was required to
pay Centre $115,000 (the "Settlement") to discharge all claims of Centre against
the Partnership and TPG (except for violations of environmental laws.) The court
returned the $140,0000 cash bond to the Partnership in April 2003. (See Legal
Proceedings in Note 10 and Part II-Item 1.)

Other Investment in Properties Information

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

As of December 31, 2002 two of the Partnership's property leases, where the
Partnership is the lessor, contain purchase option provisions with stated
purchase prices in excess of the original cost of the properties. The current
General Partner is not aware of any unfavorable purchase options in relation to
original cost.

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OTHER ASSETS

As of March 31, 2003 the property held for sale amounted to $732,000 and related
to the classification of the vacant South Milwaukee and Twin Falls properties.
The vacant South Milwaukee property was reclassified as held for sale in the
Fourth Quarter of 2002 and the closing date is anticipated to be in the Second
Quarter of 2003. The vacant Twin Falls property was reclassified as held for
sale in the First Quarter of 2003 and the closing date is anticipated to be in
the Third Quarter of 2003. Also, in the First Quarter of 2003 the net asset
value of the South Milwaukee property was written-down by $33,000 to reflect the
estimated market value of the property at March 31, 2003 of approximately
$417,000.

Cash and cash equivalents, held by the Partnership, totaled approximately
$806,000 at March 31, 2003 compared $1,369,000 at December 31, 2002. Cash of
$510,000 is anticipated to be used to fund the First Quarter 2003 distributions
to Limited Partners in May 2003, and cash of $118,000 is anticipated to be used
for the payment of year-end accounts payable and accrued expenses, and the
remainder represents amounts deemed necessary to allow the Partnership to
operate normally.

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

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

Deposit-Clerk of the Court amounted to $140,000 at March 31, 2003. In September
2002, the Partnership was required to escrow a $140,000 cash bond at the clerk
of the Maricopa County Superior Court during the appeal process related to the
Phoenix, Arizona property. Upon the execution of the settlement and release
agreement in the First Quarter of 2003, the $140,000 cash bond was returned to
the Partnership in April 2003. (See Legal Proceedings in Part II. - Item 1 and
Note 10.)

Rents and other receivables amounted to $114,000 (net of allowance of $97,000)
as of March 31, 2003. Village Inn is currently in default in relation to its
January 2002 through March 2003 lease payments. The Partnership has not
recognized revenue in 2003 related to Village Inn. Management continues legal
action in relation to Village Inn's past due rents of approximately $113,000, as
well as future lease and other obligations that will be determined to be in
excess of the lease payments received by the Partnership from the new Grand
Forks tenant, Panda buffet. Due to the uncertainty of collection, the past due
2002 rents totaling approximately $97,000 were fully reserved in the year 2002.
In the year 2002 Management charged Village Inn late fees totaling $3,400 in
relation to the 2002 past due rents. These late fee charges were fully reserved
in the year 2002 as Management is uncertain of collection. The tenant Popeye's-
Park Forest is delinquent on its January 2002 percentage rent billing for 2001
of $72,000. Management continues to pursue legal remedies in relation to the
collection of the tenant's percentage rent past due balance of approximately
$72,000. In addition, Management has charged Popeye's late fees totaling $24,000
(which includes First Quarter of 2003 late fee charges of $6,500) in relation to
the percentage rent balance due. The late fee charges have been fully reserved
as Management is uncertain of collection of these fees.

                                       21

<PAGE>

Property tax receivable at March 31, 2003 totaled $2,000 (net of allowance of
$30,000). The balance primarily represented 2001 and 2002 property taxes paid by
the Partnership, which are due from the defaulted tenant Village Inn. The
$30,000 due from Village Inn was fully reserved in 2002 due to the uncertainty
of collection. A portion of the amount also represented a property tax
receivable due from the new tenant, Chinese Super Buffet, for its portion of
2002 real estate taxes. In agreement with Management, Chinese Super Buffet is
making monthly payments toward its balance due.

Deferred charges totaled approximately $341,000 and $313,000, net of
amortization, at March 31, 2003 and December 31, 2002, 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 First Quarter of 2003,
commissions of $18,500 and $3,700 were paid to an unaffiliated leasing agent and
to an affiliate of the General Partner, respectively, upon the execution of the
new Panda Buffet lease, and a commission of $9,700 was paid to an affiliate of
the General Partner upon the execution of the new Dayton's- All Sports Cafe
lease.

LIABILITIES

Accounts payable and accrued expenses at March 31, 2003, in the amount of
$54,000, primarily represented the accruals of auditing, tax and data processing
fees.

Judgment Payable at December 31, 2002, in the amount of $93,000 represented the
accrual of the summary judgment against the Partnership in relation to the
former Mulberry Street Grill property. As of December 31, 2001 the Partnership
had withheld the May through December 2001 accrued ground lease obligations
totaling approximately $50,000 related to the property. In the Second Quarter of
2001, the Ground Lease landlord filed suit against the Partnership and TPG (as
General Partner) seeking possession of the property and damages for breach of
the Ground Lease. In April 2002, an additional $43,000 was accrued as payable to
the Ground Lease landlord, due to the Court's granting a summary judgment of
$93,000 against the Partnership. In February 2003 a Settlement Agreement and
Mutual Release (the "Agreement") was executed. According to the terms of the
Agreement the Partnership was required to pay directly to Centre a settlement
payment of $115,000 (the "Settlement"). (See Legal Proceedings in Part I- Item 1
and Note 10.)

Property taxes payable at March 31, 2003, in the amount of $24,000, represented
2002 real estate taxes due for the Chinese Super Buffet property, and the vacant
South Milwaukee, Wisconsin and Twin Falls, Idaho properties. The amount also
includes a delinquent 1989 personal property tax accrual in relation to the
Denny's- Northern property located in Phoenix, Arizona, which the Partnership
became liable for in the First Quarter of 2003.

Due to the Current General Partner amounted to $3,600 at December 31, 2002, and
primarily represented the General Partner's portion of the Fourth Quarter 2002
and First Quarter 2003 distributions.

PARTNERS' CAPITAL:

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

                                       22

<PAGE>

Cash distributions to the Limited Partners and to the General Partner during
2003 of $1,565,000 and $590, respectively, have also been made in accordance
with the Partnership Agreement. The Fourth Quarter 2002 Limited Partner
distributions totaling $1,055,000 were paid February 15, 2003. The Partnership
intends to pay First Quarter 2003 distributions of $510,000 on May 15, 2003.

RESULTS OF OPERATIONS:

The Partnership reported income from continuing operations for the three-month
period ended March 31, 2003, in the amount of $120,000 compared to income from
continuing operations for the three-month period ended March 31, 2003, of
$292,000. The decrease in income in the First Quarter of 2003 is due primarily
to: (i) increased legal expenditures due to tenant defaults, eviction
proceedings at the Twin Falls property, and court proceedings related to the
former Mulberry Street Grill property; (ii) increased audit fees; (iii) an
insurance premium adjustment; (iv) 1989 personal property taxes; (v) increased
maintenance expenditures at the Grand Forks, ND property; and (vi) the
settlement payment in February 2003.

DISCONTINUED OPERATIONS:

(Loss) Income from discontinued operations was ($4,000) and $6,000 for the
three-month periods ended March 31, 2003 and 2002, respectively. In accordance
with SFAS 144, discontinued operations represent the operations of properties
disposed of or classified as held for sale subsequent to January 1, 2002 as well
as any gain or loss recognized in their disposition. The Hardee's- Hartford
property was sold in October 2002, the vacant South Milwaukee property was
classified as held for sale in the Fourth Quarter of 2002, and the vacant Twin
Falls property was classified as held for sale in the First Quarter of 2003.
Therefore the operating results of these properties' are reflected as income
from discontinued operations for the three-month periods ended March 31, 2003
and 2002. The First Quarter of 2003 net loss from discontinued operations
includes a $33,000 property write-down of the South Milwaukee property to
reflect the estimated market value of the property at March 31, 2003 of
approximately $417,000.

REVENUES

Total operating revenues amounted to $477,000 and $490,000, for the three-month
periods ended March 31, 2003 and 2002, respectively.

As of March 31, 2003 total base rent revenues should approximate $1,877,000 for
the year 2003 based on leases currently in place. Future revenues may decrease
with tenant defaults and/or sales of Properties. They may also increase with
additional rents due from tenants, if those tenants experience sales levels,
which require the payment of additional rent to the Partnership.

EXPENSES

For the three-month periods ended March 31, 2003 and 2002, total operating
expenses, amounted to approximately 76% and 43%, of total operating revenues.
Operating cash expenses (which do not include non-cash items such as
depreciation, amortization, property write-downs, and write-off of
non-collectible receivables) amounted to approximately 59%, and 27%, of total
operating revenues, for the three-month periods ended March 31, 2003 and 2002,
respectively.

                                       23

<PAGE>

The increase in operating expenditures in 2003 is due to: (i) increased legal
expenditures due to tenant defaults, eviction proceedings at the Twin Falls
property, and court proceedings related to the former Mulberry Street Grill
property; (ii) increased audit fees; (iii) an insurance premium adjustment; (iv)
1989 personal property taxes; (v) increased maintenance expenditures at the
Grand Forks, ND property; and (vi) the settlement payment in February 2003.

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

Write-offs for non-collectible rents and receivables amounted to $3,000, and
$2,000, at March 31, 2003 and 2002, respectively. The write-offs are the result
of tenant defaults or management agreements.

OTHER INCOME:

Recoveries from former general partners received during the three-month period
ended March 31, 2003, totaled $1,300. There were no such recoveries in the First
Quarter of 2002.

INFLATION:

Inflation has a minimal effect on operating earnings and related cash flows from
a portfolio of triple net leases. By their nature, such leases actually fix
revenues and are not impacted by rising costs of maintenance, insurance, or real
estate taxes. Although the majority of the Partnership's leases have percentage
rent clauses, revenues from percentage rents represented only 23% of rental
income for the year 2002. If inflation causes operating margins to deteriorate
for lessees, if expenses grow faster than revenues, then, inflation may well
negatively impact the portfolio through tenant defaults.

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

RECENT ACCOUNTING PRONOUNCEMENT:

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

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

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.

                                       24

<PAGE>

Additionally, the value of real estate is typically based on market conditions
and property performance, so depreciated book value of real estate may not
reflect the market value of real estate assets.

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Partnership is not subject to market risk.

ITEM 4. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

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

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

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

During the two most recent fiscal years and the interim period up to and
including the date of engagement, neither the Partnership not anyone on behalf
of the Partnership had consulted with D&T regarding (i) either the application
of accounting principles to a specific transaction, either completed or
proposed; or the type of audit opinion that might be rendered on the
Partnership's financial statements; or (ii) any matter that was either the
subject of a disagreement, or a reportable event, with the Partnership's former
auditors Arthur Andersen.

                                       25

<PAGE>

                           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 (the "Ground Lease.") The
Ground Lease was considered an operating lease and the lease payments were paid
by the Partnership and expensed in the periods to which they applied. During the
Second Quarter of 2001, sub-tenant AMF Corporation ("AMF") notified Management
of its intent to close its Mulberry Street Grill restaurant. Although the
sub-lease had not expired, since such notification the Partnership has received
no rent from the former tenant and has returned possession of the Phoenix,
Arizona property to the Ground Lease Landlord, Centre at 38th Street, L.L.C.,
("Centre".) Beginning in May and through December 2001 the Partnership accrued
but withheld payment of the ground lease obligations, and on March 31, 2002 and
December 31, 2001 the total ground lease accrual approximated $50,000. On June
12, 2001 Centre leased the property to a new tenant.

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

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

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

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

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

                                       26

<PAGE>

Partnership's Appeal, and the mutual liability release of all parties relating
to or arising out of the Ground Lease, the Complaint, the Judgment, and the
Appeal, except for violations of environmental laws.

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

ITEM 2-4.

None

ITEM 5. CONTROLS AND PROCEDURES

Within the 90-day period prior to the filing of this report, the Partnership
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Chief Executive Officer
("CEO")/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 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 referred to above.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        (a)     Listing of Exhibits

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

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

                99.2    302 Certifications

        (b)     Reports on Form 8-K:

                The Registrant filed Form 8-K on January 6, 2003.

                The Registrant filed Form 8-K/A on January 17, 2003.

                                       27

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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: May 15, 2003

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

By:    The Provo Group, Inc., General Partner

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

Date: May 15, 2003

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