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FORM 10-Q



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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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(Mark One)

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



For the quarterly period ended September 30, 2004



OR



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



For the transition period from  to



Commission file number 0-17686



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)



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



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

(Address of principal executive offices, including zip code)



(816) 421-7444

(Registrants telephone number, including area code)



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



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



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



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



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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements



DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



CONDENSED BALANCE SHEETS



September 30, 2004 and December 31, 2003



ASSETS

(Unaudited)



|                                                                                        |  |                    |            |   |                   |   |            |  
|--------------------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ----------------- | - | ---------- | -
|                                                                                        |  | September 30, 2004 |            |   | December 31, 2003 |  
|INVESTMENT PROPERTIES AND EQUIPMENT: (Note 3)                                           |  |                    |            |   |                   |   |            |  
|                                                                                        |  |                   
|Land                                                                                    |  | $                  | 5,632,736  |   |                   | $ | 5,632,736  |  
|Buildings                                                                               |  |                    | 8,899,963  |   |                   |   | 8,899,963  |  
|Equipment                                                                               |  |                    | 431,143    |   |                   |   | 431,143    |  
|Accumulated depreciation                                                                |  |                    | (5,104,075 | ) |                   |   | (4,908,005 | )
|                                                                                        |  |                    |            |   |                   |   |            |  
|Net investment properties and equipment                                                 |  |                    | 9,859,767  |   |                   |   | 10,055,837 |  
|                                                                                        |  |                    |            |   |                   |   |            |  
|OTHER ASSETS:                                                                           |  |                    |            |   |                   |   |            |  
|                                                                                        |  |                   
|Property held for sale                                                                  |  |                    | 0          |   |                   |   | 391,313    |  
|Cash and cash equivalents                                                               |  |                    | 833,050    |   |                   |   | 673,142    |  
|Property tax cash escrow                                                                |  |                    | 20,163     |   |                   |   | 0          |  
|Cash held in Indemnification Trust (Note 8)                                             |  |                    | 385,748    |   |                   |   | 382,322    |  
|Rents and other receivables (Net of allowance of $112,009 in 2004 and $103,509 in 2003) |  |                    | 255,873    |   |                   |   | 510,459    |  
|Property tax receivable (Net of allowance of $6,679 in 2004)                            |  |                    | 16,646     |   |                   |   | 0          |  
|Deferred rent receivable                                                                |  |                    | 105,815    |   |                   |   | 109,705    |  
|Prepaid insurance                                                                       |  |                    | 3,193      |   |                   |   | 3,067      |  
|Deferred charges, net                                                                   |  |                    | 263,391    |   |                   |   | 272,986    |  
|                                                                                        |  |                    |            |   |                   |   |            |  
|Total other assets                                                                      |  |                    | 1,883,879  |   |                   |   | 2,342,994  |  
|                                                                                        |  |                    |            |   |                   |   |            |  
|Total assets                                                                            |  | $                  | 11,743,646 |   |                   | $ | 12,398,831 |  
|                                                                                        |  |                    |            |   |                   |   |            |  



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



2



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



CONDENSED BALANCE SHEETS



September 30, 2004 and December 31, 2003



LIABILITIES AND PARTNERS CAPITAL

(Unaudited)



|                                                         |  |                    |             |   |                   |   |             |  
|-------------------------------------------------------- |  | ------------------ | ----------- | - | ----------------- | - | ----------- | -
|                                                         |  | September 30, 2004 |             |   | December 31, 2003 |  
|LIABILITIES:                                             |  |                    |             |   |                   |   |             |  
|Accounts payable and accrued expenses                    |  | $                  | 70,804      |   |                   | $ | 93,168      |  
|Property taxes payable                                   |  |                    | 59,585      |   |                   |   | 87,648      |  
|Due to General Partner                                   |  |                    | 2,454       |   |                   |   | 1,984       |  
|Security deposits                                        |  |                    | 114,585     |   |                   |   | 129,585     |  
|Unearned rental income                                   |  |                    | 26,357      |   |                   |   | 29,380      |  
|                                                         |  |                    |             |   |                   |   |             |  
|Total liabilities                                        |  |                    | 273,785     |   |                   |   | 341,765     |  
|                                                         |  |                    |             |   |                   |   |             |  
|CONTINGENT LIABILITIES: (Note 7)                         |  |                    |             |   |                   |   |             |  
|                                                         |  |                   
|PARTNERS CAPITAL: (Notes 1, 4 and 9)                    |  |                    |             |   |                   |   |             |  
|Current General Partner                                  |  |                    |             |   |                   |   |             |  
|Cumulative net income                                    |  |                    | 215,800     |   |                   |   | 203,372     |  
|Cumulative cash distributions                            |  |                    | (88,975     | ) |                   |   | (84,004     | )
|                                                         |  |                    |             |   |                   |   |             |  
|                                                         |  |                    | 126,825     |   |                   |   | 119,368     |  
|                                                         |  |                    |             |   |                   |   |             |  
|Limited Partners (46,280.3 interests outstanding)        |  |                    |             |   |                   |   |             |  
|Capital contributions, net of offering costs             |  |                    | 39,358,468  |   |                   |   | 39,358,468  |  
|Cumulative net income                                    |  |                    | 27,730,065  |   |                   |   | 26,499,727  |  
|Cumulative cash distributions                            |  |                    | (54,905,268 | ) |                   |   | (53,080,268 | )
|Reallocation of former general partners deficit capital |  |                    | (840,229    | ) |                   |   | (840,229    | )
|                                                         |  |                    |             |   |                   |   |             |  
|                                                         |  |                    | 11,343,036  |   |                   |   | 11,937,698  |  
|                                                         |  |                    |             |   |                   |   |             |  
|Total partners capital                                  |  |                    | 11,469,861  |   |                   |   | 12,057,066  |  
|                                                         |  |                    |             |   |                   |   |             |  
|Total liabilities and partners capital                  |  | $                  | 11,743,646  |   |                   | $ | 12,398,831  |  
|                                                         |  |                    |             |   |                   |   |             |  



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



3



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

CONDENSED STATEMENTS OF INCOME

For
the Three and Nine- Month Periods Ended September 30, 2004 and 2003

(Unaudited)



|                                                                           |  |                                 |         |                                |   |         |  |      |           |  |   |          
|-------------------------------------------------------------------------- |  | ------------------------------- | ------- | ------------------------------ | - | ------- |  | ---- | --------- |  | - | ---------
|                                                                           |  | Three Months endedSeptember 30, |         | Nine Months endedSeptember 30,
|                                                                           |  | 2004                            |         | 2003                           |   | 2004    |  | 2003
|OPERATING REVENUES                                                         |  |                                 |         |                                |   |         |  |      |           |  |   |          
|Rental income (Note 5)                                                     |  | $                               | 641,434 |                                | $ | 668,432 |  | $    | 1,514,819 |  | $ | 1,490,584
|Lease termination fee (Note 3)                                             |  |                                 | 0       |                                |   | 0       |  |      | 0         |  |   | 50,000   
|Property tax reimbursements (Note 3)                                       |  |                                 | 31,890  |                                |   | 0       |  |      | 106,890   |  |   | 0        
|Property tax expense recovery (Note 3)                                     |  |                                 | 16,795  |                                |   | 0       |  |      | 16,795    |  |   | 0        
|                                                                           |  |                                 |         |                                |   |         |  |      |           |  |   |          
|TOTAL OPERATING REVENUES                                                   |  |                                 | 690,119 |                                |   | 668,432 |  |      | 1,638,504 |  |   | 1,540,584
|                                                                           |  |                                 |         |                                |   |         |  |      |           |  |   |          
|OPERATING EXPENSES                                                         |  |                                 |         |                                |   |         |  |      |           |  |   |          
|Partnership management fees (Note 6)                                       |  |                                 | 51,730  |                                |   | 50,664  |  |      | 154,419   |  |   | 151,440  
|Restoration fees (Note 6)                                                  |  |                                 | 134     |                                |   | 45      |  |      | 403       |  |   | 161      
|Insurance                                                                  |  |                                 | 9,580   |                                |   | 8,682   |  |      | 30,351    |  |   | 36,801   
|General and administrative                                                 |  |                                 | 10,489  |                                |   | 12,253  |  |      | 70,419    |  |   | 64,302   
|Advisory Board fees and expenses                                           |  |                                 | 3,500   |                                |   | 2,188   |  |      | 10,500    |  |   | 8,028    
|Personal property taxes                                                    |  |                                 | 0       |                                |   | 1,102   |  |      | 0         |  |   | 15,316   
|Professional services                                                      |  |                                 | 45,971  |                                |   | 35,334  |  |      | 129,815   |  |   | 231,595  
|Maintenance and repair expenses                                            |  |                                 | 705     |                                |   | 430     |  |      | 3,427     |  |   | 24,292   
|Expenses incurred due to default by lessee or vacancy                      |  |                                 | 0       |                                |   | 11      |  |      | 0         |  |   | 4,704    
|Property taxes                                                             |  |                                 | 10,200  |                                |   | 0       |  |      | 61,670    |  |   | 0        
|Other property expenses                                                    |  |                                 | 820     |                                |   | 0       |  |      | 4,590     |  |   | 0        
|Settlement expense (Note 10)                                               |  |                                 | 0       |                                |   | 0       |  |      | 0         |  |   | 22,134   
|Depreciation                                                               |  |                                 | 65,357  |                                |   | 65,357  |  |      | 196,070   |  |   | 196,070  
|Amortization                                                               |  |                                 | 3,198   |                                |   | 3,198   |  |      | 9,595     |  |   | 8,900    
|Provision for non-collectible rents and other receivables                  |  |                                 | 0       |                                |   | 0       |  |      | 0         |  |   | 2,596    
|                                                                           |  |                                 |         |                                |   |         |  |      |           |  |   |          
|TOTAL OPERATING EXPENSES                                                   |  |                                 | 201,684 |                                |   | 179,264 |  |      | 671,259   |  |   | 766,339  
|                                                                           |  |                                 |         |                                |   |         |  |      |           |  |   |          
|OTHER INCOME                                                               |  |                                 |         |                                |   |         |  |      |           |  |   |          
|Interest income                                                            |  |                                 | 3,229   |                                |   | 4,116   |  |      | 7,695     |  |   | 10,791   
|Bankruptcy claim (Note 10)                                                 |  |                                 | 0       |                                |   | 0       |  |      | 24,271    |  |   | 0        
|Recovery of amounts previously written off (Note 2)                        |  |                                 | 3,357   |                                |   | 1,115   |  |      | 10,071    |  |   | 4,006    
|Other income                                                               |  |                                 | 305     |                                |   | 15      |  |      | 609       |  |   | 44       
|                                                                           |  |                                 |         |                                |   |         |  |      |           |  |   |          
|TOTAL OTHER INCOME                                                         |  |                                 | 6,891   |                                |   | 5,246   |  |      | 42,646    |  |   | 14,841   
|                                                                           |  |                                 |         |                                |   |         |  |      |           |  |   |          
|INCOME FROM CONTINUING OPERATIONS                                          |  |                                 | 495,326 |                                |   | 494,414 |  |      | 1,009,891 |  |   | 789,086  
|                                                                           |  |                                 |         |                               
|INCOME FROM DISCONTINUED OPERATIONS                                        |  |                                 | 5,000   |                                |   | 329,246 |  |      | 232,875   |  |   | 412,561  
|                                                                           |  |                                 |         |                                |   |         |  |      |           |  |   |          
|NET INCOME                                                                 |  | $                               | 500,326 |                                | $ | 823,660 |  | $    | 1,242,766 |  | $ | 1,201,647
|                                                                           |  |                                 |         |                                |   |         |  |      |           |  |   |          
|NET INCOME - CURRENT GENERAL PARTNER                                       |  | $                               | 5,003   |                                | $ | 8,237   |  | $    | 12,428    |  | $ | 12,016   
|                                                                           |  |                                 |         |                               
|NET INCOME - LIMITED PARTNERS                                              |  |                                 | 495,323 |                                |   | 815,423 |  |      | 1,230,338 |  |   | 1,189,631
|                                                                           |  |                                 |         |                                |   |         |  |      |           |  |   |          
|                                                                           |  | $                               | 500,326 |                                | $ | 823,660 |  | $    | 1,242,766 |  | $ | 1,201,647
|                                                                           |  |                                 |         |                                |   |         |  |      |           |  |   |          
|PER LIMITED PARTNERSHIP INTEREST, based on 46,280.3 Interests outstanding: |  |                                 |         |                                |   |         |  |      |           |  |   |          
|                                                                           |  |                                 |         |                               
|INCOME FROM CONTINUING OPERATIONS                                          |  | $                               | 10.59   |                                | $ | 10.58   |  | $    | 21.60     |  | $ | 16.88    
|                                                                           |  |                                 |         |                               
|INCOME FROM DISCONTINUED OPERATIONS                                        |  |                                 | .11     |                                |   | 7.04    |  |      | 4.98      |  |   | 8.82     
|                                                                           |  |                                 |         |                                |   |         |  |      |           |  |   |          
|NET INCOME PER LIMITED PARTNERSHIP INTEREST                                |  | $                               | 10.70   |                                | $ | 17.62   |  | $    | 26.58     |  | $ | 25.70    
|                                                                           |  |                                 |         |                                |   |         |  |      |           |  |   |          



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



4



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



CONDENSED STATEMENTS OF CASH FLOWS



For the Nine Month Periods Ended September 30, 2004 and 2003



(Unaudited)



|                                                                                  |  |      |            |   |      |   |            |  
|--------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                  |  | 2004 |            |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |      |            |   |      |   |            |  
|Net income                                                                        |  | $    | 1,242,766  |   |      | $ | 1,201,647  |  
|Adjustments to reconcile net income to net cash flows from operating activities - |  |      |            |   |      |   |            |  
|Depreciation and amortization                                                     |  |      | 205,665    |   |      |   | 227,023    |  
|Recovery of amounts previously written off                                        |  |      | (10,071    | ) |      |   | (4,006     | )
|Gain on sale of investment property                                               |  |      | (215,554   | ) |      |   | (304,373   | )
|Provision for non-collectible rents and other receivables                         |  |      | 15,179     |   |      |   | 2,596      |  
|Property write-down                                                               |  |      | 0          |   |      |   | 48,027     |  
|Increase in Due from Clerk of the Court                                           |  |      | 0          |   |      |   | 140,000    |  
|Interest applied to Indemnification Trust account                                 |  |      | (3,426     | ) |      |   | (2,925     | )
|Payment of leasing commissions                                                    |  |      | 0          |   |      |   | (31,920    | )
|Changes in operating accounts:                                                    |  |      |            |   |      |   |            |  
|(Increase) in property tax escrow                                                 |  |      | (20,163    | ) |      |   | 0          |  
|Decrease in rents and other receivables                                           |  |      | 246,086    |   |      |   | 238,623    |  
|(Increase) Decrease in prepaid expenses                                           |  |      | (126       | ) |      |   | 26,045     |  
|(Increase) in deferred rent receivable                                            |  |      | (610       | ) |      |   | (46,310    | )
|(Increase) Decrease in Property Tax receivable                                    |  |      | (23,325    | ) |      |   | 5,191      |  
|Increase in due to current General Partner                                        |  |      | 470        |   |      |   | 1,793      |  
|(Decrease) in accounts payable and other accrued                                  |  |      | (22,364    | ) |      |   | (81,879    | )
|(Decrease) in property taxes payable                                              |  |      | (28,063    | ) |      |   | (16,839    | )
|(Decrease) in security deposits                                                   |  |      | (15,000    | ) |      |   | (7,000     | )
|(Decrease) in unearned rental income                                              |  |      | (3,023     | ) |      |   | (7,565     | )
|                                                                                  |  |      |            |   |      |   |            |  
|Net cash flows from operating activities                                          |  |      | 1,368,441  |   |      |   | 1,388,128  |  
|                                                                                  |  |      |            |   |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |      |            |   |      |   |            |  
|Net proceeds from sale of investment property                                     |  |      | 611,367    |   |      |   | 2,436,034  |  
|Recoveries from former General Partner affiliates                                 |  |      | 10,071     |   |      |   | 4,006      |  
|                                                                                  |  |      |            |   |      |   |            |  
|Net cash flows from investing activities                                          |  |      | 621,438    |   |      |   | 2,440,040  |  
|                                                                                  |  |      |            |   |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |      |            |   |      |   |            |  
|Cash distributions to Limited Partners                                            |  |      | (1,825,000 | ) |      |   | (2,410,000 | )
|Cash distributions to current General Partner                                     |  |      | (4,971     | ) |      |   | (4,999     | )
|                                                                                  |  |      |            |   |      |   |            |  
|Net cash flows from financing activities                                          |  |      | (1,829,971 | ) |      |   | (2,414,999 | )
|                                                                                  |  |      |            |   |      |   |            |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                         |  |      | 159,908    |   |      |   | 1,413,169  |  
|                                                                                  |  |     
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                  |  |      | 673,142    |   |      |   | 1,369,248  |  
|                                                                                  |  |      |            |   |      |   |            |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                        |  | $    | 833,050    |   |      | $ | 2,782,417  |  
|                                                                                  |  |      |            |   |      |   |            |  



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



5



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



NOTES TO CONDENSED FINANCIAL STATEMENTS



These unaudited interim condensed financial statements should be read in conjunction with
DiVall Insured Income Properties 2 Limited Partnerships (the Partnership) 2003 annual audited financial statements within Form 10-K.



These unaudited condensed financial statements include all adjustments, which are in the opinion of management, necessary to present a fair statement of the
Partnerships financial position as of September 30, 2004, and the statements of income for the three and nine month periods ended September 30, 2004 and 2003, and cash flows for the nine month periods ended September 30, 2004 and 2003.



1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:



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



The Partnership is currently engaged in the business of owning and operating its investment
portfolio of commercial real estate properties (the Properties.) The Properties are leased on a triple net basis to, and operated by, franchisors or franchisees of national, regional, and local retail chains under long-term leases. The
lessees are primarily fast food, family style, and casual/theme restaurants, but also include a video rental store and a pre-school. At September 30, 2004, the Partnership owned 20 properties with specialty leasehold improvements in six (6) of these
properties.



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



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



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



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



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



6



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



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



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



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



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



During the three-month periods ended September 30, 2004 and 2003 the Partnership recognized
income from discontinued operations of approximately $5,000 and $329,000 respectively. During the nine-month period ended September 30, 2004 and 2003 the Partnership recognized income from discontinued operations of approximately $233,000 and
$413,000, respectively. The 2004 income from discontinued operations is primarily attributable to the reclassification of the Miami Subs restaurant property to property held for sale in the Fourth Quarter of 2003. The 2004 income from discontinued
operations includes a Second Quarter net gain on the sale of the Miami Subs property of approximately $211,000 and a Third Quarter net gain on the sale of a parcel of land located adjacent to the former vacant Twin Falls, ID property of $5,000 (the
land had no recorded value). The 2003 income from discontinued operations is attributable to the vacant South Milwaukee, WI property (which was sold in April 2003), the property in Milwaukee, WI and the Hardees restaurant in Fond du Lac, WI
(which were sold in July 2003), the vacant Twin Falls, ID property (which was sold in August 2003) and the reclassification of the Miami Subs restaurant property to property held for sale in the Fourth Quarter of 2003. The 2003 income from
discontinued operations includes a First Quarter write-down of $33,000, a Second Quarter write-down of $15,000 related to the South Milwaukee property, and a Third Quarter net gain on sale of properties of $304,000.



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



|                         |  |                              |          |  
|------------------------ |  | ---------------------------- | -------- | -
|                         |  | Year ended December 31, 2003 |         
|Balance Sheet:           |  |                              |          |  
|Land                     |  | $                            | 325,487  |  
|Buildings                |  |                              | 163,257  |  
|Accumulated depreciation |  |                              | (113,931 | )
|Deferred rent receivable |  |                              | 16,500   |  
|                         |  |                              |          |  
|Property held for sale   |  | $                            | 391,313  |  
|                         |  |                              |          |  



7



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The components of discontinued operations included in the condensed statements of income for the three and nine-month
periods ended September 30, 2004 and 2003 are outlined below.



|                                                          |  |                                            |       |                                            |   |                                           |  |                                           |         |  |   |        
|--------------------------------------------------------- |  | ------------------------------------------ | ----- | ------------------------------------------ | - | ----------------------------------------- |  | ----------------------------------------- | ------- |  | - | -------
|                                                          |  | Three month Period ended September 30,2004 |       | Three month Period ended September 30,2003 |   | Nine month Period ended September 30,2004 |  | Nine month Period ended September 30,2003
|Statements of Income:                                     |  |                                            |       |                                            |   |                                           |  |                                           |         |  |   |        
|Revenues:                                                 |  |                                            |       |                                            |   |                                           |  |                                           |         |  |   |        
|Rental Income                                             |  | $                                          | 0     |                                            | $ | 31,304                                    |  | $                                         | 32,500  |  | $ | 191,103
|                                                          |  |                                            |       |                                            |   |                                           |  |                                           |         |  |   |        
|Total Revenues                                            |  |                                            | 0     |                                            |   | 31,304                                    |  |                                           | 32,500  |  |   | 191,103
|                                                          |  |                                            |       |                                            |   |                                           |  |                                           |         |  |   |        
|Expenses:                                                 |  |                                            |       |                                            |   |                                           |  |                                           |         |  |   |        
|Property Write-down                                       |  |                                            | 0     |                                            |   | 0                                         |  |                                           | 0       |  |   | 48,027 
|Property Taxes                                            |  |                                            | 0     |                                            |   | 4,435                                     |  |                                           | 0       |  |   | 4,435  
|Depreciation                                              |  |                                            | 0     |                                            |   | 787                                       |  |                                           | 0       |  |   | 17,791 
|Amortization                                              |  |                                            | 0     |                                            |   | 609                                       |  |                                           | 0       |  |   | 4,262  
|Management Services                                       |  |                                            | 0     |                                            |   | 600                                       |  |                                           | 0       |  |   | 8,400  
|Provision for non-collectible rents and other receivables |  |                                            | 0     |                                            |   | 0                                         |  |                                           | 15,179  |  |   | 0      
|                                                          |  |                                            |       |                                            |   |                                           |  |                                           |         |  |   |        
|Total Expenses                                            |  |                                            | 0     |                                            |   | 6,431                                     |  |                                           | 15,179  |  |   | 82,915 
|                                                          |  |                                            |       |                                            |   |                                           |  |                                           |         |  |   |        
|Net Gain on Sale of Properties                            |  |                                            | 5,000 |                                            |   | 304,373                                   |  |                                           | 215,554 |  |   | 304,373
|                                                          |  |                                            |       |                                            |   |                                           |  |                                           |         |  |   |        
|Income from Discontinued Operations                       |  | $                                          | 5,000 |                                            | $ | 329,246                                   |  | $                                         | 232,875 |  | $ | 412,561
|                                                          |  |                                            |       |                                            |   |                                           |  |                                           |         |  |   |        



The Partnership will be dissolved on
November 30, 2010, or earlier upon the prior occurrence of any of the following events: (a) the disposition of all properties of the Partnership; (b) the written determination by the General Partner that the Partnerships assets may constitute
plan assets for purposes of ERISA; (c) the agreement of Limited Partners owning a majority of the outstanding interests to dissolve the Partnership; or (d) the dissolution, bankruptcy, death, withdrawal, or incapacity of the last
remaining General Partner, unless an additional General Partner is elected previously by a majority of the Limited Partners. During the Second Quarter of 2001, a consent solicitation was circulated, which if approved would have authorized the sale
of the Partnerships assets and dissolution of the Partnership (the 2001 Consent). A majority of the Limited Partners did not vote in favor of the 2001 Consent. Another consent solicitation was circulated during the Second Quarter
of 2003, which if approved would have authorized the sale of the Partnerships assets and dissolution of the Partnership (the 2003 Consent). A majority of the Limited Partners did not vote in favor of the 2003 Consent. Therefore,
the Partnership continues to operate as a going concern.



8



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No provision for federal income taxes has been made, as any liability for such taxes would be that of the individual
partners rather than the Partnership. At December 31, 2003, the tax basis of the Partnerships assets exceeded the amounts reported in the accompanying financial statements by approximately $7,346,000.



2. REGULATORY INVESTIGATION:



A preliminary investigation during 1992 by the Office of Commissioner of Securities for the
State of Wisconsin and the Securities and Exchange Commission (the Investigation) revealed that during at least the four years ended December 31, 1992, the former general partners of the Partnership, Gary J. DiVall (DiVall)
and Paul E. Magnuson (Magnuson) had transferred substantial cash assets of the Partnership and two affiliated publicly registered partnerships, DiVall Insured Income Fund Limited Partnership (DiVall 1) and DiVall Income
Properties 3 Limited Partnership (DiVall 3) (collectively the Partnerships) to various other entities previously sponsored by or otherwise affiliated with DiVall and Magnuson. The unauthorized transfers were in violation of
the respective Partnership Agreements and resulted, in part, from material weaknesses in the internal control 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 September 30, 2004, $5,832,000 of recoveries have been received which exceeded the original estimate of $3 million. As a result, from
January 1, 1996 through September 30, 2004 the Partnership has recognized a total of $1,144,000 as recovery of amounts previously written off in the statements of income, which represents its share of the excess recovery. The current General Partner
continues to pursue recoveries of the misappropriated funds, however, no further significant recoveries are anticipated.



3. INVESTMENT PROPERTIES:



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



As of September 30, 2004,
the Partnership owned 18 fully constructed fast-food restaurants, a video store, and a preschool. The 20 properties are composed of the following: ten (10) Wendys restaurants, one (1) Dennys restaurant, one (1) Applebees
restaurant, one (1) Popeyes Famous Fried Chicken restaurant, one (1) Hooters restaurant, one (1) Kentucky Fried Chicken restaurant, (1) Chinese Super Buffet restaurant, one (1) Blockbuster Video store, one (1) Sunrise Preschool, one (1)
Panda Buffet Restaurant, and one (1) Daytonas- All Sports Café. The 20 properties are located in a total of ten (10) states.



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



9



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Popeyes  Park Forest, IL



Through September 30, 2004, Popeyes is current on its monthly lease obligations, however, the tenant is delinquent on its January 2002
percentage rent billing for the year ended December 31, 2001 of $72,000 and its February 2003 percentage rent billing for the year ended December 21, 2002 of $31,500. Management continues to pursue legal remedies in relation to the collection of the
tenants percentage rent past due balance of approximately $103,500, however, due to the uncertainty of collection, the entire amount was fully reserved in the Fourth Quarter of 2003. In addition, through September 30, 2004 Management had
charged Popeyes late fees totaling $90,000 (which includes 2004 and 2003 late fee charges of $55,000 and $35,000, respectively, which were not recognized as revenue due to uncertainty of collection) in relation to the percentage rent balances
due. The tenant was delinquent on its reporting of its 2003 monthly sales figures and therefore percentage rents for the year ended December 31, 2003 were not accrued by the Partnership at December 31, 2003. The delinquent 2003 sales figures were
received by Management in June 2004 and Popeyes 2003 percentage rent of approximately $19,000 was then billed in the Third Quarter of 2004. However, due to the uncertainty of collection the amount will not be recognized as revenue for
financial statement purposes until such time as the rent is collected.



Per the
lease and its amendments (Lease), Popeyes is to timely pay as they come due all taxes charged to the property. However, the tenant failed to pay the 2002 property taxes of approximately $40,000, which were due and payable to Cook
County, Illinois in 2003, as well as approximately $5,000 in assessed late fees. In the Fourth Quarter of 2003 the Partnership accrued approximately $86,000 in property taxes, which included the 2002 property taxes and associated late fees, as well
as the estimated 2003 property taxes that will be due in 2004. The 2002 property taxes and late fees were paid by the Partnership in January 2004 and the $20,000 first installment for the 2003 taxes was paid in February 2004. In March 2004
Management learned that the tenant had also failed to pay the $31,000 second installment of its 2001 property taxes. The Partnership paid the 2001 delinquent property taxes, as well as approximately $10,000 in assessed late fees, in March 2004.



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



In March 2004 the Partnerships legal counsel obtained a court order of possession that stated that Popeyes was to vacate the property by April 2, 2004. In
April 2004 Management entered into a verbal agreement with Popeyes that the tenant: (1) pay $25,000 by wire or certified check per month until the Partnership is reimbursed in full for the approximately $107,000 in delinquent property taxes
paid on Popeyes behalf (the Partnership received $25,000 in each April, May, June, and July 2004 and received the final payment of approximately $7,000 in September 2004); and (2) fund the $20,000 2003 property tax second installment due in
the Fourth Quarter 2004 through prorated monthly escrow payments made to the Partnership from April through September 2004 (the Partnership received approximately $17,000 of the $20,000 in September 2004). If the tenant adheres to this verbal
agreement, Management intends to re-evaluate outstanding percentage rents relative to appropriate and sustainable occupancy costs and defer any current action for possession.



Popeyes 2004 estimated property taxes have been prorated and accrued on a monthly basis by the Partnership. In September 2004 the
Partnership began billing Popeyes monthly property tax escrow charges. No 2004 escrow payments have been received by the Partnership. These charges will be reflected in the financial statements only as escrow payments are received, and will be
recorded as a reversal of 2004 property tax expense equal to the amount of payment received.



10



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Miami Subs, FL Property



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



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



Hardees property- Fond du Lac, WI



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



Milwaukee, WI property



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



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 was $32,500. Commissions of $18,500 and $3,700 were paid to an unaffiliated leasing agent and to an affiliate of the General Partner, respectively, in March 2003. HVAC maintenance and repair
expenditures of $18,000 were incurred in the First Quarter of 2003 at the property.



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



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



11



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



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



4785 Merle Hay Road- Des Moines, IA



In July 2004 the Partnership paid Daytonas delinquent 2002 property taxes balance of
approximately $15,000. Daytonas reimbursed the Partnership $5,000 in both August and September. Management anticipates the final installment to be received from Daytonas in the Fourth Quarter of 2004. Due to the property tax default
Management requested that Daytonas begin escrowing for their next property tax installment with the Partnership in September 2004. Escrow payments of approximately $3,400 were received by the Partnership from Daytonas in September 2004.



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



Twin Falls, ID property



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



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



During the Fourth Quarter of 2001, the Bankruptcy court
granted the motion of Phoenix Restaurant Group, Inc. (Phoenix) to reject the lease with the Partnership at the Twin Falls, Idaho location. The lease was terminated and rent income ceased in the Fourth Quarter of 2001. Although Phoenix
had rejected the lease, its subtenant, Fiesta Time, maintained possession of the property. Management, therefore, took legal action to evict Fiesta Time



12



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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.



Former Mulberry Street Grill property- Phoenix, AZ



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



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



At September 30, 2004 the owners of the Panda Buffet property have an option to purchase the property at a price, which approximates the net
asset value of the property. The current General Partner is not aware of any unfavorable purchase options in relation to the original cost with other properties.



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



13



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available for distribution with respect to such quarter. Such distributions were to be made 90% to Limited Partners and
10% to the former general partners, provided, however, that quarterly distributions were to be cumulative and were not to be made to the former general partners unless and until each Limited Partner had received a distribution from Net Cash Receipts
in an amount equal to 10% per annum, cumulative simple return on his or her Adjusted Original Capital, as defined, from the Return Calculation Date, as defined.



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



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



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



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



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.



14



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5. LEASES:



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



As of September 30, 2004 aggregate minimum operating lease payments to be
received under the leases for the Partnerships properties are as follows:



|                         |  |   |           
|------------------------ |  | - | ----------
|Year ending December 31, |  |   |           
|2004                     |  | $ | 1,666,908 
|2005                     |  |   | 1,670,908 
|2006                     |  |   | 1,580,408 
|2007                     |  |   | 1,563,325 
|2008                     |  |   | 1,416,575 
|Thereafter               |  |   | 7,888,173 
|                         |  |   |           
|                         |  | $ | 15,786,297
|                         |  |   |           



Percentage rentals included in rental
income for the nine months ended September 30, 2004 and 2003 were $266,000 and $251,000, respectively.



Base rents for WenCoast Restaurants, a franchisee of Wendys restaurants, accounted for 52% of total operating base rents for 2003 (excluding properties sold or held for sale in 2003.) For the three and nine
month periods ended September 30, 2004 Wencoast base rents accounted for 51% of total operating base rents.



6. TRANSACTIONS WITH CURRENT GENERAL PARTNER AND ITS AFFILIATES:



The current General Partner was to receive a management fee (Base Fee) for managing the three original affiliated Partnerships equal to 4% of gross receipts,
subject to a minimum of $300,000 annually, and a maximum annual reimbursement for office rent and related office overhead (Expense) of $25,000, as provided in the Permanent Manager Agreement (PMA). The Base Fee and the
Expense reimbursement are subject to increases due to increases in the Consumer Price Index. The current General Partner receives a Base Fee for managing the Partnership equal to 4% of gross receipts and the Partnership is only responsible for its
allocable share of such minimum and maximum annual amounts as indicated above (originally $159,000 minimum annual Base Fee and $13,250 maximum annual office rent and related office overhead reimbursement). Effective March 1, 2004, the minimum annual
Base Fee and the maximum annual reimbursement for office rent and overhead increased by 2.28%, representing the allowable annual Consumer Price Index adjustment per the PMA. Therefore, as of March 1, 2004 the minimum monthly Base Fee paid by the
Partnership was raised to $17,288 and the maximum annual reimbursements for office rent and related office overhead was raised to $16,738.



15



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For purposes of computing the 4% overall fee, gross receipts includes amounts recovered in connection with the
misappropriation of assets by the former general partners and their affiliates. TPG has received fees from the Partnership totaling $56,262 to date on the amounts recovered, which includes 2004 fees of $403. The fees received from the Partnership on
the amounts recovered reduce the 4% minimum fee by that same amount.



Amounts
paid and/or accrued to the current General Partner and its affiliates for the three and nine-month periods ended September 30, 2004 and 2003 are as follows:



|                                         |  |                                                              |        |                                                              |   |                                                             |  |                                                             |         |  |   |        
|---------------------------------------- |  | ------------------------------------------------------------ | ------ | ------------------------------------------------------------ | - | ----------------------------------------------------------- |  | ----------------------------------------------------------- | ------- |  | - | -------
|Current General Partner                  |  | Incurred for the Three-month Period ended September 30, 2004 |        | Incurred for the Three-month Period ended September 30, 2003 |   | Incurred for the Nine-month Period ended September 30, 2004 |  | Incurred for the Nine-month Period ended September 30, 2003
|Management fees                          |  | $                                                            | 51,730 |                                                              | $ | 50,664                                                      |  | $                                                           | 154,419 |  | $ | 151,440
|Restoration fees                         |  |                                                              | 134    |                                                              |   | 45                                                          |  |                                                             | 403     |  |   | 160    
|Overhead allowance                       |  |                                                              | 4,184  |                                                              |   | 4,091                                                       |  |                                                             | 12,491  |  |   | 12,231 
|Leasing commissions                      |  |                                                              | 0      |                                                              |   | 0                                                           |  |                                                             | 0       |  |   | 13,420 
|Sales commissions                        |  |                                                              | 0      |                                                              |   | 58,000                                                      |  |                                                             | 19,500  |  |   | 58,000 
|Reimbursement for out-of-pocket expenses |  |                                                              | 1,664  |                                                              |   | 1,339                                                       |  |                                                             | 6,480   |  |   | 4,889  
|Cash distribution                        |  |                                                              | 2,001  |                                                              |   | 3,295                                                       |  |                                                             | 4,971   |  |   | 4,999  
|                                         |  |                                                              |        |                                                              |   |                                                             |  |                                                             |         |  |   |        
|                                         |  | $                                                            | 59,713 |                                                              | $ | 117,434                                                     |  | $                                                           | 198,264 |  | $ | 245,139
|                                         |  |                                                              |        |                                                              |   |                                                             |  |                                                             |         |  |   |        



7. CONTINGENT LIABILITIES:



According to the Partnership Agreement, as amended, the current General
Partner may receive a disposition fee not to exceed 3% of the contract price of the sale of investment properties. Fifty percent (50%) of all such disposition fees earned by the current General Partner is to be escrowed until the aggregate amount of
recovery of the funds misappropriated from the Partnerships by the former general partners is greater than $4,500,000. Upon reaching such recovery level, full disposition fees will thereafter be payable and fifty percent (50%) of the previously
escrowed amounts will be paid to the current General Partner. At such time as the recovery exceeds $6,000,000 in the aggregate, the remaining escrowed disposition fees shall be paid to the current General Partner. If such levels of recovery are not
achieved, the current General Partner will contribute the amounts escrowed towards the recovery. In lieu of an escrow, 50% of all such disposition fees have been paid directly to a restoration account and then distributed among the three original
Partnerships. Fifty percent (50%) of the total amount paid to the restoration account was refunded to the current General Partner during March 1996 after exceeding the recovery level of $4,500,000. The General Partner does not expect any future
refunds, as the possibility of achieving the $6,000,000 recovery threshold appears remote.



8. PMA INDEMNIFICATION TRUST:



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



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Partnership assets as of September 30, 2004. Funds are invested in U.S. Treasury securities. In addition, $135,748 of
earnings has been credited to the Trust as of September 30, 2004. The rights of the Permanent Manager to the Trust shall be terminated upon the earliest to occur of the following events: (i) the written release by the Permanent Manager of any and
all interest in the Trust; (ii) the expiration of the longest statute of limitations relating to a potential claim which might be brought against the Permanent Manager and which is subject to indemnification; or (iii) a determination by a court of
competent jurisdiction that the Permanent Manager shall have no liability to any person with respect to a claim which is subject to indemnification under the PMA. At such time as the indemnity provisions expire or the full indemnity is paid, any
funds remaining in the Trust will revert back to the general funds of the Partnership.



9. FORMER GENERAL PARTNERS CAPITAL ACCOUNTS:



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



10. LEGAL
PROCEEDINGS:



Former Mulberry Street Grill property



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



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



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



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.



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



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



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



DeDan bankruptcy



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



Phoenix Foods Preference Claim



The trustee in the Phoenix Foods bankruptcy has made a claim seeking to recover from the
Partnership alleged preferential payments by Phoenix Foods to the Partnership in the amount of approximately $16,500. The payments the trustee is seeking to recover were rent payments received in the ordinary course of business prior to
Phoenix Foods bankruptcy. The Partnership does not believe such payments were preferential under the Bankruptcy Code and is vigorously contesting such characterization.



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



Liquidity and Capital Resources:



Investment Properties and Net Investment in Direct Financing Leases



The Properties, including equipment held by the Partnership at
September 30, 2004, were originally purchased at a price, including acquisition costs, of approximately $15,997,585.



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



As of September 30, 2004,
the Partnership owned 18 fully constructed fast-food restaurants, a video store, and a preschool. The 20 properties are composed of the following: ten (10) Wendys restaurants, one (1) Dennys restaurant, one (1) Applebees
restaurant, one (1) Popeyes Famous Fried Chicken restaurant, one (1) Hooters restaurant, one (1) Kentucky Fried Chicken restaurant, (1) Chinese Super Buffet restaurant, one (1) Blockbuster Video store, one (1) Sunrise Preschool, one (1)
Panda Buffet Restaurant, and one (1) Daytonas- All Sports Café. The 20 properties are located in a total of ten (10) states.



During the three-month periods ended September 30, 2004 and 2003 the Partnership recognized income from discontinued operations of approximately $5,000 and $329,000
respectively. During the nine-month period ended September 30, 2004 and 2003 the Partnership recognized income from discontinued operations of approximately $233,000 and $413,000, respectively. The 2004 income from discontinued operations is
primarily attributable to the reclassification of the Miami Subs restaurant property to property held for sale in the Fourth Quarter of 2003. The 2004 income from discontinued operations includes a Second Quarter net gain on the sale of the Miami
Subs property of approximately $211,000 and a Third Quarter net gain on the sale of a parcel of land located adjacent to the former vacant Twin Falls, ID property of $5,000 (the land had no recorded value). The 2003 income from discontinued
operations is attributable to the vacant South Milwaukee, WI property (which was sold in April 2003), the property in Milwaukee, WI and the Hardees restaurant in Fond du Lac, WI (which were sold in July 2003), the vacant Twin Falls, ID
property (which was sold in August 2003) and the reclassification of the Miami Subs restaurant property to property held for sale in the Fourth Quarter of 2003. The 2003 income from discontinued operations includes a First Quarter write-down of
$33,000, a Second Quarter write-down of $15,000 related to the South Milwaukee property, and a Third Quarter net gain on sale of properties of $304,000.



The following summarizes significant developments, by property, for properties with such developments (see comments in notes to condensed financial statements).



Popeyes  Park Forest, IL



Through September 30, 2004, Popeyes is current on its monthly lease obligations,
however, the tenant is delinquent on its January 2002 percentage rent billing for the year ended December 31, 2001 of $72,000 and its February 2003 percentage rent billing for the year ended December 31, 2002 of $31,500. Management continues to
pursue legal remedies in relation to the collection of the tenants percentage rent past due balance of approximately $103,500, however, due to the uncertainty of collection, the entire amount was fully reserved in the Fourth Quarter of 2003.
In addition, through September 30, 2004 Management had charged Popeyes late fees totaling $90,000 (which includes 2004 and 2003 late fee charges of $55,000 and $35,000, respectively, which were not recognized as revenue due to uncertainty of
collection) in relation to the percentage rent balances due. The tenant was delinquent on its reporting of its 2003 monthly sales figures and therefore percentage rents for the year



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ended December 31, 2003 were not accrued by the Partnership at December 31, 2003. The delinquent 2003 sales figures were
received by Management in June 2004 and Popeyes 2003 percentage rent of approximately $19,000 was then billed in the Third Quarter of 2004. However, due to the uncertainty of collection the amount will not be recognized as revenue for
financial statement purposes until such time as the rent is collected.



Per the
lease and its amendments (Lease), Popeyes is to timely pay as they come due all taxes charged to the property. However, the tenant failed to pay the 2002 property taxes of approximately $40,000, which were due and payable to Cook
County, Illinois in 2003, as well as approximately $5,000 in assessed late fees. In the Fourth Quarter of 2003 the Partnership accrued approximately $86,000 in property taxes, which included the 2002 property taxes and associated late fees, as well
as the estimated 2003 property taxes that will be due in 2004. The 2002 property taxes and late fees were paid by the Partnership in January 2004 and the $20,000 first installment for the 2003 taxes was paid in February 2004. In March 2004
Management learned that the tenant had also failed to pay the $31,000 second installment of its 2001 property taxes. The Partnership paid the 2001 delinquent property taxes, as well as approximately $10,000 in assessed late fees, in March 2004.



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



In March 2004 the Partnerships legal counsel obtained a court order of possession that stated that Popeyes was to vacate the property by April 2, 2004. In
April 2004 Management entered into a verbal agreement with Popeyes that the tenant: (1) pay $25,000 by wire or certified check per month until the Partnership is reimbursed in full for the approximately $107,000 in delinquent property taxes
paid on Popeyes behalf (the Partnership received $25,000 in each April, May, June, and July 2004 and received the final payment of approximately $7,000 in September 2004); and (2) fund the $20,000 2003 property tax second installment due in
the Fourth Quarter 2004 through prorated monthly escrow payments made to the Partnership from April through September 2004 (the Partnership received approximately $17,000 of the $20,000 in September 2004). If the tenant adheres to this verbal
agreement, Management intends to re-evaluate outstanding percentage rents relative to appropriate and sustainable occupancy costs and defer any current action for possession.



Popeyes 2004 estimated property taxes have been prorated and accrued on a monthly basis by the Partnership. In September 2004 the
Partnership began billing Popeyes monthly property tax escrow charges. No 2004 escrow payments have been received by the Partnership. These charges will be reflected in the financial statements only as escrow payments are received, and will be
recorded as a reversal of 2004 property tax expense equal to the amount of payment received.



Miami Subs, FL Property



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



At the time of closing the former
tenant was delinquent $17,000 in past rent (after the application of a $15,000 security deposit). The former tenant also owed the Partnership approximately $13,360 in real estate taxes as the



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Partnership paid the propertys delinquent 2003 real estate taxes in June 2004. Management continues to pursue legal
remedies to collect the former tenants total past due balances. Due to the uncertainty of collection half of the total outstanding receivable balances were reserved in June 2004.



Hardees property- Fond du Lac, WI



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



Milwaukee, WI property



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



Grand Forks, ND Property



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



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



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



South Milwaukee, WI property



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



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



4785 Merle Hay Road- Des Moines, IA



In July 2004 the Partnership paid Daytonas delinquent 2002 property taxes balance of
approximately $15,000. Daytonas reimbursed the Partnership $5,000 in both August and September. Management anticipates the final installment to be received from Daytonas in the Fourth Quarter of 2004. Due to the property tax default
Management requested that Daytonas begin escrowing for their next property tax installment with the Partnership in September 2004. Escrow payments of approximately $3,400 were received by the Partnership from Daytonas in September 2004.



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



Twin Falls, ID property



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



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



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



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.



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



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



At September 30, 2004 the owners of the Panda Buffet property have an option to purchase the property at a price, which approximates the net
asset value of the property. The current General Partner is not aware of any unfavorable purchase options in relation to the original cost with other properties.



Other Assets



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



Cash and cash equivalents, held by the Partnership, totaled approximately $833,000 at
September 30, 2004 compared to $673,000 at December 31, 2003. Cash of $480,000 is anticipated to be used to fund the Third Quarter 2004 distributions to Limited Partners in November 2004; cash of $71,000 is anticipated to be used for the payment of
accounts payable and accrued expenses; and the remainder represents amounts deemed necessary to allow the Partnership to operate normally.



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



Property tax cash escrow amounted to approximately $20,000 at
September 30, 2004. Due to a property tax default Management requested that Daytonas begin escrowing for their next property tax installment with the



23



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Partnership in September 2004. Payments of approximately $3,400 were received by the Partnership from Daytonas in
September 2004. (For further discussion see Note 3- Investment Properties.) In September 2004 the Partnership received approximately $17,000 from Popeyes in relation to their 2003 second installment property tax payment which is due in the
Fourth Quarter of 2004. The Partnership recorded the receipt as property tax expense recovery in the income statement, as the installment had been accrued at December 31, 2003 by the Partnership. (For further discussion see Note 3- Investment
Properties.)



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



Rents and other receivables amounted to approximately $256,000 (net of allowance of $112,000) at September 30, 2004 compared to $510,000 (net of allowance of $103,500) as
of December 31, 2003. Prior to the closing on the sale of the Miami Subs property, the former tenant was delinquent $17,000 in past rent (after the application of a $15,000 security deposit). Management continues to pursue legal remedies to collect
Miami Subs past due balance; however, due to the uncertainty of collection half of the outstanding balance ($8,500) was reserved in June 2004. (For further discussion see Note 3- Investment Properties.) The tenant Popeyes- Park Forest is
delinquent on its January 2002 percentage rent billing for 2001 of $72,000 and its February 2003 percentage rent billing for 2002 of $31,500. Management continues to pursue legal remedies in relation to the collection of the tenants percentage
rent past due balance of approximately $103,500, however, due to the uncertainty of collection, the entire amount was fully reserved in the Fourth Quarter of 2003. In addition, Management has charged Popeyes late fees totaling $90,000 (which
includes 2004 and 2003 late fee charges of $55,000 and $35,000, respectively, which were not recognized as revenue due to uncertainty of collection) in relation to the percentage rent balances due. (For further discussion see Note 3- Investment
Properties.) Village Inn in Grand Forks, ND was in default in relation to its January 2002 through June 2003 lease payments. The Partnership did not recognize revenue in 2003 related to Village Inn. Management initiated legal action against Village
Inn for past due rents of approximately $137,000, as well as other damages. 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 (which were not recognized as revenue due to uncertainty of collection) in relation to the 2002 past due rents. During June 2003 the Partnership recovered $50,000 in past rent due from Village Inn pursuant to
the execution of a settlement and lease termination agreement. The remaining past due rents and allowances were removed from the balance sheet in June 2003.



Property tax receivable at September 30, 2004 totaled approximately $17,000 (net of allowance of $6,700). In June 2004 the Partnership paid former tenant Miami Subs
2003 delinquent property taxes of $13,400. Management intends to pursue legal remedies to collect Miami Subs past due balance; however, due to the uncertainty of collection half of the outstanding balance ($6,700) was reserved in June 2004.
(For further discussion see Note 3- Investment Properties.) In July 2004 the Partnership paid Daytonas delinquent 2002 property taxes balance of approximately $15,000. Daytonas reimbursed the Partnership $5,000 in both August and
September. Management anticipates the final installment to be received from Daytonas in the Fourth Quarter of 2004. (For further discussion see Note 3- Investment Properties.)



Deferred charges totaled approximately $263,000 and $273,000, net of accumulated amortization, at September 30, 2004 and December 31, 2003,
respectively. Deferred charges represent leasing commissions paid when properties are leased or upon the negotiated extension of a lease. Leasing commissions are capitalized and amortized over the life of the lease. During the First Quarter of 2003,
commissions of $18,500 and $3,700 were paid to an unaffiliated



24



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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 Daytonas- All Sports Café lease. Deferred charges totaling $56,000 related to the Milwaukee, WI and Hardees- Fond du Lac, WI
properties were written-off when the two properties were sold in the Third Quarter of 2003.



Liabilities



Accounts
payable and accrued expenses at September 30, 2004, in the amount of $71,000, primarily represented the accruals of auditing, tax and data processing fees.



Property taxes payable at September 30, 2004 and December 31, 2003 amounted to $60,000 and $88,000 respectively. Property taxes payable at December 31, 2003, primarily
represented 2003 and 2002 real estate taxes due for the Popeyes- Park Forest property. Since the tenant was delinquent on payment of these taxes to Cook County, Illinois, the Partnership paid the full 2002 property taxes in January 2004 and
the first installment of the 2003 taxes in February 2004. In the Second Quarter and Third Quarters of 2004, $75,000 and $32,000, respectively, in property tax reimbursements from Popeyes- Park Forest were recognized as revenues as related to
these accounts. (For further discussion see Note 3- Investment Properties.) Popeyes 2004 estimated property taxes have been prorated and accrued on a monthly basis by the Partnership.



Due to the Current General Partner amounted to $2,454 at September 30, 2004 and primarily
represented the General Partners Third Quarter 2004 distributions.



Partners Capital



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



Cash distributions to the Limited Partners and to the
General Partner during 2004 of $1,825,000 and $4,971 respectively, have also been made in accordance with the Partnership Agreement. The Partnership intends to pay Third Quarter 2004 distributions of $480,000 on November 15, 2004.



Results of Operations



The Partnership reported income from continuing operations for the three-month period ended
September 30, 2004, in the amount of $495,000 compared to income from continuing operations for the three-month period ended September 30, 2003 of $494,000. The Partnership reported income from continuing operations for the nine-month period ended
September 30, 2004, in the amount of $1,010,000 compared to income from continuing operations for the nine-month period ended September 30, 2003 of $789,000. The variance in income from continuing operations in 2004 compared to 2003 is due primarily
to: (i) the Third and Second Quarter 2004 collections and revenue recognition of $32,000 and $75,000, respectively, in property tax reimbursements from Popeyes; (ii) the Third Quarter 2004 revenue recognition of $17,000 in 2003 property tax
expense recovery due to the collection of an escrow tax payment from Popeyes in relation to its 2003 property tax second installment; (iii) the March 2004 payment of Popeyes 2001 property taxes second installment and related penalties
due to tenant default; (iv) a one-time settlement payment of approximately $25,000 from the Bankruptcy Court in relation to the DeDan bankruptcy litigation was received in January 2004; (v) increased legal expenditures in 2003 due to tenant
defaults, eviction proceedings at the Twin Falls property, and court proceedings related to the former Mulberry Street Grill property; (vi) increased audit fees in 2003; (vii) an insurance premium adjustment in the First Quarter



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of 2003; (viii) 1989 personal property taxes paid in the First Quarter of 2003 in relation to the Dennys- Northern
property; (ix) increased maintenance expenditures at the Grand Forks, ND property in 2003; and (x) the Mulberry Street Grill settlement payment in February 2003.



Discontinued Operations



During the three-month periods ended September 30, 2004 and 2003 the Partnership recognized income from discontinued operations of approximately $5,000 and $329,000,
respectively. During the nine- month periods ended September 30, 2004 and 2003, the Partnership recognized income from discontinued operations of $233,000 and $413,000, respectively. In accordance with Statement of Financial Accounting Standard No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), discontinued operations represent the operations of properties disposed of or classified as held for sale subsequent to January 1, 2002 as well as any gain
or loss recognized in their disposition. The 2004 income from discontinued operations is primarily attributable to the reclassification of the Miami Subs restaurant property to property held for sale in the Fourth Quarter of 2003. The 2004 income
from discontinued operations includes a Second Quarter net gain on the sale of the Miami Subs property of approximately $211,000 and a Third Quarter net gain on the sale of a parcel of land located adjacent to the former vacant Twin Falls, ID
property of $5,000 (the land had no recorded value). The 2003 income from discontinued operations is attributable to the vacant South Milwaukee, WI property (which was sold in April 2003), the property in Milwaukee, WI and the Hardees
restaurant in Fond du Lac, WI (which were sold in July 2003), the vacant Twin Falls, ID property (which was sold in August 2003) and the reclassification of the Miami Subs restaurant property to property held for sale in the Fourth Quarter of 2003.
The 2003 income from discontinued operations includes a First Quarter write-down of $33,000 and a Second Quarter write-down of $15,000 related to the South Milwaukee property, and a Third Quarter net gain on sale of properties of $304,000.



Revenues



Total operating revenues amounted to $690,000 and $668,000 for the three-month periods ended
September 30, 2004 and 2003, respectively. During the nine- month periods ended September 30, 2004 and 2003, total operating revenues amounted to $1,639,000 and $1,541,000, respectively.



As of September 30, 2004 total base operating rent revenues should approximate $1,667,000 for the year 2004 based on leases currently in
place. Future operating rent revenues may decrease with tenant defaults and/or the reclassification of Properties as held for sale. They may also increase with additional rents due from tenants, if those tenants experience sales levels, which
require the payment of additional rent to the Partnership.



Expenses



For the three-month periods ended
September 30, 2004 and 2003, total operating expenses amounted to approximately 29% and 27%, of total operating revenue, respectively. For the nine-month periods ended September 30, 2004 and 2003, total operating expenses amounted to approximately
41% and 50%, of total operating revenue, respectively. The variance between 2004 and 2003 operating expenditures are due to: (i) the March 2004 payment of Popeyes 2001 property taxes second installment and related penalties due to tenant
default; (ii) 2004 monthly property tax accruals in relation to Popeyes (iii) increased 2003 legal expenditures due to tenant defaults, eviction proceedings at the Twin Falls property, and court proceedings related to the former Mulberry
Street Grill property; (iv) increased 2003 audit fees; (v) an insurance premium adjustment in the First Quarter of 2003; (vi) 1989 personal property taxes paid in the First Quarter of 2003 in relation to the Dennys- Northern property; (vii)
the Mulberry Street Grill settlement payment in February 2003; and (viii) increased maintenance expenditures at the Grand Forks, ND property in 2003.



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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 approximately $15,000 for the nine- month period ended September 30, 2004. Write-offs for non-collectible rents and receivables amounted to $2,600 for the nine- month period ended September 30, 2003. The write-offs are
the result of tenant defaults.



Other Income



For the three-month periods ended September 30, 2004 and 2003 the
Partnership generated other income of approximately $7,000 and $5,000, respectively. For the nine-month periods ended September 30, 2004 and 2003 the Partnership generated other income of approximately $43,000 and $15,000, respectively. During
January 2004 the Partnership received a one-time settlement payment of approximately $25,000 from the Bankruptcy Court in relation to the DeDan bankruptcy litigation. In the late 1980s, the Partnership leased some properties to DeDan, Inc.,
and the leases were guaranteed by the owner of DeDan, Dan Fore. These leases went into default in the early 1990s and the Partnership obtained possession of the properties and re-leased them to various entities. The original lessee, DeDan and
Dan Fore, filed for bankruptcy and the Partnership filed a claim in the Bankruptcy Court for damages incurred due to the lease defaults. (See Legal Proceedings in Note 10 and Part II- Item 1.)



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



Inflation



Inflation has a minimal effect on operating earnings and related cash flows from a portfolio of triple net leases. By their nature, such leases actually fix revenues and are not impacted by rising costs of
maintenance, insurance, or real estate taxes. Although the majority of the Partnerships leases have percentage rent clauses, revenues from percentage rents represented only 25% of operating rental income for the year ended 2003. If inflation
causes operating margins to deteriorate for lessees, or if expenses grow faster than revenues, then, inflation may well negatively impact the portfolio through tenant defaults.



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



Critical Accounting Policies



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



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



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



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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.



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PART II - OTHER INFORMATION



Item 1. Legal Proceedings



Former Mulberry Street Grill property



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



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



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



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



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



In early January 2003, Centre informed the Partnership that the replacement tenant had vacated the premises. In February 2003 the Partnership made an offer to Centre
to settle the lawsuit and terminate the Ground Lease. In February 2003 a Settlement Agreement and Mutual Release (Agreement) was executed between Centre, the Partnership and TPG. The Agreement included a February 28, 2003 settlement
payment of $115,000 (the Settlement) from the Partnership to Centre in satisfaction of any and all obligations the Partnership and TPG has



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now, or may have in the future, to Centre, whether in connection with the Complaint, the Judgment, the Ground Lease, or
otherwise, except for any liability for violations of environmental law for which the Partnership is liable. In addition, the Agreement included the termination of the Ground Lease, dismissal of the Partnerships Appeal, and the mutual
liability release of all parties relating to or arising out of the Ground Lease, the Complaint, the Judgment, and the Appeal, except for violations of environmental laws.



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



DeDan Bankruptcy



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



Phoenix Foods Preference Claim



The trustee in the Phoenix Foods bankruptcy has made a claim seeking to recover from the Partnership alleged preferential payments by Phoenix Foods to the
Partnership in the amount of approximately $16,500. The payments the trustee is seeking to recover were rent payments received in the ordinary course of business prior to Phoenix Foods bankruptcy. The Partnership does not believe such payments
were preferential under the Bankruptcy Code and is vigorously contesting such characterization.



Item 2-4.



None



Item 5. Controls and Procedures



As of the end of the period covered by this report, the Partnership carried out an
evaluation, under the supervision and with the participation of the Companys management, including the Chief Executive Officer (CEO)/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 period covered by this report referred to above.



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Item 6. Exhibits and Reports on Form 8-K



| | (a) | Listing of Exhibits
| | --- | -------------------



|     |  |                                                                                                                                        
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | 302 Certifications.                                                                                                                    
|     | 
|32.1 |  | Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350.                                                         
|     | 
|99.0 |  | Correspondence to the Limited Partners which is scheduled to be mailed November 15, 2004 regarding the Third Quarter 2004 distribution.



| | (b) | Report on Form 8-K:
| | --- | -------------------



Registrant filed no reports on Form 8-K during the third quarter of fiscal year 2004.

|
|



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SIGNATURES



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



DIVALL INSURED
INCOME PROPERTIES 2 LIMITED PARTNERSHIP



|      |  |                                       
|----- |  | --------------------------------------
|By:   |  | The Provo Group, Inc., General Partner
|By:   |  | /s/ Bruce A. Provo                    
|      |  | Bruce A. Provo, President             
|Date: |  | November 8, 2004                      



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



|      |  |                                                                               
|----- |  | ------------------------------------------------------------------------------
|By:   |  | The Provo Group, Inc., General Partner                                        
|By:   |  | /s/ Bruce A. Provo                                                            
|      |  | Bruce A. Provo, President, Chief Executive Officer
and Chief Financial Officer
|Date: |  | November 8, 2004                                                              



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