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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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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 June 30, 2003



OR



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



For the transition period from  to



Commission file number 0-17686



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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.)



101 W. 11th Street,
Suite 1110, Kansas City, Missouri 64105

(Address of principal executive offices, including zip code)



(816) 421-7444

(Registrants telephone number, including area code)



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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



June 30, 2003 and December 31, 2002



ASSETS

(Unaudited)



|                                                                                        |  | June 30, 2003 |            |   | December 31,2002 |  
|--------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ---------------- | -
|INVESTMENT PROPERTIES AND EQUIPMENT: (Note 3)                                           |  |               |            |   |                  |  
|                                                                                        |  |              
|Land                                                                                    |  | $             | 5,958,223  |   |                  | $
|Buildings                                                                               |  |               | 9,063,220  |   |                  |  
|Equipment                                                                               |  |               | 431,143    |   |                  |  
|Accumulated depreciation                                                                |  |               | (4,889,648 | ) |                  |  
|                                                                                        |  |               |            |   |                  |  
|Net investment properties and equipment                                                 |  |               | 10,562,938 |   |                  |  
|                                                                                        |  |               |            |   |                  |  
|OTHER ASSETS:                                                                           |  |               |            |   |                  |  
|                                                                                        |  |              
|Property held for sale                                                                  |  |               | 1,714,318  |   |                  |  
|Cash and cash equivalents                                                               |  |               | 1,293,559  |   |                  |  
|Cash held in Indemnification Trust (Note 8)                                             |  |               | 380,773    |   |                  |  
|Deposit- Clerk of the Court (Note 10)                                                   |  |               | 0          |   |                  |  
|Rents and other receivables (Net of allowance of $33,236 and $134,578 in 2003 and 2002) |  |               | 113,548    |   |                  |  
|Property tax receivable (Net of allowance of $29,929 in 2002)                           |  |               | 0          |   |                  |  
|Deferred rent receivable                                                                |  |               | 121,992    |   |                  |  
|Prepaid insurance                                                                       |  |               | 11,576     |   |                  |  
|Deferred charges, net                                                                   |  |               | 279,382    |   |                  |  
|                                                                                        |  |               |            |   |                  |  
|Total other assets                                                                      |  |               | 3,915,148  |   |                  |  
|                                                                                        |  |               |            |   |                  |  
|Total assets                                                                            |  | $             | 14,478,086 |   |                  | $
|                                                                                        |  |               |            |   |                  |  



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



2



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



CONDENSED BALANCE SHEETS



June 30, 2003 and December 31, 2002



LIABILITIES AND PARTNERS CAPITAL

(Unaudited)



|                                                         |  | June 30, 2003 |             |   | December 31,2002 |  
|-------------------------------------------------------- |  | ------------- | ----------- | - | ---------------- | -
|LIABILITIES:                                             |  |               |             |   |                  |  
|Accounts payable and accrued expenses                    |  | $             | 89,859      |   |                  | $
|Judgment payable                                         |  |               | 0           |   |                  |  
|Property taxes payable                                   |  |               | 0           |   |                  |  
|Due to General Partner                                   |  |               | 1,567       |   |                  |  
|Security deposits                                        |  |               | 144,085     |   |                  |  
|Unearned rental income                                   |  |               | 112,028     |   |                  |  
|                                                         |  |               |             |   |                  |  
|Total liabilities                                        |  |               | 347,539     |   |                  |  
|                                                         |  |               |             |   |                  |  
|CONTINGENT LIABILITIES: (Note 7)                         |  |               |             |   |                  |  
|                                                         |  |              
|PARTNERS CAPITAL: (Notes 1, 4 and 9)                    |  |               |             |   |                  |  
|Current General Partner -                                |  |               |             |   |                  |  
|Cumulative net income                                    |  |               | 191,309     |   |                  |  
|Cumulative cash distributions                            |  |               | (79,178     | ) |                  |  
|                                                         |  |               |             |   |                  |  
|                                                         |  |               | 112,131     |   |                  |  
|                                                         |  |               |             |   |                  |  
|Limited Partners (46,280.3 interests outstanding)        |  |               |             |   |                  |  
|Capital contributions, net of offering costs             |  |               | 39,358,468  |   |                  |  
|Cumulative net income                                    |  |               | 25,305,445  |   |                  |  
|Cumulative cash distributions                            |  |               | (49,805,268 | ) |                  |  
|Reallocation of former general partners deficit capital |  |               | (840,229    | ) |                  |  
|                                                         |  |               |             |   |                  |  
|                                                         |  |               | 14,018,416  |   |                  |  
|                                                         |  |               |             |   |                  |  
|Total partners capital                                  |  |               | 14,130,547  |   |                  |  
|                                                         |  |               |             |   |                  |  
|Total liabilities and partners capital                  |  | $             | 14,478,086  |   |                  | $
|                                                         |  |               |             |   |                  |  



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



3



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



CONDENSED STATEMENTS OF INCOME



For the Three and Six-Month Periods Ended June 30, 2003 and 2002

(Unaudited)



|                                                                           |  | Three Months ended June 30, |         | Six months ended June 30,
|-------------------------------------------------------------------------- |  | --------------------------- | ------- | -------------------------
|                                                                           |  | 2003                        |         |                          
|OPERATING REVENUES:                                                        |  |                             |         |                          
|Rental income (Note 5)                                                     |  | $                           | 428,244 |                          
|Lease termination fee (Note 3)                                             |  |                             | 50,000  |                          
|                                                                           |  |                             |         |                          
|TOTAL OPERATING REVENUES                                                   |  |                             | 478,244 |                          
|                                                                           |  |                             |         |                          
|OPERATING EXPENSES                                                         |  |                             |         |                          
|Partnership management fees (Note 6)                                       |  |                             | 50,647  |                          
|Restoration fees (Note 6)                                                  |  |                             | 62      |                          
|Insurance                                                                  |  |                             | 8,681   |                          
|General and administrative                                                 |  |                             | 36,700  |                          
|Advisory Board fees and expenses                                           |  |                             | 2,188   |                          
|Personal property taxes                                                    |  |                             | 0       |                          
|Professional services                                                      |  |                             | 72,356  |                          
|Maintenance and repair expenses                                            |  |                             | 1,007   |                          
|Expenses incurred due to default by lessee or vacancy                      |  |                             | 2,833   |                          
|Settlement expense                                                         |  |                             | 0       |                          
|Depreciation                                                               |  |                             | 66,143  |                          
|Judgment expense                                                           |  |                             | 0       |                          
|Amortization                                                               |  |                             | 3,199   |                          
|Provision for non-collectible rents and other receivables                  |  |                             | 0       |                          
|                                                                           |  |                             |         |                          
|TOTAL OPERATING EXPENSES                                                   |  |                             | 243,816 |                          
|                                                                           |  |                             |         |                          
|OTHER INCOME                                                               |  |                             |         |                          
|Interest income                                                            |  |                             | 3,567   |                          
|Other income                                                               |  |                             | (106    | )                        
|Recovery of amounts previously written off (Note 2)                        |  |                             | 1,556   |                          
|                                                                           |  |                             |         |                          
|TOTAL OTHER INCOME                                                         |  |                             | 5,017   |                          
|                                                                           |  |                             |         |                          
|INCOME FROM CONTINUING OPERATIONS                                          |  |                             | 239,445 |                          
|INCOME FROM DISCONTINUED OPERATIONS                                        |  |                             | 23,772  |                          
|                                                                           |  |                             |         |                          
|NET INCOME                                                                 |  | $                           | 263,217 |                          
|                                                                           |  |                             |         |                          
|NET INCOME- CURRENT GENERAL PARTNER                                        |  | $                           | 2,632   |                          
|NET INCOME- LIMITED PARTNERS                                               |  |                             | 260,585 |                          
|                                                                           |  |                             |         |                          
|                                                                           |  | $                           | 263,217 |                          
|                                                                           |  |                             |         |                          
|PER LIMITED PARTNERSHIP INTEREST, based on 46,280.3 Interests outstanding: |  |                             |         |                          
|INCOME FROM CONTINUING OPERATIONS                                          |  | $                           | 5.12    |                          
|(LOSS) INCOME FROM DISCONTINUED OPERATIONS                                 |  |                             | .51     |                          
|                                                                           |  |                             |         |                          
|NET INCOME PER LIMITED PARTNERSHIP INTEREST                                |  | $                           | 5.63    |                          
|                                                                           |  |                             |         |                          



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



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



CONDENSED STATEMENTS OF CASH FLOWS



For the Six Month Periods Ended June 30, 2003 and 2002



(Unaudited)



|                                                                                      |  | 2003 |            |   | 2002 |  
|------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -
|CASH FLOWS FROM (USED) IN OPERATING ACTIVITIES:                                       |  |      |            |   |      |  
|Net income                                                                            |  | $    | 377,987    |   |      | $
|Adjustments to reconcile net income to net cash from (used in) operating activities - |  |      |            |   |      |  
|Depreciation and amortization                                                         |  |      | 157,072    |   |      |  
|Recovery of amounts previously written off                                            |  |      | (2,891     | ) |      |  
|Provision for non-collectible rents and other receivables                             |  |      | 2,596      |   |      |  
|Property write-down                                                                   |  |      | 48,027     |   |      |  
|Interest applied to Indemnification Trust account                                     |  |      | (2,048     | ) |      |  
|Payment of leasing commissions                                                        |  |      | (31,920    | ) |      |  
|Decrease in rents and other receivables                                               |  |      | 622,294    |   |      |  
|Deposits for payment of real estate taxes                                             |  |      | 0          |   |      |  
|Decrease in prepaid expenses                                                          |  |      | 17,363     |   |      |  
|(Increase) in deferred rent receivable                                                |  |      | (42,784    | ) |      |  
|Decrease in Property Tax receivable                                                   |  |      | 5,191      |   |      |  
|(Decrease) in due to current General Partner                                          |  |      | (1,502     | ) |      |  
|(Decrease) Increase in accounts payable and other accrued                             |  |      | (68,289    | ) |      |  
|Increase in security deposits received                                                |  |      | 7,500      |   |      |  
|(Decrease) in property taxes payable                                                  |  |      | (16,839    | ) |      |  
|(Decrease) in unearned rental income                                                  |  |      | (732       | ) |      |  
|                                                                                      |  |      |            |   |      |  
|Net cash from operating activities                                                    |  |      | 1,071,025  |   |      |  
|                                                                                      |  |      |            |   |      |  
|CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:                                       |  |      |            |   |      |  
|Principal payments received on note receivable                                        |  |      | 0          |   |      |  
|Net proceeds from sale of investment property                                         |  |      | 417,099    |   |      |  
|Recoveries from former General Partner affiliates                                     |  |      | 2,891      |   |      |  
|                                                                                      |  |      |            |   |      |  
|Net cash from investing activities                                                    |  |      | 419,990    |   |      |  
|                                                                                      |  |      |            |   |      |  
|CASH FLOWS (USED IN) FINANCING ACTIVITIES:                                            |  |      |            |   |      |  
|Cash distributions to Limited Partners                                                |  |      | (1,565,000 | ) |      |  
|Cash distributions to current General Partner                                         |  |      | (1,704     | ) |      |  
|                                                                                      |  |      |            |   |      |  
|Net cash (used in) financing activities                                               |  |      | (1,566,704 | ) |      |  
|                                                                                      |  |      |            |   |      |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                  |  |      | (75,689    | ) |      |  
|                                                                                      |  |     
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                      |  |      | 1,369,248  |   |      |  
|                                                                                      |  |      |            |   |      |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                            |  | $    | 1,293,559  |   |      | $
|                                                                                      |  |      |            |   |      |  



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





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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) 2002 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 June 30, 2003, and the statements of income for the three-and six month periods ended June 30, 2003 and 2002, and cash flows for the six-month periods ended June 30, 2003 and 2002.



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 June 30, 2003, the Partnership owned 24 properties with specialty leasehold improvements in 10 of these
properties.



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



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



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



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



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



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appropriate payment to avoid possible foreclosure of the property. Taxes are accrued in the period in which the liability is incurred.



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



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



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



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



The Partnership will be dissolved on November 30, 2010, or earlier upon the prior occurrence of any of the following events: (a) the
disposition of all properties of the Partnership; (b) the written determination by the General Partner that the Partnerships assets may constitute plan assets for purposes of ERISA; (c) the agreement of Limited Partners owning a
majority of the outstanding interests to dissolve the Partnership; or (d) the dissolution, bankruptcy, death, withdrawal, or incapacity of the last remaining General Partner, unless an additional General Partner is elected previously by a majority
of the Limited Partners. During the Second Quarter of 1998, the General Partner received the consent of the Limited Partners to liquidate the Partnerships assets and dissolve the Partnership. No buyer was identified for the Partnerships
assets, and Management continued normal operations. During the Second Quarter of 2001, another consent solicitation was circulated, which if approved would have authorized the sale of the Partnerships assets and dissolution of the Partnership
(the 2001 Consent). A majority of the Limited Partners did not vote in favor of the 2001 Consent. 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.



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 $8,093,000.



2. REGULATORY INVESTIGATION:





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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 June 30, 2003, $5,816,000 of recoveries have been received which exceeded the original estimate of $3 million. As a result, in 1996,
1997, 1999, 2000, 2001, 2002 and 2003 the Partnership has recognized a total of $1,133,000 as recovery of amounts previously written off in the statements of income, which represents its share of the excess recovery. There were no restoration
recoveries in 1998. The current General Partner continues to pursue recoveries of the misappropriated funds, however, no further significant recoveries are anticipated.



3. INVESTMENT PROPERTIES:



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



As of June 30, 2003, the
Partnership owned 21 fully constructed fast-food restaurants, a video store, a preschool, and one (1) vacant property. The 24 properties are composed of the following: ten (10) Wendys restaurants, one (1) Hardees restaurant, one (1)
Dennys restaurant, one (1) Applebees restaurant, one (1) Popeyes Famous Fried Chicken restaurant, one (1) Hooters restaurant, one (1) Kentucky Fried Chicken restaurant, (1) Chinese Super Buffet restaurant, one (1) Miami Subs
restaurant, one (1) Omega restaurant, one (1) Blockbuster Video store, one (1) Sunrise Preschool, one (1) Panda Buffet Restaurant, one (1) Daytonas- All Sports Café, and one (1) vacant property, (which was previously operated as a
Fiesta Time restaurant.) The 24 properties are located in a total of thirteen (13) states.



During the three months ended June 30, 2003 and 2002, the Partnership recognized income from discontinued operations of $24,000 and $43,000, respectively. During the six months ended June 30, 2003 and 2002, the
Partnership recognized income from discontinued operations of $56,000 and $86,000, respectively. The 2003 and 2002 income from discontinued operations is attributable to the Hartford, WI property (which was sold in October 2002), and the
reclassifications of the vacant South Milwaukee, WI property to property held for sale in the Fourth Quarter of 2002, the vacant Twin Falls, ID property in the First Quarter of 2003, and the Omega restaurant property in Milwaukee, WI and the
Hardees restaurant in Fond du Lac, WI in the Second Quarter of 2003. The



8



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2003 income from discontinued operations includes a First Quarter write-down of $33,000 related to the South Milwaukee property, and a Second Quarter
write-down of $15,000 related to the Omega restaurant property.



The components
of discontinued operations for the three and six-month periods ended June 30, 2003 and 2002 are outlined below.



|                                    |  | Three-month period ended June 30, 2003 |        | Three-month period endedJune 30,2002 |   | Six-month Period ended June 30, 2003 |  | Six-month Period ended June 30, 2002
|----------------------------------- |  | -------------------------------------- | ------ | ------------------------------------ | - | ------------------------------------ |  | ------------------------------------
|Revenues                            |  |                                        |        |                                      |   |                                      |  |                                     
|Rental Income                       |  | $                                      | 46,400 |                                      | $ | 62,400                               |  | $                                   
|Expenses                            |  |                                        |        |                                      |   |                                      |  |                                     
|Property Write-down                 |  |                                        | 15,189 |                                      |   | 0                                    |  |                                     
|Depreciation                        |  |                                        | 5,613  |                                      |   | 16,876                               |  |                                     
|Amortization                        |  |                                        | 1,826  |                                      |   | 2,104                                |  |                                     
|                                    |  |                                        |        |                                      |   |                                      |  |                                     
|Income from Discontinued Operations |  | $                                      | 23,772 |                                      | $ | 43,420                               |  | $                                   
|                                    |  |                                        |        |                                      |   |                                      |  |                                     



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



Hardees property- Fond du Lac, WI



During June 2003, Management entered 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
$694,000. A net gain on the sale of $84,000 will be recognized in the Third Quarter of 2003. Closing costs amounted to $4,000. The Partnership anticipates a sales commission totaling $22,000 to be paid to a General Partner affiliate in the Third
Quarter of 2003. The net asset value of the property at June 30, 2003 was approximately $610,000, which included $297,000 related to land, $305,000 related to buildings and equipment, and $8,000 related to deferred charges, and is included on the
balance sheet as property held for sale.



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 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 will be 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 Omega restaurant property was written-down by $15,000
to reflect the net estimated sales price, less costs to sell, of the property at June 30, 2003 of approximately $790,000, which included $409,000 related to land and $278,000 related to buildings and equipment, $49,000 related to deferred charges
and $54,000 related to deferred rent, and is included on the balance sheet as property held for sale.



Grand Forks, ND Property



During February 2003 a new 10-year lease was executed with Panda Buffet, Inc. in relation to the Grand Forks, ND property, formerly occupied by Village Inn. The lease is
set to expire in 2012 and the annual first year base rent is $32,000. Although the tenant took possession of the property upon execution of the lease, the lease payments are to commence in July 2003. Commissions of $18,500 and $3,700 were paid to an
unaffiliated leasing



9



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agent and to an affiliate of the General Partner, respectively, in March 2003. HVAC maintenance and repair expenditures of $18,000 were incurred in the First
Quarter of 2003 at the property.



During October 2001, the Village Inn
Restaurant had notified Management of its intent to close and vacate its restaurant in Grand Forks, ND. The Village Inn lease on the property expires in 2009. In February 2002, Management was notified Village Inn had closed and vacated the
restaurant. Rent income was collected from the tenant through December 2001, however; rent income has not been collected for January 2002 through June 2003. The Partnership has not recognized revenue in 2003 related to Village Inn. In March 2002 and
September 2002, the Partnership paid the propertys first and second installments of 2001 real estate taxes. The Partnership also paid the 2002 real estate taxes in the Fourth Quarter of 2002. Management sought legal action in relation to
Village Inns past due rent and real estate taxes of approximately $167,000, as well as future lease and other obligations that will be determined to be in excess of the lease payments received by the Partnership from the new tenant, Panda
Buffet. The Partnership incurred expenditures of approximately $27,000 to replace the roof on the property in the Third Quarter of 2002. 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.



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 market 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 reflect the net estimated sales price, less costs to sell, of the property at March 31, 2003 of approximately $417,000, which included $275,000 related to land and $142,000 related to
buildings and equipment, shown on the balance sheet as property held for sale at March 31, 2003.



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



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



Twin Falls, ID property



During the Fourth Quarter of 2001, the Bankruptcy court granted the motion of Phoenix
Restaurant Group, Inc. (Phoenix) to reject the lease with the Partnership at the Twin Falls, Idaho location. The lease was terminated and rent income ceased in the Fourth Quarter of 2001. The remaining balance due the Partnership for the
period prior to the termination of the lease of approximately $29,000 and its full reserve has been removed from the



10



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Partnerships balance sheet as Management has determined it to be non-collectible. Although Phoenix had rejected the lease, its subtenant, Fiesta Time,
maintained possession of the property. Management, therefore, took legal action to evict Fiesta Time from the Twin Falls property. In the Fourth Quarter of 2002, a judgment was entered in Magistrate Court evicting Fiesta Time. However, Fiesta Time
appealed the action to District Court and the Court upheld the judgment in February 2003. The Partnership then received $30,000 in past rent that the court had required Fiesta Time to escrow during the court proceedings.



In February 2003 Management entered a purchase and sale agreement to sell the vacant Twin
Falls property at a sales price of $550,000. The closing date of the sale has moved from the Second Quarter to the Third Quarter of 2003. The net book value of the property at June 30, 2003 was approximately $315,000, which included $155,000 related
to land and $160,000 related to buildings and equipment, and is included on the balance sheet as property held for sale.



Miami Subs- Palm Beach, FL



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



Hardees property- Hartford, WI



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



North 7thStreet property- Phoenix, AZ



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



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



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



11



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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.) 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 Agreements) was made and entered into as of February 1, 2003. According to the terms of the Agreements the Partnership was required to pay Centre
$115,000 (the Settlement) to discharge all claims of Centre against the Partnership and TPG (except for violations of environmental laws.) The court returned the $140,0000 cash bond to the Partnership in April 2003. (See Legal
Proceedings in Note 10 and Part II- Item 1.)



Other Investment in Properties Information



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



As of December 31, 2002 two of the Partnerships property
leases, where the Partnership is the lessor, contain purchase option provisions with stated purchase prices in excess of the original cost of the properties. The owner of the Omega Restaurant exercised his purchase option and entered into a purchase
agreement to buy the Milwaukee, WI property for $720,000. Closing is anticipated to be in July 2003. The current General Partner is not aware of any unfavorable purchase options in relation to original cost.



4. PARTNERSHIP AGREEMENT:



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



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



12



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Amounts paid and/or accrued to the current General Partner and its affiliates for the three-month periods ended June 30, 2003 and 2002 are as follows:



|Current General Partner |  | Incurred for the Three-month Period ended June 30, 2003 |        | Incurred for the Three-month Period ended June 30, 2002 |   | Incurred for the Six-month Periodended June 30, 2003 |  | Incurred for theSix-month Periodended June 30, 2002
|----------------------- |  | ------------------------------------------------------- | ------ | ------------------------------------------------------- | - | ---------------------------------------------------- |  | ---------------------------------------------------
|Management fees         |  | $                                                       | 50,647 |                                                         | $ | 49,911                                               |  | $                                                  



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



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



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



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



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



On August 15, 2003, the Partnership intends to make distributions to the Limited Partners of $845,000, which amounts to $18.26 per Interest.



13



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5. LEASES:



Original lease terms for the majority of the investment properties are generally 1020 years from their inception. The leases generally provide for minimum rents and
additional rents based upon percentages of gross sales in excess of specified 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 June 30, 2003 aggregate minimum lease payments to be received under the leases for the
Partnerships properties are as follows:



|Year ending December
31, |  |  
|------------------------ |  | -
|2003                     |  | $
|2004                     |  |  
|2005                     |  |  
|2006                     |  |  
|2007                     |  |  
|Thereafter               |  |  
|                         |  |  
|                         |  | $
|                         |  |  



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



6. TRANSACTIONS WITH CURRENT GENERAL PARTNER AND ITS AFFILIATES:



The current General Partner was to receive a fee for managing the three original affiliated Partnerships equal to 4% of gross receipts, subject to a minimum of
$300,000 annually, and a maximum annual reimbursement for office rent and related office overhead of $25,000, as provided in the Permanent Manager Agreement (PMA). The current General Partner receives a fee for managing the Partnership
equal to 4% of gross receipts and the Partnership shall only be responsible for its allocable share of such minimum and maximum annual amounts as indicated above ($159,000 minimum annual base fee and $13,250 maximum annual rent reimbursement).
Effective March 1, 2003, the minimum annual management fee and the maximum annual reimbursement for office rent and overhead increased by 1.58%, representing the allowable annual Consumer Price Index adjustment per the PMA. Therefore, as of March 1,
2003 the minimum monthly management fee paid by the Partnership was raised to $16,903.



For purposes of computing the 4% overall fee, gross receipts includes amounts recovered in connection with the misappropriation of assets by the former general partners and their affiliates. TPG has received fees from the Partnership
totaling $55,713 to date on the amounts recovered, which includes 2003 fees of $116. The fees received from the Partnership on the amounts recovered reduce the 4% minimum fee by that same amount.



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Amounts paid and/or accrued to the current General Partner and its affiliates for the three-month periods ended June 30,
2003 and 2002 are as follows:



|Current General Partner                  |  | Incurred for the Three-month Periodended June 30, 2003 |        | Incurred for the Three-month Periodended June 30, 2002 |   | Incurred for the Six-month Periodended June 30, 2003 |  | Incurred for the Six-month Periodended June 30, 2002
|---------------------------------------- |  | ------------------------------------------------------ | ------ | ------------------------------------------------------ | - | ---------------------------------------------------- |  | ----------------------------------------------------
|Management fees                          |  | $                                                      | 50,647 |                                                        | $ | 49,911                                               |  | $                                                   
|Restoration fees                         |  |                                                        | 62     |                                                        |   | 9                                                    |  |                                                     
|Overhead allowance                       |  |                                                        | 4,091  |                                                        |   | 4,028                                                |  |                                                     
|Leasing commissions                      |  |                                                        | 0      |                                                        |   | 0                                                    |  |                                                     
|Reimbursement for out-of-pocket expenses |  |                                                        | 2,232  |                                                        |   | 2,077                                                |  |                                                     
|Cash distribution                        |  |                                                        | 1,114  |                                                        |   | 844                                                  |  |                                                     
|                                         |  |                                                        |        |                                                        |   |                                                      |  |                                                     
|                                         |  | $                                                      | 58,146 |                                                        | $ | 56,869                                               |  | $                                                   
|                                         |  |                                                        |        |                                                        |   |                                                      |  |                                                     



7. CONTINGENT LIABILITIES:



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



8. PMA INDEMNIFICATION TRUST:



The Permanent Manager
Agreement (PMA) provides that the Permanent Manager will be indemnified from any claims or expenses arising out of or relating to the Permanent Manager serving in such capacity or as substitute general partner, so long as such claims do
not arise from fraudulent or criminal misconduct by the Permanent Manager. The PMA provides that the Partnership fund this indemnification obligation by establishing a reserve of up to $250,000 of Partnership assets which would not be subject to the
claims of the Partnerships creditors. An Indemnification Trust (Trust) serving such purposes has been established at United Missouri Bank, N.A. The Trust has been fully funded with Partnership assets as of June 30, 2003. Funds are
invested in U.S. Treasury securities. In addition, $130,773 of earnings has been credited to the Trust as of June 30, 2003. The rights of the Permanent Manager to the Trust shall be terminated upon the earliest to occur of the following events: (i)
the written release by the Permanent Manager of any and all interest in the Trust; (ii) the expiration of the longest statute of limitations relating to a potential claim which might be brought against the Permanent Manager and which is subject to
indemnification; or (iii) a determination by a court of competent jurisdiction that the Permanent Manager shall have no liability to any person with respect to a claim which is subject to indemnification under the



15



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PMA. At such time as the indemnity provisions expire or the full indemnity is paid, any funds remaining in the Trust will
revert back to the general funds of the Partnership.



9. FORMER GENERAL
PARTNERS CAPITAL ACCOUNTS:



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



10. LEGAL PROCEEDINGS:



The Partnership owned the building in Phoenix, Arizona occupied by the Mulberry Street Grill restaurant, which was located on a parcel of land leased to the Partnership
pursuant to a long-term ground lease (the Ground Lease.) The Ground Lease was considered an operating lease and the lease payments were paid by the Partnership and expensed in the periods to which they applied. During the Second Quarter
of 2001, sub-tenant AMF Corporation (AMF) notified Management of its intent to close its Mulberry Street Grill restaurant. Although the sub-lease had not expired, since such notification the Partnership has received no rent from the
former tenant and has returned possession of the Phoenix, Arizona property to the Ground Lease Landlord, Centre at 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 March 31, 2002 and December 31, 2001 the total ground lease
accrual approximated $50,000. On June 12, 2001 Centre leased the property to a new tenant.



On June 18, 2001, Centre filed a lawsuit (the Complaint) in the Maricopa County, 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 are liable to the Partnership for breach of the subleases and any damages for which the Partnership may be held liable pursuant to the Ground Lease. Due to the
bankruptcy filing by AMF the Partnership was prevented from proceeding against them. Although the Partnership had difficulty locating National Restaurant, the lawsuit against them continues.



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



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



16



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



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



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



Liquidity and Capital Resources:



Investment Properties and Net Investment in Direct Financing Leases



The Properties, including equipment held by the Partnership and properties held for sale at June 30, 2003, were originally purchased at a
price, including acquisition costs, of approximately $20,482,810.



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 June 30, 2003, the Partnership owned 21 fully constructed fast-food restaurants, a
video store, a preschool, and one (1) vacant property. The 24 properties are composed of the following: ten (10) Wendys restaurants, one (1) Hardees restaurant, one (1) Dennys restaurant, one (1) Applebees restaurant, one (1)
Popeyes Famous Fried Chicken restaurant, one (1) Hooters restaurant, one (1) Kentucky Fried Chicken restaurant, (1) Chinese Super Buffet restaurant, one (1) Miami Subs restaurant, one (1) Omega restaurant, one (1) Blockbuster Video
store, one (1) Sunrise Preschool, one (1) Panda Buffet Restaurant, one (1) Daytonas- All Sports Café, and one (1) vacant property, (which was previously operated as a Fiesta Time restaurant.) The 24 properties are located in a total of
thirteen (13) states.



During the three months ended June 30, 2003 and 2002,
the Partnership recognized income from discontinued operations of $24,000 and $43,000, respectively. During the six months ended June 30, 2003 and 2002, the Partnership recognized income from discontinued operations of $56,000 and $86,000,
respectively. The 2003 and 2002 income from discontinued operations is attributable to the Hartford, WI property (which was sold in October 2002), and the reclassifications of the vacant South Milwaukee, WI property to property held for sale in the
Fourth Quarter of 2002, the vacant Twin Falls, ID property in the First Quarter of 2003, and the Omega restaurant property in Milwaukee, WI and the Hardees restaurant in Fond du Lac, WI in the Second Quarter of 2003. The 2003 income from
discontinued operations includes a First Quarter write-down of $33,000 related to the South Milwaukee property, and a Second Quarter write-down of $15,000 related to the Omega restaurant property.



17



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The components of discontinued operations for the three and six-month periods ended June 30, 2003 and 2002 are outlined
below.



|                                    |  | Three-monthperiod ended June 30, 2003 |        | Three-monthperiod ended June 30, 2002 |   | Six-month Period endedJune 30, 2003 |  | Six-month Period endedJune 30, 2002
|----------------------------------- |  | ------------------------------------- | ------ | ------------------------------------- | - | ----------------------------------- |  | -----------------------------------
|Revenues                            |  |                                       |        |                                       |   |                                     |  |                                    
|                                    |  |                                       |        |                                      
|Rental Income                       |  | $                                     | 46,400 |                                       | $ | 62,400                              |  | $                                  
|                                    |  |                                       |        |                                      
|Expenses                            |  |                                       |        |                                       |   |                                     |  |                                    
|                                    |  |                                       |        |                                      
|Property Write-down                 |  |                                       | 15,189 |                                       |   | 0                                   |  |                                    
|                                    |  |                                       |        |                                      
|Depreciation                        |  |                                       | 5,613  |                                       |   | 16,876                              |  |                                    
|                                    |  |                                       |        |                                      
|Amortization                        |  |                                       | 1,826  |                                       |   | 2,104                               |  |                                    
|                                    |  |                                       |        |                                       |   |                                     |  |                                    
|Income from Discontinued Operations |  | $                                     | 23,772 |                                       | $ | 43,420                              |  | $                                  
|                                    |  |                                       |        |                                       |   |                                     |  |                                    



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



Hardees property- Fond du Lac, WI



During June 2003, Management entered 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
$694,000. A net gain on the sale of $84,000 will be recognized in the Third Quarter of 2003. Closing costs amounted to $4,000. The Partnership anticipates a sales commission totaling $22,000 to be paid to a General Partner affiliate in the Third
Quarter of 2003. The net asset value of the property at June 30, 2003 was approximately $610,000, which included $297,000 related to land, $305,000 related to buildings and equipment, and $8,000 related to deferred charges, and is included on the
balance sheet as property held for sale.



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 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 will be 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 Omega restaurant property was written-down by $15,000
to reflect the net estimated sales price, less costs to sell, of the property at June 30, 2003 of approximately $790,000, which included $409,000 related to land and $278,000 related to buildings and equipment, $49,000 related to deferred charges
and $54,000 related to deferred rent, and is included on the balance sheet as property held for sale.



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 market 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 reflect the net estimated sales price, less costs to sell, of the property at March 31, 2003 of
approximately



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



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.



Grand Forks, ND Property



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



During October 2001, the Village Inn Restaurant had notified Management of its intent to close and vacate its restaurant in Grand Forks, ND. The Village Inn lease on the property expires in 2009. In February 2002,
Management was notified Village Inn had closed and vacated the restaurant. Rent income was collected from the tenant through December 2001, however; rent income has not been collected for January 2002 through June 2003. The Partnership has not
recognized revenue in 2003 related to Village Inn. In March 2002 and September 2002, the Partnership paid the propertys first and second installments of 2001 real estate taxes. The Partnership also paid the 2002 real estate taxes in the Fourth
Quarter of 2002. Management sought legal action in relation to Village Inns past due rent and real estate taxes of approximately $167,000, as well as future lease and other obligations that will be determined to be in excess of the lease
payments received by the Partnership from the new tenant, Panda Buffet. The Partnership incurred expenditures of approximately $27,000 to replace the roof on the property in the Third Quarter of 2002. 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.



4785 Merle Hay Road- Des Moines, IA



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



Twin Falls, ID property



During the Fourth Quarter of 2001, the Bankruptcy court granted the motion of Phoenix
Restaurant Group, Inc. (Phoenix) to reject the lease with the Partnership at the Twin Falls, Idaho location. The lease was terminated and rent income ceased in the Fourth Quarter of 2001. The remaining balance due the Partnership for the
period prior to the termination of the lease of approximately $29,000 and its full reserve has been removed from the Partnerships balance sheet as Management has determined it to be non-collectible. Although Phoenix had rejected the lease, its
subtenant, Fiesta Time, maintained possession of the property. Management, therefore, took legal



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action to evict Fiesta Time from the Twin Falls property. In the Fourth Quarter of 2002, a judgment was entered in
Magistrate Court evicting Fiesta Time. However, Fiesta Time appealed the action to District Court and the Court upheld the judgment in February 2003. The Partnership then received $30,000 in past rent that the court had required Fiesta Time to
escrow during the court proceedings.



In February 2003 Management entered a
purchase and sale agreement to sell the vacant Twin Falls property at a sales price of $550,000. The closing date of the sale has moved from the Second Quarter to the Third Quarter of 2003. The net book value of the property at June 30, 2003 was
approximately $315,000, which included $155,000 related to land and $160,000 related to buildings and equipment, and is included on the balance sheet as property held for sale.



Miami Subs- Palm Beach, FL



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



Hardees property- Hartford, WI



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



North 7thStreet property- Phoenix, AZ



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



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



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



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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.) 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 Agreements) was made and entered into as of February 1, 2003. According to the
terms of the Agreements the Partnership was required to pay Centre $115,000 (the Settlement) to discharge all claims of Centre against the Partnership and TPG (except for violations of environmental laws.) The court returned the
$140,0000 cash bond to the Partnership in April 2003. (See Legal Proceedings in Note 10 and Part II- Item 1.)



Other Investment in Properties Information



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



As of December 31, 2002 two of the Partnerships property leases, where the Partnership is the lessor, contain purchase option provisions with stated purchase prices
in excess of the original cost of the properties. In May 2003 the owner of the Omega Restaurant exercised his purchase option and entered into a purchase agreement to buy the Milwaukee, WI property for $825,000. The closing date on the sale of the
property was July 28, 2003. The current General Partner is not aware of any unfavorable purchase options in relation to original cost.



Other Assets



As of June 30, 2003 the property held for sale amounted to $1,714,000 and related to the classification of the vacant Twin Falls property, and the Hardees-Fond du
Lac and Omega restaurant properties. The vacant Twin Falls property was reclassified as held for sale in the First Quarter of 2003 and the closing date is anticipated to be in the Third Quarter of 2003. The net asset value of the Twin Falls property
was $315,000 as of June 30, 2003. The Hardees and Omega properties were reclassified as held for sale in the Second Quarter of 2003 and the closing dates for both of the properties was July 2003. The net asset value of the Omega
restaurant property was written-down by $15,000 in the Second Quarter of 2003 to reflect the net estimated sales price, less costs to sell, of the property at June 30, 2003 of approximately $790,000. The net asset value of the Hardees- Fond du
Lac property was $610,000 as of June 30, 2003.



Cash and cash equivalents, held
by the Partnership, totaled approximately $1,294,000 at June 30, 2003 compared to $1,369,000 at December 31, 2002. Cash of $845,000 is anticipated to be used to fund the Second Quarter 2003 distributions to Limited Partners in August 2003; cash of
$202,000 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.



21



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



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



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



Rents
and other receivables amounted to $114,000 as of June 30, 2003. Village Inn 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 sought
legal action in relation to Village Inns past due rents of approximately $137,000, as well as future lease and other obligations that would be determined to be in excess of the lease payments received by the Partnership from the new Grand
Forks tenant, Panda Buffet. Due to the uncertainty of collection, the past due 2002 rents totaling approximately $97,000 were fully reserved in the year 2002. In the year 2002 Management charged Village Inn late fees totaling $3,400 in relation to
the 2002 past due rents. These late fee charges were fully reserved in the year 2002 as Management is uncertain of collection. During June 2003 the Partnership recovered $50,000 in past rent due from Village Inn subsequent 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. 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 $31,000. Management continues to pursue legal remedies in relation to the collection of the tenants percentage rent past due balance of approximately $103,000. In addition,
Management has charged Popeyes late fees totaling $33,000 (which includes 2003 late fee charges of $15,800) in relation to the percentage rent balance due. The late fee charges have been fully reserved as Management is uncertain of collection
of these fees.



Property tax receivable at December 31, 2002 totaled $5,200
(net of allowance of $30,000). The balance primarily represented 2001 and 2002 property taxes paid by the Partnership, which are due from the defaulted tenant Village Inn. The $30,000 due from Village Inn was fully reserved in 2002 due to the
uncertainty of collection. The remaining past due property tax receivable and allowances in relation to Village Inn were removed from the balance sheet in June 2003, subsequent to the settlement and lease termination agreement. A portion of the
amount also represented a property tax receivable due from the new tenant, Chinese Super Buffet, for its portion of 2002 real estate taxes. In agreement with Management, Chinese Super Buffet made monthly payments in 2003 toward its balance due at
December 31, 2002.



Deferred charges totaled approximately $279,000 and
$313,000, net of amortization, at June 30, 2003 and December 31, 2002, respectively. Deferred charges represent leasing commissions paid when properties are leased or upon the negotiated extension of a lease. Leasing commissions are capitalized and
amortized over the life of the lease. During the First Quarter of 2003, commissions of $18,500 and $3,700 were paid to an unaffiliated leasing agent and to an affiliate of the General Partner, respectively, upon the execution of the new Panda Buffet
lease, and a commission of $9,700 was paid to an affiliate of the General Partner upon the execution of the new Daytons- All



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Sports Café lease. The deferred charges related to the Omega and Hardees- Fond du Lac properties were reclassified and included in property held
for sale on the balance sheet as of June 30, 2003, due to purchase contracts executed in the Second Quarter of 2003 for both of these properties.



Liabilities



Accounts payable and accrued expenses at June 30, 2003, in the amount of $90,000, primarily represented the accruals of auditing, tax and data processing fees.



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



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



Due to the Current General Partner amounted to $1,567 at June 30, 2003 and primarily represented the General Partners Second Quarter of 2003 distribution.



Security deposits amounted to $144,000 and $137,000 at June 30, 2003 and
December 31, 2002, respectively. The increase is due primarily to the $5,000 security deposit received from the new tenant Panda Buffet, and the $7,500 purchase deposit received in relation to the pending sale of the Twin Falls property. A $5,000
purchase deposit was relinquished upon the sale of the South Milwaukee property in April 2003.



Partners Capital:



Net income for the year was allocated between the General Partner and the Limited Partners, 1% and 99%, respectively, as provided in the Partnership Agreement as discussed more fully in Note 4 of the condensed financial statements included
in Item 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 2003 of $1,565,000 and $1,704, respectively, have also been made in accordance with the Partnership Agreement. The Fourth Quarter 2002 Limited Partner distributions totaling $1,055,000 were paid
February 15, 2003 and the First Quarter 2003 Limited Partner distributions totaling $510,000 were paid May 15, 2003. The Partnership intends to pay Second Quarter 2003 distributions of $845,000 on August 15, 2003.



Results of Operations:



The Partnership reported income from continuing operations for the three-month period ended
June 30, 2003, in the amount of $239,000 compared to income from continuing operations for the three-month period ended June 30, 2002, of $168,000. The Partnership reported income from continuing operations for the six-month period ended



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June 30, 2003, in the amount of $322,000 compared to income from continuing operations for the six-month period ended June 30, 2002, of $423,000. The
variance in income from continuing operations in 2003 compared to 2002 is due primarily to: (i) 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; (ii) increased audit fees in 2003; (iii) an insurance premium adjustment in the First Quarter of 2003; (iv) 1989 personal property taxes paid in the First Quarter of 2003; (v) increased maintenance expenditures at the
Grand Forks, ND property in 2003; (vi) the settlement payment in February 2003; (vii) $30,000 rent collection from Fiesta Time in the First Quarter of 2003; (viii) $50,000 lease termination fee from Village Inn in the Second Quarter of 2003; and
(ix) Village Inn rent charges recorded in 2002 and not in 2003.



Discontinued Operations:



Income from
discontinued operations was $24,000 and $43,000 for the three-month periods ended June 30, 2003 and 2002, respectively. Income from discontinued operations was $56,000 and $86,000 for the six-month periods ended June 30, 2003 and 2002, respectively.
In accordance with SFAS 144, discontinued operations represent the operations of properties disposed of or classified as held for sale subsequent to January 1, 2002 as well as any gain or loss recognized in their disposition. The Hardees-
Hartford property was sold in October 2002, the vacant South Milwaukee property was classified as held for sale in the Fourth Quarter of 2002, the vacant Twin Falls property was classified as held for sale in the First Quarter of 2003, and the
Hardees- Fond du Lac and Omega restaurant properties were classified as held for sale in the Second Quarter of 2003 and sold in July 2003. Therefore the operating results of these properties are reflected as income from discontinued
operations for the three and six-month periods ended June 30, 2003 and 2002. The 2003 income from discontinued operations includes a $33,000 property write-down of the South Milwaukee property to reflect the net estimated sales price, less costs to
sale, of the property at March 31, 2003 of approximately $417,000 and a $15,000 property write-down of the Omega restaurant property to reflect the net estimated sales price, less costs to sell, of the property at June 30, 2003 of approximately
$790,000.



Revenues



Total operating revenues amounted to $478,000 and $465,000, for the three-month periods
ended June 30, 2003 and 2002, respectively. For the six-month periods ended June 30, 2003 and 2002, the total operating revenues amounted to $909,000 and $909,000, respectively.



As of June 30, 2003 total base rent revenues should approximate $1,800,000 for the year 2003 based on leases currently in place. Future
revenues may decrease with tenant defaults and/or sales of Properties. They may also increase with additional rents due from tenants, if those tenants experience sales levels, which require the payment of additional rent to the Partnership.



During June 2003 the Partnership received a lease termination fee of $50,000
from defaulted former tenant Village Inn upon a settlement and lease termination agreement.



Expenses



For the
three-month periods ended June 30, 2003 and 2002, total operating expenses, amounted to approximately 51% and 65%, of total operating revenue, compared to 66% and 55% for the six-month periods ended June 30, 2003 and 2002. Operating cash expenses
(which do not include non-cash items such as depreciation, amortization, property write-downs, and write-off of non-collectible receivables) amounted to approximately 36%, and 38%, of total operating revenues, for the three-month periods ended June
30, 2003 and 2002, respectively. Operating cash expenses amounted to 50% and 34%, respectively, for the six-month periods ended June 30, 2003 and 2002.



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



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



Write-offs for non-collectible rents
and receivables amounted to $2,600, and $58,000, for the periods ended June 30, 2003 and 2002, respectively. The write-offs are the result of tenant defaults or management agreements.



Other Income:



Recoveries from former general partners received during the three-month period ended June
30, 2003, and 2002 totaled $1,600 and $200, respectively. Recoveries from former general partners received during the six-month period ended June 30, 2003 and 2002 totaled $2,900 and $200, respectively.



Inflation:



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



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



Critical Accounting Policies:



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



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



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



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



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Item 3. Quantitative and Qualitative Disclosure About Market Risk



The Partnership is not subject to market risk.



Item 4. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure



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



Prior to the wind-down of Arthur Andersens business, its report on
the Partnerships financial statements for either of the past two-years did not contain an adverse opinion or a disclaimer opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles. In addition, during
the Partnerships two most recent fiscal years and the interim period following the wind-down of Arthur Andersens business, there were no disagreements with Arthur Andersen on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Arthur Andersen, would have caused it to make reference to the subject matter of the disagreement in connection with the report.



The Partnership engaged Deloitte and Touche LLP (D&T) as its
new independent auditors on December 19, 2002. The engagement was disclosed in the Partnerships Form 8-K dated January 2, 2003.



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



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PART II - OTHER INFORMATION



Item 1. Legal Proceedings



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



On June 18, 2001, Centre filed a lawsuit (the Complaint) in the Maricopa County, 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 are liable to the Partnership for breach of the subleases and any damages for which the Partnership may be held liable pursuant to the Ground Lease. Due to the
bankruptcy filing by AMF the Partnership was prevented from proceeding against them. Although the Partnership had difficulty locating National Restaurant, the lawsuit against them continues.



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



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



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



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



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



Item 2-4.



None



Item 5. Controls and Procedures



Within the 90-day period
prior to the filing of this report, the Partnership carried out an evaluation, under the supervision and with the participation of the Companys management, including the Chief Executive Officer (CEO)/Financial Officer
(CFO), of the effectiveness of the design and operation of the Partnerships disclosure controls and procedures. Based on that evaluation, the CEO/CFO has concluded that the Partnerships disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Partnership in the reports it files under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in
the securities and Exchange Commission rules and forms. There have been no significant changes in the Partnerships internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation
referred to above.



Item 6. Exhibits and Reports on Form 8-K



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



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



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



| | 99.2 |  | 302 Certifications
| | ---- |  | ------------------



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



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



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



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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: |  | August 14, 2003                       



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



|By:   |  | The Provo Group, Inc., General Partner                                        
|----- |  | ------------------------------------------------------------------------------
|      | 
|By:   |  | /s/Bruce A. Provo                                                             
|      |  | Bruce A. Provo, President, Chief Executive Officer and Chief Financial Officer
|      | 
|Date: |  | August 14, 2003                                                               



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