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FORM 10-Q



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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark One)

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

For the quarter ended March 31, 2007

OR



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

For the transition period from  to

Commission file number 0-17686



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DIVALL INSURED INCOME PROPERTIES
2 LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)



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

1100 Main Street, Suite 1830 Kansas City, Missouri 64105

(Address of principal executive offices, including zip code)

(816) 421-7444

(Registrants telephone number, including area code)

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

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



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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated
filer ̈Accelerated filer ̈Non-accelerated filer  x

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



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PART IFINANCIAL INFORMATION

Item 1. Financial Statements

DIVALL INSURED INCOME PROPERTIES 2 LIMITED
PARTNERSHIP

CONDENSED BALANCE SHEETS

March 31, 2007 and December 31, 2006

ASSETS

(Unaudited)



|                                            |  |                |            |   |                   |   |            |  
|------------------------------------------- |  | -------------- | ---------- | - | ----------------- | - | ---------- | -
|                                            |  | March 31, 2007 |            |   | December 31, 2006 |  
|INVESTMENT PROPERTIES:(Note 3)              |  |                |            |   |                   |   |            |  
|                                            |  |               
|Land                                        |  | $              | 4,442,717  |   |                   | $ | 4,728,785  |  
|Buildings                                   |  |                | 7,281,838  |   |                   |   | 7,576,708  |  
|Accumulated depreciation                    |  |                | (4,359,407 | ) |                   |   | (4,470,221 | )
|                                            |  |                |            |   |                   |   |            |  
|Net investment properties                   |  | $              | 7,365,148  |   |                   | $ | 7,835,272  |  
|                                            |  |                |            |   |                   |   |            |  
|                                            |  |               
|OTHER ASSETS:                               |  |                |            |   |                   |   |            |  
|                                            |  |               
|Cash and cash equivalents                   |  | $              | 936,321    |   |                   | $ | 625,592    |  
|Cash held in Indemnification Trust (Note 8) |  |                | 423,077    |   |                   |   | 417,860    |  
|Properties held for sale (Note 3)           |  |                | 1,038,219  |   |                   |   | 617,266    |  
|Property taxes cash escrow                  |  |                | 11,966     |   |                   |   | 30,197     |  
|Rents and other receivables                 |  |                | 36,917     |   |                   |   | 432,440    |  
|Property taxes receivable                   |  |                | 12,503     |   |                   |   | 10,703     |  
|Deferred rent receivable                    |  |                | 73,684     |   |                   |   | 80,657     |  
|Prepaid insurance                           |  |                | 22,138     |   |                   |   | 31,626     |  
|Deferred charges, net                       |  |                | 223,363    |   |                   |   | 243,540    |  
|                                            |  |                |            |   |                   |   |            |  
|Total other assets                          |  | $              | 2,778,188  |   |                   | $ | 2,489,881  |  
|                                            |  |                |            |   |                   |   |            |  
|Total assets                                |  | $              | 10,143,336 |   |                   | $ | 10,325,153 |  
|                                            |  |                |            |   |                   |   |            |  

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



2



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

CONDENSED BALANCE SHEETS

March 31, 2007 and December 31, 2006

LIABILITIES AND PARTNERS CAPITAL

(Unaudited)



|                                                         |  |                |             |   |                   |   |             |  
|-------------------------------------------------------- |  | -------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                         |  | March 31, 2007 |             |   | December 31, 2006 |  
|LIABILITIES:                                             |  |                |             |   |                   |   |             |  
|Accounts payable and other accrued expenses              |  | $              | 96,671      |   |                   | $ | 89,318      |  
|Property taxes payable                                   |  |                | 24,024      |   |                   |   | 40,900      |  
|Due to General Partner                                   |  |                | 1,296       |   |                   |   | 2,380       |  
|Security deposits                                        |  |                | 99,040      |   |                   |   | 104,640     |  
|Unearned rental income                                   |  |                | 23,780      |   |                   |   | 29,380      |  
|                                                         |  |                |             |   |                   |   |             |  
|Total liabilities                                        |  | $              | 244,811     |   |                   | $ | 266,618     |  
|                                                         |  |                |             |   |                   |   |             |  
|                                                         |  |               
|CONTINGENT LIABILITIES: (Note 7)                         |  |                |             |   |                   |   |             |  
|                                                         |  |               
|PARTNERS CAPITAL: (Notes 1, 4 and 9)                    |  |                |             |   |                   |   |             |  
|Current General Partner                                  |  |                |             |   |                   |   |             |  
|Cumulative net income                                    |  | $              | 257,051     |   |                   | $ | 254,943     |  
|Cumulative cash distributions                            |  |                | (105,475    | ) |                   |   | (104,632    | )
|                                                         |  |                |             |   |                   |   |             |  
|                                                         |  |                | 151,576     |   |                   |   | 150,311     |  
|                                                         |  |                |             |   |                   |   |             |  
|Limited Partners (46,280.3 interests outstanding)        |  |                |             |   |                   |   |             |  
|Capital contributions, net of offering costs             |  |                | 39,358,468  |   |                   |   | 39,358,468  |  
|Cumulative net income                                    |  |                | 31,813,978  |   |                   |   | 31,605,253  |  
|Cumulative cash distributions                            |  |                | (60,585,268 | ) |                   |   | (60,215,268 | )
|Reallocation of former general partners deficit capital |  |                | (840,229    | ) |                   |   | (840,229    | )
|                                                         |  |                |             |   |                   |   |             |  
|                                                         |  | $              | 9,746,949   |   |                   |   | 9,908,224   |  
|                                                         |  |                |             |   |                   |   |             |  
|Total partners capital                                  |  | $              | 9,898,525   |   |                   | $ | 10,058,535  |  
|                                                         |  |                |             |   |                   |   |             |  
|Total liabilities and partners capital                  |  | $              | 10,143,336  |   |                   | $ | 10,325,153  |  
|                                                         |  |                |             |   |                   |   |             |  

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



3



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

CONDENSED STATEMENTS OF INCOME

For
the Three Month Period Ended March 31, 2007 and 2006



|                                                                           |  |                              |         |      |   |        
|-------------------------------------------------------------------------- |  | ---------------------------- | ------- | ---- | - | -------
|                                                                           |  | Three Months ended March 31,
|                                                                           |  | 2007                         |         | 2006
|OPERATING REVENUES:                                                        |  |                              |         |      |   |        
|Rental income (Note 5)                                                     |  | $                            | 350,169 |      | $ | 348,035
|Property taxes recoveries (Note 3)                                         |  |                              | 0       |      |   | 0      
|                                                                           |  |                              |         |      |   |        
|TOTAL OPERATING REVENUES                                                   |  | $                            | 350,169 |      |   | 348,035
|                                                                           |  |                              |         |      |   |        
|OPERATING EXPENSES                                                         |  |                              |         |      |   |        
|Partnership management fees (Note 6)                                       |  | $                            | 55,525  |      | $ | 53,718 
|Restoration fees (Note 6)                                                  |  |                              | 124     |      |   | 134    
|Insurance                                                                  |  |                              | 12,488  |      |   | 9,069  
|General and administrative                                                 |  |                              | 30,450  |      |   | 29,325 
|Advisory Board fees and expenses                                           |  |                              | 3,500   |      |   | 3,500  
|Professional services                                                      |  |                              | 40,249  |      |   | 47,506 
|Maintenance and repair expenses                                            |  |                              | 647     |      |   | 630    
|Depreciation                                                               |  |                              | 53,613  |      |   | 53,612 
|Amortization                                                               |  |                              | 4,296   |      |   | 3,390  
|                                                                           |  |                              |         |      |   |        
|TOTAL OPERATING EXPENSES                                                   |  | $                            | 200,892 |      | $ | 200,884
|                                                                           |  |                              |         |      |   |        
|OTHER INCOME                                                               |  |                              |         |      |   |        
|Interest income                                                            |  |                              |         |      |   |        
|Judgment claim (Note 3)                                                    |  | $                            | 8,587   |      | $ | 7,681  
|Recovery of amounts previously written off (Note 2)                        |  |                              | 0       |      |   | 25,000 
|Other income                                                               |  |                              | 3,107   |      |   | 3,357  
|TOTAL OTHER INCOME                                                         |  |                              | 9,911   |      |   | 0      
|                                                                           |  |                              |         |      |   |        
|INCOME FROM CONTINUING OPERATIONS                                          |  | $                            | 21,605  |      | $ | 36,038 
|                                                                           |  |                              |         |      |   |        
|INCOME FROM DISCONTINUED OPERATIONS (Note 1)                               |  | $                            | 170,882 |      | $ | 183,189
|NET INCOME                                                                 |  |                              | 39,951  |      |   | 41,661 
|                                                                           |  |                              |         |      |   |        
|NET INCOME- CURRENT GENERAL PARTNER                                        |  | $                            | 210,833 |      | $ | 224,850
|                                                                           |  |                              |         |      |   |        
|NET INCOME- LIMITED PARTNERS                                               |  | $                            | 2,108   |      | $ | 2,248  
|                                                                           |  |                              | 208,725 |      |   | 222,602
|                                                                           |  |                              |         |      |   |        
|                                                                           |  | $                            | 210,833 |      | $ | 224,850
|                                                                           |  |                              |         |      |   |        
|PER LIMITED PARTNERSHIP INTEREST, Based on 46,280.3 interests outstanding: |  |                              |         |      |   |        
|INCOME FROM CONTINUING OPERATIONS                                          |  |                              |         |      |   |        
|INCOME FROM DISCONTINUED OPERATIONS                                        |  | $                            | 3.66    |      | $ | 3.92   
|NET INCOME PER LIMITED PARTNERSHIP INTEREST                                |  |                              | .85     |      |   | .89    
|                                                                           |  |                              |         |      |   |        
|                                                                           |  | $                            | 4.51    |      | $ | 4.81   
|                                                                           |  |                              |         |      |   |        

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



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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

CONDENSED STATEMENTS OF CASH FLOWS

For the Three Month Periods Ended March 31, 2007 and 2006

(Unaudited)



|                                                                                  |  |      |          |   |      |   |            |  
|--------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ---------- | -
|                                                                                  |  | 2007 |          |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |      |          |   |      |   |            |  
|Net income                                                                        |  | $    | 210,833  |   |      | $ | 224,850    |  
|Adjustments to reconcile net income to net cash flows from operating activities - |  |      |          |   |      |   |            |  
|Depreciation and amortization                                                     |  |      | 60,158   |   |      |   | 65,682     |  
|Recovery of amounts previously written off                                        |  |      | (3,107   | ) |      |   | (3,357     | )
|Interest applied to PMA Indemnification Trust account                             |  |      | (5,217   | ) |      |   | (3,934     | )
|Changes in operating accounts:                                                    |  |      |          |   |      |   |            |  
|Decrease in property taxes cash escrow                                            |  |      | 18,231   |   |      |   | 10,208     |  
|Decrease in rents and other receivables                                           |  |      | 395,523  |   |      |   | 411,833    |  
|Decrease in prepaid insurance                                                     |  |      | 9,488    |   |      |   | 12,353     |  
|Decrease in deferred rent receivable                                              |  |      | 4,963    |   |      |   | 2,713      |  
|Increase in property taxes receivable                                             |  |      | (1,800   | ) |      |   | (1,523     | )
|Decrease in due to General Partner                                                |  |      | (1,084   | ) |      |   | (3,897     | )
|Increase in accounts payable and other accrued expenses                           |  |      | 7,353    |   |      |   | 6,480      |  
|(Decrease) Increase in property taxes payable                                     |  |      | (16,876  | ) |      |   | 9,990      |  
|Decrease in income taxes payable                                                  |  |      | 0        |   |      |   | (8,685     | )
|Increase in unearned rental income                                                |  |      | 0        |   |      |   | 82,005     |  
|                                                                                  |  |      |          |   |      |   |            |  
|Net cash flows from operating activities                                          |  |      | 678,465  |   |      |   | 804,718    |  
|                                                                                  |  |      |          |   |      |   |            |  
|                                                                                  |  |     
|CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:                                   |  |      |          |   |      |   |            |  
|Payment of leasing commissions                                                    |  |      | 0        |   |      |   | (12,980    | )
|Recoveries from former General Partner affiliates                                 |  |      | 3,107    |   |      |   | 3,357      |  
|                                                                                  |  |      |          |   |      |   |            |  
|Net cash flows from (used in) investing activities                                |  |      | 3,107    |   |      |   | (9,603     | )
|                                                                                  |  |      |          |   |      |   |            |  
|                                                                                  |  |     
|CASH FLOWS USED IN FINANCING ACTIVITIES:                                          |  |      |          |   |      |   |            |  
|Cash distributions to Limited Partners                                            |  |      | (370,000 | ) |      |   | (2,000,000 | )
|Cash distributions to current General Partner                                     |  |      | (843     | ) |      |   | (899       | )
|                                                                                  |  |      |          |   |      |   |            |  
|Net cash flows used in financing activities                                       |  |      | (370,843 | ) |      |   | (2,000,899 | )
|                                                                                  |  |      |          |   |      |   |            |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                         |  |      | 310,729  |   |      |   | 1,205,784  |  
|                                                                                  |  |     
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                  |  |      | 625,592  |   |      |   | 2,218,807  |  
|                                                                                  |  |      |          |   |      |   |            |  
|                                                                                  |  |     
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                        |  | $    | 936,321  |   |      | $ | 1,013,023  |  
|                                                                                  |  |      |          |   |      |   |            |  

The accompanying notes are an integral part of these condensed financial 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) 2006 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 March 31, 2007, and the statements of income for the three-month periods ended March 31, 2007 and 2006, and cash flows for the three- month periods ended March 31, 2007 and 2006.

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, franchisees of national, regional, and local retail
chains under long-term leases. As of March 31, 2007 the lessees are primarily fast food, family style, and casual/theme restaurants, but also include a video rental store, and a pre-school. The Partnership owned 19 investment properties, two of
which were held for sale as of March 31, 2007.

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

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

As of March 31, 2007 and December 31, 2006, there
were no recorded values for allowance for doubtful accounts based on an analysis of specific accounts and historical experience.

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.



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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.

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 term of the lease.

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

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

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

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

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

In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47 (FIN 47), Accounting for Conditional Asset
Retirement Obligations, an interpretation of SFAS No. 143, which clarifies that a liability for the performance of an asset retirement activity should be recorded if the obligation to perform such activity is unconditional, whether or not
the timing or method of settlement may be conditional on a future event. FIN 47 was effective no later than the end of the fiscal year ending after December 15, 2005. FIN 47 did not have a significant impact on the Partnerships financial
statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Partnerships adoption of FIN 48 has not had a material impact on its financial statements.



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

During the
three-month periods ended March 31, 2007 and 2006, the Partnership recognized income from discontinued operations of approximately $40,000 and $42,000, respectively. The income from discontinued operations is attributable to the
reclassification of the Wendys- 1515 Savannah Hwy., Charleston, SC property to property held for sale in the First Quarter of 2007, and the Sunrise Preschool- Phoenix, AZ property, which was reclassified to property held for sale in the Second
Quarter of 2006 and sold in April of 2007.

The components of properties held for sale in the condensed balance sheets as of March 31, 2007 and
December 31, 2006 are outlined below.



|                         |  |                |           |   |                   |   |         |  
|------------------------ |  | -------------- | --------- | - | ----------------- | - | ------- | -
|                         |  | March 31, 2007 |           |   | December 31, 2006 |  
|Balance Sheet:           |  |                |           |   |                   |   |         |  
|Land                     |  | $              | 527,439   |   |                   | $ | 241,371 |  
|Buildings, net           |  |                | 514,034   |   |                   |   | 385,840 |  
|Deferred rent receivable |  |                | 2,010     |   |                   |   | 0       |  
|                         |  |                |           |   |                   |   |         |  
|Deferred charges, net    |  |                | 15,881    |   |                   |   | 0       |  
|                         |  |                |           |   |                   |   |         |  
|Security deposits        |  |                | (15,545   | ) |                   |   | (9,945  | )
|Unearned rental income   |  |                | (5,600    | ) |                   |   | 0       |  
|                         |  |                |           |   |                   |   |         |  
|Property held for sale   |  | $              | 1,038,219 |   |                   | $ | 617,266 |  
|                         |  |                |           |   |                   |   |         |  

The components of discontinued operations included in the condensed statements of income for the three- month
periods ended March 31, 2007 and 2006 are outlined below.



|                                    |  |                                        |        |                                         |   |       
|----------------------------------- |  | -------------------------------------- | ------ | --------------------------------------- | - | ------
|                                    |  | Three-month Period ended March 31,2007 |        | Three-month Period ended March 31, 2006
|Statements of Income:               |  |                                        |        |                                         |   |       
|Revenues:                           |  |                                        |        |                                         |   |       
|Rental Income                       |  | $                                      | 49,967 |                                         | $ | 50,341
|                                    |  |                                        |        |                                         |   |       
|Total Revenues                      |  | $                                      | 49,967 |                                         | $ | 50,341
|                                    |  |                                        |        |                                         |   |       
|Expenses:                           |  |                                        |        |                                         |   |       
|Professional Services               |  | $                                      | 7,767  |                                         | $ | 0     
|Depreciation                        |  |                                        | 2,249  |                                         |   | 8,680 
|                                    |  |                                        |        |                                         |   |       
|Total Expenses                      |  | $                                      | 10,016 |                                         | $ | 8,680 
|                                    |  |                                        |        |                                         |   |       
|Income from Discontinued Operations |  | $                                      | 39,951 |                                         | $ | 41,661
|                                    |  |                                        |        |                                         |   |       



8



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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 Quarters of 2001, 2003 and 2005, consent solicitations were circulated (the 2001, 2003 and 2005 Consents, respectively), which if approved would have authorized
the sale of the Partnerships assets and dissolution of the Partnership. A majority of the Limited Partners did not vote in favor of either the 2001, 2003 or 2005 Consents. Therefore, the Partnership continued to operate as a going concern. The
bi-annual consent solicitation is scheduled to be mailed in May of 2007, which if approved would authorize the sale of the Partnerships assets and dissolution of the Partnership.

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, 2006, the tax basis of the
Partnerships assets exceeded the amounts reported in the accompanying financial statements by approximately $6,862,000.

2. REGULATORY
INVESTIGATION:

A preliminary investigation during 1992 by the Office of Commissioner of Securities for the State of Wisconsin and the Securities
and Exchange Commission (the Investigation) revealed that during at least the four years ended December 31, 1992, the former general partners of the Partnership, Gary J. DiVall (DiVall) and Paul E. Magnuson
(Magnuson) had transferred substantial cash assets of the Partnership and two affiliated publicly registered partnerships, DiVall Insured Income Fund Limited Partnership (DiVall 1) and DiVall Income Properties 3 Limited
Partnership (DiVall 3) (collectively the Partnerships) to various other entities previously sponsored by or otherwise affiliated with DiVall and Magnuson. The unauthorized transfers were in violation of the respective
Partnership Agreements and resulted, in part, from material weaknesses in the internal control systems of the Partnerships.

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

In 1993, the current General Partner estimated an aggregate recovery of $3 million for the
Partnerships. At that time, an allowance was established against amounts due from former general partners and their affiliates reflecting the estimated $3 million receivable. This net receivable was allocated among the Partnerships based on each
Partnerships pro rata share of the total misappropriation, and restoration costs and recoveries have been allocated based on the same percentage. Through March 31, 2007, $5,864,000 of recoveries have been received which exceeded the
original estimate of $3 million. As a result, from January 1, 1996 through March 31, 2007, the Partnership has recognized a total of $1,176,000 as recovery of amounts previously written off in the statements of income, which represents its
share of the excess recovery. The current General Partner continues to pursue recoveries of the misappropriated funds, however, no further significant recoveries are anticipated.



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3. INVESTMENT PROPERTIES and PROPERTIES HELD FOR SALE:

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

As of March 31, 2007, the Partnership owned 17 fully constructed fast-food restaurants, a video
store, and a preschool. The 19 properties are composed of the following: ten (10) Wendys restaurants (the 1515 Savannah Hwy., Charleston, SC property was reclassified as held for sale in March of 2007), one (1) Dennys
restaurant, one (1) Applebees restaurant, one (1) Popeyes Famous Fried Chicken restaurant, one (1) Kentucky Fried Chicken restaurant, one (1) Chinese Super Buffet restaurant, one (1) Panda Buffet restaurant, one
(1) Daytonas- All Sports Café, one (1) Blockbuster Video store, and one (1) Sunrise Preschool (reclassified as property held for sale in June of 2006). The 19 properties are located in a total of nine (9) states.

On January 1, 2002, the Partnership adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
statement requires current and historical results from operations for disposed properties and assets classified as held for sale that occur subsequent to January 1, 2002 to be reclassified separately as discontinued operations.

During the three-month periods ended March 31, 2007 and 2006, the Partnership recognized income from discontinued operations of approximately $40,000 and $42,000,
respectively. The income from discontinued operations is attributable to the reclassification of the Wendys- 1515 Savannah Hwy., Charleston, SC property to property held for sale in the First Quarter of 2007, and the Sunrise Preschool-
Phoenix, AZ property , which was reclassified to property held for sale in the Second Quarter of 2006 and sold in April of 2007.

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

Wendys- 1515 Savannah Hwy., Charleston, SC Property

A letter of intent to enter into a purchase agreement for the sale of the property was executed in late March of 2007. A sales contract is currently being negotiated
for the sale of the property to an unaffiliated party for $1.17 million. The net book value of the property at March 31, 2007, classified as property held for sale in the condensed financial statements, was approximately $421,000, which
included $286,000 related to land, $128,000 related to buildings and improvements, $2,000 related to deferred rent, $16,000 related to deferred charges, and $11,000 related to security deposits and unearned rental income.

Sunrise Preschool- Phoenix, AZ Property

A listing agreement for the
sale of the property was executed in June of 2006. In early January of 2007, a sales contract was executed for the sale of the property for $1.6 million. Per notice from the Partnership, tenant, Borg Holdings, Inc. (Borg), had 30 days
from January 16, 2007, to act upon their right of first refusal to purchase the Phoenix property, since a separate buyer entered into a real estate contract for the purchase of the property. On January 29, 2007, Borg informed the
Partnership that they would be exercising their right to accept the terms of the contract for the sale of the Phoenix, AZ property. The closing date on the sale of the property was April 23, 2007 and the net sales proceeds totaled approximately
$1.49 million. A net gain on the sale of approximately $863,000 will be recognized in the Second Quarter of 2007. Closing and other sale related costs amounted to approximately $109,000,



10



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which included a sales commission paid to a General Partner affiliate totaling $48,000. The net book value of the property at March 31, 2007, classified
as property held for sale in the condensed financial statements, was approximately $617,000, which included $241,000 related to land, $386,000 related to buildings and improvements, and $10,000 related to security deposits.

Popeyes- Park Forest, IL Property

As of March 31, 2007,
Popeyes is delinquent on its April and May 2006 rent obligations and property taxes escrow payments totaling approximately $13,000 and $10,000, respectively. These unpaid amounts are accrued for at March 31, 2007. As of March 31,
2007, the tenant does not have a property tax escrow cash balance held with the Partnership. The Partnership received the required June of 2006 through March of 2007 rent and property taxes escrow payments.

In the Second Quarter of 2006, Management defaulted Popeyes for failure to meet its lease obligations, and filed for possession of the Park Forest property in the
Cook County Judicial Court. The Partnership continued the pursuit of all legal remedies available to recover possession and terminate the Lease. However, a Settlement Agreement (Settlement) was executed on May 1, 2007, and it was
agreed to by all parties that Popeyes would pay its past due rent and property taxes escrow obligations. In accordance with the Settlement, the Partnership received a payment for the approximately $10,000 of past due property taxes escrow on
May 3, 2007 and the first of three equal installment payments of $4,233 related to the past due rent obligations on May 8, 2007. The second and third installments are to be received from Popeyes by June 1 and July 1, 2007,
respectively. The Settlement reaffirms that Popeyes remains responsible for monthly rent obligations and property taxes through the remainder of its Lease (expires December 31, 2009).

4785 Merle Hay Road- Des Moines, IA Property

Beginning in December
of 2005, Management requested that Daytonas escrow its future property taxes liabilities with the Partnership on a monthly basis. Daytonas remains current on its property tax escrow obligations. As of March 31, 2007, escrow payments
held by the Partnership totaled approximately $12,000.

Blockbuster- Ogden, UT Property

The Blockbuster lease on the current 6,000 square foot space expired on January 31, 2006. During lease renewal negotiations with Management, the tenant maintained
possession of the property and paid the Partnership holdover rent for February and March of 2006. In April of 2006, Management executed a two-year renewal lease agreement with the tenant, retroactive to February 1, 2006. The first base year
rent totaled approximately $108,000. Leasing commissions related to the lease renewal execution totaled approximately $13,000, ($6,500 paid to a non-affiliated broker and $6,500 paid to a General Partner affiliate) during the Quarter ended
March 31, 2006.

Former Miami Subs- Palm Beach, FL Property

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



11



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In November 2004, a Settlement Agreement (DiFede Agreement) was executed with DiFede. Per the DiFede
Agreement the former tenant agreed to pay the Partnership by December 31, 2004 approximately $36,000 in past due rent, late charges, related attorney and court fees and other miscellaneous items. However, the settlement payment per the DiFede
Agreement was not received by the Partnership. Further legal action was taken by the Partnership and the Circuit Court in Broward County, Florida entered a final judgment (the Judgment) against DiFede in early January 2005, awarding
approximately $42,000 in damages to the Partnership. Due to the uncertainty of collection, the remaining fifty percent (50 %) of the total outstanding receivable balance was written-off. The receivable balance and applicable allowance were removed
from the balance sheet at December 31, 2004. Throughout 2005 Management continued their pursuit of legal action to collect the Judgment. In satisfaction of the Judgment (which was recorded in the Circuit Court in March of 2006), the Partnership
received $25,000 from Difede in the First Quarter of 2006.

Other Investment in Properties Information

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

At March 31, 2007 the owners of the
Panda Buffet property in Grand Forks, ND have an option to purchase the property at a price, which (i) exceeds the original cost of the property less accumulated depreciation and (ii) is not less than the fair market value of the property
at the time the option was granted. The General Partner is not aware of any unfavorable purchase options in relation to the original cost or fair market value of the property at the time the option was granted, contained in any of the
Partnerships existing leases.

4. PARTNERSHIP AGREEMENT:

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

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



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

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

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

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

5. LEASES:

Original lease terms for the majority of the investment properties are generally 1020 years
from their inception. The leases generally provide for minimum rents and additional rents based upon percentages of gross sales in excess of specified sales breakpoints. The lessee is responsible for occupancy costs such as maintenance, insurance,
real estate taxes, and utilities. Accordingly, these amounts are not reflected in the statements of income except in circumstances where, in managements opinion, the Partnership will be required to pay such costs to preserve its assets (i.e.,
payment of past-due real estate taxes). Management



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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 March 31, 2007, the
aggregate minimum operating lease payments to be received under the current operating leases for the Partnerships properties are as follows (does not include the Sunrise Preschool- Phoenix, AZ property which was reclassified to property held
for sale in the Second Quarter of 2006 and sold in April of 2007, and the Wendys- 1515 Savannah Hwy., Charleston, SC property which was reclassified as property held for sale in the First Quarter of 2007):



|                         |  |   |          
|------------------------ |  | - | ---------
|Year ending December 31, |  |  
|2007                     |  | $ | 1,375,727
|2008                     |  |   | 1,169,060
|2009                     |  |   | 1,126,930
|2010                     |  |   | 937,500  
|2011                     |  |   | 938,500  
|Thereafter               |  |   | 4,232,277
|                         |  |   |          
|                         |  | $ | 9,779,994
|                         |  |   |          

Operating percentage rentals included in operating rental income for the three-month periods ended March 31,
2007 and 2006 were approximately $3,000 and $6,000, respectively. At March 31, 2007, rents and other receivables included $23,000 of 2006 percentage rentals billed in the Fourth Quarter of 2006 and the First Quarter of 2007.

Operating percentage rentals included in rental income from operations in 2006 (does not include income from properties held for sale in 2006 and/or 2007) was
approximately $423,000. At December 31, 2006, rents and other receivables included $18,000 of billed and $399,000 of unbilled percentage rents.

Nine
(9) of the properties (does not include the 1515 Savannah Hwy., Charleston, SC property, which was reclassified as held for sale in March of 2007) are leased to Wencoast Restaurants, Inc. (Wencoast), a franchisee of Wendys
restaurants. Wencoast operating base rents accounted for 55% of the total 2006 operating base rents (does not include income from properties held for sale during 2006 and 2007).

6. TRANSACTIONS WITH CURRENT GENERAL PARTNER AND ITS AFFILIATES:

The current General Partner was to receive a
management fee (Base Fee) for managing the three original affiliated Partnerships equal to 4% of gross receipts, subject to a minimum of $300,000 annually, and a maximum annual reimbursement for office rent and related office overhead
(Expense) of $25,000, as provided in the Permanent Manager Agreement (PMA). The Base Fee and the Expense reimbursement are subject to increases due to increases in the Consumer Price Index. The current General Partner
receives a Base Fee for managing the Partnership equal to 4% of gross receipts and the Partnership is only responsible for its allocable share of such minimum and maximum annual amounts as indicated above (originally $159,000 minimum annual Base Fee
and $13,250 Expense reimbursement). Effective March 1, 2007, the minimum annual Base Fee and the maximum Expense reimbursement increased by 3.23%, which represents the allowable annual Consumer Price Index adjustment per the PMA. Therefore, as
of March 1, 2007, the minimum monthly Base Fee paid by the Partnership was raised to $18,945 and the maximum monthly Expense reimbursement was raised to $1,528.



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For purposes of computing the 4% overall fee, gross receipts includes amounts recovered in connection with the
misappropriation of assets by the former general partners and their affiliates. TPG has received fees from the Partnership totaling $57,526 to date on the amounts recovered, which includes the three-month periods ended March 31, 2007 and 2006
fees of $124 and $134, respectively. The fees received from the Partnership on the amounts recovered reduce the 4% minimum fee by that same amount.

Amounts paid and/or accrued to the current General Partner and its affiliates for the three-month periods ended March 31, 2007 and 2006 are as follows:



|                                         |  |                                                          |        |                                                          |   |       
|---------------------------------------- |  | -------------------------------------------------------- | ------ | -------------------------------------------------------- | - | ------
|Current General Partner                  |  | Incurred for the Three-Month Period
ended March 31, 2007 |        | Incurred for the Three-Month Period
ended March 31, 2006
|Management fees                          |  | $                                                        | 55,525 |                                                          | $ | 53,718
|Restoration fees                         |  |                                                          | 124    |                                                          |   | 134   
|Overhead allowance                       |  |                                                          | 4,490  |                                                          |   | 4,345 
|Leasing commissions                      |  |                                                          | 0      |                                                          |   | 6,480 
|Reimbursement for out-of-pocket expenses |  |                                                          | 1,492  |                                                          |   | 1,867 
|Cash distribution                        |  |                                                          | 843    |                                                          |   | 899   
|                                         |  |                                                          |        |                                                          |   |       
|                                         |  | $                                                        | 62,474 |                                                          | $ | 67,443
|                                         |  |                                                          |        |                                                          |   |       

7. CONTINGENT LIABILITIES:

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

8. PMA INDEMNIFICATION TRUST:

The PMA provides that the
Permanent Manager will be indemnified from any claims or expenses arising out of or relating to the Permanent Manager serving in such capacity or as substitute general partner, so long as such claims do not arise from fraudulent or criminal
misconduct by the Permanent Manager. The PMA provides that the Partnership fund this indemnification obligation by establishing a reserve of up to $250,000 of Partnership assets which would not be subject to the claims of the Partnerships
creditors. An Indemnification Trust (Trust) serving such purposes has been established at United Missouri Bank,



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N.A. The corpus of the Trust has been fully funded with Partnership assets since 1994. Funds are invested in U.S. Treasury securities. In addition, $173,077
of earnings has been credited to the Trust as of March 31, 2007. The rights of the Permanent Manager to the Trust shall be terminated upon the earliest to occur of the following events: (i) the written release by the Permanent Manager of
any and all interest in the Trust; (ii) the expiration of the longest statute of limitations relating to a potential claim which might be brought against the Permanent Manager and which is subject to indemnification; or (iii) a
determination by a court of competent jurisdiction that the Permanent Manager shall have no liability to any person with respect to a claim which is subject to indemnification under the PMA. At such time as the indemnity provisions expire or the
full indemnity is paid, any funds remaining in the Trust will revert back to the general funds of the Partnership.

9. FORMER GENERAL PARTNERS
CAPITAL ACCOUNTS:

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

10. LEGAL PROCEEDINGS:

Former South Milwaukee, WI property

The Partnership sold real property and improvements located at 106 N. Chicago Avenue, South Milwaukee, Wisconsin to F2BL, LLC (the
Buyer) on April 17, 2003 pursuant to a Real Estate Purchase Agreement dated October 10, 2002 (the Contract). In October of 2003, the Buyer notified the Partnership that an underground storage tank
(UST) and petroleum release had been discovered on this Property. Since that time, the Buyer removed the UST and remediated the petroleum release. A substantial amount of the costs incurred in such efforts were paid by the
Wisconsin Petroleum Environmental Clean Up Fund (the PECUF). In sporadic correspondence since the Fourth Quarter of 2003, the Buyer claimed, and the Partnership denied, that the Partnership was responsible for payment of those
costs not reimbursed by the PECUF.

On January 23, 2006, the Buyer initiated a lawsuit against the Partnership by filing a Complaint with the
Milwaukee County Circuit Court. The Complaint alleged, among other things that (i) the Partnership breached its representation in the Contract that, to the best of the Partnerships knowledge, the Partnership was in compliance with all
environmental laws, and (ii) the Partnership failed to deliver to Buyer a Phase I Environmental Assessment of the Property which had been performed in 1998. The Buyer sought a judgment awarding it damages to be proven at trial, plus its
attorneys fees. Prior to filing suit, the Buyer alleged approximately $100,000 of actual unreimbursed damages incurred in the removal of the UST and remediation of the petroleum release and alleged consequential damages of $190,000. The Court
set certain deadlines which included the completion of discovery and the filing of dispositive motions by February 20, 2007.

In September of 2006,
Management and the Buyer entered into a Mutual Release of All Claims Agreement (F2BL Agreement). It is understood and agreed that the F2BL Agreement is a compromise of a doubtful and disputed claim, and that liability is expressly denied
by the parties released. Pursuant to this F2BL Agreement the Partnership paid the Buyer $25,000 in settlement costs. Management believes that it had meritorious defenses to all of the Buyers claims and did not believe that a material recovery
by the Buyer was probable. However, the Partnership determined that the time and cost to vigorously defend such litigation would exceed the cost of the settlement achieved.



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11. SUBSEQUENT EVENTS:

On May 15, 2007, the Partnership is scheduled to make distributions to the Limited Partners of $360,000 amounting to approximately $7.78 per Unit Interest

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

Liquidity and Capital Resources:

Investment Properties and Net Investment in Direct Financing Leases

The Properties held by the Partnership at March 31, 2007 (does not include properties shown as held for sale in the condensed financial
statements), were originally purchased at a price, including acquisition costs, of approximately $12,887,193.

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

As of March 31, 2007, the Partnership owned 17 fully constructed fast-food restaurants, a video store, and a preschool. The 19 properties are composed of the following: ten (10) Wendys restaurants (the
1515 Savannah Hwy., Charleston, SC property was reclassified as held for sale in March of 2007), one (1) Dennys restaurant, one (1) Applebees restaurant, one (1) Popeyes Famous Fried Chicken restaurant, one
(1) Kentucky Fried Chicken restaurant, one (1) Chinese Super Buffet restaurant, one (1) Panda Buffet restaurant, one (1) Daytonas- All Sports Café, one (1) Blockbuster Video store, and one (1) Sunrise
Preschool (reclassified as property held for sale in June of 2006). The 19 properties are located in a total of nine (9) states.

Ten (10) of the
nineteen (19) properties owned as of March 31, 2007 are leased to Wencoast Restaurants, Inc. (Wencoast). Since more than 20% of the Partnerships properties, both by asset value and number, are leased to a single
tenant, the financial status of the tenant may be considered relevant to investors. At the request of the Partnership, Wencoast provided it with copies of Wencoasts most recent available audited financial statements for the periods ended
January 2, 2005 and January 1, 2006. Those audited financial statements are attached to the December 31, 2006 Annual Report 10-K as Exhibit 99.1. These financial statements were prepared by Wencoasts auditors. The
Partnership has no rights to audit Wencoast and no right to dictate the form of the audited financials provided by Wencoast. The Partnerships auditors have not audited the financial statements received from Wencoast. The Partnership has
no reason to believe the Wencoast financial statements do not accurately reflect the financial position of Wencoast.

In accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, current and historical results from operations for disposed properties and assets classified as held for sale that occur
subsequent to January 1, 2002 are reclassified separately as discontinued operations.

During the three-month periods ended March 31, 2007 and
2006, the Partnership recognized income from discontinued operations of approximately $40,000 and $42,000, respectively. The income from



17



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discontinued operations is attributable to the reclassification of the Wendys- 1515 Savannah Hwy., Charleston, SC property to property held for sale in
the First Quarter of 2007, and the Sunrise Preschool- Phoenix, AZ property , which was reclassified to property held for sale in the Second Quarter of 2006 and sold in April of 2007.

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

Wendys-
1515 Savannah Hwy., Charleston, SC Property

A letter of intent to enter into a purchase agreement for the sale of the property was executed in late
March of 2007. A sales contract is currently being negotiated for the sale of the property to an unaffiliated party for $1.17 million. The net book value of the property at March 31, 2007, classified as property held for sale, was approximately
$421,000, which included $286,000 related to land, $128,000 related to buildings and improvements, $2,000 related to deferred rent, $16,000 related to deferred charges, and $11,000 related to security deposits and unearned rental income.

Sunrise Preschool- Phoenix, AZ Property

A listing agreement for
the sale of the property was executed in June 2006. In early January of 2007, a sales contract was executed for the sale of the property for $1.6 million. Per notice from the Partnership, tenant, Borg Holdings, Inc. (Borg), had 30 days
from January 16, 2007, to act upon their right of first refusal to purchase the Phoenix property, since a separate buyer entered into a real estate contract for the purchase of the property. On January 29, 2007, Borg informed the
Partnership that they would be exercising their right to accept the terms of the contract for the sale of the Phoenix, AZ property. The closing date on the sale of the property was April 23, 2007 and the net sales proceeds totaled approximately
$1.49 million. A net gain on the sale of approximately $863,000 will be recognized in the Second Quarter of 2007. Closing and other sale related costs amounted to approximately $109,000, which included a sales commission paid to a General Partner
affiliate totaling $48,000. The net book value of the property at March 31, 2007, classified as property held for sale in the condensed financial statements, was approximately $617,000, which included $241,000 related to land, $386,000 related
to buildings and improvements, and $10,000 related to security deposits.

Popeyes- Park Forest, IL Property

As of March 31, 2007, Popeyes is delinquent on its April and May 2006 rent obligations and property taxes escrow payments totaling approximately $13,000 and
$10,000, respectively. These unpaid amounts are accrued for at March 31, 2007. As of March 31, 2007, the tenant does not have a property tax escrow cash balance held with the Partnership. The Partnership received the required June of 2006
through March of 2007 rent and property taxes escrow payments.

In the Second Quarter of 2006, Management defaulted Popeyes for failure to meet its
lease obligations, and filed for possession of the Park Forest property in the Cook County Judicial Court. The Partnership continued the pursuit of all legal remedies available to recover possession and terminate the Lease. However, a Settlement
Agreement (Settlement) was executed on May 1, 2007, and it was agreed to by all parties that Popeyes would pay its past due rent and property taxes escrow obligations. In accordance with the Settlement, the Partnership
received a payment for the approximately $10,000 of past due property taxes escrow on May 3, 2007 and the first of three equal installment payments of $4,233 related to the past due rent obligations on May 8, 2007. The second and third
installments are to be received from Popeyes by June 1 and July 1, 2007, respectively. The Settlement reaffirms that Popeyes remains responsible for monthly rent obligations and property taxes through the remainder of its Lease
(expires December 31, 2009).



18



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Daytonas- Des Moines, IA Property

Beginning in December of 2005, Management requested that Daytonas escrow its future property taxes liabilities with the Partnership on a monthly basis. Daytonas remains current on its property tax escrow
obligations. As of March 31, 2007, escrow payments held by the Partnership totaled approximately $12,000.

Blockbuster- Ogden, UT Property

The Blockbuster lease on the current 6,000 square foot space expired on January 31, 2006. During lease renewal negotiations with Management, the
tenant maintained possession of the property and paid the Partnership holdover rent for February and March of 2006. In April of 2006, Management executed a two-year renewal lease agreement with the tenant, retroactive to February 1, 2006. The
first base year rent will total approximately $108,000. Leasing commissions related to the lease renewal execution totaled approximately $13,000, ($6,500 paid to a non-affiliated broker and $6,500 paid to a General Partner affiliate) during the
Quarter ended March 31, 2006.

Former Miami Subs- Palm Beach, FL Property

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

In November 2004, a Settlement Agreement (DiFede Agreement) was executed with DiFede. Per the DiFede Agreement the former tenant agreed to pay the Partnership by December 31, 2004 approximately
$36,000 in past due rent, late charges, related attorney and court fees and other miscellaneous items. However, the settlement payment per the DiFede Agreement was not received by the Partnership. Further legal action was taken by the Partnership
and the Circuit Court in Broward County, Florida entered a final judgment (the Judgment) against DiFede in early January 2005, awarding approximately $42,000 in damages to the Partnership. Due to the uncertainty of collection, the
remaining fifty percent (50 %) of the total outstanding receivable balance was written-off. The receivable balance and applicable allowance were removed from the balance sheet at December 31, 2004. Throughout 2005 Management continued their
pursuit of legal action to collect the Judgment. In satisfaction of the Judgment (which was recorded in the Circuit Court in March of 2006), the Partnership received $25,000 from Difede in the First Quarter of 2006.

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.



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At March 31, 2007 the owners of the Panda Buffet property in Grand Forks, ND have an option to purchase the property
at a price, which (i) exceeds the original cost of the property less accumulated depreciation and (ii) is not less than the fair market value of the property at the time the option was granted. The General Partner is not aware of any
unfavorable purchase options in relation to the original cost or fair market value of the property at the time the option was granted, contained in any of the Partnerships existing leases.

Other Assets

Cash and cash equivalents held by the
Partnership totaled approximately $936,000 at March 31, 2007, compared to $626,000 at December 31, 2006. Cash of $360,000 is anticipated to be used to fund the First Quarter of 2007 distributions to Limited Partners in May of 2007, and
cash of $94,000 is anticipated to be used for the payment of quarter-end accounts payable and other accrued expenses, and the remainder represents amounts deemed necessary to allow the Partnership to operate normally.

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

Properties held for sale at March 31, 2007 amounted to approximately $1,038,000 and included the Wendys- 1515 Savannah Hwy.,
Charleston, SC (Wendys) property and the Sunrise Preschool (Sunrise) property in Phoenix, AZ. A letter of intent to enter into a purchase agreement for the sale of the Wendys property was executed in late March of 2007.
A sales contract is currently being negotiated for the sale of the property to an unaffiliated party for $1.17 million. Wendys property held for sale amount at March 31, 2007 includes $286,000 related to land, $128,000 related to
buildings and improvements, $2,000 related to deferred rent, $16,000 related to deferred charges, and $11,000 related to security deposits and unearned rental income. A listing contract for the sale of the Sunrise property (asking price of $1.6
million) was executed in June of 2006 and the property was sold on April 23, 2007. The Sunrise property held for sale amount at March 31, 2007 includes $241,000 related to land, $386,000 related to buildings and improvements, and $10,000
related to security deposits. (For further disclosure see Investment Properties in Note 3 to the condensed financial statements and Part I- Item 2.)

Property taxes cash escrow amounted to approximately $12,000 and $30,000 at March 31, 2007 and December 31, 2006, respectively. Daytonas property taxes cash escrow balance as of December 31, 2006 was approximately
$18,000 and payments of approximately $5,000 were received by the Partnership from Daytonas in the First Quarter of 2007. The Partnership paid the tenants 2005 second property taxes installment of approximately $11,000 in the First
Quarter of 2007. Daytonas property taxes cash escrow balance as of March 31, 2007 was approximately $12,000. Daytonas 2006 first property taxes installment is scheduled to be due in the Third Quarter of 2007. (For further disclosure
see Investment Properties in Note 3 to the condensed financial Statements and Part I- Item 2.) Popeyes property taxes escrow cash balance as of December 31, 2006 was $12,000 and payments of approximately $14,000 were received by the
Partnership from Popeyes in the First Quarter of 2007. The Partnership paid the tenants first 2006 property taxes installment of approximately $27,000 in the First Quarter of 2007. Popeyes does not hold a property taxes cash escrow
balance with the Partnership as of March 31, 2007 and as of that date owes approximately $10,000 in property taxes escrow payments to the Partnership (it should be noted that the Partnership received full payment towards the past due property
taxes in May of 2007). The tenants 2006 second property taxes installment is scheduled to be due in the Third Quarter of 2007. (For further disclosure see Investment Properties in Note 3 to the condensed financial statements and Part I-
Item 2.)



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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- PMA
Indemnification Trust.)

Rents and other receivables amounted to approximately $37,000 at March 31, 2007, compared to $432,000 as of December 31,
2006. As of March 31, 2007 and December 31, 2006, Popeyes- Park Forest was delinquent on two monthly lease obligations totaling approximately $13,000 (it should be noted that the Partnership received the first of three equal
installments related to the past due lease obligations in May of 2007). (For further disclosure see Investment Properties- Popeyes- Park Forest in Note 3 to the condensed financial statements and Part I- Item 2.) At March 31, 2007,
rents and other receivables also included approximately $23,000 in 2006 percentage rentals billed in the Fourth Quarter of 2006 and the First Quarter of 2007. At December 31, 2006, rents and other receivables also included $417,000 in
percentage rental income accrued during 2006 for tenants who had reached their individual sales breakpoints. These percentage rents included $18,000 which were billed to tenants in the Fourth Quarter of 2006 and $399,000 which were not billed
to or owed by the tenants until the First Quarter of 2007. The 2006 percentage rental income collections during the First Quarter of 2007 totaled $394,000.

Property taxes receivable at March 31, 2007 and December 31, 2006 totaled approximately $13,000 and $11,000, respectively. The balances primarily represented property taxes escrow charges due from Popeyes- Park Forest.(For further disclosure see Investment Properties- Popeyes- Park Forest in Note 3 to the condensed financial statements and Part I- Item 2.)

Prepaid Insurance amounted to approximately $22,000 at March 31, 2007 compared to $32,000 at December 31, 2006. The March 31, 2007 balance represented approximately seven months of prepaid insurance paid by the Partnership
and the December 31, 2006 balance represented approximately ten (10) months of prepaid insurance.

Deferred charges totaled approximately
$223,000 and $244,000, net of accumulated amortization, at March 31, 2007 and December 31, 2006, respectively. Deferred charges represent leasing commissions paid when properties are leased or upon the negotiated extension of a lease.
Leasing commissions of approximately $15,000 related to the Wendys- 1515 Savannah Hwy., Charleston, SC property were reclassified and included in properties held for sale in the First Quarter of 2007 (for further discussion see Investment
Properties in Note 3 to the condensed financial statements.). Leasing commissions are capitalized and amortized over the life of the lease.

Liabilities

Accounts payable and other accrued expenses at March 31, 2007, and December 31, 2006 amounted to
approximately $97,000 and $89,000, respectively, and primarily represented the accruals of auditing, tax and data processing fees.

Property taxes payable
at March 31, 2007 and December 31, 2006, totaled approximately $24,000 and $41,000, respectively. The balances primarily represented Popeyes- Park Forests and Daytonas property taxes escrow charges related to the
tenants next installment of property taxes. (For further disclosure see Investment Properties- Daytonas- All Sports Café and Popeyes- Park Forest in Note 3 to the condensed financial statements and Part I- Item 2.)



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Due to the Current General Partner amounted to approximately $1,300 at March 31, 2007 and primarily represented the
General Partners First Quarter of 2007 distribution.

Partners Capital

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

Cash
distributions to the Limited Partners and to the General Partner during 2007 of $370,000 and $843, respectively, have also been made in accordance with the Partnership Agreement. The Partnership intends to pay First Quarter of 2007 distributions of
$360,000 on May 15, 2007.

Results of Operations

The Partnership reported income from continuing operations for the three-month period ended March 31, 2007, in the amount of $171,000 compared to income from continuing operations for the three-month period ended
March 31, 2006 of $183,000. The variance in income from continuing operations in 2007 compared to 2006 is due primarily to: (i) First Quarter of 2007 accruals totaling $3,000 for an estimated insurance premium adjustment related to the
06/07 policy year (based on the unexpected insurance premium adjustment payment in the Second Quarter of 2006 of approximately $12,000 related to the 04/05 policy year); (ii) income taxes paid with the North Dakota and Ohio 2006 tax returns
during the First Quarter of 2007 and quarterly estimated payments made during 2007; (iii) higher income tax expenditures in the First Quarter of 2006 related to the 2005 South Carolina tax return and the 2006 South Carolina estimated tax
payments; (iv) higher professional service fees, such as legal and auditing, during 2006; and (v) during March of 2006 the Partnership received $25,000 from DiFede in satisfaction of the Judgment recorded in the Broward County, Florida
Circuit Court in January of 2005.

Discontinued Operations

The Partnership recognized income from discontinued operations of approximately $40,000 and $42,000 in the three-month periods ending March 31, 2007 and 2006, respectively. The income from discontinued operations
are attributable to the reclassification of the Wendys- 1515 Savannah Hwy., Charleston, SC property to held for sale in the First Quarter of 2007, and the Sunrise Preschool- Phoenix, AZ property, which was reclassified to property held for
sale in the Second Quarter of 2006 and sold in April of 2007. In accordance with Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), discontinued operations
represent the operations of properties disposed of or classified as held for sale subsequent to January 1, 2002 as well as any gain or loss recognized in their disposition.

Revenues

Total operating revenues amounted to $350,000 and $348,000 for the three-month periods ended
March 31, 2007 and 2006, respectively.



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As of March 31, 2007, total base operating rent revenues should approximate $1,376,000 for the year 2007 based on
leases currently in place (does not include the Wendys- 1515 Savannah Hwy., Charleston, SC property and the Sunrise Preschool, Phoenix, AZ property which were reclassified as property held for sale in the First Quarter of 2007 and the Second
Quarter of 2006, respectively). Future operating rent revenues may decrease with tenant defaults and/or the reclassification of Properties as held for sale. They may also increase with additional rents due from tenants, if those tenants experience
sales levels, which require the payment of additional rent to the Partnership.

Expenses

For the three-month periods ended March 31 2007 and 2006, total operating expenses amounted to approximately 57% and 58%, of total revenue, respectively.

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

For the three-month periods ended March 31, 2007 and 2006, there were no write-offs for non-collectible rents and receivables. Such write-offs would
primarily be the result of tenant defaults.

Other Income

For the three-month periods ended March 31, 2007 and 2006, the Partnership generated other income of approximately $22,000 and $36,000, respectively. During January of 2007, the Partnership received approximately
$10,000 in investor service fees related to the void and reissuance of old outstanding limited partrner distribution checks. During March of 2006, the Partnership received $25,000 from DiFede in satisfaction of the Judgment recorded in the Broward
County, Florida Circuit Court in January of 2005. (See Investment Properties- Former Miami Subs- Palm Beach, FL Property in Note 3 to Financial Statements and Part I- Item 2.)

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

Inflation

Inflation has a minimal
effect on operating earnings and related cash flows from a portfolio of triple net leases. By their nature, such leases actually fix revenues and are not impacted by rising costs of maintenance, insurance, or real estate taxes. Although the majority
of the Partnerships leases have percentage rental clauses, revenues from operating percentage rentals represented only 23% of operating rental income for the year ended 2006 (does not include operating income from properties held for sale as
of March 31, 2007). If inflation causes operating margins to deteriorate for lessees, or if expenses grow faster than revenues, then, inflation may well negatively impact the portfolio through tenant defaults.

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



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Critical Accounting Policies

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

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

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

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

Item 3. Quantitative and Qualitative Disclosure About Market Risk

The Partnership is not subject to market risk. See Part II, Item 1A for the discussion of Risk Factors.

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Partnership carried out an evaluation,
under the supervision and with the participation of the Companys management, including the Chief Executive Officer (CEO)/Chief Financial Officer (CFO), of the effectiveness of the design and operation of the
Partnerships disclosure controls and procedures. Based on that evaluation, the CEO/CFO has concluded that the Partnerships disclosure controls and procedures are effective to ensure that information required to be disclosed by the
Partnership in the reports it files under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the securities and Exchange Commission rules and forms.

There have been no significant changes in the Partnerships internal controls or in other factors that could significantly affect internal controls subsequent to
the date of the evaluation period covered by this report referred to above.



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PART II  OTHER INFORMATION

Item 1. Legal Proceedings

Former South Milwaukee, WI property

The Partnership sold real property and improvements located at 106 N. Chicago Avenue, South Milwaukee, Wisconsin to F2BL, LLC (the Buyer) on
April 17, 2003 pursuant to a Real Estate Purchase Agreement dated October 10, 2002 (the Contract). In October of 2003, the Buyer notified the Partnership that an underground storage tank (UST) and
petroleum release had been discovered on this Property. Since that time, the Buyer removed the UST and remediated the petroleum release. A substantial amount of the costs incurred in such efforts were paid by the Wisconsin Petroleum Environmental
Clean Up Fund (the PECUF). In sporadic correspondence since the Fourth Quarter of 2003, the Buyer claimed, and the Partnership denied, that the Partnership was responsible for payment of those costs not reimbursed by the PECUF.

On January 23, 2006, the Buyer initiated a lawsuit against the Partnership by filing a Complaint with the Milwaukee County Circuit Court. The
Complaint alleged, among other things that (i) the Partnership breached its representation in the Contract that, to the best of the Partnerships knowledge, the Partnership was in compliance with all environmental laws, and (ii) the
Partnership failed to deliver to Buyer a Phase I Environmental Assessment of the Property which had been performed in 1998. The Buyer sought a judgment awarding it damages to be proven at trial, plus its attorneys fees. Prior to filing suit,
the Buyer alleged approximately $100,000 of actual unreimbursed damages incurred in the removal of the UST and remediation of the petroleum release and alleged consequential damages of $190,000. The Court set certain deadlines which included the
completion of discovery and the filing of dispositive motions by February 20, 2007.

In September of 2006, Management and the Buyer entered into a
Mutual Release of All Claims Agreement (F2BL Agreement). It is understood and agreed that the F2BL Agreement is a compromise of a doubtful and disputed claim, and that liability is expressly denied by the parties released. Pursuant to
this F2BL Agreement the Partnership paid the Buyer $25,000 in settlement costs. Management believes that it had meritorious defenses to all of the Buyers claims and did not believe that a material recovery by the Buyer was
probable. However, the Partnership determined that the time and cost to vigorously defend such litigation would exceed the cost of the settlement achieved.

Item 1A. Risk Factors

General Risks Associated With Real Estate Ownership

The Partnership is subject to all of the general risks associated with the ownership of real estate. In particular, the Partnership faces the risk that rental
revenue from its Properties may be insufficient to cover all operating expenses. Additional real estate ownership risks include:



| |  |  | Adverse changes in general or local economic conditions;
| | - |  | --------------------------------------------------------



| |  |  | Changes in supply of, or demand for, similar or competing properties;
| | - |  | ---------------------------------------------------------------------



| |  |  | Changes in interest rates and operating expenses;
| | - |  | -------------------------------------------------



| |  |  | Competition for tenants;
| | - |  | ------------------------



| |  |  | Changes in market rental rates;
| | - |  | -------------------------------



| |  |  | Inability to lease properties upon termination of existing leases;
| | - |  | ------------------------------------------------------------------



| |  |  | Renewal of leases at lower rental rates;
| | - |  | ----------------------------------------



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| |  |  | Inability to collect rents from tenants due to financial hardship, including bankruptcy;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | Changes in tax, real estate, zoning and environmental laws that may have an adverse impact upon the value of real estate;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | Uninsured property liability;
| | - |  | -----------------------------



| |  |  | Property damage or casualty losses;
| | - |  | -----------------------------------



| |  |  | Unexpected expenditures for capital improvements or to bring properties into compliance with applicable federal, state and local laws;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Acts of terrorism and war; and
| | - |  | ------------------------------



| |  |  | Acts of God and other factors beyond the control of our management.
| | - |  | -------------------------------------------------------------------

Risks Related to Tenants

The Partnerships return on its investment will be derived principally
from rental payments received from its tenants. Therefore, the Partnerships return on its investment is largely dependent upon the business success of its tenants. The business success of the Partnerships
individual tenants can be adversely affected on three general levels. First, the tenants rely heavily on the management contributions of a few key entrepreneurial owners. The business operations of such entrepreneurial tenants can be adversely
affected by death, disability or divorce of a key owner, or by such owners poor business decisions such as an undercapitalized business expansion. Second, changes in a local market area can adversely affect a tenants business
operation. A local economy can suffer a downturn with high unemployment. Socioeconomic neighborhood changes can affect retail demand at specific sites and traffic patterns may change, or stronger competitors may enter a market. These and other local
market factors can potentially adversely affect the tenants of Partnership properties. Finally, despite an individual tenants solid business plans in a strong local market, the chain concept itself can suffer reversals or changes in
management policy, which in turn can affect the profitability of operations for Partnership properties. Therefore, there can be no assurance that any specific tenant will have the ability to pay its rent over the entire term of its lease with
the Partnership.

Since over 94% of the Partnerships investment in properties as of March 31, 2007 (does not include properties held for sale)
involves restaurant tenants, the restaurant market is the major market segment with a material impact on Partnership operations. It would appear that the management skill and potential operating efficiencies realized by Partnership lessees will be a
major ingredient for their future operating success in a very competitive restaurant and food service marketplace.

There is no way to determine, with any
certainty, which, if any, tenants will succeed or fail in their business operations over the term of their respective leases with the Partnership. It can be reasonably anticipated that some lessees will default on future lease payments to the
Partnership, which will result in the loss of expected lease income for the Partnership. Management will use its best efforts to vigorously pursue collection of any defaulted amounts and to protect the Partnerships assets and future rental
income potential by trying to re-negotiate leases or re-lease any properties with rental defaults. External events, which could impact the Partnerships liquidity, are the entrance of other competitors into the market areas of our tenants;
liquidity and working capital needs of the lessees; and failure or withdrawal of any of the national franchises held by the Partnerships tenants. Each of these events, alone or in combination, would affect the liquidity level of the lessees
resulting in possible default by a tenant. Since the information regarding plans for future liquidity and expansion of closely held organizations, which are tenants of the Partnership, tend to be of a private and proprietary nature, anticipation of
individual liquidity problems is difficult, and prediction of future events is nearly impossible.



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Illiquidity of Real Estate Investments

Because real estate investments are relatively illiquid, the Partnership is limited in its ability to quickly sell one or more Properties
in response to changing economic, financial and investment conditions. The real estate market is affected by many forces, such as general economic conditions, availability of financing, interest rates and other factors, including supply and
demand, that are beyond the Partnerships control. There is no way to predict whether the Partnership will be able to sell any property for a price or on terms that would be acceptable to the
Partnership. It is also impossible to predict the length of time needed to find a willing purchaser and to close the sale of a Property.

The Partnership May Be Subject to Unknown Environmental Liabilities

Investments in real property can create a potential for
environmental liability. An owner of property can face liability for environmental contamination created by the presence or discharge of hazardous substances on the property. The Partnership can face such liability regardless of
the knowledge of the contamination; the timing or cause of the contamination; or the party responsible for the contamination of the property.

The presence of hazardous substances on a property may adversely affect the Partnerships ability to sell that property and it may incur substantial remediation costs. Although the
Partnership leases generally require tenants to operate in compliance with all applicable federal, state and local environmental laws, ordinances and regulations, and to indemnify the Partnership against any environmental liabilities arising
from the tenants activities on the property, the Partnership could nevertheless be subject to strict liability by virtue of its ownership interest. There also can be no assurance that tenants could or would satisfy their indemnification
obligations under their leases. The discovery of environmental liabilities attached to the Partnerships Properties could have an adverse effect on the Partnerships results of operations, financial condition or ability to make
distributions to limited partners.

Item 2-5.

None

Item 6. Exhibits and Reports on Form 8-K



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



|     |  |                                                                                                                                      
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | 302 Certifications.                                                                                                                  
|     | 
|32.1 |  | Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350.                                                       
|     | 
|99.0 |  | Correspondence to the Limited Partners which is scheduled to be mailed May 15, 2007 regarding the First Quarter of 2007 distribution.



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

The Registrant has
not filed a Form 8-K in 2007.



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SIGNATURES

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

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP



|      |  |                                       
|----- |  | --------------------------------------
|By:   |  | The Provo Group, Inc., General Partner
|      | 
|By:   |  | /s/ Bruce A. Provo                    
|      |  | Bruce A. Provo, President             
|      | 
|Date: |  | May 11, 2007                          

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



|      |  |                                                                               
|----- |  | ------------------------------------------------------------------------------
|By:   |  | The Provo Group, Inc., General Partner                                        
|      | 
|By:   |  | /s/ Bruce A. Provo                                                            
|      |  | Bruce A. Provo, President, Chief Executive Officer and Chief Financial Officer
|      | 
|Date: |  | May 11, 2007                                                                  



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