DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP - Quarter Report: 2007 September (Form 10-Q)

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarter ended September 30, 2007

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

For the transition period from to

Commission file number 0-17686

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

Wisconsin

39-1606834

(State or other jurisdiction of

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

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

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

CONDENSED BALANCE SHEETS

September 30, 2007 and December 31, 2006

ASSETS

(Unaudited)


	September 30, 2007			December 31, 2006
INVESTMENT PROPERTIES: (Note 3)

Land	$	4,248,367		$	4,728,785
Buildings		6,829,763			7,576,708
Accumulated depreciation		(4,189,115	)		(4,470,221	)

Net investment properties	$	6,889,015		$	7,835,272

OTHER ASSETS:

Cash and cash equivalents	$	702,162		$	625,592
Cash held in Indemnification Trust (Note 8)		434,346			417,860
Properties held for sale (Note 3)		818,204			617,266
Property taxes cash escrow		43,393			30,197
Rents and other receivables		180,579			432,440
Property taxes receivable		11,353			10,703
Deferred rent receivable		63,872			80,657
Prepaid insurance		3,162			31,626
Deferred charges, net		267,735			243,540

Total other assets	$	2,524,806		$	2,489,881

Total assets	$	9,413,821		$	10,325,153

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

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

CONDENSED BALANCE SHEETS

September 30, 2007 and December 31, 2006

LIABILITIES AND PARTNERS’ CAPITAL

(Unaudited)


	September 30, 2007			December 31, 2006
LIABILITIES:
Accounts payable and other accrued expenses	$	94,017		$	89,318
Property taxes payable		54,746			40,900
Due to General Partner		1,872			2,380
Security deposits		99,040			104,640
Unearned rental income		57,640			29,380

Total liabilities	$	307,315		$	266,618

CONTINGENT LIABILITIES: (Note 7)

PARTNERS’ CAPITAL: (Notes 1, 4 and 9)
Current General Partner
Cumulative net income	$	271,338		$	254,943
Cumulative cash distributions		(111,190	)		(104,632	)

		160,148			150,311

Limited Partners (46,280.3 interests outstanding)
Capital contributions, net of offering costs		39,358,468			39,358,468
Cumulative net income		33,228,387			31,605,253
Cumulative cash distributions		(62,800,268	)		(60,215,268	)
Reallocation of former general partners’ deficit capital		(840,229	)		(840,229	)

	$	8,946,358		$	9,908,224

Total partners’ capital	$	9,106,506		$	10,058,535

Total liabilities and partners’ capital	$	9,413,821		$	10,325,153

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

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

CONDENSED STATEMENTS OF INCOME

For the Three and Nine-Month Periods Ended September 30, 2007 and 2006


	Three Months ended September 30,				Nine Months ended September 30,
	2007		2006		2007		2006
OPERATING REVENUES:
Rental income (Note 5)	$	487,209	$	463,680	$	1,132,965	$	1,116,493

TOTAL OPERATING REVENUES	$	487,209	$	463,680	$	1,132,965	$	1,116,493

OPERATING EXPENSES
Partnership management fees (Note 6)	$	56,711	$	54,932	$	168,946	$	163,591
Restoration fees (Note 6)		124		124		373		373
Insurance		12,488		10,912		36,636		49,508
General and administrative		20,718		19,255		81,873		81,961
Advisory Board fees and expenses		2,125		2,625		6,875		8,750
Professional services		41,697		36,577		130,519		123,602
Other property expenses		820		820		820		820
Settlement expense (Note 10)		0		25,000		0		25,000
Depreciation		50,458		50,458		151,374		151,374
Amortization		2,676		2,676		8,029		8,029

TOTAL OPERATING EXPENSES	$	187,817	$	203,379	$	585,445	$	613,008

OTHER INCOME
Interest income	$	20,484	$	8,874	$	54,227	$	24,224
Judgment claim (Note 3)		0		0		0		25,000
Recovery of amounts previously written off (Note 2)		3,107		3,107		9,321		9,321
Other income		1,552		0		12,083		0

TOTAL OTHER INCOME	$	25,143	$	11,981	$	75,631	$	58,545

INCOME FROM CONTINUING OPERATIONS	$	324,535	$	272,282	$	623,151	$	562,030
INCOME FROM DISCONTINUED OPERATIONS (Note 1)		30,226		71,749		1,016,378		199,571

NET INCOME	$	354,761	$	344,031	$	1,639,529	$	761,601

NET INCOME- CURRENT GENERAL PARTNER	$	3,548	$	3,440	$	16,395	$	7,616
NET INCOME- LIMITED PARTNERS		351,213		340,591		1,623,134		753,985

	$	354,761	$	344,031	$	1,639,529	$	761,601

PER LIMITED PARTNERSHIP INTEREST, Based on 46,280.3 interests outstanding:
INCOME FROM CONTINUING OPERATIONS	$	6.94	$	5.82	$	13.33	$	12.02
INCOME FROM DISCONTINUED OPERATIONS		.65		1.54		21.74		4.27

NET INCOME PER LIMITED PARTNERSHIP INTEREST	$	7.59	$	7.36	$	35.07	$	16.29

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

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

CONDENSED STATEMENTS OF CASH FLOWS

For the Nine-Month Periods Ended September 30, 2007 and 2006

(Unaudited)


	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,639,529		$	761,601
Adjustments to reconcile net income to net cash flows from operating activities -
Depreciation and amortization		170,718			192,969
Recovery of amounts previously written off		(9,321	)		(9.321	)
Interest applied to PMA Indemnification Trust account		(16,486	)		(14,137	)
Net gain on disposal of assets		(861,701	)		0
Changes in operating accounts:
Increase (Decrease) in property taxes cash escrow		(13,195	)		3,989
Decrease in rents and other receivables		251,861			259,458
Decrease in prepaid insurance		28,464			29,832
Decrease in deferred rent receivable		15,140			12,390
Increase in property taxes receivable		(650	)		(9,723	)
Decrease in due to General Partner		(508	)		(3,420	)
Increase in accounts payable and other accrued expenses		4,699			11,862
Increase in property taxes payable		13,845			3,794
Decrease in security deposits		(9,945	)		0
Increase in unearned rental income		33,860			2,815

Net cash flows from operating activities	$	1,246,310		$	1,242,109

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Proceeds from sale of investment properties	$	1,488,912		$	0
Payment of leasing commissions		(55,125	)		(12,960	)
Investment in Buildings		(21,290	)		0
Recoveries from former General Partner affiliates		9,321			9,321

Net cash flows from (used in) investing activities	$	1,421,818		$	(3,639	)

CASH FLOWS USED IN FINANCING ACTIVITIES:
Cash distributions to Limited Partners	$	(2,585,000	)	$	(2,730,000	)
Cash distributions to current General Partner		(6,558	)		(3,046	)

Net cash flows used in financing activities	$	(2,591,558	)	$	(2,733,046	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	$	76,570		$	(1,494,576	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		625,592			2,218,807

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	702,162		$	724,231

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

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 September 30, 2007, and the statements of income for the three and nine-month periods ended September 30, 2007 and 2006, and cash flows for the nine-month periods ended September 30, 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 September 30, 2007 the lessees are primarily fast food, family style, and casual/theme restaurants, but also include a video rental store. The Partnership owned 18 investment properties, two of which were held for sale as of September 30, 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 September 30, 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.

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.

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 Second Quarter of 2007, capitalized roofing expenditures of approximately $21,000 were made to the Blockbuster, Ogden, UT property. The property was reclassified to property held for sale in May of 2007.

During the three-month periods ended September 30, 2007 and 2006, the Partnership recognized income from discontinued operations of approximately $30,000 and $72,000, respectively. During the nine-month periods ended September 30, 2007 and 2006, the Partnership recognized income from discontinued operations of approximately $1,016,000 and $200,000, respectively. The income from discontinued operations is attributable to the reclassification of the Wendy’s- 1515 Savannah Hwy., Charleston, SC property and the Blockbuster, Ogden, UT property to properties held for sale in the First and Second Quarters of 2007, respectively. Discontinued operations also includes income related to 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 2007 income from discontinued operations included a Second Quarter net gain on the sale of the Sunrise Preschool property of approximately $862,000.

The components of properties held for sale in the condensed balance sheets as of September 30, 2007 and December 31, 2006 are outlined below.


	September 30, 2007			December 31, 2006
Balance Sheet:
Land	$	480,418		$	241,371
Buildings, net		329,300			385,840
Deferred rent receivable		1,645			0
Deferred charges, net		18,041			0
Security deposits		(5,600	)		(9,945	)
Unearned rental income		(5,600	)		0

Property held for sale	$	818,204		$	617,266

The components of discontinued operations included in the condensed statements of income for the three and nine-month periods ended September 30, 2007 and 2006 are outlined below (Professional service fees of approximately $7,000 incurred in the First Quarter of 2007 were re-classed to net gain on sale of property in the Second Quarter of 2007 due to the sale of the Sunrise property in April of 2007):


	Three-month Period ended September 30, 2007		Three-month Period ended September 30, 2006		Nine-month Period ended September 30, 2007		Nine-month Period ended September 30, 2006
Statements of Income:
Revenues:
Rental Income	$	47,663	$	80,335	$	185,033	$	236,304

Total Revenues	$	47,663	$	80,335	$	185,033	$	236,304

Expenses:
Insurance	$	0	$	827	$	827	$	827
Professional Services		4,089		0		5,349		730
Maintenance and repair		11,728		735		12,865		1,610
Depreciation		0		5,404		6,455		29,072
Amortization		1,620		1,620		4,860		4,494

Total Expenses	$	17,437	$	8,586	$	30,356	$	36,733

Net Gain on Sale of Property	$	0	$	0	$	861,701	$	0

Income from Discontinued Operations	$	30,226	$	71,749	$	1,016,378	$	199,571

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, 2005 and 2007, consent solicitations were circulated (the “2001, 2003, 2005 and 2007 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, 2005 or 2007 Consents. Therefore, the Partnership continues to operate as a going concern.

No provision for federal income taxes has been made, as any liability for such taxes would be that of the individual partners rather than the Partnership. At December 31, 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 September 30, 2007, $5,870,000 of recoveries have been received which exceeded the original estimate of $3 million. As a result, from January 1, 1996 through September 30, 2007, the Partnership has recognized a total of $1,182,000 as recovery of amounts previously written off in the statements of income, which represents its share of the excess recovery. The current General Partner continues to pursue recoveries of the misappropriated funds, however, no further significant recoveries are anticipated.

3. INVESTMENT PROPERTIES 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 September 30, 2007, the Partnership owned 17 fully constructed fast-food restaurants and a video store. The 18 properties are composed of the following: ten (10) Wendy’s restaurants (the 1515 Savannah Hwy., Charleston, SC property was reclassified to property 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, and one (1) Blockbuster Video store (reclassified to property held for sale in May of 2007). The 18 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 September 30, 2007 and 2006, the Partnership recognized income from discontinued operations of approximately $30,000 and $72,000, respectively. During the nine-month periods ended September 30, 2007 and 2006, the Partnership recognized income from discontinued operations of approximately $1,016,000 and $200,000, respectively. The income from discontinued operations is attributable to the reclassification of the Wendy’s- 1515 Savannah Hwy., Charleston, SC property and the Blockbuster, Ogden, UT property to properties held for sale in the First Quarter of 2007 and the Second Quarter of 2007, respectively. Discontinued operations also includes income related to 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 2007 income from discontinued operations included a Second Quarter net gain on the sale of the Sunrise Preschool property of approximately $862,000.

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

Denny’s- Phoenix, Arizona

The Denny’s lease on the Phoenix, AZ property expired on October 31, 2007. Effective November 1, 2007 Management executed a lease term extension of an additional three-years and two-months. The new lease will expire December 31, 2010 and the first-year base rent will total $72,000. A leasing commission of approximately $7,000 is anticipated to be paid to a General Partner affiliate during the Fourth Quarter of 2007 in relation to the lease extension.

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 was then executed on August 21, 2007 for the sale of the property to an unaffiliated party for $1.17 million. Total sales commissions of 6% are anticipated to be paid upon the sale, which includes a 3% commission to a General Partner affiliate. The net book value of the property at September 30, 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.

The tenant, Wencoast Restaurants, Inc. (“Wencoast”), ceased operations at the property effective September 30, 2007, but will continue to be liable for its monthly rent obligations per the lease agreement until the sale of the property.

Blockbuster- Ogden, UT Property

A listing agreement for the sale of the property was executed with an unaffiliated broker in May of 2007 (current asking price is $1,250,000.) The terms of the listing agreement includes a 6% sales commission to be paid at closing, which includes a 2-3% commission payable to a General Partner affiliate. The net book value of the property at September 30, 2007, classified as property held for sale in the condensed financial statements, was approximately $397,000, which included $194,000 related to land, $201,000 related to buildings and improvements (included approximately $21,000 in roofing capital improvements incurred in the Second Quarter of 2007), and $2,000 related to deferred charges.

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.

Popeye’s- Park Forest, IL Property

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 three equal installment payments of $4,233 related to the past due rent obligations on May 8, June 20, 2007, and July 17, 2007. 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). As of September 30, 2007, the tenant is delinquent one month on its current monthly obligations and has a $33,000 property tax escrow cash balance held with the Partnership (the September payment was received on October 1, 2007).

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 $862,000 was recognized in the Second Quarter of 2007. Closing and other sale related costs amounted to approximately $111,000 and included a $48,000 sales commission paid to a General Partner affiliate.

Wendy’s- 1004 Richland Avenue, Aiken, SC

The Richland Avenue property lease with Wencoast Restaurants, Inc. (“Wencoast”), a franchisee of Wendy’s restaurants, was assigned to Wendgusta, LLC (“Wendgusta”), a franchisee of Wendy’s restaurants on July 2, 2007. The terms of the lease remain the same, including the expiration date of November 6, 2016.

Wendy’s- 3869 Washington Road, Martinez, GA

The Washington Road property lease with Wencoast was assigned to Wendgusta on July 2, 2007. The terms of the lease remain the same, including the expiration date of November 6, 2016.

Wendy’s- 1717 Martintown Road, N Augusta, SC

The Martintown Road property lease with Wencoast was set to expire on November 6, 2016, however on July 2, 2007 the lease was assigned to Wendgusta. Per the assignment agreement, the monetary lease obligations remain the same, however, the lease was extended to November 6, 2021 and includes a five year lease option renewal. Per the terms of the assignment agreement, Wendgusta is also responsible for making $180,000 in capital improvement expenditures to the property within 18 months by December 2009. A leasing commission of approximately $13,000 was paid to a General Partner affiliate in July of 2007 in relation to the lease extension.

Wendy’s- 1730 Walton Way, Augusta, GA

The Walton Way property lease with Wencoast was set to expire on November 6, 2016, however on July 2, 2007 the lease was assigned to Wendgusta. Per the assignment agreement, the monetary lease obligations remain the same, however, the lease was extended to November 6, 2021 and includes a five year lease option renewal. Per the terms of the assignment agreement, Wendgusta is also responsible for making $180,000 in capital improvement expenditures to the property within 18 months by December 2009. A leasing commission of approximately $15,000 was paid to a General Partner affiliate in July of 2007 in relation to the lease extension.

Wendy’s- 3013 Peach Orchard, Augusta, GA

is also responsible for making $180,000 in capital improvement expenditures to the property within 18 months by December 2009. A leasing commission of approximately $13,000 was paid to a General Partner affiliate in July of 2007 in relation to the lease extension.

Wendy’s- 1901 Whiskey Road, Aiken, SC

The Whiskey Road property lease with Wencoast was set to expire on November 6, 2016, however on July 2, 2007 the lease was assigned to Wendgusta. Per the assignment agreement, the monetary lease obligations remain the same, however, the lease was extended to November 6, 2021 and includes a five year lease option renewal. Per the terms of the assignment agreement, Wendgusta is also responsible for making $180,000 in capital improvement expenditures to the property within 18 months by December 2009. A leasing commission of approximately $15,000 was paid to a General Partner affiliate in July of 2007 in relation to the lease extension.

Daytona’s All Sports Café- Des Moines, IA Property

Beginning in December of 2005, Management requested that Daytona’s All Sports Café (“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 and as of September 30, 2007, escrow payments held by the Partnership totaled approximately $11,000.

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.

At September 30, 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.

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 5 - 20 years from their inception. The leases generally provide for minimum rents and additional rents based upon percentages of gross sales in excess of specified sales breakpoints. The lessee is responsible for occupancy costs such as maintenance, insurance, real estate taxes, and utilities. Accordingly, these amounts are not reflected in the statements of income except in circumstances where, in management’s opinion, the Partnership will be required to pay such costs to preserve its assets (i.e., payment of past-due real estate taxes). Management has determined that the leases are properly classified as operating leases; therefore, rental income is reported when earned on a straight-line basis and the cost of the property, excluding the cost of the land, is depreciated over its estimated useful life.

As of September 30, 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 Wendy’s- 1515 Savannah Hwy., Charleston, SC and the Blockbuster, Ogden, UT properties which were reclassified to properties held for sale in the First and Second Quarters of 2007, respectively). The operating payments below include the November 1, 2007 lease extension of the Denny’s, Phoenix, AZ property (For further disclosure see Investment Properties in Note 3 to the condensed financial statements and Part I- Item 2.)


Year ending December 31,
2007	$	1,279,727
2008		1,232,060
2009		1,198,930
2010		1,009,500
2011		938,500
Thereafter		6,082,552

	$	11,741,269

Operating percentage rentals included in operating rental income for the nine-month periods ended September 30, 2007 and 2006 were approximately $189,000 and $174,000, respectively. At September 30, 2007, rents and other receivables included approximately $174,000 of unbilled 2007 percentage rents.

Operating percentage rentals included in rental income from operations in 2006 (does not include income from properties held for sale or sold during 2006 and 2007) was approximately $423,000. At December 31, 2006, rents and other receivables included $18,000 of billed and $399,000 of unbilled 2006 percentage rents. As of September 30, 2007 these 2006 percentage rents had been fully collected.

As of July 2, 2007, six (6) of the properties are leased to Wendgusta, LLC (“Wendgusta”), a franchisee of Wendy’s restaurants. In addition, three (3) of the properties (does not include the 1515 Savannah Hwy., Charleston, SC property, which was reclassified to property held for sale in March of 2007) are leased to Wencoast Restaurants, Inc. (“Wencoast”), a franchisee of Wendy’s restaurants. Wendgusta and Wencoast operating base rents accounted for 42% and 18%, respectively, of the total 2006 operating base rents. In each case, the percentage calculation does not include income from properties held for sale or sold during 2006 and 2007.

6. TRANSACTIONS WITH CURRENT GENERAL PARTNER AND ITS AFFILIATES:

Pursuant to the terms of the Permanent Manager Agreement (“PMA”), the General Partner receives a Base Fee for managing the Partnership equal to 4% of gross receipts, subject to a $159,000 minimum. The PMA also provides that the Partnership is responsible for reimbursement for office rent and related office overhead (“Expenses”) up to a maximum of $13,250. Both the Base fee and Expense reimbursement are subject to annual Consumer Price Index based adjustments. 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.

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. To-date, TPG has received fees from the Partnership totaling $57,774 on the amounts recovered, which includes fees received for the nine-month periods ended September 30, 2007 and 2006 of $373 and $373 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 and nine-month periods ended September 30, 2007 and 2006 are as follows:


Current General Partner	Incurred for the Three-Month Period ended September 30, 2007		Incurred for the Three-Month Period ended September 30, 2006		Incurred for the Nine-Month Period ended September 30, 2007		Incurred for the Nine-Month Period ended September 30, 2006
Management fees	$	56,711	$	54,932	$	168,946	$	163,591
Restoration fees		124		124		373		373
Overhead allowance		4,585		4,442		13,660		13,229
Sales Commissions		0		0		48,000		0
Leasing commissions		55,125		0		55,125		6,480
Reimbursement for out-of-pocket expenses		1,390		1,431		5,353		5,441
Cash distribution		1,419		1,376		6,558		3,046

	$	119,354	$	62,305	$	298,015	$	192,160

7. CONTINGENT LIABILITIES:

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

8. PMA INDEMNIFICATION TRUST:

The PMA provides that the Permanent Manager will be indemnified from any claims or expenses arising out of or relating to the Permanent Manager serving in such capacity or as substitute general partner, so long as such claims do not arise from fraudulent or criminal misconduct by the Permanent Manager. The PMA provides that the Partnership fund this indemnification obligation by establishing a reserve of up to $250,000 of Partnership assets which would not be subject to the claims of the Partnership’s creditors. An Indemnification Trust (“Trust”) serving such purposes has been established at United Missouri Bank, N.A. The corpus of the Trust has been fully funded with Partnership assets since 1994. Funds are invested in U.S. Treasury securities. In addition, $184,346 of earnings has been credited to the Trust as of September 30, 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 beginning in 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.

11. SUBSEQUENT EVENTS:

On November 15, 2007, the Partnership is scheduled to make distributions to the Limited Partners of $290,000 amounting to approximately $6.27 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 September 30, 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 $ 12,240,768.

Six (6) of the eighteen (18) properties owned as of September 30, 2007 were leased to Wendgusta. LLC (“Wendgusta”). 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. However, since Wendgusta was formed during 2007, no audited financial statements are available as of September 30, 2007.

Four (4) of the eighteen (18) properties owned as of September 30, 2007 were 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 September 30, 2007 and 2006, the Partnership recognized income from discontinued operations of approximately $30,000 and $72,000, respectively. During the nine-month periods ended September 30, 2007 and 2006, the Partnership recognized income from discontinued operations of approximately $1,016,000 and $200,000, respectively. The income from discontinued operations is attributable to the reclassification of the Wendy’s- 1515 Savannah Hwy., Charleston, SC property and the Blockbuster, Ogden, UT property to properties held for sale in the First Quarter of 2007 and the Second Quarter of 2007, respectively. Discontinued operations also includes income related to 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 2007 income from discontinued operations included a Second Quarter net gain on the sale of the Sunrise Preschool property of approximately $862,000.

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

Denny’s- Phoenix, Arizona

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

Blockbuster- Ogden, UT Property

Popeye’s- Park Forest, IL Property

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). As of September 30, 2007, the tenant is delinquent one month on its current monthly obligations and has a $33,000 property tax escrow cash balance held with the Partnership (the September payment was received on October 1, 2007).

Sunrise Preschool- Phoenix, AZ Property

Wendy’s- 1004 Richland Avenue, Aiken, SC

Wendy’s- 3869 Washington Road, Martinez, GA

The Washington Road property lease with Wencoast was assigned to Wendgusta on July 2, 2007. The terms of the lease remain the same, including the expiration date of November 6, 2016.

Wendy’s- 1717 Martintown Road, N Augusta, SC

Wendy’s- 1730 Walton Way, Augusta, GA

Wendy’s- 3013 Peach Orchard, Augusta, GA

The Peach Orchard property lease with Wencoast was set to expire on November 6, 2016, however on July 2, 2007 the lease was assigned to Wendgusta. Per the assignment agreement, the monetary lease obligations remain the same, however, the lease was extended to November 6, 2021 and includes a five year lease option renewal. Per the terms of the assignment agreement, Wendgusta is also responsible for making $180,000 in capital improvement expenditures to the property within 18 months by December 2009. A leasing commission of approximately $13,000 was paid to a General Partner affiliate in July of 2007 in relation to the lease extension.

Wendy’s- 1901 Whiskey Road, Aiken, SC

Daytona’s All Sports Café- Des Moines, IA Property

Former Miami Subs- Palm Beach, FL Property

Other Investment in Properties Information

Other Assets

Cash and cash equivalents held by the Partnership totaled approximately $702,000 at September 30, 2007, compared to $626,000 at December 31, 2006. Cash of $290,000 is anticipated to be used to fund the Third Quarter of 2007 distribution to Limited Partners in November 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.

The book value of properties held for sale at September 30, 2007 amounted to approximately $818,000 and included the Wendy’s- 1515 Savannah Hwy., Charleston, SC property (“the Wendy’s Property”) and the Blockbuster, Ogden, UT property (“the Blockbuster Property”). 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 and a sales contract was executed on August 21, 2007 for the sale of the Wendy’s Property to an unaffiliated party for $1.17 million. The book value of the Wendy’s Property held for sale at September 30, 2007 amounted to approximately $421,000, and included $286,000 related to land, $128,000 related to buildings and improvements, $2000 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 Blockbuster Property (asking price of $1.25 million) was executed in May of 2007. The book value of the Blockbuster Property held for sale at September 30, 2007 amounted to approximately $397,000, and included $194,000 related to land, $201,000 related to buildings and improvements (included approximately $21,000 in roofing capital improvements incurred in the Second Quarter of 2007), and $2,000 related to deferred charges. (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 $43,000 and $30,000 at September 30, 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 $14,000 were received by the Partnership from Daytona’s during the First through Third Quarters of 2007. The Partnership paid the tenant’s 2005 second property taxes installment of approximately $11,000 in the First Quarter of 2007 and the 2006 first property taxes installment of approximately $11,000 in the Second Quarter of 2007. Daytona’s property taxes cash escrow balance as of September 30, 2007 was approximately $11,000. Daytona’s 2007 second property taxes installment of approximately

$11,000 is scheduled to be due in the First Quarter of 2008. (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 $48,000 were received by the Partnership from Popeye’s during the First through Third Quarters of 2007 (including $10,000 in past due balances). The Partnership paid the tenant’s first 2006 property taxes installment of approximately $27,000 in the First Quarter of 2007. Popeye’s property taxes cash escrow balance held with the Partnership as of September 30, 2007 totaled approximately $33,000. The tenant’s 2006 second property taxes installment is scheduled to be due during the Fourth Quarter of 2007. The installment was originally scheduled to be due in the Third Quarter of 2007, but was moved to a later date due to the timing of Cook County’s property tax billing. (For further disclosure see Investment Properties in Note 3 to the condensed financial statements and Part I- Item 2.)

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 $181,000 at September 30, 2007, compared to $432,000 as of December 31, 2006. As of December 31, 2006, Popeye’s- Park Forest was delinquent on two monthly lease obligations totaling approximately $13,000. The Partnership received from Popeye’s three equal installments of $4,333 related to the past due lease obligations in May, June and July of 2007, respectively. As of September 30, 2007, Popeye’s- Park Forest was delinquent one month’s lease obligation totaling approximately $6,000 (the September payment was received on October 1, 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 September 30, 2007, rents and other receivables also included approximately $174,000 in 2007 percentage rental income accrued in the Second and Third Quarters of 2007 for tenants who had reached their sales breakpoint. These 2007 percentage rents will not be billed to or owed by the tenant’s until the First Quarter of 2008. 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. As of September 30, 2007 the 2006 percentage rental income had been collected in full.

Property taxes receivable at September 30, 2007 and December 31, 2006 totaled approximately $11,000 and $11,000, respectively. The September 30, 2007 balance includes Popeye’s- Park Forest’s one month property tax deficiency (the September payment was received on October 1, 2007). The December 31, 2006 balance 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 $3,000 at September 30, 2007 compared to $32,000 at December 31, 2006. The September 30, 2007 balance represented approximately one (1) month 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 $268,000 and $244,000, net of accumulated amortization, at September 30, 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 totaling approximately $55,000 were paid in July of 2007 in relation to the lease term extension of the four Wendy’s properties that were assigned from Wencoast to Wendgusta (for further discussion see Investment in Properties in Note 3 to the condensed financial statements and Part I- Item 2). Leasing commissions of approximately $16,000 related to the Wendy’s- 1515 Savannah Hwy., Charleston, SC property and $4,000 related to the Blockbuster, Ogden, UT property were reclassified and included in properties held for sale in the First and Second Quarters of 2007, respectively (for further discussion see Investment Properties in Note 3 to the condensed financial statements and Part I- Item 2.). Leasing commissions are capitalized and amortized over the life of the lease.

Liabilities

Accounts payable and other accrued expenses at September 30, 2007, and December 31, 2006 amounted to approximately $94,000 and $89,000, respectively, and primarily represented the accruals of auditing, tax and data processing fees.

Property taxes payable at September 30, 2007 and December 31, 2006, totaled approximately $55,000 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.)

Due to the Current General Partner amounted to approximately $1,872 at September 30, 2007 and primarily represented the General Partner’s Third 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 $2,585,000 and $6,558, respectively, have also been made in accordance with the Partnership Agreement. The Partnership intends to pay Third Quarter of 2007 distributions of $290,000 on November 15, 2007.

Results of Operations

The Partnership reported income from continuing operations for the three-month period ended September 30, 2007, in the amount of $325,000 compared to income from continuing operations for the three-month period ended September 30, 2006 of $272,000. The Partnership reported income from continuing operations for the nine-month period ended September 30, 2007, in the amount of $623,000 compared to income from continuing operations for the nine-month period ended September 30, 2006 of $562,000. The variance in income from continuing operations in 2007 compared to 2006 is due primarily to: (i) higher percentage rental income accruals during the Third Quarter of 2007; (ii) higher interest earnings during the Second and Third Quarter of 2007 due to higher interest yields and increased average cash balances due to the sale of the Sunrise Preschool property; (iii) lower investor communication expenditures in the First through Third Quarters of 2007; (iv) 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; (v) higher legal expenditures during 2007 due to the Popeye’s default litigation and settlement; (vii) an unexpected insurance premium adjustment payment in the Second Quarter of 2006 of approximately $12,000 related to the 04/05 policy year; and (viii) the March of 2006 receipt of $25,000 from DiFede in satisfaction of the Judgment recorded in the Broward County, Florida Circuit Court in January of 2005.

Discontinued Operations

During the three-month periods ended September 30, 2007 and 2006, the Partnership recognized income from discontinued operations of approximately $30,000 and $72,000, respectively. During the nine-month periods ended September 30, 2007 and 2006, the Partnership recognized income from discontinued operations of approximately $1,016,000 and $200,000, respectively. The income from discontinued operations are attributable to the reclassification of the Wendy’s- 1515 Savannah Hwy., Charleston, SC property and the Blockbuster, Ogden, UT property to properties held for sale in the First Quarter of 2007 and the Second Quarter of 2007, respectively. Discontinued operations also includes income related to the Sunrise Preschool property which was located in Phoenix, AZ property, and was reclassified to property held for sale in the Second Quarter of 2006 and sold in April of 2007. The 2007 income from discontinued operations included the Second Quarter net gain on the sale of the Sunrise Preschool property of approximately $862,000. 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 $487,000 and $464,000 for the three-month periods ended September 30, 2007 and 2006, respectively. During the nine-month periods ended September 30, 2007 and 2006, total operating revenues amounted to $1,133,000 and $1,116,000, respectively. The variance in operating revenues in 2007 compared to 2006 is due primarily to higher percentage rental income accruals during the Third Quarter of 2007.

As of September 30, 2007, total base operating rent revenues should approximate $1,280,000 for the year 2007 based on leases currently in place (does not include properties sold or held for sale during 2007). Future operating rent revenues may decrease with tenant defaults and/or the reclassification of Properties as held for sale. They may also increase with additional rents due from tenants, if those tenants experience sales levels, which require the payment of additional rent to the Partnership.

Expenses

For the three-month periods ended September 30 2007 and 2006, total operating expenses amounted to approximately 39% and 44%, of total revenue, respectively. For the nine-month periods ended September 30 2007 and 2006, total operating expenses amounted to approximately 52% and 55%, of total revenue, respectively. The variance in total operating expenses in 2007 compared to 2006 is due primarily to: (i) lower investor communication expenditures in the First through Third Quarters of 2007; (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 legal expenditures during 2007 due to the Popeye’s default litigation and settlement; and (iv) an unexpected insurance premium adjustment payment in the Second Quarter of 2006 of approximately $12,000 related to the 04/05 policy year.

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 and nine-month periods ended September 30, 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 September 30, 2007 and 2006, the Partnership generated other income of approximately $25,000 and $12,000, respectively. For the nine-month periods ended September 30, 2007 and 2006, the Partnership generated other income of approximately $76,000 and $59,000, respectively. During the First, Second and Third Quarters of 2007, the Partnership received approximately $10,000, $600 and $1,600, respectively, in investor service fees related to the voiding and reissuance of old outstanding limited partner 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 (higher interest yields were recognized in the Second and Third Quarters of 2007) 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 or sold during 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.

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.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

Former South Milwaukee, WI property

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;

•

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 100% of the Partnership’s investment in properties as of September 30, 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.

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 November 15, 2007 regarding the Third Quarter of 2007 distribution.

(b)

Report on Form 8-K:

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

SIGNATURES

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

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP


By:		The Provo Group, Inc., General Partner

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

Date:		November 13, 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:		November 13, 2007