<PAGE>
 
                                   FORM 10-Q

                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 quarterly period ended     September 30, 1998
                                    --------------------------------------------

                                       OR

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

    For the transition period from __________________ to ____________________

                         Commission file number 0-17686

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


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


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

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



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

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

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

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
                                 BALANCE SHEETS

                    September 30, 1998 and December 31, 1997
                    ----------------------------------------

                                     ASSETS
<TABLE>
<CAPTION>
                                                   (Unaudited)
                                                  September 30,   December 31,
                                                       1998           1997
                                                  --------------  -------------
INVESTMENT PROPERTIES AND EQUIPMENT:(Note 3)
<S>                                               <C>             <C>
   Land                                             $ 7,604,805    $ 8,330,982
   Buildings                                         13,569,725     14,930,273
   Equipment                                            707,378        707,378
   Accumulated depreciation                          (5,357,746)    (5,472,407)
                                                    -----------    -----------
 
       Net investment properties and equipment       16,524,162     18,496,226
                                                    -----------    -----------
 
OTHER ASSETS:
   Cash and cash equivalents                          1,523,762      1,438,534
   Cash restricted for real estate taxes                 13,142         11,251
   Cash held in Indemnification Trust (Note 8)          318,294        304,753
   Rents and other receivables                           59,896        285,163
   Deferred rent receivable                             140,287        182,770
   Prepaid insurance                                      1,961         19,341
   Deferred charges                                      93,471         86,434
   Unsecured notes receivable from lessees               56,751         69,726
                                                    -----------    -----------
       Total other assets                             2,207,564      2,397,972
                                                    -----------    -----------
DUE FROM FORMER AFFILIATES: (Notes 2 and 9)
   Due from former general partner affiliates         1,498,900      1,498,900
   Allowance for uncollectible amounts
      due from former affiliates                     (1,498,900)    (1,498,900)
   Restoration cost receivable                        4,885,224      4,469,873
   Allowance for uncollectible
      restoration receivable                         (4,885,224)    (4,469,873)
                                                    -----------    -----------
 
       Due from former affiliates, net                        0              0
                                                    -----------    -----------
 
       Total assets                                 $18,731,726    $20,894,198
                                                    ===========    ===========
</TABLE>



        The accompanying notes are an integral part of these statements.

                                       2
<PAGE>
 
             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                                 BALANCE SHEETS

                    September 30, 1998 and December 31, 1997
                    ----------------------------------------

                       LIABILITIES AND PARTNERS' CAPITAL

<TABLE>
<CAPTION>
                                                                    (Unaudited)
                                                                   September 30,   December 31,
                                                                       1998           1997
                                                                  -------------   ------------
LIABILITIES:
<S>                                                               <C>             <C>
   Accounts payable and accrued expenses                           $     47,711   $     69,837
   Due to current General Partner                                           942          2,510
   Security deposits                                                    104,517        153,112
   Unearned rental income                                                90,936        131,263
   Real estate taxes payable                                             60,919         58,355
                                                                   ------------   ------------
 
          Total liabilities                                             305,025        415,077
                                                                   ------------   ------------
 
CONTINGENT LIABILITIES: (Note 7)
 
PARTNERS' CAPITAL: (Notes 1, 4 and 11)
   Current General Partner -
      Cumulative net income                                             117,191        101,904
      Cumulative cash distributions                                     (46,206)       (40,091)
                                                                   ------------   ------------
                                                                         70,985         61,813
                                                                   ------------   ------------
   Limited Partners (46,280.3 interests outstanding)
      Capital contributions, net of offering costs                   39,358,468     39,358,468
      Cumulative net income                                          17,967,745     16,454,337
      Cumulative cash distributions                                 (38,130,268)   (34,555,268)
      Reallocation of former general partners' deficit capital         (840,229)      (840,229)
                                                                   ------------   ------------

                                                                     18,355,716     20,417,308
                                                                   ------------   ------------
 
               Total partners' capital                               18,426,701     20,479,121
                                                                   ------------   ------------
 
               Total liabilities and partners' capital             $ 18,731,726   $ 20,894,198
                                                                   ============   ============
</TABLE>


        The accompanying notes are an integral part of these statements.

                                       3
<PAGE>
 

            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                             STATEMENTS OF INCOME

                                  (Unaudited)
                                  -----------

<TABLE>
<CAPTION>
                                                         Three Months Ended             Nine Months Ended
                                                        ---------------------       -------------------------
                                                            September 30,                 September 30,
                                                            -------------                 -------------
                                                          1998         1997            1998           1997
                                                        --------     --------       ----------     ----------
<S>                                                     <C>          <C>            <C>            <C>
REVENUES:
  Rental income (Note 5)                                $495,847     $726,956       $1,834,137     $2,192,632
  Interest income on direct financing leases                   0        2,245                0          8,348
  Other interest income                                   32,463       18,211          107,536         55,413
  Recovery of amount previously written off                9,465            0           31,550          2,221
  Other income                                            12,521       44,288           38,134         79,485
  Gain on disposal of assets                                   0        3,772          556,227         76,028
                                                        --------     --------       ----------     ----------
                                                         550,296      795,472        2,567,584      2,414,127
                                                        --------     --------       ----------     ----------

EXPENSES:
  Partnership management fees                             45,231       44,520          135,219        132,612
  Disposition fees                                             0       15,000           66,000         52,166
  Restoration fees                                             0            0                0             89
  Appraisal fees                                           1,500            0           59,825          4,597
  Insurance                                                5,794        6,410           17,380         20,126
  General and administrative                              18,965       16,924           93,667         89,089
  Advisory Board fees and expenses                         3,947        3,628           12,022         10,316
  Environmental Inspections                                    0            0           49,500              0
  Land title surveys                                      67,400            0           67,400              0
  Ground lease payments (Note 3)                          31,372       31,249           95,169         94,117
  Expenses incurred due to default by lessee                 925        4,811            1,259          8,689
  Professional services                                   34,882       25,901          122,664         76,668
  Professional services related to investigation             168        4,283            1,279         31,377
  Depreciation                                           102,384      113,471          310,566        351,972
  Amortization                                             2,313        1,163            6,939          8,023
                                                        --------     --------       ----------     ----------
                                                         314,881      267,360        1,038,889        879,841
                                                        --------     --------       ----------     ----------

NET INCOME                                              $235,415     $528,112       $1,528,695     $1,534,286
                                                        ========     ========       ==========     ==========

NET INCOME - CURRENT GENERAL PARTNER                    $  2,354     $  5,281       $   15,287     $   15,343
NET INCOME - LIMITED PARTNERS                            233,061      522,831        1,513,408      1,518,943
                                                        --------     --------       ----------     ----------

                                                        $235,415     $528,112       $1,528,695     $1,534,286
                                                        ========     ========       ==========     ==========

NET INCOME (LOSS) PER LIMITED PARTNERSHIP
INTEREST, based on 46,280.3 Interests outstanding          $5.04       $11.30           $32.70         $32.82
                                                           =====       ======           ======         ======
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       4
<PAGE>
 
            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                           STATEMENTS OF CASH FLOWS

                                  (Unaudited)
                                  -----------
                                        
<TABLE>
<CAPTION>
                                                                              Nine Months Ended September 30,
                                                                              -------------------------------
                                                                                 1998                1997
                                                                              -----------        ------------
<S>                                                                           <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income                                                               $ 1,528,695        $ 1,534,286
     Adjustments to reconcile net income to net
       cash provided by operating activities -
          Depreciation and amortization                                           317,505            395,995
          Recovery of amounts previously written off                              (31,550)            (2,221)
          Net (gain) on disposal of assets                                       (556,227)           (76,028)
          Interest applied to Indemnification Trust account                       (13,541)           (11,985)
          (Increase)/Decrease in rents and other receivables                      225,267             (6,627)
          Withdrawals/(Deposits) for payment of real estate taxes                  (1,891)            99,510
          Decrease in prepaids                                                     17,380             20,125
          Decrease in deferred rent receivable                                     42,483              6,072
          (Decrease) in due to current General Partner                             (1,568)           (84,615)
          (Decrease) in accounts payable and other                                (22,126)           (18,128)
          (Decrease) in security deposits                                         (48,595)           (12,475)
          Increase/(Decrease) in real estate taxes payable                          2,564            (81,026)
          (Decrease) in unearned rental income                                    (40,327)           (38,478)
                                                                              -----------        -----------
                    Net cash from operating activities                          1,418,069          1,688,405
                                                                              -----------        -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:

     Principal payments received on direct financing leases                        31,551             45,075
     Principal payments received on notes receivable                               12,975             12,344
     Investment in leasing commissions                                            (13,976)            (6,000)
     Proceeds from sale of investment properties                                2,217,724          1,901,601
     Recoveries from former affiliates                                                  0              2,221
                                                                              -----------        -----------
                    Net cash from investing activities                          2,248,274          1,955,241
                                                                              -----------        -----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:

     Cash distributions to Limited Partners                                    (3,575,000)        (3,525,000)
     Cash distributions to current General Partner                                 (6,115)            (6,137)
                                                                              -----------        -----------
                    Net cash (used in) financing activities                    (3,581,115)        (3,531,137)
                                                                              -----------        -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                          85,228            112,509

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                1,438,534          1,444,326
                                                                              -----------        -----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                    $ 1,523,762        $ 1,556,835
                                                                              ===========        ===========
</TABLE>




       The accompanying notes are an integral part of these statements.

                                       5
<PAGE>
 
             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                         NOTES TO FINANCIAL STATEMENTS


These unaudited interim financial statements should be read in conjunction with
DiVall Insured Income Properties 2 Limited Partnership's (the "Partnership")
1997 annual audited financial statements within Form 10-K.

These unaudited financial statements include all adjustments which are, in the
opinion of management, necessary to present a fair statement of financial
position as of September 30, 1998, and the results of operations for the three
and nine-month periods ended September 30, 1998, and 1997, and cash flows for
the nine-month periods ended September 30, 1998 and 1997.  Results of operations
for the periods are not necessarily indicative of the results to be expected for
the full year.

The following significant event(s) have occurred subsequent to fiscal year 1997,
which require disclosure in this interim report per Regulation S-X, Rule 10-01,
Paragraph (a) (5):

During the First Quarter of 1998, the Partnership sold two Denny's restaurant
properties in New Smyrna Beach, Florida and Daytona Beach, Florida for
$1,250,000 and $950,000, respectively.  The sale of properties took place in
January 1998, resulting in a gain, before disposition fees, of $556,000.
 
1.   ORGANIZATION AND BASIS OF ACCOUNTING:

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

The Partnership is currently engaged in the business of owning and operating its
investment portfolio (the "Properties") of commercial real estate. The
Properties are leased on a triple net basis to, and operated by, franchisors or
franchisees of national, regional, and local retail chains under long-term
leases.  The lessees consist primarily of fast-food, family style, and
casual/theme restaurants, but also include a video rental store and a child care
center.  At September 30, 1998, the Partnership owned 30 properties with
specialty leasehold improvements in 12 of these properties.

Deferred organization costs are amortized over a 60-month period.  Deferred
costs on proposed acquisitions are capitalized as a cost of the properties upon
acquisition.

Rental revenue from investment properties is recognized on the straight-line
basis over the life of the respective lease.  Revenue from direct financing
leases is recognized at level rates of return over the term of the lease.

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

Deferred charges consist of leasing commissions paid when properties are leased
to tenants other than the original tenant.  Leasing commissions are capitalized
and amortized over the life of the lease.

                                       6
<PAGE>
 
Real estate taxes on the Partnership's investment properties are the
responsibility of the tenant. However, when a tenant fails to make the required
tax payments or when a property becomes vacant, the Partnership makes the
appropriate payment to avoid possible foreclosure of the property. Taxes are
accrued in the period in which the liability is incurred.

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

The preparation of financial statements in conformity with generally accepted
accounting principles 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.

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 in interest of the Limited Partners.

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, 1997, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$8,200,000.

2.   REGULATORY INVESTIGATION:

A preliminary investigation during 1992 by the Office of Commissioner of
Securities for the State of Wisconsin and the Securities and Exchange Commission
(the "Investigation") revealed that during at least the four years ended
December 31, 1992, the former general partners of the Partnership, Gary J.
DiVall ("DiVall") and Paul E. Magnuson ("Magnuson") had transferred substantial
cash assets of the Partnership and two affiliated publicly registered
partnerships, DiVall Insured Income Fund Limited Partnership ("DiVall 1") and
DiVall Income Properties 3 Limited Partnership ("DiVall 3") (collectively the
"Partnerships") to various other entities previously sponsored by or otherwise
affiliated with DiVall and Magnuson.  The unauthorized transfers were in
violation of the respective Partnership Agreements and resulted, in part, from
material weaknesses in the internal control system of the Partnerships.  The
aggregate amount of the misappropriations, related costs, and 9% interest
accrued since January 1, 1993, is in excess of $15,800,000, of which
approximately $6,384,000 has been attributed to the Partnership and is reflected
as due from former affiliates on the balance sheet at September 30, 1998.  The
9% interest accrued as of September 30, 1998, amounted to approximately
$2,862,000 and is not reflected in the accompanying income statement.  As of
December 31, 1997, approximately $5,969,000 was reflected as due from former
affiliates based on estimated overall misappropriation and related costs of
$14,800,000.

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.  Through September 30, 1998, $5,766,000 of recoveries have
been received which exceeded the original estimate of $3 million.  As a result,
the Partnership has recognized $1,108,000 as 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.

                                       7
<PAGE>
 
3.   INVESTMENT PROPERTIES:
     
As of September 30, 1998, the Partnership owned 27 fully constructed fast-food
restaurants, a check cashing store, a video store, and a preschool.  The
properties are comprised of the following:  ten (10) Wendy's restaurants, four
(4) Hardee's restaurants, five (5) Denny's restaurants, one (1) Applebee's
restaurant, one (1) Popeye's Famous Fried Chicken restaurant, one (1) Red Apple
restaurant, one (1) Hooter's restaurant, one (1) Kentucky Fried Chicken
restaurant, one (1) Hostettler's restaurant, one (1) Miami Subs restaurant, one
(1) Village Inn restaurant, one (1) Cash-A-Check store, one (1) Blockbuster
Video store, and one (1) Sunrise Preschool.  The 30 properties are located in a
total of thirteen (13) states.

From time to time, the Partnership experiences interruptions in rental receipts
due to tenant delinquencies and vacancies.  At September 30, 1998, three of the
Partnership's properties were unoccupied.

During the Second Quarter of 1998, the tenant of the Red Apple restaurant in
Cedar Rapids, Iowa vacated the property and ceased making rental payments.
Management is pursuing its legal remedies under the lease terms.

The lease on one of the Partnership's Denny's properties expired on May 31,
1998.  At that time the tenant vacated the property, and Management is currently
marketing the property for lease to a new Denny's operator.

During the Third Quarter of 1998, the tenant of the Partnership's Hostetler's
restaurant vacated the property.  The tenant remains liable for all lease terms
through December 31, 2002. Management is currently working with the tenant to
locate a sub-lease tenant for the property.

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.

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

The current General Partner receives a fee for managing the Partnership equal to
4% of gross receipts, with a maximum reimbursement for office rent and related
office overhead of $25,000 between the three affiliated Partnerships as provided
in the Permanent Manager Agreement ("PMA").  Effective March 1, 1998, the
minimum management fee and the maximum reimbursement for office rent and
overhead increased by 1.6% representing the allowable annual Consumer Price
Index adjustment per the PMA.  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 $54,777 to date on the
amounts recovered, which has been offset against the 4% minimum fee.

The Partnership owns three (3) restaurants located on parcels of land where it
has entered into long-term ground leases.  One (1) of these leases is paid by
the tenant and two (2) are paid by the Partnership.  The leases paid by the
Partnership are considered operating leases and the lease payments are expensed
in the periods to which they apply.  The lease terms require aggregate minimum
annual payments of approximately $124,000 and expire in the years ranging from
1998 to 2003.

The tenant operating a Denny's restaurant on Camelback Road in Phoenix, Arizona,
has not formally exercised its option to extend its lease which expired on
January 30, 1998, but continues to operate the restaurant and pay rent.
Management is currently negotiating a possible new lease.

Several of the Partnership's property leases contain purchase option provisions
with stated purchase prices in excess of the original cost of the properties.
The current General Partner is not aware of any unfavorable purchase options in
relation to current book value.
 
                                       8
<PAGE>
 
The tenant of the Partnership's Hardee's restaurants exercised their negotiated
options to purchase three of their properties during the First Quarter of 1997.
These sales resulted in gross proceeds to the Partnership of $1,394,000 with a
net gain of $72,000.

Cypress Restaurants, Inc., the tenant of the Denny's restaurants in New Smyrna
Beach, Florida and Daytona Beach, Florida, negotiated a purchase contract for
their properties in the amount of $1,250,000 and $950,000 respectively, from the
Partnership.  The Daytona Beach property, however, was found to have
environmental contamination from an adjoining property, which impacted their
ability to obtain financing.  Therefore, the Partnership agreed to finance
$550,000 of the $950,000 purchase price for a period of six months, until the
environmental issues can be addressed.  The sale of the properties took place in
January 1998, resulting in a gain of $556,000.  The note was repaid in full
during the Third Quarter of 1998.  The Partnership is not liable for the
environmental contamination.

A land easement was granted to the State of Arizona Salt River Project
Agricultural Improvement and Power District on a portion of the land at one of
the Denny's properties in exchange for a payment to the Partnership of $29,000.

A land easement want granted to the City of Des Moines, on a portion of the
Hostetler's property for sanitary sewer improvements in exchange for a payment
to the Partnership of $2,100.

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

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

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


                                       9
<PAGE>
 
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 its attributable to such year; and (c)
then, to Limited Partners, 99%, and to the General Partner, 1%, of remaining Net
Proceeds available for distribution.

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

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

Aggregate minimum lease payments to be received under the leases for the
Partnership's properties are as follows:

<TABLE>
<S>             <C>
          Year ending
          December 31,
          1998            $ 2,310,028
          1999              2,304,628
          2000              2,301,296
          2001              2,197,033
          2002              2,134,166
          Thereafter       14,778,980
                          -----------
                          $26,026,131
                          ===========
</TABLE>

Ten (10) of the properties are leased to Wensouth Orlando, a franchisee of
Wendy's restaurants. Wensouth base rents accounted for 31% of total base rents
for 1997.

                                      10
<PAGE>
 
6.   TRANSACTIONS WITH CURRENT GENERAL PARTNER:

Amounts paid to the current General Partner for the nine-month periods ended
September 30, 1998 and 1997 are as follows.

<TABLE>
<CAPTION>
                                              Incurred as of      Incurred as of
Current General Partner                     September 30, 1998  September 30, 1997
-----------------------                     ------------------  ------------------
<S>                                              <C>                 <C>
Management fees                                  $135,219            $132,612
Disposition fees                                   66,000              52,166
Restoration fees                                        0                  89
Overhead allowance                                 10,909              10,775
Reimbursement for out-of-pocket expenses           25,072              13,988
Cash distribution                                   6,115               6,137
                                                 --------            --------
                                                 $243,315            $215,767
                                                 ========            ========
</TABLE>

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 the restoration account and then
distributed among the three Partnerships. Fifty percent (50%) of the total
amount paid to the recovery was refunded to the current General Partner during
March 1996 after surpassing the recovery level of $4,500,000. The remaining
amount allocated to the Partnership may be owed to the current General Partner
if the $6,000,000 recovery level is met. As of September 30, 1998, the
Partnership may owe the current General Partner $16,296, which is currently
reflected as a recovery, if the $6,000,000 recovery level is achieved, which is
considered unlikely.

8.  PMA INDEMNIFICATION TRUST:

The Permanent Manager Agreement ("PMA") provides that the Permanent Manager will
be indemnified from any claims or expenses arising out of or relating to the
Permanent Manager serving in such capacity or as substitute general partner, so
long as such claims do not arise from fraudulent or criminal misconduct by the
Permanent Manager. The PMA provides that the Partnership fund this
indemnification obligation by establishing a reserve of up to $250,000 of
Partnership assets which would not be subject to the claims of the Partnership's
creditors. An Indemnification Trust ("Trust") serving such purposes has been
established at United Missouri Bank, N.A. The Trust has been fully funded with
Partnership assets as of September 30, 1998. Funds are invested in U.S. Treasury
securities. In addition, $68,294 of earnings have been credited to the Trust as
of September 30, 1998. 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

                                      11
<PAGE>
 
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.   RESTORATION TRUST ACCOUNT AND EXPENSE ALLOCATIONS:

Restoration costs represent expenses incurred by the Partnership in relation to
the misappropriated assets by the former general partners and their affiliates.
These costs are allocated among the Partnerships based on each partnership's
respective share of the entire misappropriation, as currently quantified. The
amount of misappropriation for each partnership is adjusted annually to reflect
new discoveries and more accurate quantification of amounts based on the
continuing investigation. Such adjustments will result in periodic adjustments
to prior allocations of recovery costs to reflect updated information.
Consequently, previous payments for restoration expenses may not be consistent
with modified allocations.

Recoveries realized by the Partnerships are being distributed to each respective
partnership on the same basis as the restoration costs are currently being
allocated. As of September 30, 1998, the Partnerships recovered a total of
approximately $5,726,000 from the former general partners and their affiliates.
Of this amount, the Partnership received its pro-rata share in the amount of
$2,315,000. Additionally, $40,347, representing 50% of all previously escrowed
disposition fees earned by the General Partner have been paid to the recovery.
Of that amount, $16,296 was allocated to the Partnership and is contingently
payable to the General Partner upon achievement of the final recovery level as
described in Note 7.

The PMA contemplated that the Permanent Manager could establish a separate and
distinct Restoration Trust Fund which would hold all recoveries until a final
independent adjudication by a court of competent jurisdiction or vote of the
Limited Partners ratified the allocation of proceeds to each respective
partnership. Management has concluded that a fair and reasonable interim
accounting for recovery proceeds can be accomplished at the partnership level in
a manner similar to restoration costs which are paid directly by the
Partnerships. Management reserves the right to cause the final allocation of
such costs and recoveries to be determined either by a vote of the Limited
Partners or a court of competent jurisdiction. Potential sources of recoveries
include third party litigation, promissory notes, land contracts, and personal
assets of the former general partners and their affiliates.

10.  LITIGATION:

As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure the
repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 1 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.

In 1993, nineteen (19) of the Private Partnerships sought the protection of the
Bankruptcy Court in the Eastern District of Wisconsin. Seven (7) of these
bankruptcies were voluntary and twelve (12) of these bankruptcies were
involuntary. Several of the Private Partnerships seeking bankruptcy owe
promissory notes to DiVall, Magnuson, or entities owned by them, in which the
Partnership has a security interest. These cases were subsequently transferred
to the Western District Bankruptcy Court located in Madison, Wisconsin.

                                      12
<PAGE>
 
The Partnership's experience in those bankruptcy cases that have concluded,
either through the approval of Plans of Reorganization, dismissal of the
bankruptcies, settlements or a combination of the foregoing, is that (i) the
value of the obligations of the Private Partnerships assigned to the Partnership
has been at a significant discount to their face amounts, and (ii) the General
Partner interests in such Private Partnerships often have little economic value.
The Partnership's recoveries in these bankruptcies have been on a steeply
discounted basis.

Plans of reorganization have been filed in the bankruptcies, and settlement
agreements in all of the Private Partnerships have been reached. Settlements in
the bankruptcies have resulted in cash payments to the Partnerships of a total
of $720,000 and notes secured by subordinated mortgages in the aggregate amount
of $625,000. The Partnerships subsequently sold the secured notes for a total of
$175,000.

11.  FORMER GENERAL PARTNERS' CAPITAL ACCOUNTS:

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

12.  SUBSEQUENT EVENTS:

On November 15, 1998, the Partnership made distributions to the Limited Partners
for the Third  Quarter of 1998 of $1,010,000 amounting to approximately $21.82
per limited partnership 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 investment properties, including equipment held by the Partnership at
September 30, 1998, were originally purchased at a price, including acquisition
costs, of approximately $24,747,000.

The tenant of the Country Kitchen restaurant in Cedar Rapids, Iowa vacated the
property during 1995 and ceased paying rent. Management entered into a lease
agreement for the property beginning on January 1, 1998 for a Red Apple
Restaurant. Red Apple Restaurant vacated the property on May 24, 1998 without
notification to Management. Management is currently pursuing any and all
remedies available to the Partnership under Iowa law.

During the Third Quarter of 1998, the tenant of the Partnership's Hostetler's
restaurant vacated the property. The tenant remains liable for all lease terms
through December 31, 2002. Management is currently working with the tenant to
locate a sub-lease tenant for the property.

The lease on one of the Partnership's Denny's properties expired May 31, 1998.
At that time, the tenant vacated the property, and management is currently
marketing the property for lease to a new Denny's operator.

                                      13
<PAGE>
 
The tenant of the Partnership's Hardee's restaurants exercised their negotiated
option to purchase three (3) of their properties during the First Quarter of
1997, resulting in a net gain of approximately $72,000.

Cypress Restaurants, Inc., the tenant of the Denny's restaurants in New Smyrna
Beach, Florida and Daytona Beach, Florida, negotiated a purchase contract for
their properties in the amount of $1,250,000 and $950,000 respectively, from the
Partnership. The Daytona Beach property, however, was found to have
environmental contamination from an adjoining property, which impacted their
ability to obtain financing. Therefore, the Partnership agreed to finance
$550,000 of the $950,000 purchase price for a period of six months, until the
environmental issues can be addressed. The sale of the properties took place in
January 1998, resulting in a gain of $556,000. The note was repaid in full
during the Third Quarter of 1998. The Partnership is not liable for the
environmental contamination.

A land easement was granted to the State of Arizona Salt River Project
Agricultural Improvement and Power District on a portion of the land at one of
the Denny's properties in exchange for a payment to the Partnership of $29,000.

Other Assets

Cash and cash equivalents, including cash restricted for real estate taxes was
approximately $1,537,000 at September 30, 1998, compared to $1,450,000 at
December 31, 1997. The Partnership designated cash of $1,010,000 to fund the
Third Quarter 1998 distributions to Limited Partners, $275,000 for the payment
of accounts payable and accrued expenses, and the remainder represents reserves
deemed necessary to allow the Partnership to operate normally. Cash generated
through the operations of the Partnership's investment properties and sales of
investment properties will provide the sources for future fund liquidity and
Limited Partner distributions.

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

Due From Former Affiliates and Allowance for Uncollectible Amounts Due From
Former Affiliates

Due from former affiliates represented misappropriated assets due from the
former general partners and their affiliates in the amount of $1,499,000 at
September 30, 1998. It is not expected that any further material recoveries will
be received.

The Partnership maintains a record of costs incurred in identifying or
recovering the misappropriated assets. These amounts are expensed when incurred,
and then, recorded on the balance sheet as a restoration cost receivable with a
corresponding allowance for such receivable deemed uncollectible. These costs
are considered due from the former general partners and their affiliates.
Interest has been accrued on the misappropriated funds since January 1, 1993, at
a rate of 9% per annum and has been included in the restoration cost receivable.
The receivable increased from approximately $4,470,000 at December 31, 1997, to
$4,885,000 at September 30, 1998, and includes $2,862,000 of cumulative accrued
interest.

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. Through September 30, 1998, $5,766,000

                                      14
<PAGE>
 
of recoveries have been received which exceeded the original estimate of $3
million. As a result, the Partnership has recognized $1,108,000 as 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.

The restoration costs are allocated among the Partnerships based on each
Partnership's respective share of the misappropriation as discussed in Note 9 of
the financial statements. The allocation is adjusted periodically to reflect any
changes in the entire misappropriation. The Partnership's percentage of the
allocation was reduced in 1993.

Liabilities

Accounts payable and accrued expenses at September 30, 1998, in the amount of
$48,000, primarily represented the accrual of legal and auditing fees.

Partners' Capital

Net income for the quarter was allocated between the General Partner and the
Limited Partners, 1% and 99%, respectively, as provided in the Partnership
Agreement and the Amendment to the Partnership Agreement, as discussed more
fully in Note 4 of the financial statements. The former general partners'
deficit capital account balance was reallocated to the Limited Partners at
December 31, 1993. Refer to Note 11 to the financial statements for additional
information regarding the reallocation.

Cash distributions paid to the Limited Partners and to the General Partner
during 1998 of $3,575,000 and $6,115 respectively, have also been in accordance
with the amended Partnership Agreement. The Third Quarter 1998 distribution of
$1,010,000 was paid to the Limited Partners on November 15, 1998.

Results of Operations:

The Partnership reported net income for the quarter ended September 30, 1998, in
the amount of $235,000 compared to net income for the quarter ended September
30, 1997, of $528,000. For the nine months ended September 30, 1998 and 1997,
net income totaled $1,529,000 and $1,534,000, respectively.

Revenues

Total revenues were $550,000 and $795,000, for the quarters ended September 30,
1998 and 1997, respectively, and were $2,568,000 and $2,414,000 for the nine
months ended September 30, 1998 and 1997, respectively. The 1998 revenue
included a gain of $556,000 on the sale of two Denny's properties to the tenant.
During 1997, a net gain of $72,000 was recorded on the sale of three Hardee's
properties to the tenant. The 1998 revenue does not include an accrual for
percentage rents due to a change in accounting regulations. The percentage rent
accrual at September 30, 1997 totaled $158,000. Interest income increased
significantly during 1998 due to higher cash balances held as a result of
proceeds from property sales.

Total revenues should approximate $3,000,000 annually based on leases currently
in place. Future revenues may decrease with tenant defaults and/or sales of
Partnership Properties. They may also increase with additional rents due from
tenants, if those tenants experience sales levels which require the payment of
additional rent to the Partnership.

                                      15
<PAGE>
 
Expenses

For the quarters ended September 30, 1998 and 1997, cash expenses amounted to
approximately 38% and 19%, of total revenues, respectively. For the nine months
ended September 30, 1998 and 1997, cash expenses totaled 28% and 22%,
respectively. Total expenses, including non-cash items, amounted to
approximately 57% and 34%, of total revenues for the quarters ended September
30, 1998 and 1997, respectively and totaled 40% and 36% for the nine months
ended September 30, 1998 and 1997, respectively.

Disposition fees were recorded during 1998 as a result of the sale of two
Denny's properties. Fees incurred during 1997 were a result of the sale of three
Hardee's properties. Appraisal fees totaling $58,000, land survey fees of
$67,000, and environmental inspections of $50,000 were incurred during 1998 for
the Partnership's properties in connection with the valuation and possible
liquidation of the Partnership's assets.

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. If inflation causes operating margins to deteriorate for lessees
if expenses grow faster than revenues, then, inflation may well negatively
impact the portfolio through tenant defaults.

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

Year 2000

The Partnership's operations are not dependent on date sensitive software. The
Partnership is not aware of any Year 2000 problems with its current software.
Accounting and Partnership records software are owned and operated by third
parties who provide services to the Partnership under contract. The Partnership
is currently in the process of evaluating Year 2000 issues with these third
party providers. The Partnership believes, however, that even if any Year 2000
problems are not corrected on schedule, the cost and disruption to operations of
the Partnership are expected to be minimal.

Tenants are responsible for the operation of any equipment located at the
Partnership's properties. While the Partnership is not fully aware of the
compliance attainment efforts of its tenants, tenant preparedness for the Year
2000 should have minimal impact on the Partnership and are not expected to be
material to the Partnership's operations, financial condition or liquidity.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

                                      16
<PAGE>
 
                          PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Partnership is pursuing collection actions against former tenants of the
Partnership and/or guarantors of former tenants of the Partnership arising from
defaults on their leases. Although the Partnership believes its claims are
valid, it is currently unknown whether the Partnerships will receive favorable
verdicts or whether any such verdicts will ultimately prove collectible.

Items 2-5.

Not Applicable.

Item 6. Exhibits and Reports on Form 8-K

(a)    Listing of Exhibits:

       99.0    Correspondence to the Limited Partners dated November 15, 1998,
               regarding the Third Quarter 1998 distribution.

(b)  Reports on Form 8-K:

     The Registrant filed no reports on Form 8-K during the third quarter of
     fiscal year 1998.

                                      17
<PAGE>
 
                                   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: 
       --------------------------------------------
       Bruce A. Provo, President


Date:  November 14, 1998


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



By:    The Provo Group, Inc., General Partner



By: 
       --------------------------------------------
       Bruce A. Provo, President


Date:  November 14, 1998



By: 
       --------------------------------------------
       Kristin J. Atkinson
       Vice President - Finance and Administration

Date: November 14, 1998

                                      18
<PAGE>
 
                                   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 14, 1998


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


By:    The Provo Group, Inc., General Partner



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


Date:  November 14, 1998



By:    /s/Kristin J. Atkinson
       -------------------------------------------
       Kristin J. Atkinson
       Vice President - Finance and Administration


Date:  November 14, 1998

                                      19