<PAGE>
 
                                    FORM 10-K
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

(Mark One)

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

         For the quarterly period ended         December 31, 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 Indicate by check mark if disclosure
of delinquent  filers  pursuant to Item 405 of  Regulation  S-K is not contained
herein,  and will not be contained,  to the best of registrant's  knowledge,  in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]

         The  aggregate   market  value  of  the  voting   securities   held  by
nonaffiliates  of  the  Registrant:   The  aggregate  market  value  of  limited
partnership  interests held by nonaffiliates is not determinable  since there is
no public trading market for the limited partnership interests.

                   Index to Exhibits located on page: 32 - 33
                                                      -------
<PAGE>
 
                                     PART I
Item 1.  Business

Background

The  Registrant,  DiVall Insured Income  Properties 2 Limited  Partnership  (the
"Partnership"),  is a limited partnership  organized under the Wisconsin Uniform
Limited Partnership Act pursuant to an Agreement of Limited Partnership dated as
of November  18, 1987,  and amended as of November 25, 1987,  February 20, 1988,
June 21, 1988,  February 8, 1993, May 26, 1993 and June 30, 1994  (collectively,
the "Partnership Agreement"). As of December 31, 1998, the Partnership consisted
of one  General  Partner  and 2,608  Limited  Partners  owning an  aggregate  of
46,280.3 Limited  Partnership  Interests (the "Interests")  acquired at a public
offering  price of $1,000 per Interest  before volume  discounts.  The Interests
were sold commencing February 23, 1988, pursuant to a Registration  Statement on
Form S-11 filed under the  Securities  Act of 1933  (Registration  33-18794)  as
amended. On June 30, 1989, the former general partners exercised their option to
extend  the  offering  period to a date no later  than  February  22,  1990.  On
February 22, 1990,  the  Partnership  closed the offering at 46,280.3  Interests
($46,280,300),  providing net proceeds to the Partnership after volume discounts
and 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  of  primarily   fast-food,   family  style,  and
casual/theme  restaurants,  but also include an auto tag agency,  a video rental
store and a child care center.  At December 31, 1998, the  Partnership  owned 29
properties with specialty leasehold  improvements in 12 of these properties,  as
more fully  discussed in Item 2. During the Second  Quarter of 1998, the General
Partner  received the written consent of a majority of the Partners to liquidate
the  Partnership's  assets  and  dissolve  the  Partnership.  No buyer  has been
identified for the  Partnership's  assets,  and Management  will continue normal
operations for the foreseeable future.

The  Partnership's  return on its investment  will be derived  principally  from
rental payments received from its lessees.  Therefore,  the Partnership's return
on its investment is largely dependent,  among other factors,  upon the business
success of its lessees.  The business  success of the  Partnership's  individual
lessees 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  lessee'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
lessees of Partnership properties. Finally, despite an individual lessee'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 lessee will have the ability to pay its rent over
the entire term of its lease with the Partnership.

Since over 90% of the  Partnership's  investment  in  properties  and  equipment
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


                                       2
<PAGE>
 
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-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
leaseholders;  and failure or withdrawal of any of the national  franchises held
by the  Partnership's  tenant.  Each of these events,  alone or in  combination,
would affect the liquidity level of leaseholders  resulting in possible  default
by the 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.

A preliminary  investigation  during 1992 by the Office of the  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, two of 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.


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 the  responsibility for daily operations
and  assets of the  Partnerships  as well as to  develop  and  execute a plan of
restoration to the Partnerships. As reported in the Partnership's report on Form
8-K dated May 26, 1993,  effective  as of that date,  the Limited  Partners,  by
written consent of a majority of interests,  elected the Permanent Manager, TPG,
as General Partner. Additional results of the solicitation included the approval
of the Permanent Manager Agreement  ("PMA"),  the acceptance of the resignations
of  the  former  general  partners,  amendments  to  certain  provisions  of the
Partnership  Agreement pertaining to general partner interests and compensation,
and an amendment of the  Partnership  Agreement  providing for an Advisory Board
(the "Board").

The Permanent Manager Agreement

The PMA was entered into on February 8, 1993, between the Partnership,  DiVall 1
(which  was  dissolved  in  December  1998),  DiVall 3, the now  former  general
partners DiVall and Magnuson,  their controlled affiliates,  and TPG, naming TPG
as the Permanent  Manager.  The PMA contains  provisions  allowing the Permanent
Manager  to submit  the PMA,  the issue of  electing  the  Permanent  Manager as
General  Partner,  and the issue of acceptance of the resignations of the former
general  partners to a vote of the Limited  Partners  through a solicitation  of
written consents.

TPG, as the new General Partner,  has been operating and managing the affairs of
the Partnership in accordance with the provisions of the PMA and the Partnership
Agreement.

Advisory Board

The  concept  of the  Advisory  Board was first  introduced  by TPG  during  the
solicitation of written  consents for the  Partnerships  and is the only type of
oversight body known to exist for similar  partnerships  at this time. The first
Advisory  Board was  appointed in October  1993,  and held its first  meeting in
November  1993.  The three person  Advisory  Board is empowered  to, among other
functions,  review  operational  policies and  practices,  review  extraordinary
transactions,  and advise and serve as an audit committee to the Partnership and
the General  Partner.  The Advisory  Board does not have the authority to direct
management  decisions  or  policies  of the  Partnership  or remove the  General
Partner.  The powers of the Advisory Board are advisory only. The Advisory Board
has full and free access to the Partnership's books

                                       3
<PAGE>
 
and records, and individual Advisory Board members have the right to communicate
directly with the Limited Partners concerning  Partnership business.  Members of
the Advisory Board are compensated $3,000 annually and $1,200 for each quarterly
meeting attended.

The Advisory Board currently consists of a broker dealer representative,  Steven
Carson of First Albany  Corporation;  and a Limited Partner from each of the two
remaining  Partnerships:  Richard Otte from the Partnership,  and Albert Gerritz
from DiVall 3. For a brief  description of each Advisory Board member,  refer to
Item 10, Directors and Executive Officers of the Registrant.

The Partnership has no employees.

All of the Partnership's business is conducted in the United States.

Item 2.  Properties

The Partnership's  Properties are leased under long-term leases,  generally with
terms of  approximately  20 years.  All leases are triple net which  require the
tenant to pay all  property  operating  costs  including  maintenance,  repairs,
utilities,  property  taxes,  and  insurance.  A majority of the leases  contain
percentage  rent  provisions  which  require  the  tenant  to  pay  a  specified
percentage (3% to 8%) of gross sales above a threshold amount.

The Partnership owned the following  Properties  (including  specialty leasehold
improvements for use in some of these properties) as of December 31, 1998:

<TABLE>
<CAPTION>
                                                                                                         Lease
Acquisi-      Property Name                                             Purchase         Rental Per      Expiration    Renewal
tion Date     & Address                           Lessee                Price (1)        Annum           Date          Options
---------     ---------                           ------                ---------        -----           ----          -------
<S>           <C>                                 <C>                  <C>               <C>         <C>                <C> 
03/11/88      Miami Subs                          QSR, Inc.               743,625         39,000     03-31-2016          None
              US-1 Near PGA Blvd
              Palm Beach, FL
06/15/88      Denny's                             DenAmerica, Inc.      1,087,137(2)     115,200     08-20-2009           (3)
              8801 N 7th St
              Phoenix, AZ
06/15/88      Denny's (4)                         DenAmerica, Inc.        520,126(2)      93,000     01-30-1993           (3)
              2201 W Camelback
              Phoenix, AZ
07/15/88      Hooter's                            TWI X, Inc.           1,346,719         95,000     07-14-2008          None
              7669 Grapevine Hwy
              N Richland Hills, TX
08/01/88      Hardee's                            Hardee's Food         1,091,190(2)      64,000     10-31-2001           (3)
              106 N Chicago Ave                   Systems, Inc.
              S Milwaukee, WI
08/15/88      Denny's                             First Foods, Inc.     1,155,965(2)      65,000     10-31-2007           (3)
              2360 W Northern Ave
              Phoenix, AZ
09/09/88      Red Apple Restaurant                                        660,156
              555 33rd Ave
              Cedar Rapids, IA
10/10/88      Kentucky Fried Chicken (5)          KFC National            451,230         60,000     06-30-2018          None
              1014 S St Francis Dr                Management Co.
              Santa Fe, NM
12/22/88      Wendy's                             WenSouth                596,781         76,920     12-31-2008          None
              1721 Sam Rittenburg Blvd            Orlando, Ltd.
              Charleston, SC

</TABLE>

                                       4
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                                         Lease
Acquisi-      Property Name                                             Purchase         Rental Per      Expiration      Renewal
tion Date     & Address                           Lessee                Price (1)        Annum           Date            Options
---------     ---------                           ------                ---------        -----           ----            -------
<S>           <C>                                 <C>                  <C>               <C>         <C>                <C> 

12/22/88      Wendy's                             WenSouth                 649,594         86,160     12-31-2008          None
              3013 Peach Orchard Rd               Orlando, Ltd.                         
              Augusta, GA                                                               
12/29/88      Popeye's                            Stillman Mgmt.           580,938         77,280     12-31-2009          None
              2562 Western Ave                    Co., Inc.                             
              Park Forest, IL                                                           
02/21/89      Wendy's                             WenSouth                 776,344         96,780     01-31-2009          None
              1901 Whiskey Rd                     Orlando, Ltd.                         
              Aiken, SC                                                                 
02/21/89      Wendy's                             WenSouth                 728,813         96,780     01-31-2009          None
              1730 Walton Way                     Orlando, Ltd.                         
              Augusta, GA                                                               
02/21/89      Wendy's                             WenSouth                 528,125         70,200     01-31-2009          None
              347 Folly Rd                        Orlando, Ltd.                         
              Charleston, SC                                                            
02/21/89      Wendy's                             WenSouth                 580,938         77,280     01-31-2009          None
              361 Hwy 17 Bypass                   Orlando, Ltd.                         
              Mount Pleasant, SC                                                        
03/14/89      Wendy's                             WenSouth                 633,750         90,480     01-31-2009          None
              1004 Richland Ave                   Orlando, Ltd.                         
              Aiken, SC                                                              
04/20/89      Hostetlers, BBQ                     Hickory Park, Inc.       897,813(2)      55,584     12-31-2002           (3)
              4875 Merle Hay
              Des Moines, IA
04/28/89      Hardee's                            Hardee's Food            686,563         64,000     04-30-2009          None
              1570 E Sumner St                    Systems, Inc.
              Hartford, WI
10/18/89      Hardee's                            Hardee's Food          1,421,983(2)      76,000     04-30-2009          None
              4000 S 27th St                      Systems, Inc.
              Milwaukee, WI
12/28/89      Village Inn                         Columbia VI,             845,000(2)      84,000     11-30-2009          None
              2451 Columbia Rd                     L.L.C.
              Grand Forks, ND
12/29/89      Wendy's                             WenSouth                 660,156         87,780     12-31-2009          None
              1717 Martintown Rd                  Orlando, Ltd.
              N Augusta, SC
12/29/89      Wendy's                             WenSouth                 580,938         77,280     12-31-2009          None
              1515 Savannah Hwy                   Orlando, Ltd.
              Charleston, SC
12/29/89      Wendy's                             WenSouth                 633,750         84,120     12-31-2009          None
              3869 Washington Rd                  Orlando, Ltd.
              Martinez, GA
01/01/90      Sunrise Preschool                   Sunrise                1,182,735(2)     127,920     05-31-2009          None
              4111 E Ray Rd                       Preschools, Inc.
              Phoenix, AZ
01/05/90      Hardee's                            Hardee's Food          1,140,236(2)      88,000     11-30-2009          None
              20 N Pioneer Rd                     Systems, Inc.
              Fond du lac, WI

</TABLE>

                                       5
<PAGE>
 
<TABLE>
<CAPTION>


                                                                                                             Lease
Acquisi-      Property Name                                             Purchase           Rental Per      Expiration     Renewal
tion Date     & Address                           Lessee                Price (1)            Annum           Date         Options
---------     ---------                           ------                ---------            -----           ----         -------
<S>          <C>                                  <C>                    <C>              <C>           <C>               <C>  
01/31/90      Blockbuster Video                   Blockbuster               646,425         100,554     01-31-2001           (3)
              336 E 12th St                       Videos, Inc.                           
              Ogden, UT                                                                  
03/21/90      Denny's                             DenAmerica, Inc.        1,179,501(2)       83,200     04-30-2012           (3)
              688 N Blue Lakes Blvd
              Twin Falls, ID
05/02/90      Denny's (4)                                                   514,259(2)
              3752 E Ind School
              Phoenix, AZ
05/31/90      Applebee's                          Thomas & King,                                        10-31-2009          None
              2770 Brice Rd                       Inc.                    1,434,434(2)      135,780
              Columbus, OH
                                                                        $23,955,224      $2,267,298
                                                                        ===========      ==========
</TABLE>

Footnotes:

(1)   Purchase price includes all costs incurred to acquire the property.
(2)   Purchase price includes cost of specialty leasehold improvements.
(3)   Renewal option available.
(4)   Ownership of lessee's interest under a ground lease. The Partnership is
      responsible for payment of all rent obligations under the ground lease.
(5)   Ownership  of lessee's  interest  under a ground  lease.  The tenant is
      responsible for payment of all rent obligations under the ground lease.

In connection  with the proposed  liquidation  of the  Partnership  during 1998,
Management received appraisals on each of the Properties.  Six of the Properties
were  written  down to  their  estimated  net  realizable  values,  based on the
appraisal amounts received. The write-downs approximated $685,000.

During the  Fourth  Quarter of 1998,  the  tenant of the  Cash-A-Check  store in
Hallandale,  Florida,  exercised  their  option to  purchase  the  property  for
$325,000.

The two Florida Denny's properties were sold to the tenant, Cypress Restaurants,
Inc.,  during  January  1998 for a total of  $2,200,000,  resulting in a gain of
$556,000.  Environmental contamination from an adjacent property was detected on
the Daytona  Beach  property.  Therefore,  the  Partnership  accepted a note for
$550,000  of the sale  price to be paid in full in six  months,  when  permanent
financing could be arranged once the  environmental  issues were addressed.  The
note was repaid in full during the Third Quarter of 1998. The Partnership is not
liable for the environmental contamination.

The  tenant of the Red Apple  Restaurant  in Cedar  Rapids,  Iowa,  vacated  the
property  during 1998 and ceased paying rent. The  uncollected  rent was written
off, because the tenant could not be located.  Management is currently marketing
the property for lease to a new tenant.

The tenant of the Hostetler's Barbeque in Des Moines, Iowa, vacated the property
during 1998 and has leased the property to a sub-tenant. The tenant continues to
make rental payments as required under the lease.

DenAmerica, Inc., the tenant of the Denny's restaurant in Twin Falls, Idaho, has
vacated the property,  but is continuing to make rental  payments.  During 1997,
the deferred  rental income and remaining  equipment lease balances were written
off, due to uncertainty regarding their collectibility. However, the amounts due
during  1998  have  been  collected.  DenAmerica  re-leased  the  property  to a
sub-tenant during

                                       6
<PAGE>
 
the Fourth Quarter of 1998. DenAmerica remains liable to the Partnership for all
amounts due under the lease.

DenAmerica did not renew its lease on the Denny's property in Phoenix,  Arizona,
when it expired on May 31, 1998.  Management is currently marketing the property
for lease to a new tenant.

Item 3.  Legal Proceedings

None.

Item 4.  Submission of Matters to a Vote of Security Holders

None.


                                     PART II

Item 5.  Market  Price and  Dividends  on the  Registrant's  Common  Equity  and
         Related Stockholder Matters

(a)      Although  some  Interests  have been traded,  there is no active public
         market  for the  Interests,  and it is not  anticipated  that an active
         public market for the Interests will develop.

(b)      As of December 31, 1998 there were 2,608 record holders of Interests in
         the Partnership.

(c)      The  Partnership  does  not pay  dividends.  However,  the  Partnership
         Agreement,   provides  for  distributable  net  cash  receipts  of  the
         Partnership to be distributed on a quarterly  basis, 99% to the Limited
         Partners and 1% to the General  Partner,  subject to the limitations on
         distributions  to the  General  Partner  described  in the  Partnership
         Agreement.   During   1998  and  1997,   $4,585,000   and   $4,600,000,
         respectively,   were  distributed  in  the  aggregate  to  the  Limited
         Partners.  The General  Partner  received  aggregate  distributions  of
         $8,838 and $8,736 in 1998 and 1997, respectively.



                                       7
<PAGE>
 
Item 6. Selected Financial Data

             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
                        (a Wisconsin limited partnership)

                  December 31, 1998, 1997, 1996, 1995, and 1994
                  (not covered by Independent Auditor's Report)

<TABLE>
<CAPTION>

                                     1998               1997               1996               1995             1994
----------------------------- ------------------  -----------------  -----------------  ---------------- -----------------
<S>                                   <C>                <C>                <C>               <C>               <C>       
Total Revenue                         $3,622,550         $3,448,300         $5,316,853        $3,932,498        $4,190,932
----------------------------- ------------------  -----------------  -----------------  ---------------- -----------------
Net Income                             1,524,131          2,183,977          3,277,512         1,782,105         2,158,283
----------------------------- ------------------  -----------------  -----------------  ---------------- -----------------
Net Income per
Limited Partner
Interest                                   32.60              46.72              70.11             38.12             46.17
----------------------------- ------------------  -----------------  -----------------  ---------------- -----------------
Total Assets                          17,693,852         20,894,198         23,379,356        27,134,604        29,455,349
----------------------------- ------------------  -----------------  -----------------  ---------------- -----------------
Total Partners' Capital               17,409,414         20,479,121         22,903,880        26,464,478        28,117,453
----------------------------- ------------------  -----------------  -----------------  ---------------- -----------------
Cash Distributions per
Limited Partnership
Interest                                   99.07              99.39             147.47             74.11             68.68
----------------------------- ------------------  -----------------  -----------------  ---------------- -----------------
</TABLE>


The  above  selected  financial  data  should  be read in  conjunction  with the
financial  statements and the related notes  appearing  elsewhere in this annual
report.

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

Liquidity and Capital Resources:

Investment Properties and Net Investment in Direct Financing Leases

The  Properties,  including  equipment  held by the  Partnership at December 31,
1998,  were originally  purchased at a price,  including  acquisition  costs, of
approximately $23,955,000.

The  tenant of the Red Apple  Restaurant  in Cedar  Rapids,  Iowa,  vacated  the
property during 1998 and ceased paying rent.  Management is currently  marketing
the property for lease to a new tenant.

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 were resolved.  The sale of the  properties  took place in
January  1998,  and resulted in a gain of $556,000.  The note was repaid in full
during the Third Quarter of 1998.

During the  Fourth  Quarter of 1998,  the  tenant of the  Cash-A-Check  store in
Hallandale,  Florida,  exercised  their  option to  purchase  the  property  for
$325,000.

                                       8
<PAGE>
 
DenAmerica,  Inc.,  the tenant of the Denny's  restaurant in Twin Falls,  Idaho,
vacated the property,  but is continuing to make rental  payments.  During 1997,
the deferred  rental income and remaining  equipment lease balances were written
off, due to uncertainty regarding their collectibility. However, all amounts due
under the lease have been paid to date. DenAmerica sublet the property to Fiesta
Time during  1998,  but remains  liable to the  Partnership  for all amounts due
under the lease.

One of the Denny's properties in Phoenix, Arizona is currently vacant. The lease
expired on May 31, 1998,  and the tenant did not renew.  Management  is pursuing
other possible tenants for the property.

The tenant of the Hostetler's  Barbeque in Des Moines, Iowa vacated the property
during 1998 and has leased the property to a sub-tenant. The tenant continues to
make rental payments as required under the lease.

Other Assets

Cash and cash equivalents,  including cash restricted for real estate taxes held
by the Partnership,  was approximately $1,260,000 at December 31, 1998, compared
to $1,450,000 at December 31, 1997. The Partnership  designated cash of $825,000
to fund the  Fourth  Quarter  1998  distributions  to Limited  Partners  paid in
February 1999, $182,000 for the payment of year-end 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  Properties  and sales of Properties  will provide the sources for
future fund liquidity and Limited Partner distributions.

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

Liabilities

Accounts  payable and accrued  expenses at December 31,  1998,  in the amount of
$45,000, primarily represented the year-end accruals of legal and auditing fees.

Due to the Current  General  Partner  amounted to $3,000 at December  31,  1998,
representing the General Partner's portion of the Fourth Quarter distribution.

Real estate taxes payable increased from $58,000 at December 31, 1997 to $73,000
at December  31,  1998,  primarily  due to the accrual of real estate  taxes for
properties which became vacant during the year.

Partners' Capital

Net  income for the year was  allocated  between  the  General  Partner  and the
Limited  Partners,  1% and 99%,  respectively,  as provided  in the  Partnership
Agreement as discussed more fully in Note 4 of the financial statements included
in Item 8 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  financial  statements  included  in  Item 8 of  this  report  for
additional information regarding the reallocation.

Cash  distributions  paid to the Limited  Partners  and to the  General  Partner
during 1998 of $4,585,000 and $8,838, respectively, have also been in accordance
with the Partnership Agreement. The Fourth Quarter 1998 distribution of $825,000
was paid to the Limited Partners on February 15, 1999.


                                       9
<PAGE>
 
Results of Operations:

The Partnership reported net income for the year ended December 31, 1998, in the
amount of  $1,524,000  compared to net income for the years ended  December  31,
1997 and 1996, of $2,184,000 and $3,278,000, respectively. Results for all three
years were different than would be expected from "normal" operations,  primarily
because of costs  associated with the  misappropriation  of assets by the former
general partners and their  affiliates,  tenant defaults,  non-cash  write-offs,
property  write-downs,  real estate  taxes on vacant  properties,  and  property
valuation costs.  Results were also impacted by gains on the sales of properties
and  the  reversal  of a  portion  of  the  former  general  partner  receivable
write-off.   The   costs   associated   with  the   misappropriation   decreased
significantly during 1997 and 1998 as the recovery efforts have wound down.

Revenues

Total revenues were $3,623,000,  $3,448,000, and $5,317,000, for the years ended
December  31,  1998,  1997,  and 1996,  respectively.  A decrease in fixed rents
resulted  from  tenant  turnover,  property  sales,  and  modified  leases.  The
unusually  high  revenues in 1996 were  primarily a result of a $930,000 gain on
the sale of two Applebee's  restaurants,  and an $864,000 recovery for a portion
of the former general partner  receivable  which had previously been written-off
due to  recoveries  received in excess of original  estimates.  During  1997,  a
$106,000 gain was  recognized on the sales of four  Hardee's  restaurants  and a
$245,000  recovery was  recorded.  During 1998,  gains  totaling  $639,000  were
recorded  on the sales of two  Denny's  restaurants  and a  Cash-A-Check  store.
Recoveries of receivables which had been previously  written off totaled $41,000
during 1998.

Total revenues should approximate  $2,700,000 annually based on leases currently
in place.  Future  revenues may decrease  with tenant  defaults  and/or sales of
Properties.  They may also increase with additional  rents due from tenants,  if
those  tenants  experience  sales levels which require the payment of additional
rent to the Partnership.

Expenses

For the years ended December 31, 1998, 1997, and 1996, cash expenses amounted to
approximately  24%,  19%,  and  25%,  of  total  revenues,  respectively.  Total
expenses,  including non-cash items, amounted to approximately 58%, 37% and 38%,
of total  revenues  for the years  ended  December  31,  1998,  1997,  and 1996,
respectively.  Items negatively  impacting  expenses during the last three years
include  expenses  incurred  primarily  in relation to the  misappropriation  of
assets by the former general partners and their affiliates, non-cash write-offs,
property  write-downs,  real estate  taxes and  equipment  losses.  In addition,
during 1998, the Partnership  incurred legal fees,  appraisal fees, and fees for
land title surveys and environmental inspections in connection with the proposed
liquidation of the Partnership.

Charge-offs of uncollectible  rent, losses on equipment  leases,  write-downs of
property  to  their   estimated  net  realizable   values,   depreciation,   and
amortization are non-cash items and do not affect current operating cash flow of
the Partnership or distributions to the Limited Partners.

Write-offs  for  uncollectible  rents  and  receivables  amounted  to  $123,000,
$67,000,  and $0 at  December  31,  1998,  1997,  and  1996,  respectively.  The
write-offs  are the  result of  defaults  as well as  modifications  to  several
property  leases  since  inception  of the  Partnership.  The 1997  write-off is
primarily a result of an allowance  recorded for deferred rent on the Denny's in
Twin Falls, Idaho. The tenant of the property, DenAmerica, Inc., has vacated the
property  and  future  collectibility  was  uncertain.  However,  the tenant has
continued to make all required  rent  payments.  The 1998  write-off  related to
certain unpaid rent and notes receivable from DenAmerica.


                                      10
<PAGE>
 
During  1998,  six  properties  were  written  down to  their  appraised  value,
resulting in a non-cash charge of $685,000. During 1996, two Hardee's properties
were written down to their  estimated  net  realizable  values based on purchase
option prices granted to the tenant of the properties.

During 1997,  remaining  equipment  lease payments of $61,000 on the Twin Falls,
Idaho,  lease were  written  off. The tenant had vacated the property and future
collectibility was uncertain. However, the tenant continued to make the required
payments  during 1998,  which were recorded as recoveries of amounts  previously
written-off.  Equipment  lease  terminations  created losses during 1996, in the
amount of $95,000.  The equipment  leases were terminated by the tenant of eight
(8) Hardee's restaurants which had been experiencing sales difficulties.

Disposition fees were incurred during 1996 as a result of the sale of two of the
Partnership's Applebee's properties.  Fees incurred during 1997 were a result of
the sales of four Hardee's  properties.  Fees incurred during 1998 were a result
of the sales of two  Denny's  properties  and the  Cash-A-Check  property to the
tenants.

Inflation:

Inflation has a minimal effect on operating earnings and related cash flows from
a portfolio  of triple net leases.  By their  nature,  such leases  actually fix
revenues and are not impacted by rising costs of maintenance, insurance, or real
estate taxes.  Although the majority of the Partnership's leases have percentage
rent clauses,  revenues from  percentage  rents  represented  only 13% of rental
income for 1998.  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 and any cots to
make the software Year 2000 compliant  will be borne by the third  parties.  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. The
Partnership  does plan to evaluate the efforts of its tenants to prepare for the
Year 2000.

Item 7A.  Quantitative and Qualitative Disclosure About Market Risk

None.

                                      11
<PAGE>
 
Item 8. Financial Statements and Supplementary Data


             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                        (a Wisconsin limited partnership)

                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

                                                                        Page

Report of Independent Public Accountants ..........................    13
                                                                   
Balance Sheets, December 31, 1998 and 1997 ........................    14 - 15
                                                                   
Statements of Income for the Years                                 
Ended December 31, 1998, 1997, and 1996 ...........................    16
                                              
Statements of Partners' Capital for the
Years Ended December 31, 1998, 1997, and 1996......................    17

Statements of Cash Flows for the Years
Ended December 31, 1998, 1997, and 1996 ...........................    18 - 19
                                                                   
Notes to Financial Statements .....................................    20 - 28
                                                                   
Schedule III--Real Estate and Accumulated                          
Depreciation ......................................................    34 - 35
                                             


                                      12
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS





To the Partners of
Divall Insured Income Properties 2 Limited Partnership:

We have  audited  the  accompanying  balance  sheets  of Divall  Insured  Income
Properties 2 Limited Partnership(the  Partnership),  as of December 31, 1998 and
1997, and the related statements of income, partners' capital and cash flows for
each of the three years in the period ended December 31, 1998.  These  financial
statements  are  the  responsibility  of  the  Partnership's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,   the  financial  position  of  Divall  Insured  Income
Properties  2 Limited  Partnership,  as of December  31, 1998 and 1997,  and the
results of its  operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.

Our audit was made for the purpose of forming an opinion on the basic  financial
statements  taken as a whole.  The  schedule  listed in the  index of  financial
statements  is  presented  for  purposes of complying  with the  Securities  and
Exchange  Commission's rules and is not part of the basic financial  statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic  financial  statements  and, in our opinion,  fairly  states in all
material  respects  the  financial  data  required  to be set forth  therein  in
relation to the basic financial statements taken as a whole.





Chicago, Illinois
February 18, 1999





                                      
<PAGE>
 
            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP


                                BALANCE SHEETS

                          December 31, 1998 and 1997

                                    ASSETS

<TABLE>
<CAPTION>



                                                                         December 31,      December 31,
                                                                             1998             1997
INVESTMENT PROPERTIES AND EQUIPMENT:(Note 3)

<S>                                                                      <C>              <C>         
         Land                                                            $  7,406,721     $  8,330,982
         Buildings                                                         12,736,444       14,930,273
         Equipment                                                            707,378          707,378
         Accumulated depreciation                                          (5,356,448)      (5,472,407)
                                                                         ------------     ------------

                  Net investment properties and equipment                  15,494,095       18,496,226
                                                                         ------------     ------------

OTHER ASSETS:

         Cash and cash equivalents                                          1,256,165        1,438,534
         Cash restricted for real estate taxes                                  4,404           11,251
         Cash held in Indemnification Trust (Note 8)                          321,207          304,753
         Rents and other receivables (Net of allowance of $41,475
                in 1998)                                                      369,715          285,163
         Deferred rent receivable                                             134,899          182,770
         Prepaid insurance                                                     19,892           19,341
            Deferred charges                                                   91,158           86,434
         Unsecured notes receivable from lessees (Net of allowance of
                 $136,863 in 1998 and $136,335 in 1997)                         2,317           69,726
                                                                         ------------     ------------

                  Total other assets                                        2,199,757        2,397,972
                                                                         ------------     ------------

                  Total assets                                           $ 17,693,852     $ 20,894,198
                                                                                          ===========              ===========

</TABLE>


       The accompanying notes are an integral part of these statements.

                                      14
<PAGE>
 
            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                                BALANCE SHEETS

                          December 31, 1998 and 1997

                       LIABILITIES AND PARTNERS' CAPITAL

<TABLE>
<CAPTION>



                                                                              December 31,     December 31,
                                                                                  1998             1997
LIABILITIES:
<S>                                                                           <C>              <C>         
         Accounts payable and accrued expenses                                $     45,050     $     69,837
         Due to current General Partner                                              2,723            2,510
         Security deposits                                                         102,017          153,112
         Unearned rental income                                                     61,179          131,263
         Real estate taxes payable                                                  73,469           58,355
                                                                              ------------     ------------

                              Total liabilities                                    284,438          415,077
                                                                              ------------     ------------

CONTINGENT LIABILITIES: (Note 7)

PARTNERS' CAPITAL: (Notes 1, 4 and 9)
         Current General Partner -
                  Cumulative net income                                            117,145          101,904
                  Cumulative cash distributions                                    (48,929)         (40,091)
                                                                              ------------     ------------
                                                                                    68,216           61,813
                                                                              ------------     ------------
         Limited Partners (46,280.3 interests outstanding)
                  Capital contributions, net of offering costs                  39,358,468       39,358,468
                  Cumulative net income                                         17,963,227       16,454,337
                  Cumulative cash distributions                                (39,140,268)     (34,555,268)
                  Reallocation of former general partners' deficit capital        (840,229)        (840,229)
                                                                              ------------     ------------

                                                                                17,341,198       20,417,308
                                                                              ------------     ------------

                           Total partners' capital                              17,409,414       20,479,121
                                                                              ------------     ------------

                           Total liabilities and partners' capital            $ 17,693,852     $ 20,894,198
                                                                              ============     ============

</TABLE>




       The accompanying notes are an integral part of these statements.

                                      15
<PAGE>
 
             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                              STATEMENTS OF INCOME

              For the Years Ended December 31, 1998, 1997, and 1996

<TABLE>
<CAPTION>


                                                                        1998           1997           1996
                                                                     -----------    -----------    -----------
REVENUES:
<S>                                                                  <C>            <C>            <C>        
        Rental income (Note 5)                                       $ 2,764,028    $ 2,951,174    $ 3,262,082
        Interest income on direct financing leases                             0         10,384         57,028
        Other interest income                                            123,478         73,223         98,393
        Net other income                                                  55,142         63,349        105,710
        Recovery of amount previously written off (Note 2)                41,015        244,561        863,643
        Net gain on disposal of assets                                   638,887        105,609        929,997
                                                                     -----------    -----------    -----------
                                                                       3,622,550      3,448,300      5,316,853
                                                                     -----------    -----------    -----------
EXPENSES:
        Partnership management fees (Note 6)                             180,450        167,350        202,587
        Disposition fees (Note 6)                                         75,750         52,166         66,750
        Disposition fees - Restoration (Note 6)                                0              0         20,550
        Restoration fees (Note 6)                                              0          9,782         33,408
        Appraisal fees                                                    58,575          6,410          2,268
        Environmental inspections                                         48,250              0              0
        Land title surveys                                                66,150              0              0
        Insurance                                                         23,319         26,130         36,594
        General and administrative                                       108,569        107,992        125,634
        Advisory Board fees and expenses                                  15,766         14,018         16,703
        Interest                                                               0              0          3,551
        Real estate taxes                                                  9,323         12,172           (880)
        Ground lease payments (Note 3)                                   126,541        125,209        123,921
        Expenses incurred due to default by lessee                         3,403          8,398          7,220
        Professional services                                            150,639         99,481        141,073
        Professional services related to Investigation                     1,279         32,618        526,210
        Loss on equipment lease                                                0         61,404         95,246
        Depreciation                                                     412,950        464,596        511,650
        Amortization                                                       9,252          9,186            804
        Provision for uncollectible rents and other receivables          122,860         67,411              0
        Write down of properties to net realizable value (Note 3)        685,343              0        126,052
                                                                     -----------    -----------    -----------
                                                                       2,098,419      1,264,323      2,039,341
                                                                     -----------    -----------    -----------

NET INCOME                                                           $ 1,524,131    $ 2,183,977    $ 3,277,512
                                                                     ===========    ===========    ===========

NET INCOME - CURRENT GENERAL PARTNER                                      15,241         21,840         32,775

NET INCOME  - LIMITED PARTNERS                                         1,508,890      2,162,137      3,244,737
                                                                     -----------    -----------    -----------
                                                                     $ 1,524,131    $ 2,183,977    $ 3,277,512
                                                                     -----------    ===========    ===========
NET INCOME PER LIMITED PARTNERSHIP
  INTEREST, based on 46,280.3 Interests outstanding                  $     32.60    $     46.72    $     70.11
                                                                     ===========    ===========    ===========

</TABLE>



       The accompanying notes are an integral part of these statements.

                                      16
<PAGE>
 
             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                         STATEMENTS OF PARTNERS' CAPITAL

              For the years ended December 31, 1998, 1997 and 1996


<TABLE>
<CAPTION>
                                   Current General Partner                                Limited Partners
                             ----------------------------------  ------------------------------------------------------------------
                                                                   Capital
                             Cumulative  Cumulative              Contributions,              Cumulative
                                 Net       Cash                     Net of       Cumulative     Cash
                               Income  Distributions     Total   Offering Costs  Net Income  Distribution  Reallocation    Total
                               ------  -------------   --------  --------------  ----------  ------------  ------------ -----------
<S>                           <C>        <C>           <C>        <C>           <C>          <C>            <C>         <C>
BALANCE AT DECEMBER 31, 1995  $ 47,289   $(18,245)     $ 29,044   $39,358,468   $11,047,463  $(23,130,268)  $(840,229)  $26,435,434

Cash Distributions
  ($147.47 per limited
    partnership interest)                 (13,110)      (13,110)                               (6,825,000)               (6,825,000)
Net Income                      32,775                   32,775                   3,244,737                               3,244,737
                              --------   --------      --------   -----------   -----------  ------------   ---------   -----------
BALANCE AT DECEMBER 31, 1996  $ 80,064   $(31,355)     $ 48,709   $39,358,468   $14,292,200  $(29,955,268)  $(840,229)  $22,855,171

Cash Distributions
  ($99.39 per limited
    partnership interest)                  (8,736)       (8,736)                               (4,600,000)               (4,600,000)
Net Income                      21,840                   21,840                   2,162,137                               2,162,137
                              --------   --------      --------   -----------   -----------  ------------   ---------   -----------
BALANCE AT DECEMBER 31, 1997  $101,904   $(40,091)     $ 61,813   $39,358,468   $16,454,337  $(34,555,268)  $(840,229)  $20,417,308

Cash Distributions
  ($99.07 per limited
    partnership interest)                  (8,838)       (8,838)                               (4,585,000)               (4,585,000)
Net Income                      15,241                   15,241                   1,508,890                               1,508,890
                              --------   --------      --------   -----------   -----------  ------------   ---------   -----------
BALANCE AT DECEMBER 31, 1998  $117,145   $(48,929)     $ 68,216   $39,358,468   $17,963,227  $(39,140,268)  $(840,229)  $17,341,198
                              ========   ========      ========   ===========   ===========  ============   =========   ===========
</TABLE>

The accompanying notes are an integral part of these statements.

                                      17
<PAGE>
 
             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
                            STATEMENTS OF CASH FLOWS

              For the Years Ended December 31, 1998, 1997, and 1996

<TABLE>
<CAPTION>

                                                                                 1998              1997              1996
                                                                             -----------       -----------       -----------
<S>                                                                          <C>               <C>               <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
       Net income                                                            $ 1,524,131       $ 2,183,977       $ 3,277,512
       Adjustments to reconcile net income to net
            cash provided by operating activities -
                Depreciation and amortization                                    422,202           473,782           512,454
                Recovery of amount previously written off                        (41,015)         (244,561)         (863,643)
                Provision for uncollectible rents and other receivables          122,860            67,411                 0
                Property write downs to net realizable value                     685,343                 0           126,052
                Net (gain) on disposal of assets                                (638,887)         (105,609)         (929,997)
                Loss on equipment leases                                               0            61,404            95,246
                Interest applied to Indemnification Trust account                (16,454)          (15,116)          (14,406)
                (Increase) Decrease in rents and other receivables              (207,412)          (67,112)          203,837
                (Deposits) Withdrawals for payment of real estate taxes            6,847            99,374           (49,408)
                (Increase) Decrease in prepaids                                     (551)            2,921            (2,631)
                (Increase) Decrease in deferred rent receivable                   47,871             9,145            37,156
                Increase (Decrease) in due to current General Partner                213           (84,217)           32,611
                Increase (Decrease) in accounts payable and other                (24,787)            2,248          (199,126)
                Increase (Decrease) in security deposits                         (51,095)            8,822           (38,355)
                Increase (Decrease) in real estate taxes payable                  15,114           (60,776)           62,113
                Increase (Decrease) in unearned rental income                    (70,084)           73,524            39,674
                                                                             -----------       -----------       -----------

                         Net cash from operating activities                    1,774,296         2,405,217         2,289,089
                                                                             -----------       -----------       -----------

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
       Principal payments received on direct financing leases                     41,015            47,422           229,294
       Proceeds from sale of investment properties                             2,542,725         1,931,182         2,990,000
       Investment in leasing commissions                                         (13,976)          (42,000)                0
       Recoveries from former G.P. affiliates                                          0           244,561         1,785,744
       Payments from affiliated partnerships                                           0                 0            96,088
       Issuance of unsecured notes                                                     0                 0           (36,288)
       Principal receipts from unsecured notes                                    67,409            16,562                 0
                                                                             -----------       -----------       -----------

                         Net cash from investing activities                    2,637,173         2,197,727         5,064,838
                                                                             -----------       -----------       -----------

CASH FLOWS USED IN FINANCING ACTIVITIES:
       Cash distributions to Limited Partners                                 (4,585,000)       (4,600,000)       (6,825,000)
       Cash distributions to current General Partner                              (8,838)           (8,736)          (13,110)
       Payments on equipment notes                                                     0                 0           (77,255)
                                                                             -----------       -----------       -----------

                         Net cash (used in) financing activities              (4,593,838)       (4,608,736)       (6,915,365)
                                                                             -----------       -----------       -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                            (182,369)           (5,792)          438,562

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                 1,438,534         1,444,326         1,005,764
                                                                             -----------       -----------       -----------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                     $ 1,256,165       $ 1,438,534       $ 1,444,326
                                                                             ===========       ===========       ===========

SUPPLEMENTAL DISCLOSURE--cash paid for interest                              $         0       $         0       $     3,551
                                                                             ===========       ===========       ===========


The accompanying notes are an integral part of these statements.

</TABLE>

                                      18
<PAGE>
 
            Supplemental Information to the Statements of Cash Flows

The following  significant noncash transactions  occurred during the three years
affecting the Partnership's financial statements:


         1.   During 1996, the  Partnership  was deeded land with a value of
              $88,424 in exchange for a note receivable from a tenant.
             
         2.   During 1996, equipment was transferred to the Partnership with
              an estimated  value of $37,600 in exchange for delinquent rent
              from a tenant.
             
         3.   During 1996,  security  deposits totaling $67,932 were applied
              as equipment lease payments for a tenant.
             
         4.   During 1996,  the  Partnership  incurred  leasing  commissions
              totaling $53,520 which were unpaid at year-end. The amount was
              paid in full during 1997.





       The accompanying notes are an integral part of these statements.


                                      19
<PAGE>
 
             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996


1.       ORGANIZATION AND BASIS OF ACCOUNTING:

DiVall Insured Income Properties 2 Limited  Partnership (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 December 31, 1998, the Partnership owned 29 properties with specialty
leasehold improvements in 12 of these properties.

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.
Percentage  rents are accrued  throughout the year based on the tenant's  actual
reported  year-to-date  sales along with  management's  estimate of the tenant's
sales for any remaining unreported periods during the year.

The Partnership considers its operations to be in only one segment and therefore
no segment disclosure is made.

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 represent  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.

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

                                      20
<PAGE>
 
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.

Certain  reclassifications have been made to the prior year financial statements
to make them consistent with the current year presentation.

During 1996, the Partnership adopted Statement of Financial Accounting Standards
No.121 ("SFAS 121"),  Accounting for the Impairment of Long-Lived Assets and for
Long-Lived  Assets to be Disposed of, which requires that all long-lived  assets
be reviewed for impairment in value whenever changes in  circumstances  indicate
that the  carrying  amount of an asset may not be  recoverable.  The adoption of
SFAS 121 had no impact on the Partnership's financial statements.

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.  The General Partner  received the consent of
the Limited  Partners to  liquidate  the  Partnership's  assets and dissolve the
Partnership  during the Second Quarter of 1998.  However,  a buyer was not found
for the Partnership's  assets,  and no current  liquidation or dissolution plans
are  in  effect.   Management  plans  to  continue  normal  operations  for  the
Partnership for the foreseeable future.

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,  1998,  the tax basis of the  Partnership's  assets  exceeded  the
amounts  reported in the  accompanying  financial  statements  by  approximately
$8,400,000.


                                      21
<PAGE>
 
The  following  represents  a  reconciliation  of net  income  as  stated on the
Partnership statements of income to net income for tax reporting purposes:

<TABLE>
<CAPTION>


                                                      1998                1997                 1996
                                                      ----                ----                 ----
<S>                                                <C>                  <C>                <C>       
Net income, per statements of income               $1,524,131           $2,183,977         $3,277,512

Book to tax depreciation difference                  (32,592)             (36,811)           (35,161)
Book over tax gain from asset disposition           (506,943)            (227,315)           (98,501)
Straight line rent adjustment                          47,871               10,866             37,156
Bad debt reserve/expense                               41,475               53,666          (488,777)
Real estate tax expense                                     0                    0           (65,881)
Book valuation adjustment of real property            685,342                    0            126,052
Book valuation adjustment of equipment leases               0               65,690                  0
Other, net                                           (69,826)               73,865            215,779
                                                     --------               ------        -----------
   Net income for tax reporting
    purposes                                       $1,689,458           $2,123,938         $2,968,179
                                                   ==========           ==========         ==========
</TABLE>



2.       REGULATORY INVESTIGATION:

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

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

In 1993,  the current  General  Partner  estimated an  aggregate  recovery of $3
million for the Partnerships. At that time, an allowance was established against
amounts due from former  general  partners and their  affiliates  reflecting the
estimated $3 million  receivable.  This net receivable  was allocated  among the
Partnerships   based  on  each   Partnership's  pro  rata  share  of  the  total
misappropriation, and restoration costs and recoveries have been allocated based
on the same percentage. Through December 31, 1998, $5,766,000 of recoveries have
been received which exceeded the original  estimate of $3 million.  As a result,
in 1996 and 1997, the  Partnership  has recognized  $1,108,000 as income,  which
represents  its  share  of  the  excess  recovery.  There  were  no  restoration
activities or recoveries in 1998. The current General

                                      22
<PAGE>
 
Partner continues to pursue recoveries of the misappropriated funds, however, no
further significant recoveries are anticipated.

3.       INVESTMENT PROPERTIES:

As of December 31, 1998, the Partnership  owned 27 fully  constructed  fast-food
restaurants,  a video store, and a preschool. The properties are composed 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) former Red Apple Restaurant, one (1) Hooter's
restaurant,  one (1) Kentucky  Fried  Chicken  restaurant,  one (1)  Hostetler's
restaurant,  one (1) Miami Subs restaurant,  one (1) Village Inn restaurant, one
(1) Blockbuster  Video store, and one (1) Sunrise  Preschool.  The 29 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 December 31, 1998, three of the
Partnership's properties were unoccupied.

The tenant of the Hostetler's  Barbeque in Des Moines, Iowa vacated the property
during 1998 and has leased the property to a sub-tenant. The tenant continues to
make rental payments as required under the lease.

DenAmerica,  the tenant of the Denny's restaurant in Twin Falls, Idaho,  vacated
the property  during 1997,  but is  continuing to make rental  payments.  During
1997,  the deferred  rental income and remaining  equipment  lease balances were
written off due to uncertainty  regarding  their  collectibility.  However,  the
amounts due during 1998 have been collected.  DenAmerica  re-leased the property
to a sub-tenant during the Fourth Quarter of 1998.  DenAmerica remains liable to
the Partnership for all amounts due under the lease.

DenAmerica did not renew its lease on the Denny's  property in Phoenix,  Arizona
when it expired on May 30, 1998.  Management is currently marketing the property
for lease to a new tenant.

The  tenant of the Red Apple  Restaurant  in Cedar  Rapids,  Iowa,  vacated  the
property  during 1998 and ceased paying rent. The  uncollected  rent was written
off as  uncollectible,  because  the tenant  cannot be  located.  Management  is
currently marketing the property for lease to a new tenant.

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,  1993,  but  continues  to  operate  the  restaurant  and pay rent.
Management is currently negotiating a possible new lease or sale of the property
to the tenant.

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
the  close of the  offering,  approximately  75% of the  original  proceeds  was
invested in the Partnership's properties.


                                      23
<PAGE>
 
The current General Partner receives a fee for managing the Partnership equal to
4% of the gross  receipts,  with a maximum  reimbursement  for  office  rent and
related office overhead of $25,000 between the three  affiiliated  Partnerships.
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 Permanent  Manager
Agreement ("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 $126,000 and expire in the years 2003 and 2008.

Several  of  the  Partnership's   property  leases  contained   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  original  cost.  Apple  South,  Inc.  the tenant of two
Applebee's restaurants,  notified Management of its intent to exercise an option
in its lease to purchase  those  properties.  One sale  closed in January  1996,
resulting in an approximate  gain of $484,000.  The other sale took place during
September 1996 and resulted in an approximate gain of $446,000.

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 were  addressed.  The sale of the properties took place in
January 1998, resulting in a gain of $556,000. The Partnership is not liable for
the  environmental  contamination.  The note was repaid in full during the Third
Quarter of 1998.

During the  Fourth  Quarter of 1998,  the  tenant of the  Cash-A-Check  store in
Hallandale,  Florida  exercised  their  option  to  purchase  the  property  for
$325,000, resulting in a gain of approximately $83,000.

In connection  with the proposed  liquidation  of the  Partnership  during 1998,
Management received appraisals on each of the Properties.  Six of the Properties
were  written  down to  their  estimated  net  realizable  values,  based on the
appraisal amounts received. The write-downs approximated $685,000.

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,

                                      24
<PAGE>
 
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 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 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.)



                                      25
<PAGE>
 
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>
<CAPTION>
Year ending
December 31,
<S>                                                       <C>       
1999                                                      $2,196,032
2000                                                       2,211,950
2001                                                       2,112,947
2002                                                       2,056,080
2003                                                       2,014,549
Thereafter                                                12,229,389
                                                          ----------
                                                         $22,820,947
</TABLE>


Percentage  rentals  included  in  rental  income in 1998,  1997,  and 1996 were
$586,429,  $608,915,  and  $578,747,  respectively.  The decrease in  percentage
rental  income  is a  result  of the  sale  of  various  properties  subject  to
percentage rent.

Ten (10) of the  properties  are leased to Wensouth  Orlando,  a  franchisee  of
Wendy's  restaurants.  Wensouth base rents accounted for 35% of total base rents
for 1998.

6.       TRANSACTIONS WITH CURRENT GENERAL PARTNER:

Amounts incurred to the current General Partner for the years ended December 31,
1998, 1997, and 1996, are as follows:
<TABLE>
<CAPTION>



                                         Incurred               Incurred               Incurred
                                    for the year ended     for the year ended     for the year ended
Current General Partner             December 31, 1998       December 31, 1997      December 31, 1996
-----------------------             -----------------       -----------------      -----------------

<S>                                      <C>                    <C>                    <C>     
Management fees                          $180,450               $167,350               $202,587
Disposition fees                           75,750                 52,166                 66,750
Restoration fees                                0                  9,782                 33,408
Overhead allowance                         14,558                 14,367                 14,301
Leasing Commissions                        13,976                  6,000                 53,620
Reimbursement for out-of-pocket
expenses                                   28,906                 21,605                 21,781
Cash distribution                           8,838                  8,736                 13,110
                                            -----                  -----                -------
                                         $322,478               $280,006               $405,557
                                         ========               ========               ========
</TABLE>


                                      26
<PAGE>
 
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  Partnerships.  Fifty  percent  (50%) of the total
amount paid to the recovery was refunded to the current  General  Partner during
1996 after  exceeding 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 December 31, 1998, the  Partnership may
owe the current General Partner $16,296, which has been reflected as a recovery,
if the $6,000,000 recovery level is achieved. Management believes it is unlikely
that such a recovery level will be achieved.

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 December 31, 1998. Funds are invested in U.S. Treasury
securities. In addition,  $71,207 of earnings have been credited to the Trust as
of December 31, 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 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  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.


                                      27
<PAGE>
 
10.      SUBSEQUENT EVENTS:

On February 15, 1999, the Partnership made distributions to the Limited Partners
of $825,000 amounting to $17.83 per Interest.


                                      28
<PAGE>
 
Item 9.  Changes  in  and  Disagreements  With  Accountants  on  Accounting  and
         Financial Disclosure

None

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

TPG is an  Illinois  corporation  with its  principal  office  at 101 West  11th
Street, Suite 1110, Kansas City, Missouri 64105. TPG was elected General Partner
by vote of the Limited  Partners  effective on May 26, 1993. Prior to such date,
TPG had been managing the Partnership since February 8, 1993, under the terms of
the Permanent  Manager  Agreement  ("PMA"),  which  remains in effect.  TPG also
serves as the corporate  general partner for DiVall 3. See Items 1 and 13 hereof
for  additional  information  about the PMA and the  election  of TPG as General
Partner.

The  executive  officers  and  director of the  General  Partner who control the
affairs of the Partnership are as follows:

         Bruce A. Provo, Age 48 - President, Founder and Director.
         Mr. Provo has been involved in the  management of real estate and other
         asset  portfolios since 1979. Since he founded the company in 1985, Mr.
         Provo has been President of TPG. From 1982 to 1986, Mr. Provo served as
         President  and  Chief  Operating  Officer  of  the  North  Kansas  City
         Development Company ("NKCDC"),  North Kansas City, Missouri.  NKCDC was
         founded in 1903 and the assets of the  company  were sold in  December,
         1985  for   $102,500,000.   NKCDC  owned   commercial   and  industrial
         properties,  including an office park and a retail district, as well as
         apartment  complexes,   motels,   recreational  facilities,  fast  food
         restaurants,  and other properties.  NKCDC's holdings consisted of over
         100  separate  properties  and  constituted  approximately  20%  of the
         privately  held real  property in North Kansas  City,  Missouri (a four
         square mile  municipality).  Following the sale of the  company's  real
         estate, Mr. Provo served as the President,  Chief Executive Officer and
         Liquidating Trustee of NKCDC from 1986 to 1991.

         Mr. Provo graduated from Miami University,  Oxford, Ohio in 1972 with a
         B.S. in Accounting. He became a Certified Public Accountant in 1974 and
         was a manager in the banking and financial  services division of Arthur
         Andersen LLP prior to joining Rubloff Development  Corporation in 1979.
         From 1979 through  1985,  Mr. Provo served as Vice  President - Finance
         and then as President of Rubloff Development Corporation. Mr. Provo has
         previously  served on the Board of  Directors  of the  National  Realty
         committee,  a legislative  "watchdog"  organization  for the commercial
         real estate industry headquartered in Washington, DC.

         Kristin  J.   Atkinson,   Age  36  -  Vice   President  -  Finance  and
         Administration.  Ms.  Atkinson  joined TPG in September 1994 to provide
         management  expertise in the areas of financial controls and management
         accounting services for four limited partnerships managed by TPG. Prior
         to joining TPG, Ms. Atkinson was Manager of Financial

                                      29
<PAGE>
 
         Reporting for Farm & Home Savings Association (a $4 billion savings and
         loan  association)  for  nine  years  where  she  was  responsible  for
         supervision  of the  preparation  of internal  and  external  financial
         documentation, including regulatory filings for the savings association
         and its parent company.  Ms. Atkinson  graduated Magna Cum Laude with a
         B.S. in  Accounting  from  Missouri  Southern  State College in Joplin,
         Missouri  and worked as an  accountant  for James P. Arthur and Company
         for one year before joining Farm & Home Savings Association.

The Advisory  Board,  although  its members are not  "Directors"  or  "Executive
Officers" of the Partnership,  provides advisory  oversight to management of the
Partnership and consists of:

         Steven Carson - Self-Employed  Investment Advisor. Mr. Carson's primary
         client concentration  includes labor union, pension, and annuity funds.
         Mr. Carson worked for First Albany  Corporation  for 11 years. He began
         his  career as a retail  broker at E.F  Hutton & Company  and served as
         Vice President,  Shearson  American Express from 1980-1986.  Mr. Carson
         attended Northrup University in Los Angeles,  California. He has served
         as Board Member and President on various Civic Boards in Syracuse,  New
         York. Mr. Carson represents the broker-dealer community.

         Richard W. Otte - Editorial Writer. Mr. Otte is in his sixth year as an
         Editorial Board Member and editorial writer for The Volusion, a DeLand,
         Florida,  subsidiary of the News-Journal  Corporation in Daytona Beach,
         Florida.  Mr.  Otte  retired in 1988  after 34 years with the  Dispatch
         Printing  Co.,  serving his last eight years as Managing  Editor of the
         Columbus  Dispatch  and as a  member  of its  Operating  Committee.  He
         previously  was the executive  sports editor of the newspaper in Ohio's
         capital  city.  Mr.  Otte's 49 years in  professional  journalism  also
         include news reporting, editing and sports assignments with the Daytona
         Journal Herald and Springfield News- Sun. Mr. Otte is a Limited Partner
         representing DiVall 2.

         Albert  Gerritz - Retired,  Perinton  Volunteer  Ambulance  Corps.  Mr.
         Gerritz  has  held  various  offices  in  Finance  and  Administration,
         including  President.  Mr. Gerritz  retired in 1986 after 36 years with
         Eastman  Kodak Co. where he was  Supervisor  of  Engineering  Services,
         Research Labs. Mr. Gerritz was instrumental in identifying the need and
         pursuing the development of a unique research complex for Kodak,  which
         became  the  case  study  for his  consulting  activities  on  research
         facilities  nationwide.  Mr. Gerritz also worked for forty years in the
         Bushnell's  Basin Fire  Department and served five years as Chief.  Mr.
         Gerritz  has a life  membership  in  National  Society of  Professional
         Engineers. Mr. Gerritz is a Limited Partner representing DiVall 3.

Item 11.  Executive Compensation

The  Partnership  has not paid any  "executive  compensation"  to the  corporate
General  Partner or to the  directors and officers of the General  Partner.  The
General Partner's participation in the income of the Partnership is set forth in
the Partnership Agreement, which is filed as Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5
hereto.  The  current  General  Partner  received  management  fees and  expense
reimbursements during the year.

See Item 13, below, and Note 6 to the financial  statements in Item 8 hereof for
further discussion of payments by the Partnership to the General Partner and the
former general partners.


                                      30
<PAGE>
 
Item 12.  Security Ownership of Certain Beneficial Owners and Management

(a) As of December 31, 1998, no one person or group is known by the  Partnership
to  own  beneficially  more  than  5%  of  the  outstanding   Interests  of  the
Partnership.

(b) As of  December  31,  1998,  neither  the  General  Partner nor any of their
affiliates owned any Interests in the Partnership.

Item 13.  Certain Relationships and Related Transactions

The compensation to be paid to TPG is governed by the Partnership Agreement,  as
amended by vote of the Limited  Partners to reflect the terms of the PMA.  TPG's
compensation  includes  a  base  fee  equal  to 4% of  the  Partnership's  gross
collected receipts, subject to a minimum of $159,000 per year. For this purpose,
"gross  collected  receipts" means all cash revenues arising from operations and
reserves of the Partnerships,  including any proceeds  recovered with respect to
the  obligations  of the  former  general  partners.  The  portion  of such  fee
resulting  from  recoveries  from  former  general  partners  is  designated  as
restoration  fees.  TPG is also  entitled to  reimbursement  for office rent and
utilities not to exceed  $13,250 per year. TPG is entitled to  reimbursement  of
reasonable  direct  costs  and  expenses,  such as  travel,  lodging,  overnight
delivery  and  postage,  but has no right to be  reimbursed  for  administrative
expenses  such as  payroll,  payroll  taxes,  insurance,  retirement  and  other
benefits,  base phone and fax charges,  office  furniture and equipment,  copier
rent, and the like.  Between the  Partnerships,  TPG is entitled to an aggregate
minimum base  management fee of $300,000 per year and  reimbursement  for office
rent in the maximum  amount of $25,000 per year. The  Partnership  shall only be
responsible  for its  allocable  share of such  minimum and  maximum  amounts as
indicated   above   ($159,000   minimum  base  fee  and  $13,250   maximum  rent
reimbursement).  TPG is  entitled  to an annual  increase  in the  minimum  base
management fee and maximum  office  overhead  reimbursement  in an amount not to
exceed the  percentage  increase in the  Consumer  Price  Index  ("CPI") for the
immediately  preceding  calendar  year.  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  CPI   adjustments.
Additionally,  TPG is allowed up to  one-half  of the  Competitive  Real  Estate
Commission,  not to exceed 3% upon the  disposition of assets.  The payment of a
portion of such fees is  subordinated  to TPG's success at recovering  the funds
misappropriated by the former general partners.

The PMA has an  expiration  date of December  31,  2002,  but may be  terminated
earlier  (a) by a vote at any time by a  majority  in  interest  of the  Limited
Partners,  (b) upon the dissolution and winding up of the Partnership,  (c) upon
the entry of an order of a court finding that the Permanent  Manager has engaged
in fraud or other  like  misconduct  or has shown  itself to be  incompetent  in
carrying out its duties under the Partnership Agreement,  or (d) upon sixty (60)
days written  notice from the Permanent  Manager to the Limited  Partners of the
Partnership.  Upon termination of the PMA, other than by the voluntary action of
TPG, TPG shall be paid a  termination  fee of one month's Base Fee  allocable to
the  Partnership,  subject  to a minimum  of  $13,250.  In the event that TPG is
terminated by action of a substitute general partner, TPG shall also receive, as
part of this termination  fee, 4% of any proceeds  recovered with respect to the
obligations  of  the  former  general  partners,   whenever  such  proceeds  are
collected.

Under the PMA, TPG shall be indemnified by the Partnership, DiVall and Magnuson,
and their controlled  affiliates,  and shall be held harmless from all claims of
any  party to the  Partnership  Agreement  and from any third  party  including,
without  limitation,  the Limited Partners of the  Partnership,  for any and all
liabilities,  damages, costs and expenses, including reasonable attorneys' fees,
arising from or related to

                                      31
<PAGE>
 
claims  relating to or arising from the PMA or its status as Permanent  Manager.
The  indemnification  does not extend to claims  arising  from fraud or criminal
misconduct of TPG as established by court findings. To the extent possible,  the
Partnership is to provide TPG with  appropriate  errors and omissions,  officers
liability or similar insurance coverage, at no cost to TPG. In addition,  TPG is
granted the right to establish the Trust in an amount,  not to exceed  $250,000,
solely for the  purpose  of funding  such  indemnification  obligations.  Once a
determination has been made that no such claims can or will be made against TPG,
the balance of the Trust will become  unrestricted  cash of the Partnership.  At
December 31, 1998 the Partnership had fully funded the Trust.

The following  fees and  reimbursements  from the  Partnership  were incurred to
management in 1998:

<TABLE>
<CAPTION>
         The Provo Group, Inc.

<S>                                                                 <C>     
         Management Fees                                            $180,450
         Disposition Fees                                             75,750
         Leasing Commissions                                          13,976
         Office Overhead Allowance                                    14,558
         Direct Cost Reimbursements                                   28,906
                                                                   ---------
                                                           
         1998 Total                                                 $313,640
                                                                     =======
</TABLE>

                                        



                                     PART IV


Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)      1.   Financial Statements
            
              The following  financial  statements of DiVall  Insured Income
              Properties 2 Limited Partnership are included in Part II, Item
              8:
            
              Report of Independent Public Accountants
            
              Balance Sheets, December 31, 1998 and 1997
            
              Statements  of Income for the Years Ended  December  31, 1998,
              1997, and 1996
            
              Statements of Partners'  Capital for the Years Ended  December
              31, 1998, 1997, and 1996
            
              Statements  of Cash  Flows for the Years  Ended  December  31,
              1998, 1997, and 1996
            
              Notes to Financial Statements
            
         2.   Financial Statement Schedules


                                      32
<PAGE>
 
             Schedule III - Real Estate and Accumulated Depreciation

All other  schedules for which  provision is made in the  applicable  accounting
regulation of the Securities and Exchange  Commission are not required under the
related instruction or are inapplicable and, therefore, have been omitted.

3.   Listing of Exhibits

     3.1      Agreement of Limited Partnership dated as of November
              18,  1987,  amended  as of  November  25,  1987,  and
              February 20,  1988,  filed as Exhibit 3A to Amendment
              No. 1 to the Partnership's  Registration Statement on
              Form  S-11  as  filed  on  February  22,  1988,   and
              incorporated herein by reference.

     3.2      Amendments   to   Amended    Agreement   of   Limited
              Partnership  dated as of June 21,  1988,  included as
              part of Supplement dated August 15, 1988, filed under
              Rule 424(b)(3), incorporated herein by reference.

     3.3.     Amendment to Amended Agreement of Limited Partnership
              dated as of February 8, 1993, filed as Exhibit 3.3 to
              the  Partnership's  10-K for the year ended  December
              31, 1992, and incorporated herein by reference.

     3.4      Amendment to Amended Agreement of Limited Partnership
              dated as of May 26, 1993, filed as Exhibit 3.4 to the
              Partnership's  10-K for the year ended  December  31,
              1993, and incorporated herein by reference.

     3.5      Amendment to Amended Agreement of Limited Partnership
              dated as of June 30,  1994,  filed as Exhibit  3.5 to
              the  Partnership's  10-K for the year ended  December
              31, 1994 and incorporated herein by reference.

     10.0     Permanent  Manager  Agreement  filed as an exhibit to
              the  Current  Report  on Form 8-K dated  January  22,
              1993, incorporated herein by reference.

     99.0     Correspondence to the Limited Partners dated February
              15,   1999   regarding   the  Fourth   Quarter   1998
              distribution.

(b)      Reports on Form 8-K:

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



                                      33
<PAGE>
 
             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
             SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1998

<TABLE>
<CAPTION>



                                                                                                  Gross amount at which             

                                        Initial cost to Partnership                            carried at end of year (A)           

                                        -----------------------------                -----------------------------------------------

                                                                                                                                    

                                                                          Costs                                                     

                                                          Building     capitalized                                                  

                                                            and         subsequent                    Building and                  

        Property           Encumbrances      Land       Improvements to acquisitions       Land       Improvements        Total     

------------------------- ---------------------------- ------------------------------------------------------------- ---------------

<S>                              <C>        <C>            <C>                  <C>        <C>            <C>             <C>       

Palm Gardens, Florida (1)        $     -    $  495,237     $  248,388           $   -      $  325,487     $  163,258      $  488,745

Phoenix, Arizona                       -       444,224        421,676               -         444,224        421,676         865,900

Phoenix, Arizona                       -             -        295,750               -               -        295,750         295,750

N. Richland Hills, Texas (2)           -       762,580        584,139               -         662,580        480,123       1,142,703

South Milwaukee, Wisconsin             -       274,749        454,064          79,219         274,749        533,283         808,032

Phoenix, Arizona (2)                   -       482,383        490,343               -         453,433        428,676         882,109

Cedar Rapids, Iowa                     -       108,125        552,031               -         108,125        552,031         660,156

Santa Fe, New Mexico                   -             -        451,230               -               -        451,230         451,230

Augusta, Georgia                       -       215,416        434,178               -         215,416        434,178         649,594

Charleston, South Carolina             -       273,619        323,162               -         273,619        323,162         596,781

Park Forest, Illinois                  -       187,900        393,038               -         187,900        393,038         580,938

Aiken, South Carolina                  -       402,549        373,795               -         402,549        373,795         776,344

Augusta, Georgia                       -       332,154        396,659               -         332,154        396,659         728,813

Mt. Pleasant, South Carolina           -       286,060        294,878               -         286,060        294,878         580,938

Charleston, South Carolina             -       273,625        254,500               -         273,625        254,500         528,125

Aiken, South Carolina                  -       178,521        455,229               -         178,521        455,229         633,750

Des Moines, Iowa (2)                   -       164,096        448,529         287,991         161,996        551,056         713,052

Hartford, Wisconsin                    -       201,603        484,960               -         201,603        484,960         686,563

Milwaukee, Wisconsin (2)               -       409,143        600,902               -         409,143        573,871         983,014

North Augusta, Georgia                 -       250,859        409,297               -         250,859        409,297         660,156

Charleston, South Carolina             -       286,068        294,870               -         286,068        294,870         580,938

Martinez, Georgia                      -       266,175        367,575               -         266,175        367,575         633,750

Grand Forks, North Dakota              -       172,701        566,674               -         172,701        566,674         739,375

Phoenix, Arizona (2)                   -             -        725,000               -               -        327,357         327,357

Phoenix, Arizona                       -       241,371        843,132               -         241,371        843,132       1,084,503

Ogden, Utah                            -       194,350        452,075               -         194,350        452,075         646,425

Fond du Lac, Wisconsin                 -       297,418        552,349               -         297,418        552,349         849,767

Twin Falls, Idaho (2)                  -       155,269        483,763          60,000         155,269        353,622         508,891

Columbus, Ohio                         -       351,325        708,141               -         351,326        708,140       1,059,466

                          ---------------------------- ------------------------------------------------------------- ---------------

                               $       0   $ 7,707,520   $ 13,360,327      $  427,210     $ 7,406,721   $ 12,736,444    $ 20,143,165

                          ============================ ============================================================= ===============

</TABLE>

<TABLE>
<CAPTION>
                            
                                                                   Life on which    
                                                                  depreciation in   
                                                                  in latest statement
                                                                   of operations    
                                                                    is computed     
                              Accumulated   Date of      Date         (years)       
        Property             depreciation construction acquired                     
-------------------------    ------------------------------------ ---------------   
<S>                                <C>        <C>        <C>          <C>          
Palm Gardens, Florida (1)         $ 98,189     -          3/11/88      31.5         
Phoenix, Arizona                   183,365     -          6/15/88      31.5         
Phoenix, Arizona                   128,606     -          6/15/88      31.5         
N. Richland Hills, Texas (2)       222,703     -          7/15/88      31.5         
South Milwaukee, Wisconsin         201,120    1986         8/1/88      31.5         
Phoenix, Arizona (2)               185,109     -          8/15/88      31.5         
Cedar Rapids, Iowa                 206,331     -           9/9/88      31.5         
Santa Fe, New Mexico               147,745     -         10/10/88      31.5         
Augusta, Georgia                   155,771     -         12/22/88      31.5         
Charleston, South Carolina         115,941     -         12/22/88      31.5         
Park Forest, Illinois              141,011     -         12/22/88      31.5         
Aiken, South Carolina              132,704     -          2/21/89      31.5         
Augusta, Georgia                   140,821     -          2/21/89      31.5         
Mt. Pleasant, South Carolina       104,687     -          2/21/89      31.5         
Charleston, South Carolina          90,352     -          2/21/89      31.5         
Aiken, South Carolina              161,614     -          3/14/89      31.5         
Des Moines, Iowa (2)               234,052    1989         8/1/89      31.5         
Hartford, Wisconsin                166,699     -          4/28/89      31.5         
Milwaukee, Wisconsin (2)           206,513     -           8/2/89      31.5         
North Augusta, Georgia             128,339     -         12/29/89      31.5         
Charleston, South Carolina          92,459     -         12/29/89      31.5         
Martinez, Georgia                  115,256     -         12/29/89      31.5         
Grand Forks, North Dakota          177,686     -         12/28/89      31.5         
Phoenix, Arizona (2)               162,357     -           1/1/90      31.5         
Phoenix, Arizona                   264,372     -           1/1/90      31.5         
Ogden, Utah                        167,102     -          1/31/90      31.5         
Fond du Lac, Wisconsin             173,194     -           1/5/90      31.5         
Twin Falls, Idaho (2)              158,894     -          3/21/90      31.5         
Columbus, Ohio                     208,638     -           6/1/90      31.5         
                             -------------                                          
                             $   4,671,630                                          
                             =============    
</TABLE>
                                      

(1)      This property was written down to its estimated net realizable value of
         $400,000 at December 31, 1995.

(2)      This property was written down to its estimated net realizable value at
         December 31, 1998

(A)      Represents aggregate costs for federal income tax purposes.

                                      34
<PAGE>
 
             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

             SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

                                DECEMBER 31, 1998


(B) Reconciliation of "Real Estate and Accumulated Depreciation":

<TABLE>
<CAPTION>


                                   Year Ended     Year Ended                                          Year Ended       Year Ended
                                  December 31,    December 31,                                      December 31,     December 31,
Investment in Real Estate             1998           1997              Accumulated Depreciation       1998             1997
----------------------------      -----------     -----------                                        ----------      ----------
<S>                               <C>             <C>                                                <C>             <C>       
Balance at beginning of year      $23,261,255     $25,629,957     Balance at beginning of year       $4,795,109      $4,881,162
Deletions:                                                        Additions charged to costs and
                                                                  expenses                              405,430         457,076
  Due to disposition               (2,432,747)     (2,368,702)     Deletion due to real estate
                                                                  disposition                          (528,909)       (543,129)
  Due to property write-downs        (685,343)              0    
                                  -----------     -----------                                        ----------      ----------
                                                                 
Balance at end of year            $20,143,165     $23,261,255     Balance at end of year             $4,671,630      $4,795,109
                                  ===========     ===========                                        ==========      ==========
                                                                 
</TABLE>

                                      35
<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:    March 26, 1999


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:    March 26, 1999




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

Date:    March 26, 1999

                                      36