<PAGE>
 
                                   FORM 10-Q

               UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C.  20549

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

     For the quarterly period ended     March 31, 1999
                                    ---------------------------

                                      OR

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

     For the transition period from _______________ to _______________

                        Commission file number 0-17686

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


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


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

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



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

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

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

<PAGE>
 
                        PART I - FINANCIAL INFORMATION
                         Item 1.  Financial Statements

            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
                                BALANCE SHEETS

                     March 31, 1999 and December 31, 1998
                     ------------------------------------

                                    ASSETS
<TABLE>
<CAPTION>
                                                     (Unaudited)
                                                      March 31,    December 31,
                                                         1999          1998
                                                     -----------   ------------
INVESTMENT PROPERTIES AND EQUIPMENT:(Note 3)
<S>                                                  <C>           <C>
     Land                                            $ 7,388,421    $ 7,406,721
     Buildings                                        12,736,444     12,736,444
     Equipment                                           707,378        707,378
     Accumulated depreciation                         (5,450,400)    (5,356,448)
                                                     -----------    -----------

          Net investment properties and equipment     15,381,843     15,494,095
                                                     -----------    -----------


OTHER ASSETS:
     Cash and cash equivalents                         1,222,017      1,256,165
     Cash restricted for real estate taxes                     0          4,404
     Cash held in Indemnification Trust (Note 8)         324,550        321,207
     Rents and other receivables                         178,169        369,715
     Deferred rent receivable                            129,508        134,899
     Prepaid insurance                                    14,753         19,892
     Deferred charges                                     88,845         91,158
     Notes receivable from lessees                             8          2,317
                                                     -----------    -----------
          Total other assets                           1,957,850      2,199,757
                                                     -----------    -----------

          Total assets                               $17,339,693    $17,693,852
                                                     ===========    ===========
</TABLE>


       The accompanying notes are an integral part of these statements.


                                       2
<PAGE>
 
            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                                BALANCE SHEETS

                     March 31, 1999 and December 31, 1998
                     ------------------------------------

                       LIABILITIES AND PARTNERS' CAPITAL

<TABLE>
<CAPTION>
                                                                     (Unaudited)
                                                                      March 31,      December 31,
                                                                        1999             1998
                                                                    ------------     ------------
LIABILITIES:
<S>                                                                 <C>              <C>
     Accounts payable and accrued expenses                          $     47,724     $     45,050
     Due to current General Partner                                        1,975            2,723
     Security deposits                                                   102,017          102,017
     Unearned rental income                                               50,143           61,179
     Real estate taxes payable                                            61,537           73,469
                                                                    ------------     ------------

          Total liabilities                                              263,396          284,438
                                                                    ------------     ------------

CONTINGENT LIABILITIES: (Note 7)

PARTNERS' CAPITAL: (Notes 1, 4 and 9)
     Current General Partner -
        Cumulative net income                                            122,084          117,145
        Cumulative cash distributions                                    (50,904)         (48,929)
                                                                    ------------     ------------

                                                                          71,180           68,216
                                                                    ------------     ------------
     Limited Partners (46,280.3 interests outstanding)
        Capital contributions, net of offering costs                  39,358,468       39,358,468
        Cumulative net income                                         18,452,146       17,963,227
        Cumulative cash distributions                                (39,965,268)     (39,140,268)
        Reallocation of former general partners' deficit capital        (840,229)        (840,229)
                                                                    ------------     ------------

                                                                      17,005,117       17,341,198
                                                                    ------------     ------------

          Total partners' capital                                     17,076,297       17,409,414
                                                                    ------------     ------------

          Total liabilities and partners' capital                   $ 17,339,693     $ 17,693,852
                                                                    ============     ============
</TABLE>



       The accompanying notes are an integral part of these statements.


                                       3
<PAGE>
 
            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                             STATEMENTS OF INCOME

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

<TABLE>
<CAPTION>
                                                    Three Months Ended March 31,
                                                    ----------------------------
                                                        1999           1998
                                                      --------      ----------
REVENUES:
<S>                                                   <C>           <C>
     Rental income (Note 5)                           $682,380      $  674,320
     Interest income                                    14,863          38,838
     Recovery of amount previously written off          11,783          12,620
     Other income                                       13,006          13,336
     Gain on disposal of assets                              0         556,227
                                                      --------      ----------
                                                       722,032       1,295,341
                                                      --------      ----------
EXPENSES:
     Partnership management fees (Note 6)               45,472          44,757
     Disposition fees (Note 6)                               0          66,000
     Restoration fees (Note 6)                              93               0
     Appraisal fees                                          0          56,150
     Insurance                                           5,968           5,793
     General and administrative                         14,955          34,588
     Advisory Board fees and expenses                    2,600           4,158
     Ground lease payments (Note 3)                     31,724          32,493
     Expenses incurred due to default by lessee          2,284          (1,011)
     Professional services                              28,814          42,607
     Professional services related to investigation          0             414
     Depreciation                                       93,951         105,797
     Amortization                                        2,313           2,313
                                                      --------      ----------
                                                       228,174         394,059
                                                      --------      ----------

NET INCOME                                            $493,858      $  901,282
                                                      ========      ==========
NET INCOME - CURRENT GENERAL PARTNER                  $  4,939      $    9,013
NET INCOME - LIMITED PARTNERS                          488,919         892,269
                                                      --------      ----------

                                                      $493,858      $  901,282
                                                      ========      ==========

NET INCOME (LOSS) PER LIMITED PARTNERSHIP
  INTEREST, based on 46,280.3 Interests               $  10.56      $    19.28
   outstanding                                        ========      ==========
</TABLE>



       The accompanying notes are an integral part of these statements.


                                       4
<PAGE>
 
            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                           STATEMENTS OF CASH FLOWS

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

<TABLE>
<CAPTION>
                                                                                  Three Months Ended March 31,
                                                                                  ----------------------------
                                                                                      1999            1998
                                                                                   ----------      ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                <C>             <C>
     Net income                                                                    $  493,858      $  901,282
     Adjustments to reconcile net income to net
        cash provided by operating activities -
               Depreciation and amortization                                           96,264         108,110
               Recovery of amounts previously written off                             (11,783)        (12,620)
               Net (gain) on disposal of assets                                             0        (556,227)
               Interest applied to Indemnification Trust account                       (3,343)         (4,716)
               Decrease in rents and other receivables                                191,546         153,316
               (Deposits) Withdrawals for payment of real estate taxes                  4,404            (105)
               Decrease in prepaids                                                     5,139           5,793
               (Increase) Decrease in deferred rent receivable                          5,391          31,699
               Increase (Decrease) in due to current General Partner                     (748)          1,095
               Increase in accounts payable and other                                   2,675          33,858
               (Decrease) in security deposits                                              0         (29,675)
               (Decrease) in real estate taxes payable                                (11,932)         (7,604)
               Increase/(Decrease) in unearned rental income                          (11,036)          5,948
                                                                                   ----------      ----------

                    Net cash from operating activities                                760,435         630,154
                                                                                   ----------      ----------

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:

     Principal payments received on direct financing leases                             9,465          12,620
     Principal payments received on notes receivable                                    2,309          20,610
     Proceeds from sale of investment properties                                       18,300       1,665,625
     Recoveries from former affiliates                                                  2,318               0
                                                                                   ----------      ----------

                    Net cash from investing activities                                 32,392       1,698,855
                                                                                   ----------      ----------

CASH FLOWS (USED IN) FINANCING ACTIVITIES:

     Cash distributions to Limited Partners                                          (825,000)       (875,000)
     Cash distributions to current General Partner                                     (1,975)         (3,605)
                                                                                   ----------      ----------

                    Net cash (used in) financing activities                          (826,975)       (878,605)
                                                                                   ----------      ----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                  (34,148)      1,450,404


CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                    1,256,165       1,438,534
                                                                                   ----------      ----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                         $1,222,017      $2,888,938
                                                                                   ==========      ==========
</TABLE>


       The accompanying notes are an integral part of these statements.


                                       5
<PAGE>
 
            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                         NOTES TO FINANCIAL STATEMENTS



These unaudited interim financial statements should be read in conjunction with
DiVall Insured Income Properties 2 Limited Partnership's (the "Partnership")
1998 annual audited financial statements within Form 10-K.

These unaudited financial statements include all adjustments which are, in the
opinion of management, necessary to present a fair statement of financial
position as of March 31, 1999, and the results of operations for the three-month
periods ended March 31, 1999, and 1998, and cash flows for the three-month
periods ended March 31, 1999 and 1998.  Results of operations for the periods
are not necessarily indicative of the results to be expected for the full year.


1.   ORGANIZATION AND BASIS OF ACCOUNTING:
     -------------------------------------

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

The Partnership is currently engaged in the business of owning and operating its
investment portfolio (the "Properties") of commercial real estate. The
Properties are leased on a triple net basis to, and operated by, franchisors or
franchisees of national, regional, and local retail chains under long-term
leases.  The lessees consist primarily of fast-food, family style, and
casual/theme restaurants, but also include a video rental store and a child care
center.  At March 31, 1999, 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. 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 consist of leasing commissions paid when properties are leased
to tenants other than the original tenant.  Leasing commissions are capitalized
and amortized over the life of the lease.

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


                                       6
<PAGE>
 
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.

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 in interest of the Limited Partners.  During the Second Quarter of
1998, the General Partner received the consent of the Limited Partners to
liquidate the Partnership's assets and dissolve the Partnership.  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 forseeable 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.

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")
(dissolved effective December 31, 1998)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.  Through March 31, 1999, $5,768,000 of recoveries have been
received which exceeded the original estimate of $3 million.  As a result, the
Partnership has recognized $1,110,000 as income over the past three years, which
represents its share of the excess recovery. No further significant recoveries
are anticipated.


                                       7
<PAGE>
 
3.   INVESTMENT PROPERTIES:
     ----------------------

As of March 31, 1999, the Partnership owned 27 fully constructed fast-food
restaurants, a video store, and a preschool.  The properties are comprised of
the following:  ten (10) Wendy's restaurants, four (4) Hardee's restaurants,
five (5) Denny's restaurants, one (1) Applebee's restaurant, one (1) Popeye's
Famous Fried Chicken restaurant, one (1) Red Apple restaurant, one (1) Hooter's
restaurant, one (1) Kentucky Fried Chicken restaurant, one (1) Hostettler's
restaurant, one (1) Miami Subs restaurant, one (1) Village Inn restaurant, one
(1) 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 March 31, 1999, two of the
Partnership's properties were unoccupied.

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 operating the Red Apple Restaurant in Cedar Rapids, Iowa, vacated the
property during 1998 and ceased paying rent.  The tenant cannot be located, and
Management is currently marketing the property for lease to a new 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
full investment of the net proceeds of the offering, approximately 75% of the
original proceeds was invested in the Partnership's properties.

The current General Partner receives a fee for managing the Partnership equal to
4% of gross receipts, with a maximum reimbursement for office rent and related
office overhead of $25,000 between the three original affiliated Partnerships as
provided in the Permanent Manager Agreement ("PMA").  Effective March 1, 1999,
the minimum management fee and the maximum reimbursement for office rent and
overhead increased by 1.6% representing the allowable annual Consumer Price
Index adjustment per the PMA.  For purposes of computing the 4% overall fee,
gross receipts includes amounts recovered in connection with the
misappropriation of assets by the former general partners and their affiliates.
TPG has received fees from the Partnership totaling $54,870 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.

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.

Several of the Partnership's property leases contain purchase option provisions
with stated purchase prices in excess of the original cost of the properties.
The current General Partner is not aware of any unfavorable purchase options in
relation to original cost.

4.   PARTNERSHIP AGREEMENT:
     ----------------------

The Partnership Agreement, prior to an amendment effective May 26, 1993,
provided that, for financial reporting and income tax purposes, net profits or
losses from operations were allocated 90% to the Limited Partners and 10% to the
general partners.  The Partnership Agreement also provided for quarterly cash
distributions from Net


                                       8
<PAGE>
 
Cash Receipts, as defined, within 60 days after the last day of the first full
calendar quarter following the date of release of the subscription funds from
escrow, and each calendar quarter thereafter, in which such funds were available
for distribution with respect to such quarter. Such distributions were to be
made 90% to Limited Partners and 10% to the former general partners, provided,
however, that quarterly distributions were to be cumulative and were not to be
made to the former general partners unless and until each Limited Partner had
received a distribution from Net Cash Receipts in an amount equal to 10% per
annum, cumulative simple return on his or her Adjusted Original Capital, as
defined, from the Return Calculation Date, as defined.

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

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

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

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

5.   LEASES:
     -------

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


                                       9
<PAGE>
 
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>

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 paid to the current General Partner for the three-month periods ended
March 31, 1999 and 1998 are as follows.

<TABLE>
<CAPTION>
                                            Incurred as of     Incurred as of
Current General Partner                     March 31, 1999     March 31, 1998
-----------------------                     --------------     --------------

<S>                                         <C>                <C>
Management fees                                    $45,472           $ 44,757
Disposition fees                                         0             66,000
Restoration fees                                        93                  0
Overhead allowance                                   3,669              3,611
Reimbursement for out-of-pocket expenses             2,717              7,790
Cash distribution                                    1,975              3,605
                                                   -------           --------
                                                   $53,926           $125,763
                                                   =======           ========
</TABLE>


7.   CONTINGENT LIABILITIES:
     -----------------------

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


                                      10
<PAGE>
 
Partner if the $6,000,000 recovery level is met. As of March 31, 1999, the
Partnership may owe the current General Partner $16,296, which is currently
reflected as a recovery, if the $6,000,000 recovery level is achieved, which is
considered unlikely.


8.   PMA INDEMNIFICATION TRUST:
     --------------------------

The 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 March
31, 1999. Funds are invested in U.S. Treasury securities. In addition, $74,550
of earnings have been credited to the Trust as of March 31, 1999. 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.

10.  SUBSEQUENT EVENTS:
     ------------------

On May 15, 1999, the Partnership made distributions to the Limited Partners for
the First Quarter of 1999 of $600,000 amounting to approximately $12.96 per
limited partnership interest.


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

Liquidity and Capital Resources:
--------------------------------

Investment Properties and Net Investment in Direct Financing Leases
-------------------------------------------------------------------

The investment properties, including equipment held by the Partnership at March
31, 1999, were originally purchased at a price, including acquisition costs, of
approximately $23,955,000.

The tenant of the former 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.


                                      11
<PAGE>
 
DenAmerica, Inc. did not renew the lease on its Denny's store in Phoenix,
Arizona upon the original lease's expiration on May 30, 1998. Management is
currently marketing the property for lease to a new tenant.

A land easement was granted to the City of Cedar Rapids, Iowa on a portion of
the land at the former Red Apple Restaurant property in exchange for a payment
to the Partnership of $18,300.

Other Assets
------------

Cash and cash equivalents, including cash restricted for real estate taxes was
approximately $1,222,000 at March 31, 1999, compared to $1,260,000 at December
31, 1998.  The Partnership designated cash of $600,000 to fund the First Quarter
1999 distributions to Limited Partners, $366,000 for the payment of accounts
payable and accrued expenses, and the remainder represents reserves deemed
necessary to allow the Partnership to operate normally.  Cash generated through
the operations of the Partnership's investment properties and sales of
investment properties will provide the sources for future fund liquidity and
Limited Partner distributions.

The Partnership established an Indemnification Trust (the "Trust") during the
Fourth Quarter of 1993, deposited $100,000 in the Trust during 1993 and
completed funding of the Trust with $150,000 during 1994.  The provision to
establish the Trust was included in the PMA 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.

Liabilities
-----------

Accounts payable and accrued expenses at March 31, 1999, in the amount of
$48,000, primarily represented the accrual of legal and auditing fees.

Partners' Capital
-----------------

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

Cash distributions paid to the Limited Partners and to the General Partner
during 1999 of $825,000 and $1,975, respectively, have also been in accordance
with the amended Partnership Agreement.  The First Quarter 1999 distribution of
$600,000 was paid to the Limited Partners on May 15, 1999.

Results of Operations:
----------------------

The Partnership reported net income for the quarter ended March 31, 1999, in the
amount of $494,000 compared to net income for the quarter ended March 31, 1998,
of $901,000.


                                      12
<PAGE>
 
Revenues
--------

Total revenues were $722,000 and $1,295,000, for the quarters ended March 31,
1999 and 1998, respectively.  1998 revenue included a gain of $556,000 on the
sale of two Denny's properties to the tenant.

Total revenues should approximate $2,700,000 annually or $675,000 quarterly
based on leases currently in place.  Future revenues may decrease with tenant
defaults and/or sales of Partnership properties.  They may also increase with
additional rents due from tenants, if those tenants experience sales levels
which require the payment of additional rent to the Partnership.

Expenses
--------

For the quarters ended March 31, 1999 and 1998, cash expenses amounted to
approximately 18% and 22%, of total revenues, respectively.  Total expenses,
including non-cash items, amounted to approximately 32% and 30%, of total
revenues for the quarters ended March 31, 1999 and 1998, respectively.

Disposition fees were recorded during 1998 as a result of the sale of two
Denny's properties to the tenant, and appraisal fees totaling $56,000 were
incurred during 1998 for the appraisal of all of the Partnership's properties.

Inflation:
----------

Inflation has a minimal effect on operating earnings and related cash flows from
a portfolio of triple net leases.  By their nature, such leases actually fix
revenues and are not impacted by rising costs of maintenance, insurance, or real
estate taxes.  If inflation causes operating margins to deteriorate for lessees
if expenses grow faster than revenues, then, inflation may well negatively
impact the portfolio through tenant defaults.

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

Year 2000
---------

The Partnership's operations are not dependent on date sensitive software.  The
Partnership is not aware of any Year 2000 problems with its current software.
Accounting and Partnership records software are owned and operated by third
parties who provide services to the Partnership under contract and any cost 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 is evaluating the efforts of its tenants to prepare for the Year
2000.  To the extent the Partnership is not satisfied with the status of


                                      13
<PAGE>
 
a tenant's or third party provider's Year 2000 compliance, the Partnership
expects to develop and implement appropriate contingency plans.

Item 3.   Quantitative and Qualitative Disclosure About Market Risk

None.


                                      14
<PAGE>
 
                          PART II - OTHER INFORMATION


Items 1 - 5.

Not Applicable.

Item 6.  Exhibits and Reports on Form 8-K

(a)  Listing of Exhibits:

     99.0  Correspondence to the Limited Partners dated May 15, 1999, regarding
           the First Quarter 1999 distribution.

(b)  Reports on Form 8-K:

     The Registrant filed no reports on Form 8-K during the first quarter of
     fiscal year 1999.


                                      15
<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:  May 14, 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:  May 14, 1999



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


Date:  March 14, 1999


                                      16