<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, 1997
                                    ----------------------------------------

                                      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, 1997 and December 31, 1996
                      ------------------------------------

                                     ASSETS
<TABLE>
<CAPTION>
                                                       (Unaudited)
                                                        March 31,    December 31,
                                                           1997          1996
                                                       -----------   ------------
INVESTMENT PROPERTIES AND EQUIPMENT: (Note 3)
<S>                                                    <C>           <C>
   Land                                                $ 8,605,185    $ 9,141,303
   Buildings                                            15,273,975     16,488,654
   Equipment                                               707,378        707,378
   Accumulated depreciation                             (5,245,204)    (5,550,940)
                                                       -----------    -----------

       Net investment properties and equipment          19,341,334     20,786,395
                                                       -----------    -----------

NET INVESTMENT IN DIRECT FINANCING LEASES: (Note 7)        101,200        108,826
                                                       -----------    -----------

OTHER ASSETS:
   Cash and cash equivalents                             2,523,401      1,444,326
   Cash restricted for real estate taxes                    16,808        110,625
   Cash held in Indemnification Trust (Note 9)             293,766        289,637
   Rents and other receivables (net of allowance of
       $2,975 in 1997 and $0 in 1996)                      152,694        218,051
   Deferred rent receivable                                259,339        259,326
   Prepaid insurance                                        15,138         22,262
   Deferred charges                                         47,923         53,620
   Unsecured notes receivable from lessees                  82,224         86,288
                                                       -----------    -----------
       Total other assets                                3,391,293      2,484,135
                                                       -----------    -----------
DUE FROM FORMER AFFILIATES: (Notes 2 and 10)
   Due from former general partner affiliates            1,741,240      1,743,461
   Allowance for uncollectible amounts
      due from former affiliates                        (1,741,240)    (1,743,461)
   Restoration cost receivable                           4,040,675      3,897,981
   Allowance for uncollectible
     restoration receivable                             (4,040,675)    (3,897,981)
                                                       -----------    -----------

       Due from former affiliates, net                           0              0
                                                       -----------    -----------

       Total assets                                    $22,833,827    $23,379,356
                                                       ===========    ===========

</TABLE>

        The accompanying notes are an integral part of these statements.

                                       2
<PAGE>
 
            DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                                BALANCE SHEETS

                     March 31, 1997 and December 31, 1996
                     ------------------------------------

                       LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
 
                                                                   (Unaudited)
                                                                    March 31,    December 31,
                                                                      1997           1996
                                                                  ------------   ------------
<S>                                                               <C>            <C>
LIABILITIES:
   Accounts payable and accrued expenses                          $     49,328   $     67,589
   Due to current General Partner                                       30,301         86,727
   Security deposits                                                   139,670        144,290
   Unearned rental income                                              132,182         57,739
   Real estate taxes payable                                            46,908        119,131
                                                                  ------------   ------------
                   Total liabilities                                   398,389        475,476
                                                                  ------------   ------------
CONTINGENT LIABILITIES: (Note 8)
 
PARTNERS' CAPITAL: (Notes 1, 4 and 12)
   Current General Partner -
      Cumulative net income                                             85,401         80,064
      Cumulative cash distributions                                    (33,490)       (31,355)
                                                                  ------------   ------------
                                                                        51,911         48,709
                                                                  ------------   ------------
   Limited Partners (46,280.3 interests outstanding)
      Capital contributions, net of offering costs                  39,358,468     39,358,468
      Cumulative net income                                         14,820,556     14,292,200
      Cumulative cash distributions                                (30,955,268)   (29,955,268)
      Reallocation of former general partners' deficit capital        (840,229)      (840,229)
                                                                  ------------   ------------
                                                                    22,383,527     22,855,171
                                                                  ------------   ------------
       Total partners' capital                                      22,435,438     22,903,880
                                                                  ------------   ------------
       Total liabilities and partners' capital                    $ 22,833,827   $ 23,379,356
                                                                  ============   ============
 
</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,
                                                        ----------------------
                                                          1997        1996
                                                        --------    ----------
<S>                                                     <C>         <C>
REVENUES:
    Rental income (Note 5)                              $761,332    $  817,723
    Interest income on direct financing leases             3,226        18,173
    Other interest income                                 18,014        19,671
    Recovery of amount previously written off              2,221       629,765
    Other income                                          12,015        22,260
    Gain on disposal of assets                            72,256       484,225
                                                        --------    ----------
                                                         869,064     1,991,817
                                                        --------    ----------
EXPENSES:
    Partnership management fees                           43,572        42,316
    Disposition fees                                      37,166        20,550
    Disposition fees - Restoration                             0        20,550
    Restoration fees                                          89        24,053
    Appraisal fees                                         4,597         2,268
    Insurance                                              7,124        13,645
    General and administrative                            30,744        23,203
    Advisory Board fees and expenses                       4,088         4,364
    Interest                                                   0         1,810
    Real estate taxes                                          0        (1,709)
    Ground lease payments (Note 3)                        31,785        30,936
    Expenses incurred due to default by lessee             2,156          (121)
    Professional services                                 27,799        35,780
    Professional services related to investigation        17,219       560,252
    Depreciation                                         123,335       129,488
    Amortization                                           5,697           201
                                                        --------    ----------
                                                         335,371       907,586
                                                        --------    ----------
NET INCOME                                              $533,693    $1,084,231
                                                        ========    ==========
NET INCOME - CURRENT GENERAL PARTNER                    $  5,337    $   10,842
NET INCOME - LIMITED PARTNERS                            528,356     1,073,389
                                                        --------    ----------
                                                        $533,693    $1,084,231
                                                        ========    ==========
NET INCOME (LOSS) PER LIMITED PARTNERSHIP INTEREST, 
  based on 46,280.3 Interests outstanding               $  11.42    $    23.19
                                                        ========    ==========
</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,
                                                                   -------------------------
                                                                      1997          1996
                                                                   -----------    ----------
<S>                                                                <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES: 
    Net income                                                     $   533,693    $1,084,231
    Adjustments to reconcile net income to net cash provided by
      operating activities -
        Depreciation and amortization                                  129,032       129,689
        Recovery of amounts previously written off                      (2,221)     (629,765)
        Net (gain) on disposal of assets                               (72,256)     (484,225)
        Interest applied to Indemnification Trust account               (4,129)       (3,518)
        Decrease in rents and other receivables                         65,357       165,917
        (Deposits) Withdrawals for payment of real estate taxes         93,817          (448)
        Decrease in prepaids                                             7,124         3,852
        (Increase) Decrease in deferred rent receivable                    (13)       17,051
        Increase (Decrease) in due to current General Partner          (56,426)        3,841
        (Decrease) in accounts payable and other                       (18,261)     (110,724)
        (Decrease) in security deposits                                 (4,620)      (15,000)
        (Decrease) in real estate taxes payable                        (72,223)      (21,962)
        Increase (Decrease) in unearned rental income                   74,443             0
                                                                   -----------    ----------
            Net cash from operating activities                         673,317       138,939
                                                                   -----------    ----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
    Principal payments received on direct financing leases               7,626        35,709
    Principal payments received on notes receivable                      4,064             0
    Proceeds from sale of investment properties                      1,393,982     1,366,966
    Recoveries from former affiliates                                    2,221     1,551,866
    Deposit to restoration escrow                                            0      (889,945)
    Payments from affiliated partnerships                                    0        96,088 
                                                                   -----------    ----------
            Net cash from investing activities                       1,407,893     2,160,684
                                                                   -----------    ----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
    Cash distributions to Limited Partners                          (1,000,000)     (650,000)
    Cash distributions to current General Partner                       (2,135)       (4,337)
    Payments of equipment notes                                              0       (10,245)
                                                                   -----------    ----------
            Net cash (used in) financing activities                 (1,002,135)     (664,582)
                                                                   -----------    ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                 1,079,075     1,635,041
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                     1,444,326     1,005,764
                                                                   -----------    ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                         $ 2,523,401    $2,640,805
                                                                   ===========    ==========
SUPPLEMENTAL DISCLOSURE--cash paid for interest                    $         0    $    1,810
                                                                   ===========    ==========
</TABLE>

       The accompanying notes are an integral part of these statements.


                                       5

<PAGE>
 
             DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

                         NOTES TO FINANCIAL STATEMENTS



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 and recovering
the assets misappropriated by the former general partners and their affiliates.
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, 1997, the Partnership owned 33 properties with specialty
leasehold improvements in 15 of these properties.

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

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

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

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

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

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

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities (and disclosure of
contingent assets and liabilities) at the date of the finanacial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
     
                                       6
<PAGE>
      
The Partnership will be dissolved on November 30, 2010, or earlier upon the
prior occurrence of any of the following events:  (a) the disposition of all
properties of the Partnership; (b) the written determination by the General
Partner that the Partnership's assets may constitute "plan assets" for purposes
of ERISA; (c) the agreement of Limited Partners owning a majority of the
outstanding interests to dissolve the Partnership; or (d) the dissolution,
bankruptcy, death, withdrawal, or incapacity of the last remaining General
Partner, unless an additional General Partner is elected previously by a
majority in interest of the Limited Partners.

No provision for Federal income taxes has been made, as any liability for such
taxes would be that of the individual partners rather than the Partnership.  At
December 31, 1996, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$8,300,000.

2.   REGULATORY INVESTIGATION:
     -------------------------

A preliminary investigation during 1992 by the Office of Commissioner of
Securities for the State of Wisconsin and the Securities and Exchange Commission
(the "Investigation") revealed that during at least the four years ended
December 31, 1992, the former general partners of the Partnership, Gary J.
DiVall ("DiVall") and Paul E. Magnuson ("Magnuson") had transferred substantial
cash assets of the Partnership and two affiliated publicly registered
partnerships, DiVall Insured Income Fund Limited Partnership ("DiVall 1") and
DiVall Income Properties 3 Limited Partnership ("DiVall 3") (collectively the
"Partnerships") to various other entities previously sponsored by or otherwise
affiliated with DiVall and Magnuson.  The unauthorized transfers were in
violation of the respective Partnership Agreements and resulted, in part, from
material weaknesses in the internal control system of the Partnerships.  The
aggregate amount of the misappropriations, related costs, and 9% interest
accrued since January 1, 1993, is in excess of $14,300,000, of which
approximately $5,782,000 has been attributed to the Partnership and is reflected
as due from former affiliates on the balance sheet at March 31, 1997.  The 9%
interest accrued as of March 31, 1997, amounted to approximately $2,044,000 and
is not reflected in the accompanying income statement.  As of December 31, 1996,
approximately $5,641,000 was reflected as due from former affiliates based on
estimated overall misappropriation and related costs of $14,000,000.

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

In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships.  At that time, an allowance was established
against amounts due from former general partners and their affiliates reflecting
the estimated $3 million receivable.  This net receivable was allocated among
the Partnerships based on each Partnership's pro rata share of the total
misappropriation.  Through March 31, 1997, $5,166,000 of recoveries have been
received which exceeded the original estimate of $3 million.  As a result, the
Partnership has recognized $866,000 as income, which represents its share of the
excess recovery.  The current General Partner continues to pursue recoveries of
the misappropriated funds, however, no further significant recoveries are
anticipated.

3.   INVESTMENT PROPERTIES:
     ----------------------

As of March 31, 1997, the Partnership owned 30 fully constructed fast-food
restaurants, a tag agency, a video store, and a preschool.  The properties are
comprised of the following:  ten (10) Wendy's restaurants, five (5) Hardee's
restaurants, seven (7) Denny's restaurants, one (1) Applebee's restaurant, one
(1) Popeye's Famous Fried Chicken restaurant, one (1) Country Kitchen
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) Hallandale Tag Agency, one (1) Blockbuster
Video store, and one (1) Sunrise Preschool.  The 33 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, 1997, two of the
Partnership's properties were unoccupied.  During 1995, the tenant of the
Country Kitchen restaurant in Cedar Rapids, Iowa, vacated the property and
stopped making rent payments.

                                       7
<PAGE>
      
Management is currently marketing the property for lease.  During the First
Quarter of 1997, DenAmerica, the tenant of the Partnership's Denny's
restaurants, notified the Partnership that is has vacated the property in Twin
Falls, North Dakota and ceased paying rent.  Management is currently working
with DenAmerica to resolve the issue.

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

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

The current General Partner receives a fee for managing the Partnership equal to
4% of gross receipts, with a maximum reimbursement for office rent and related
office overhead of $25,000 between the three affiliated Partnerships as provided
in the Permanent Manager Agreement ("PMA").  Effective March 1, 1997, the
minimum management fee and the maximum reimbursement for office rent and
overhead increased by 3.3% 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 $45,084 to date on the
amounts recovered, which has been offset against the 4% minimum fee.

The Partnership owns four (4) restaurants located on parcels of land where it
has entered into long-term ground leases. Two (2) of these leases are paid by
the tenant and two (2) are paid by the Partnership.  The leases paid by the
Partnership are considered operating leases and the lease payments are expensed
in the periods to which they apply. The lease terms require aggregate minimum
annual payments of approximately $124,000 and expire in the years ranging from
1998 to 2003.

The tenant operating a Denny's restaurant on Camelback Road in Phoenix, Arizona,
has not formally exercised its option to extend its lease which expired on
January 30, 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.

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.

The tenant of the Parnership's Hardee's restaurants exercised their negotiated
options to purchase three of their properties during the First Quarter of 1997.
These sales resulted in gross proceeds to the Partnership of $1,394,000 with a
net gain of $72,000.

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

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

Net Proceeds, as originally defined, were to be distributed as follows:  (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital; (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a Liquidation Preference equal to a 13.5% per annum, cumulative
simple return on Adjusted Original

                                       8
<PAGE>
 
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 8.)

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.

                                       9
<PAGE>
 
Aggregate minimum lease payments to be received under the leases for the
Partnership's properties are as follows:

<TABLE>

                     Year ending
                     December 31,
                    <S>                 <C>
                     1997               $ 2,908,582
                     1998                 2,810,316
                     1999                 2,804,916
                     2000                 2,801,584
                     2001                 2,692,654
                     Thereafter          20,617,293
                                        -----------
                                        $34,635,345
                                        ===========
</TABLE>
Five (5) of the Partnership's properties are leased to Hardee's Food Systems,
Inc. The corporate owner of Hardee's restaurants and ten (10) of the properties
are leased to Wensouth Orlando, a franchisee of Wendy's restaurants.  Hardee's
base rent accounts for 12% of total base rents and Wensouth accounts for 26% of
base rents.

6.  TRANSACTIONS WITH CURRENT GENERAL PARTNER:
    ------------------------------------------

Amounts paid to the current General Partner for the three-month periods ended
March 31, 1997 and 1996 are as follows.
<TABLE>
<CAPTION>
 
                                            Incurred as of  Incurred as of
Current General Partner                     March 31, 1997  March 31, 1996
-----------------------                     --------------  --------------
<S>                                         <C>             <C>
Management fees                                    $43,572         $42,316
Disposition fees                                    37,166          20,550
Restoration fees                                        89          24,053
Overhead allowance                                   3,592           3,526
Reimbursement for out-of-pocket expenses             5,885           4,872
Cash distribution                                    2,135           4,337
                                                   -------         -------
                                                   $92,439         $99,654
                                                   =======         =======
</TABLE>
7.  NET INVESTMENT IN DIRECT FINANCING LEASES:
    ------------------------------------------

The net investment in direct financing leases which includes the Partnership's
specialty leasehold improvement leases, is comprised of the following as of
March 31, 1997:

<TABLE>
               <S>                                        <C>
               Minimum lease payments receivable          $ 93,304
               Estimated residual values of leased
                 property (non-recourse)                    22,364
               Less-Unearned income                        (14,468)
                                                          --------

                  Net investment in direct
                    financing leases                      $101,200
                                                          ========
</TABLE>

At March 31, 1997, future minimum lease payments for each of the succeeding
fiscal years are as follows:

<TABLE>
<CAPTION>
               Year ending
               December 31,
<S>                                                       <C>
               1997                                       $ 50,108
               1998                                         37,860
               1999                                         27,700
                                                          --------
                                                          $115,668
                                                          ========
</TABLE>

                                      10
<PAGE>
 
During 1995, it was determined that the residual values of the equipment leases
were overstated.  Accordingly, they were written down to their estimated net
realizable values as of December 31, 1995.  The total amount of the write-down
was approximately $72,000.

8.   CONTINGENT LIABILITIES:
     -----------------------

According to the Partnership Agreement, as amended, the current General Partner
may receive a disposition fee not to exceed 3% of the contract price of the sale
of investment properties.  Fifty percent (50%) of all such disposition fees
earned by the current General Partner is to be escrowed until the aggregate
amount of recovery of the funds misappropriated from the Partnerships by the
former general partners is greater than $4,500,000. Upon reaching such recovery
level, full disposition fees will thereafter be payable and fifty percent (50%)
of the previously escrowed amounts will be paid to the current General Partner.
At such time as the recovery exceeds $6,000,000 in the aggregate, the remaining
escrowed disposition fees shall be paid to the current General Partner.  If such
levels of recovery are not achieved, the current General Partner will contribute
the amounts escrowed towards the recovery.  In lieu of an escrow, 50% of all
such disposition fees have been paid directly to the restoration account and
then distributed among the three Partnerships.  Fifty percent (50%) of the total
amount paid to the recovery was refunded to the current General Partner during
March 1996 after surpassing the recovery level of $4,500,000.  The remaining
amount allocated to the Partnership may be owed to the current General Partner
if the $6,000,000 recovery level is met.  As of March 31, 1997, 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.

9.   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 March 31, 1997. Funds are invested in U.S. Treasury
securities.  In addition, $43,766 of earnings have been credited to the Trust as
of March 31, 1997.  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.

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

                                       11
<PAGE>
   
Recoveries realized by the Partnerships are being distributed to each respective
partnership on the same basis as the restoration costs are currently being
allocated.  As of March 31, 1997, the Partnerships recovered a total of
approximately $5,126,000 from the former general partners and their affiliates.
Of this amount, the Partnership received its pro-rata share in the amount of
$2,073,000.  Additionally, $40,347, representing 50% of all previously escrowed
disposition fees earned by the General Partner have been paid to the recovery.
Of that amount, $16,296 was allocated to the Partnership and is contingently
payable to the General Partner upon achievement of the final recovery level as
described in Note 8.

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

On March 24, 1994, an affiliated partnership, DiVall 1, filed a complaint in the
United States District Court for the Western District of Missouri against
Boatmen's First National Bank of Kansas City ("Boatmen's") seeking a declaratory
judgment that Boatmen's has no right or interest in a promissory note executed
in the name of DiVall 1 by the former general partners (the "Note") secured by
mortgages on five DiVall 1 properties, and further seeking an injunction against
foreclosure proceedings instituted against a DiVall 1 property located in
Dallas, Texas under a first deed of trust and security agreement given to secure
the Note (the "Foreclosure").  The former general partners borrowed $600,000
during or before 1991 from Metro North State Bank (now Boatmen's).  The proceeds
of the Note were not received by DiVall 1.  As of March 31, 1997, DiVall 1 had
not paid debt service on the Note.  DiVall 1 received a notice of default on the
Note in October 1993, and the Foreclosure Action was filed in February 1994.  As
of March 31, 1997, interest in the amount of $239,000 had accrued but was unpaid
on the Note.  Interest is accrued at the face rate of the Note.  If DiVall 1
loses the case against Boatmen's, additional interest totaling approximately
$260,000, representing the default rate of interest may be due.  Boatmen's has
agreed to stay its foreclosure proceedings pending the outcome of the
litigation.  Boatmen's answered the complaint and filed a motion for summary
judgment to which DiVall 1 responded.  The District Court granted Boatmen's
motion for summary judgement.  DiVall 1 appealed and the Eighth Circuit Court of
Appeals reversed the District Court's ruling. The case was sent back to the
District Court for further discovery and trial.  Trial of the case is scheduled
to begin on June 23, 1997.  Pursuant to the Restoration Trust Account procedures
described above, all of the Partnerships are sharing the expenses of this
litigation and any recoveries resulting effectively from the partial or full
cancellation of the alleged indebtedness will be allocated among the three
Partnerships on the same basis as the restoration costs are currently being
allocated.

11.  LITIGATION:
     -----------

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

                                       12
<PAGE>
    
On July 23, 1993, nineteen (19) of the Private Partnerships sought the
protection of the Bankruptcy Court in the Eastern District of Wisconsin.  Seven
(7) of these bankruptcies were voluntary and twelve (12) of these bankruptcies
were involuntary.  Several of the Private Partnerships seeking bankruptcy owe
promissory notes to DiVall, Magnuson, or entities owned by them, in which the
Partnership has a security interest.  These cases were subsequently transferred
to the Western District Bankruptcy Court located in Madison, Wisconsin.

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

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

12.  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.

13.  SUBSEQUENT EVENTS:
     ------------------

On May 15, 1997, the Partnership made distributions to the Limited Partners for
the First Quarter of 1997 of $2,000,000 amounting to approximately $43.21 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, 1997, were originally purchased at a price, including acquisition costs, of
approximately $27,629,000.

The tenant of the Country Kitchen restaurant in Cedar Rapids, Iowa vacated the
property during 1995 and ceased paying rent.  Management is currently marketing
the property for lease.  During the First Quarter of 1997, DenAmerica, the
tenant of the Partnership's Denny's restaurants, notified the Partnership that
is has vacated the property in Twin Falls, North Dakota, and ceased paying rent.
Management is currently working with DenAmerica to resolve the issue.

Due to the damaging floods and record snowfalls in Grand Forks, North Dakota,
the tenant of the Village Inn has experienced financial difficulties.
Management intends to work with the tenant by abating rent on the property until
the business is back in operation.

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

The net investment in direct financing leases, which includes the Partnership's
specialty leasehold improvement leases, amounted to $101,000 at March 31, 1997,
compared to $109,000 at December 31, 1996.  The decrease of $8,000 was a result
of principal payments received during the quarter.

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

Cash and cash equivalents, including cash restricted for real estate taxes was
approximately $2,540,000 at March 31, 1997, compared to $1,555,000 at December
31, 1996.  The Partnership designated cash of $2,000,000 to fund the First
Quarter 1997 distributions to Limited Partners, $270,000 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, sales of
investment properties and any recoveries of misappropriated funds by the former
general partners, 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 9 to the financial statements.

Due From Affiliated Partnerships, Due From Former Affiliates, Allowance for
Uncollectible Amounts Due From Former Affiliates and Deferred Income

Due from former affiliates represented misappropriated assets due from the
former general partners and their affiliates in the amount of $1,741,000 at
March 31, 1997.  The receivable decreased from December 31, 1996 due to $2,000
of recoveries received during the quarter from the former general partners and
their affiliates.

The Partnership maintains a record of costs incurred in identifying or
recovering the misappropriated assets. These amounts are expensed when incurred,
and then, recorded on the balance sheet as a restoration cost receivable with a
corresponding allowance for such receivable deemed uncollectible.  These costs
are considered due from the former general partners and their affiliates.
Interest has been accrued on the misappropriated funds since January 1, 1993, at
a rate of 9% per annum and has been included in the restoration cost receivable.
The receivable increased from approximately $3,898,000 at December 31, 1996, to
$4,041,000 at March 31, 1997, and includes $2,044,000 of cumulative accrued
interest.
   
In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships.  At that time, an allowance was established
against amounts due from former general partners and their affiliates reflecting
the estimated $3 million receivable.  This net receivable was allocated among
the Partnerships based on each Partnership's pro rata share of the total
misappropriation.  Through March 31, 1997, $5,166,000 of recoveries have been
received which exceeded the original estimate of $3 million. As a result, the
Partnership has recognized $866,000 as income, which represents its share of the
excess recovery.  The current General Partner continues to pursue recoveries of
the misappropriated funds, however no further significant recoveries are
anticipated.

The restoration costs are allocated among the Partnerships based on each
Partnership's respective share of the misappropriation as discussed in Note 10
of the financial statements.  The allocation is adjusted periodically to reflect
any changes in the entire misappropriation.  The Partnership's percentage of the
allocation was reduced in 1993.

                                       14
<PAGE>
    
Liabilities
-----------

Accounts payable and accrued expenses at March 31, 1997, in the amount of
$49,000, 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 12 to the financial statements for additional
information regarding the reallocation.

Cash distributions paid to the Limited Partners and to the General Partner
during 1997 of $1,000,000 and $2,135, respectively, have also been in accordance
with the amended Partnership Agreement.  The First Quarter 1997 distribution of
$2,000,000 was paid to the Limited Partners on May 15, 1997.

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

The Partnership reported net income for the quarter ended March 31, 1997, in the
amount of $534,000 compared to net income for the quarter ended March 31, 1996,
of $1,084,000.  The costs associated with the misappropriation increased
significantly during 1996 as the lawsuit against the former general partner
accountants and attorneys got closer to trial and as a result of contingent fee
payments made in connection with the settlement.  During 1997, these costs had a
minimal impact on operations.   Additionally, 1996 revenue included a recovery
of amounts previously written off from the Partnership's former accountants and
attorneys.

Revenues
--------

Total revenues were $869,000 and $1,992,000, for the quarters ended March 31,
1997 and 1996, respectively. 1996 revenue included a recovery of amounts due
from the former general partners which had been previously written off and a
gain on the sale of an Applebee's property.

Total revenues should approximate $3,000,000 annually or $750,000 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.  The decrease
from 1996 to 1997 is a result of property sales as well as the reduction in
rents on the remaining Hardee's restaurants.

Expenses
--------

For the quarters ended March 31, 1997 and 1996, cash expenses amounted to
approximately 24% and 39%, of total revenues, respectively.  Total expenses,
including non-cash items, amounted to approximately 39% and 46%, of total
revenues for the quarters ended March 31, 1997 and 1996, respectively.  Items
negatively impacting expenses during 1996, include expenses incurred primarily
in relation to the misappropriation of assets by the former general partners and
their affiliates.
 
For the quarters ended March 31, 1997 and 1996, expenses incurred in relation to
the misappropriated assets amounted to $17,000 and $560,000, respectively.
Future expenses incurred in relation to the misappropriation should have a
minimal impact on the Partnership.
 
                                       15
<PAGE>
 
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.

                          PART II - OTHER INFORMATION

Item 2.  Legal Proceedings

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

On July 23, 1993, nineteen (19) of the Private Partnerships sought the
protection of the Bankruptcy Court in the Eastern District of Wisconsin. Seven
(7) of these bankruptcies were voluntary and twelve (12) of these bankruptcies
were involuntary. Several of the Private Partnerships seeking bankruptcy owe
promissory notes to DiVall, Magnuson, or entities owned by them, in which the
Partnership has a security interest. These cases were subsequently transferred
to the Western District Bankruptcy Court located in Madison, Wisconsin.

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

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

The Partnerships have been named as defendants in certain foreclosure actions
brought in state courts in Wisconsin. In each of these actions, the plaintiff
seeks to foreclose on real property owned by one of the Private Partnerships.
The Partnerships were named as subordinate lienholders on the properties. It is
believed that none of these cases constitute a claim against the individual
Public Partnerships. However, if the foreclosures are successful, the Private
Partnerships' interest in the underlying real estate may be extinguished,
rendering individual obligations to the Partnerships uncollectible. Such a
foreclosure has occurred in one instance and is pending in at least one other
situation.

                                      16
<PAGE>
 
The Partnership is also pursuing collection actions against former tenants of
the Partnership and/or guarantors of former tenants of the Partnership arising
from defaults on their leases. Although the Partnership believes its claims are
valid, it is currently unknown whether the Partnerships will receive favorable
verdicts or whether any such verdicts will ultimately prove collectible.

Item 6.  Exhibits and Reports on Form 8-K

(a)  Listing of Exhibits:

     99.0  Correspondence to the Limited Partners dated May 15, 1997, regarding
           the First Quarter 1997 distribution.

(b)  Reports on Form 8-K:

     The Registrant filed no reports on Form 10-K during the first quarter of
     fiscal year 1997.

                                      17
<PAGE>
 
                                  SIGNATURES

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


DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP


By:   The Provo Group, Inc., General Partner



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


Date: May 14, 1997


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, 1997



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


Date: March 14, 1997

                                      18