<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION

                          Washington, D.C. 20549-1004

                                   FORM 10-Q
 
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
 
     For the 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                       0-14122 
                            ---------------------------------------------------
 

 
               FIRST CAPITAL INSTITUTIONAL REAL ESTATE, LTD. - 3
-------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)

 
         Florida                                                36-3330657
-------------------------------                             -------------------
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                              Identification No.)


 
Two North Riverside Plaza, Suite 1100, Chicago, Illinois        60606-2607
--------------------------------------------------------    -------------------
     (Address of principal executive offices)                    (Zip Code)

 
                                (312) 207-0020
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             (Registrant's telephone number, including area code)

 
                                Not applicable
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(Former name, former address and former fiscal year, if changed since last
 report)
 
 
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 for 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
                                       ---   ---
DOCUMENTS INCORPORATED BY REFERENCE:

The First Amended and Restated Certificate and Agreement of Limited Partnership
filed as Exhibit A to the definitive Prospectus dated January 17, 1985, included
in the Registrant's Registration Statement on Form S-11, is incorporated herein
by reference in Part I of this report.

<PAGE>
 
BALANCE SHEETS
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                                  March 31,
                                                    1997      December 31,
                                                 (Unaudited)      1996
--------------------------------------------------------------------------
<S>                                              <C>          <C>
ASSETS
Investment in commercial rental properties:
 Land                                            $ 1,662,900  $ 1,908,600
 Buildings and improvements                       17,111,900   17,789,600
--------------------------------------------------------------------------
                                                  18,774,800   19,698,200
Accumulated depreciation and amortization         (6,361,100)  (6,574,900)
--------------------------------------------------------------------------
 Total investment properties, net of accumulated
  depreciation and amortization                   12,413,700   13,123,300
Cash and cash equivalents                          4,351,900    4,749,200
Investments in debt securities                     1,273,300
Restricted cash                                      100,000      100,000
Rents receivable                                      63,200       45,700
Investment in and loans to joint venture           5,606,000    5,852,800
Other assets                                          40,100       25,300
--------------------------------------------------------------------------
                                                 $23,848,200  $23,896,300
--------------------------------------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
 Accounts payable and accrued expenses           $   253,800  $   392,300
 Due to Affiliates                                    50,300       74,600
 Distributions payable                             1,178,500      355,700
 Security deposits                                    51,200       61,900
 Other liabilities                                     6,700       47,500
--------------------------------------------------------------------------
                                                   1,540,500      932,000
--------------------------------------------------------------------------
Partners' capital:
 General Partner (deficit)                          (131,400)    (183,300)
 Limited Partners (45,737 Units issued and
  outstanding)                                    22,439,100   23,147,600
--------------------------------------------------------------------------
                                                  22,307,700   22,964,300
--------------------------------------------------------------------------
                                                 $23,848,200  $23,896,300
--------------------------------------------------------------------------
</TABLE>
STATEMENTS OF PARTNERS' CAPITAL
For the quarter ended March 31, 1997 (Unaudited)
and the year ended December 31, 1996
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                            General     Limited
                                            Partner    Partners       Total
-------------------------------------------------------------------------------
<S>                                        <C>        <C>          <C>
Partners' (deficit) capital,
 January 1, 1996                           $(183,300) $25,923,100  $25,739,800
Net income for the year ended
 December 31, 1996                           213,400    1,145,500    1,358,900
Distributions for the year ended
 December 31, 1996                          (213,400)  (3,921,000)  (4,134,400)
-------------------------------------------------------------------------------
Partners' (deficit) capital,
 December 31, 1996                          (183,300)  23,147,600   22,964,300
Net income for the quarter ended
 March 31, 1997                               87,500      434,400      521,900
Distributions for the quarter ended March
 31, 1997                                    (35,600)  (1,142,900)  (1,178,500)
-------------------------------------------------------------------------------
Partners' (deficit) capital, March 31,
 1997                                      $(131,400) $22,439,100  $22,307,700
-------------------------------------------------------------------------------
</TABLE>
    The accompanying notes are an integral part of the financial statements.
                                                                               2
<PAGE>
 
STATEMENTS OF INCOME AND EXPENSES
For the quarters ended March 31, 1997 and 1996
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
 
<TABLE>
<CAPTION>
                                                              1997      1996
------------------------------------------------------------------------------
<S>                                                        <C>        <C>
Income:
 Rental                                                    $  739,400 $752,000
 Interest                                                      84,700  118,000
 Gain on sale of property                                     249,900
------------------------------------------------------------------------------
                                                            1,074,000  870,000
------------------------------------------------------------------------------
Expenses:
 Depreciation and amortization                                172,700  187,700
 Property operating:
  Affiliates                                                   36,500   45,100
  Nonaffiliates                                               160,800  151,800
 Real estate taxes                                             88,200   73,300
 Insurance--Affiliate                                           8,400    9,100
 Repairs and maintenance                                      123,400   98,500
 General and administrative:
  Affiliates                                                    5,400   11,100
  Nonaffiliates                                                39,500   49,500
------------------------------------------------------------------------------
                                                              634,900  626,100
------------------------------------------------------------------------------
Net income before income from participation in joint
 venture                                                      439,100  243,900
Income from participation in joint venture                     82,800   60,900
------------------------------------------------------------------------------
Net income                                                 $  521,900 $304,800
------------------------------------------------------------------------------
Net income allocated to General Partner                    $   87,500 $ 71,200
------------------------------------------------------------------------------
Net income allocated to Limited Partners                   $  434,400 $233,600
------------------------------------------------------------------------------
Net income allocated to Limited Partners per Unit (45,737
 Units outstanding)                                        $     9.50 $   5.11
------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CASH FLOWS
For the quarters ended March 31, 1997 and 1996
(Unaudited)
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                                          1997         1996
-------------------------------------------------------------------------------
<S>                                                    <C>          <C>
Cash flows from operating activities:
 Net income                                            $   521,900  $  304,800
 Adjustments to reconcile net income to net cash
  provided by operating activities:
  Depreciation and amortization                            172,700     187,700
  (Income) from participation in joint venture             (82,800)    (60,900)
  Gain on sale of property                                (249,900)
  Changes in assets and liabilities:
   (Increase) decrease in rents receivable                 (17,500)     16,800
   (Increase) in other assets                              (14,800)    (17,800)
   (Decrease) in accounts payable and accrued expenses    (138,500)   (219,800)
   (Decrease) increase in due to Affiliates                (24,300)     19,100
   (Decrease) in other liabilities                         (40,800)     (3,400)
-------------------------------------------------------------------------------
    Net cash provided by operating activities              126,000     226,500
-------------------------------------------------------------------------------
Cash flows from investing activities:
 Payments for capital and tenant improvements              (38,000)    (52,400)
 (Increase) in investments in debt securities           (1,273,300)
 (Increase) in restricted cash                                         (50,000)
 Proceeds from sale of property                            824,800
 Distributions received from joint venture                 329,600
-------------------------------------------------------------------------------
    Net cash (used for) investing activities              (156,900)   (102,400)
-------------------------------------------------------------------------------
Cash flows from financing activities:
 Distributions paid to Partners                           (355,700)   (711,500)
 (Decrease) increase in security deposits                  (10,700)      2,500
-------------------------------------------------------------------------------
    Net cash (used for) financing activities              (366,400)   (709,000)
-------------------------------------------------------------------------------
Net (decrease) in cash and cash equivalents               (397,300)   (584,900)
Cash and cash equivalents at the beginning of the
 period                                                  4,749,200   8,022,200
-------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period     $ 4,351,900  $7,437,300
-------------------------------------------------------------------------------
</TABLE>
    The accompanying notes are an integral part of the financial statements.
3
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
March 31, 1997
 
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
DEFINITION OF SPECIAL TERMS:
Capitalized terms used in this report have the same meaning as those terms have
in the Partnership's Registration Statement filed with the Securities and
Exchange Commission on Form S-11. Definitions of these terms are contained in
Article III of the First Amended and Restated Certificate and Agreement of
Limited Partnership, which is included in the Registration Statement and
incorporated herein by reference.
 
ACCOUNTING POLICIES:
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP"). Under this method of accounting,
revenues are recorded when earned and expenses are recorded when incurred.
 
Preparation of the Partnership's financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
 
The financial information included in these financial statements is unaudited;
however, in management's opinion, all adjustments (consisting of only normal,
recurring accruals) necessary for a fair presentation of the results of
operations for the periods included have been made. Results of operations for
the three months ended March 31, 1997 are not necessarily indicative of the
operating results for the year ending December 31, 1997.
 
The financial statements include the Partnership's 50% interest in two joint
ventures and 25% interest in another joint venture all with Affiliated
partnerships. These joint ventures were formed for the purpose of each
acquiring a 100% interest in certain real property and are operated under the
common control of the General Partner. Accordingly, the Partnership's pro rata
share of the ventures' revenues, expenses, assets, liabilities and Partners'
(deficit) capital is included in the financial statements.
 
Investment in and loans to joint venture includes the recording of the
Partnership's interest, under the equity method of accounting, in a joint
venture with an Affiliated partnership. The joint venture acquired a preferred
majority interest in a joint venture with the seller of the Lansing, Michigan
property. Under the equity method of accounting, the Partnership recorded its
initial interest at cost and adjusts its investment account for its share of
joint venture income or loss and its distributions of cash flow (as defined by
the joint venture agreement).
 
Commercial rental properties are recorded at cost, net of any provisions for
value impairment, and depreciated (exclusive of amounts allocated to land) on
the straight-line method over their estimated useful lives. Lease acquisition
fees are recorded at cost and amortized on the straight-line method over the
life of each respective lease. Maintenance and repair costs are expensed
against operations as incurred; expenditures for improvements are capitalized
to the appropriate property accounts and depreciated on the straight-line
method over the estimated life of such improvements.
 
The Partnership evaluates its rental properties when conditions exist which may
indicate that it is probable that the sum of expected future cash flows
(undiscounted) from a property is less than its carrying value. Upon
determination that an impairment has occurred, the carrying basis in the rental
property is reduced to estimated fair value. Management was not aware of any
indicator that would result in a significant impairment loss during the periods
reported.
 
Property sales are recorded when title transfers and sufficient consideration
has been received by the Partnership. Upon disposition, the related costs and
accumulated depreciation and amortization are removed from the respective
accounts. Gains on sales are recognized in accordance with GAAP.
 
Cash equivalents are considered all highly liquid investments with maturity of
three months or less when purchased.
 
Investments in debt securities are comprised of corporate debt securities and
are classified as held-to-maturity. These investments are carried at their
amortized cost basis in the financial statements. As of March 31, 1997 these
securities had a fair market value of $1,269,600 and unrealized losses of
$(3,700). All of these securities had maturities of less than one year when
purchased.
 
Certain reclassifications have been made to the previously reported 1996
statements in order to provide comparability with the 1997 statements. These
reclassifications had no effect on net income or Partners' (deficit) capital.
 
Reference is made to the Partnership's annual report for the year ended
December 31, 1996 for a description of other accounting policies and additional
details of the Partnership's financial condition, results of operations,
changes in Partners' (deficit) capital and changes in cash balances for the
year then ended. The details provided in the notes thereto have not changed
except as a result of normal transactions in the interim or as otherwise
disclosed herein.
 
2. RELATED PARTY TRANSACTIONS:
 
In accordance with the Partnership Agreement, subsequent to May 16, 1986, the
Termination of the Offering, the General Partner is entitled to 10% of
distributable Cash Flow (as defined in the Partnership Agreement) as a
Partnership Management Fee. Net Profits (exclusive of Net Profits from the sale
or disposition of Partnership properties) are allocated to the General Partner
in an amount equal to the greater of 1% of such Net Profits or the Partnership
Management Fee paid by the Partnership to the General Partner and, the balance,
if any, to the Limited Partners. Net Losses (exclusive of Net Losses from the
sale, disposition or provision for value impairment of Partnership properties)
are allocated 1% to the General Partner and 99% to the Limited Partners. Net
Profits from the sale or disposition of a Partnership property are allocated:
first, prior to giving effect to any distributions of Sale Proceeds from the
transaction, to all Partners with negative balances in their Capital Accounts,
pro rata in proportion to such respective negative balances, to the extent of
the total of such negative balances; second, to the General Partner, in an
amount necessary to make the positive balance in its Capital Account equal to
the amount of Sale Proceeds to be distributed to the General Partner with
respect to the sale or disposition of such property; and third, the balance, if
any, to the Limited Partners. Net Losses from
 
                                                                               4
<PAGE>
 
 
 
the sale, disposition or provision for value impairment of Partnership
properties are allocated: first, after giving effect to any distributions of
Sale Proceeds from the transaction to all Partners with positive balances in
their Capital Accounts, pro rata in proportion to such respective positive
balances, to the extent of the total amount of such positive balances; and
second, the balance, if any, 1% to the General Partner and 99% to the Limited
Partners. Notwithstanding anything to the contrary, there shall be allocated to
the General Partner not less than 1% of all items of Partnership income, gain,
loss, deduction and credit during the existence of the Partnership. For the
three months ended March 31, 1997 and 1996, the General Partner was entitled to
a Partnership Management Fee, and accordingly, allocated Net Profits, of
$35,600 and $71,200, respectively. In addition, in 1997 the General Partner was
also allocated Net Profits from the sale of Southwest Freeway of $51,900.
 
Fees and reimbursements paid and payable (receivable) by the Partnership
to/(from) Affiliates during the three months ended March 31, 1997 were as
follows:
 
<TABLE>
<CAPTION>
                                                                 Payable
                                                        Paid   (Receivable)
---------------------------------------------------------------------------
<S>                                                    <C>     <C>
Property management and leasing fees                   $71,000   $  (900)
Reimbursement of property insurance premiums, at cost     None     7,700
Real estate commissions (a)                               None    40,200
Reimbursement of expenses, at cost:
 --Accounting                                            2,100     2,700
 --Investor communications                                 800       600
 --Legal                                                   100      None
---------------------------------------------------------------------------
                                                       $74,000   $50,300
---------------------------------------------------------------------------
</TABLE>
(a) As of March 31, 1997, the Partnership owed $40,300 to the General Partner
    for real estate commissions earned in connection with the sales of
    Partnership properties. These commissions have been accrued but not paid.
    In accordance with the Partnership Agreement, the Partnership will not pay
    the General Partner or any Affiliate a real estate commission from the sale
    of a Partnership property until Limited Partners have received cumulative
    distributions of Sale or Financing Proceeds equal to 100% of their Original
    Capital Contribution, plus a cumulative return (including all Cash Flow (as
    defined in the Partnership Agreement) which has been distributed to the
    Limited Partners from the initial investment date) of 6% simple interest
    per annum on their original Capital Investment.
 
3. PROPERTY SALE:
 
On February 18, 1997, the joint venture in which the Partnership owns a 25%
interest consummated the sale of 3120 Southwest Freeway Office Building,
located in Houston, Texas. The sale price was $3,425,000, of which the
Partnership's share was $856,250. The Partnership's share of net sale proceeds
from this transaction approximated $822,900, which was net of closing expenses.
The Partnership recorded a gain of $249,900 for financial reporting purposes in
connection with this sale. The Partnership will to distribute $822,800, or
$17.99 per Unit, on May 31, 1997 to Limited Partners of record as of February
18, 1997.
 
5
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Reference is made to the Partnership's annual report for the year ended
December 31, 1996 for a discussion of the Partnership's business.
 
One of the Partnership's objectives is to dispose of its properties when market
conditions allow for the achievement of the maximum possible sales price. In
addition to being in the operation of properties phase, the Partnership is in
phase of its life cycle. During the disposition phase of the Partnership's life
cycle, comparisons of operating results are complicated due to the timing and
effect of property sales and dispositions. Partnership operations are generally
expected to decline as real property interests are sold or disposed of since
the Partnership no longer receives income generated from such real property
interests.
 
OPERATIONS
The table below is a recap of the Partnership's share of certain operating
results of each of its properties for the quarters ended March 31, 1997 and
1996. The discussion following the table should be read in conjunction with the
Financial Statements and Notes thereto appearing in this report.
 
<TABLE>
<CAPTION>
                       Comparative Operating
                            Results (a)
                       For the Quarters Ended
                        3/31/97      3/31/96
----------------------------------------------
<S>                   <C>          <C>
PARK PLAZA PROFESSIONAL BUILDING
 (50%)
Rental revenues       $    392,000 $   405,800
----------------------------------------------
Property net income   $     47,400 $    90,100
----------------------------------------------
Average occupancy              83%         84%
----------------------------------------------
ELLIS BUILDING (50%)
Rental revenues       $    315,700 $   288,000
----------------------------------------------
Property net income   $    100,600 $    89,800
----------------------------------------------
Average occupancy              96%         93%
----------------------------------------------
3120 SOUTHWEST FREEWAY OFFICE BUILDING (25%)
Rental revenues       $     30,800 $    54,200
----------------------------------------------
Property net income   $      3,100 $     5,200
----------------------------------------------
Average occupancy              (b)         83%
----------------------------------------------
HOLIDAY OFFICE PARK NORTH AND
SOUTH OFFICE BUILDING (50%)
Rental revenues       $    384,400 $   376,200
----------------------------------------------
Property net income   $     82,800 $    60,900
----------------------------------------------
Average occupancy              85%         83%
----------------------------------------------
</TABLE>
(a) The above table excludes certain income and expense items which are not
    directly related to individual property operating results such as interest
    income and general and administrative expenses. The Partnership's share of
    results from its participation in a joint venture, treated on the equity
    method, is included above.
(b) The property was sold on February 18, 1997. Property net income excludes
    the gain on sale of $249,900.
 
The increase in Partnership net income of $217,100 for the three months ended
March 31, 1997 when compared to the three months ended March 31, 1996 was
primarily the result of a gain on the sale of 3120 Southwest Freeway Office
Building ("Southwest Freeway"). Net income, exclusive of the operating results
and gain on sale of Southwest Freeway, decreased by $30,700 for the periods
under comparison. The decrease was primarily due to the diminished operating
results at Park Plaza Professional Building ("Park Plaza") together with a
decrease in interest income on the Partnership's short-term investments due to
a decrease in amounts available for investment. The decrease was partially
offset by increased operating results at Ellis Building ("Ellis") and the
Partnership's equity investment in Holiday Office Park North and South
("Holiday") together with a decrease in general and administrative expenses
which was due to a decrease in personnel costs and accounting fees.
 
The results of Southwest Freeway have been excluded from the following
comparative discussion.
 
Rental revenues increased by $14,900 or 2.1% for the three months ended March
31, 1997 when compared to the three months ended March 31, 1996. The increase
was primarily due to an increase in base rental income and tenant
reimbursements for real estate taxes at Ellis which was due to an increase in
the average occupancy rate. The increase was partially offset by a decrease in
base rental income at Park Plaza which is attributed to a reduction in rates
charged to new and renewing tenants.
 
Repairs and maintenance expense increased by $25,000 for the comparable three-
month periods. The increase was primarily due to an increase in repairs to the
HVAC units at Park Plaza and Ellis, together with an increase in cleaning costs
at Park Plaza.
 
Real estate tax expense increased by $17,200 for the three months ended March
31, 1997 when compared to the three months ended March 31, 1996. The increase
was primarily the result of a budgeted increase in real estate taxes at Park
Plaza.
 
Property operating expense increased by $10,300 for the three months ended
March 31, 1997 when compared to the three months ended March 31, 1996. The
increase was primarily the result of an increase in personnel costs at Ellis
together with an increase in security expense at Park Plaza.
 
The Partnership's share of net income from Holiday increased by $21,900 for the
three-month periods under comparison. The increase was primarily the result of
decreased salary expense resulting from the property manager's position being
vacant during the first quarter of 1997. Also contributing to the increase was
a decrease in utility costs. Partially offsetting the increase in net income
were increases in snow removal costs and depreciation and amortization
expenses.
 
To increase and/or maintain occupancy levels at the Partnership's properties,
the General Partner, through its Affiliated asset and property management
groups, continues to take the following actions: 1) implementation of marketing
programs, including hiring of third party leasing agents or providing on-site
leasing personnel, advertising, direct mail campaigns and development of
building brochures; 2) early renewal of existing tenants' leases and addressing
any expansion needs these tenants may have; 3) promotion of local broker events
and networking with local brokers; 4) cold-calling other businesses and tenants
in the market area and 5) providing rental concessions or competitively pricing
rental rates depending on market conditions.
 
                                                                               6
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
 
LIQUIDITY AND CAPITAL RESOURCES
One of the Partnership's objectives is to dispose of its properties when market
conditions allow for the achievement of the maximum possible sales price. In
the interim, the Partnership continues to manage and maintain its remaining
properties. Notwithstanding the Partnership's intention relative to property
sales, another primary objective of the Partnership is to provide cash
distributions to Partners from Partnership operations. To the extent cumulative
cash distributions exceed net income in a fiscal year, such excess
distributions are treated as a return of capital. Cash Flow (as defined in the
Partnership Agreement) is generally not equal to net income or cash flows as
determined by generally accepted accounting principles ("GAAP"), since certain
items are treated differently under the Partnership Agreement than under GAAP.
Management believes that to facilitate a clear understanding of the
Partnership's operations, an analysis of Cash Flow (as defined in the
Partnership Agreement) should be examined in conjunction with an analysis of
net income or cash flows, as determined by GAAP. The following table includes a
reconciliation of Cash Flow (as defined in the Partnership Agreement) to cash
flow provided by operating activities as determined by GAAP. Such amounts are
not indicative of actual distributions to Partners and should not necessarily
be considered as an alternative to the results disclosed in the Statements of
Income and Expenses and Statements of Cash Flows.
 
<TABLE>
<CAPTION>
                                                           Comparative
                                                        Cash Flow Results
                                                     For the Quarters Ended
                                                       3/31/97      3/31/96
------------------------------------------------------------------------------
<S>                                                  <C>          <C>
Cash Flow (as defined in the Partnership Agreement)  $   506,400  $   534,800
Less: Cash Flow from joint venture                      (144,500)    (103,200)
Items of reconciliation:
 (Increase) in current assets                            (32,300)      (1,000)
 (Decrease) in current liabilities                      (203,600)    (204,100)
------------------------------------------------------------------------------
Net cash provided by operating activities            $   126,000  $   226,500
------------------------------------------------------------------------------
Net cash (used for) investing activities             $  (156,900) $  (102,400)
------------------------------------------------------------------------------
Net cash (used for) financing activities             $  (366,400) $  (709,000)
------------------------------------------------------------------------------
</TABLE>
 
The decrease in Cash Flow (as defined in the Partnership Agreement) of $28,400
for the three months ended March 31, 1997 when compared to three months ended
March 31, 1996 was primarily due to the decreases in interest income, as
previously discussed and operating results, exclusive of depreciation and
amortization, at Park Plaza. Partially offsetting the decrease was the increase
in operating results at Ellis and improved cash flow at Holiday.
 
The decrease in the Partnership's cash position of $397,300 for the three
months ended March 31, 1997 was primarily the result of investments in debt
securities, payments for capital and tenant improvements and leasing costs and
distributions paid to Partners exceeding net cash provided by operating
activities and proceeds from the sale of Southwest Freeway. Liquid assets as of
March 31, 1997 (including cash, cash equivalents and investments in debt
securities) of the Partnership are comprised of amounts held for working
capital purposes and undistributed Sale Proceeds from the sale of Southwest
Freeway.
 
The decrease in net cash provided by operating activities of $100,500 for the
three months ended March 31, 1997 when compared to the three months ended March
31, 1996 was primarily due to the decrease in operating results, excluding
depreciation and amortization, as previously discussed and to a lesser extent
in the timing of the payment of certain expenses at Park Plaza.
 
Net cash used for investing activities increased by $54,500 for the three
months ended March 31, 1997 when compared to the three months ended March 31,
1996. The increase was primarily due to the increase in investments in debt
securities. The increase in investments in debt securities is a result of the
extension of the maturities of certain of the Partnership's short-term
investments in an effort to maximize the return on these amounts as they are
held for working capital purposes. These investments are of investment-grade
and mature less than one year from their date of purchase. The increase was
partially offset by the receipt of the proceeds from the sale of Southwest
Freeway and distributions from Holiday.
 
The Partnership maintains working capital reserves to pay for capital
expenditures such as capital and tenant improvements and leasing costs. During
the three months ended March 31, 1997, the Partnership's consolidated
properties spent $38,000 for capital and tenant improvements and leasing costs
and has projected to spend approximately $250,000 during the remainder of 1997.
Of the projected amount, approximately $150,000 and $100,000 relates to
anticipated improvement and leasing costs expected to be incurred at Ellis and
Park Plaza, respectively. The Partnership did not make any expenditures for
capital and tenant improvement and leasing costs at Holiday and has projected
to spend approximately $225,000 during the remainder of 1997. Actual amounts
expended may vary depending on a number of factors including leasing activity
and other market conditions throughout the year. The General Partner believes
these expenditures are necessary to maintain occupancy levels in very
competitive markets, maximize rental rates charged to new and renewing tenants
and prepare the remaining properties for eventual disposition. During the three
months ended March 31, 1997, the Partnership received $329,600 of distributions
from Holiday. These distributions related to cash generated during 1996.
 
The decrease in net cash used for financing activities of $342,600 for the
three months ended March 31, 1997 when compared to the three months ended March
31, 1996 was due primarily to a decrease in distributions paid to Partners. The
decrease in distributions is the result of the Partnership's adjusting the
amount of distributions to an amount consistent with its remaining assets and
earnings following the special distribution of Sales Proceeds during 1996.
 
On February 18, 1997, the joint venture in which the Partnership owns a 25%
interest completed the sale of Southwest Freeway. The Partnership's share of
the net sales proceeds from this sale approximated $824,800. The Partnership
will distribute all of these Sales Proceeds, or $17.99 per Unit, on May 31,
1997, to Limited Partners of record as of February 18, 1997. For further
information, see Note 3 in Notes to Financial Statements.
 
7
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
 
The General Partner continues to take a conservative approach to projections of
future rental income in its determination of adequate levels of cash reserves
due to the anticipated capital and tenant improvements and leasing costs
necessary to be made at the Partnership's properties during the next several
years. As a result, cash continues to be retained to supplement working capital
reserves. Cash Flow (as defined in the Partnership Agreement) retained to
supplement working capital reserves for the three months ended March 31, 1997
amounted to $150,700.
 
Distributions to Limited Partners for the quarter ended March 31, 1997 were
declared in the amount of $320,100, or $7.00 per Unit. Cash distributions are
made 60 days after the last day of each fiscal quarter. The amount of future
distributions to Partners will ultimately be dependent upon the performance of
the Partnership's investments as well as the General Partner's determination of
the amount of cash necessary to supplement working capital reserves to meet
future liquidity requirements of the Partnership. Accordingly, exclusive of the
distribution of Southwest Freeway Sales Proceeds on May 31, 1997 there can be
no assurance as to the amount of cash available for future distribution to
Partners.
 
Based upon the current estimated value of its assets, net of its outstanding
liabilities, together with its expected operating results and capital
expenditure requirements, the General Partner believes that the Partnership's
cumulative distributions to its Limited Partners from inception through the
termination of the Partnership may be less than such Limited Partners' original
Capital Contributions.
 
                                                                               8
<PAGE>

                           PART II - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

     (a) Exhibits:  None

     (b) Reports on Form 8-K:

         There were no reports filed on Form 8-K during the quarter ended
March 31, 1997.

<PAGE>
 

                                  SIGNATURES

Pursuant to the requirements 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.

                         FIRST CAPITAL INSTITUTIONAL REAL ESTATE, LTD. - 3

                         By: FIRST CAPITAL FINANCIAL CORPORATION
                             GENERAL PARTNER

Date:  May 15, 1997      By: /s/  DOUGLAS CROCKER II
       ------------          -------------------------------------
                                  DOUGLAS CROCKER II
                             President and Chief Executive Officer

Date:  May 15, 1997      By: /s/     NORMAN M. FIELD
       ------------          -------------------------------------
                                     NORMAN M. FIELD
                             Vice President - Finance and Treasurer