<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                   September 30, 1995                  
                         -------------------------------------------------------

                                      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 950, Chicago, Illinois           60606-2607
-------------------------------------------------------      -------------------
      (Address of principal executive offices)                    (Zip Code)

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


--------------------------------------------------------------------------------
  (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, (Registration
No. 2-79092), is incorporated herein by reference in Part I of this report.


<PAGE>
 
BALANCE SHEETS
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                                   September 30,
                                                       1995      December 31,
                                                    (Unaudited)      1994
-----------------------------------------------------------------------------
<S>                                                <C>           <C>
ASSETS
Investment in commercial rental properties:
 Land                                               $ 1,908,600  $ 1,908,600
 Buildings and improvements                          18,909,500   18,713,300
-----------------------------------------------------------------------------
                                                     20,818,100   20,621,900
Accumulated depreciation and amortization            (5,651,000)  (5,024,100)
-----------------------------------------------------------------------------
 Total investment properties, net of accumulated
  depreciation and amortization                      15,167,100   15,597,800
Cash and cash equivalents                             8,325,900    8,442,900
Restricted certificates of deposit                       62,500       62,500
Investment in joint venture                           5,032,300    5,234,600
Rents receivable                                         23,300       24,800
Other assets (including amounts due from joint
 venture of $810,900 and $725,500, respectively)        828,800      757,600
-----------------------------------------------------------------------------
                                                    $29,439,900  $30,120,200
-----------------------------------------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
 Accounts payable and accrued expenses              $   379,600  $   360,000
 Due to Affiliates                                      152,400      107,400
 Security deposits                                       51,200       51,500
 Distributions payable                                  686,100      559,000
 Other liabilities                                        2,900        3,500
-----------------------------------------------------------------------------
                                                      1,272,200    1,081,400
-----------------------------------------------------------------------------
Partners' (deficit) capital:
 General Partner                                       (163,300)    (163,300)
 Limited Partners (45,737 Units authorized, issued
  and outstanding)                                   28,331,000   29,202,100
-----------------------------------------------------------------------------
                                                     28,167,700   29,038,800
-----------------------------------------------------------------------------
                                                    $29,439,900  $30,120,200
-----------------------------------------------------------------------------
</TABLE>
STATEMENTS OF PARTNERS' CAPITAL
For the nine months ended September 30, 1995
and the year ended December 31, 1994
(Unaudited)
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                          General     Limited
                                          Partner    Partners       Total
-----------------------------------------------------------------------------
<S>                                      <C>        <C>          <C>
Partners' (deficit) capital,
 January 1, 1994                         $(147,800) $31,764,300  $31,616,500
Net income (loss) for the year ended
 December 31, 1994                         140,400   (1,159,500)  (1,019,100)
Distributions for the year ended
 December 31, 1994                        (155,900)  (1,402,700)  (1,558,600)
-----------------------------------------------------------------------------
Partners' (deficit) capital,
 December 31, 1994                        (163,300)  29,202,100   29,038,800
Net income for the nine months ended
 September 30, 1995                        198,200      912,600    1,110,800
Distributions for the nine months ended
 September 30, 1995                       (198,200)  (1,783,700)  (1,981,900)
-----------------------------------------------------------------------------
Partners' (deficit) capital,
 September 30, 1995                      $(163,300) $28,331,000  $28,167,700
-----------------------------------------------------------------------------
</TABLE>
 
    The accompanying notes are an integral part of the financial statements.
                                                                               2
<PAGE>
 
STATEMENTS OF INCOME AND EXPENSES
For the quarters ended September 30, 1995 and 1994
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
 
<TABLE>
<CAPTION>
                                                             1995      1994
------------------------------------------------------------------------------
<S>                                                        <C>      <C>
Income:
 Rental                                                    $782,400 $  805,200
 Interest                                                   137,500     99,700
 Income from participation in joint venture                  61,200    159,400
------------------------------------------------------------------------------
                                                            981,100  1,064,300
------------------------------------------------------------------------------
Expenses:
 Depreciation and amortization                              211,500    219,000
 Property operating:
 Affiliates                                                  53,200     35,300
 Nonaffiliates                                              154,700    157,200
 Real estate taxes                                           79,300     72,800
 Insurance--Affiliate                                         6,200      6,200
 Repairs and maintenance                                    122,200     96,900
 General and administrative:
 Affiliates                                                  20,300      8,700
 Nonaffiliates                                               31,200     41,700
------------------------------------------------------------------------------
                                                            678,600    637,800
------------------------------------------------------------------------------
Net income                                                 $302,500 $  426,500
------------------------------------------------------------------------------
Net income allocated to General Partner                    $ 68,600 $   44,500
------------------------------------------------------------------------------
Net income allocated to Limited Partners                   $233,900 $  382,000
------------------------------------------------------------------------------
Net income allocated to Limited Partners per Unit (45,737
 Units issued and outstanding)                             $   5.11 $     8.35
------------------------------------------------------------------------------
</TABLE>
 
STATEMENTS OF INCOME AND EXPENSES
For the nine months ended September 30, 1995 and 1994
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
 
<TABLE>
<CAPTION>
                                                      1995       1994
------------------------------------------------------------------------
<S>                                                <C>        <C>
Income:
 Rental                                            $2,326,300 $2,566,200
 Interest                                             456,400    235,400
 Income from participation in joint venture           252,000    272,900
------------------------------------------------------------------------
                                                    3,034,700  3,074,500
------------------------------------------------------------------------
Expenses:
 Depreciation and amortization                        626,900    710,600
 Property operating:
 Affiliates                                           139,600    169,300
 Nonaffiliates                                        438,200    468,100
 Real estate taxes                                    238,000    259,400
 Insurance--Affiliate                                  18,700     22,400
 Repairs and maintenance                              295,800    347,600
 General and administrative:
 Affiliates                                            37,500     29,000
 Nonaffiliates                                        129,200    132,400
 Loss on sale of Property                                         48,700
------------------------------------------------------------------------
                                                    1,923,900  2,187,500
------------------------------------------------------------------------
Net income                                         $1,110,800 $  887,000
------------------------------------------------------------------------
Net income allocated to General Partner            $  198,200 $   99,500
------------------------------------------------------------------------
Net income allocated to Limited Partners           $  912,600 $  787,500
------------------------------------------------------------------------
Net income allocated to Limited Partners per Unit
 (45,737 Units issued and outstanding)             $    19.95 $    17.22
------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1995 and 1994
(Unaudited)
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                                           1995        1994
-------------------------------------------------------------------------------
<S>                                                     <C>         <C>
Cash flows from operating activities:
 Net income                                             $1,110,800  $  887,000
 Adjustments to reconcile net income to net cash
  provided by operating activities:
 Depreciation and amortization                             626,900     710,600
 Loss on sale of property                                               48,700
 Changes in assets and liabilities:
  Decrease in rents receivable                               1,500      36,000
  Decrease in other assets                                  14,200      46,000
  Increase (decrease) in accounts payable and accrued
   expenses                                                 19,600    (107,100)
  Increase in due to Affiliates                             45,000      21,800
  (Decrease) in other liabilities                             (600)    (43,200)
-------------------------------------------------------------------------------
   Net cash provided by operating activities             1,817,400   1,599,800
-------------------------------------------------------------------------------
Cash flows from investing activities:
 Proceeds from the sale or disposition of property                   2,168,500
 Payments for capital and tenant improvements             (196,200)   (593,600)
 Distributions received from investment in joint
  venture in excess of income allocated                    202,300      24,600
 (Funding of) collection of loans to joint venture, net    (85,400)     59,600
-------------------------------------------------------------------------------
   Net cash (used for) provided by investing activities    (79,300)  1,659,100
-------------------------------------------------------------------------------
Cash flows from financing activities:
 Distributions paid to Partners                         (1,854,800)   (689,700)
 (Decrease) in security deposits                              (300)    (17,400)
-------------------------------------------------------------------------------
   Net cash (used for) financing activities             (1,855,100)   (707,100)
-------------------------------------------------------------------------------
Net decrease in cash and cash equivalents                 (117,000)  2,551,800
Cash and cash equivalents at the beginning of the
 period                                                  8,442,900   5,831,100
-------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period      $8,325,900  $8,382,900
-------------------------------------------------------------------------------
</TABLE>
    The accompanying notes are an integral part of the financial statements.
3
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 1995
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. Under this method of accounting, revenues are
recorded when earned and expenses are recorded when incurred.
 
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 quarter and nine months ended September 30, 1995 are not necessarily
indicative of the operating results for the year ending December 31, 1995.
 
Certain reclassifications have been made to the previously reported 1994
statements in order to provide comparability with the 1995 statements. These
reclassifications have no effect on net income or Partners' capital.
 
The financial statements include the Partnership's 50% interest in two joint
ventures and a 25% interest in another joint venture 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. In addition, the 1994 financial
statements included the Partnership's 50% interest in a joint venture with an
Affiliated partnership. These joint ventures were operated under the common
control of the General Partner. Accordingly, the Partnership's pro rata share
of the ventures' revenues, expenses, assets, liabilities and capital is
included in the financial statements.
 
Cash equivalents are considered all highly liquid investments purchased with
maturity of three months or less.
 
Investment in joint venture represents the Partnership's interest accounted for
under the equity method of accounting, in a joint venture with an Affiliated
partnership. The joint venture was formed for the purpose of acquiring a
preferred majority interest in a joint venture with the seller of the Holiday
Office Park North and South in Lansing, Michigan. Under the equity method of
accounting, the Partnership recorded its initial interest in the joint venture
at cost and adjusts its investment account for its pro rata share of the
venture's income or loss and its distributions of cash flow (as defined by the
joint venture limited partnership agreement).
 
Reference is made to the Partnership's annual report for the year ended
December 31, 1994 for a description of other accounting policies and additional
details of the Partnership's financial condition, results of operations,
changes in Partners' 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 by the Partnership Agreement) as a
Partnership Management Fee. In addition, 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 Unit Holders. Net Losses (exclusive of Net
Losses from the sale or disposition of Partnership properties) are allocated 1%
to the General Partner and 99% to the Unit Holders. 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 Unit
Holders. Net Losses from the sale or disposition 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 Partners and 99% to the Unit Holders. 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 quarter and nine months
ended September 30, 1995, the General Partner was entitled to a Partnership
Management Fee and, accordingly, Net Profits of approximately $68,600 and
$198,200, respectively.
 
Fees and reimbursements paid and payable by the Partnership to Affiliates
during the quarter and nine months ended September 30, 1995 were as follows:
 
<TABLE>
<CAPTION>
                                                          Paid
                                                  --------------------
                                                  Quarter  Nine Months Payable
-------------------------------------------------------------------------------
<S>                                               <C>      <C>         <C>
Property management and leasing fees              $ 38,000  $103,900   $ 94,600
Reimbursement of property insurance premiums, at
 cost                                                6,200    18,700       None
Real estate commission (a)                            None      None     40,200
Reimbursement of expenses, at cost:
 (1) Accounting                                      3,900    12,500      6,400
 (2) Investor communication                          3,200    10,900     11,200
 (3) Legal                                           2,600     6,800       None
-------------------------------------------------------------------------------
                                                  $ 53,900  $152,800   $152,400
-------------------------------------------------------------------------------
</TABLE>
(a) As of September 30, 1995, the Partnership owed approximately $40,200 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, no Affiliate of the
    General Partner may receive payment of a real estate commission upon the
    sale of a Partnership property until Unit Holders 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
    Unit Holders) of 6% simple interest per annum on their Capital Investment
    from the initial investment date.
 
3. RESTRICTED CERTIFICATES OF DEPOSIT:
 
Restricted certificates of deposit include negotiable certificates of deposit
in the amounts of $25,000 and $12,500 which have been pledged as collateral for
security deposits to the Houston Lighting & Power Company and $25,000 which has
been pledged as collateral for security deposits to the Florida Lighting &
Power Company.
                                                                               4
<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, 1994, for a discussion of the Partnership's business.
 
As the Partnership progresses through the disposition phase of its life cycle,
management's discussion and analysis of financial condition and results of
operations is complicated to compare between periods. Results of net income and
cash flows as defined by generally accepted accounting principles ("GAAP") as
well as Cash Flow (as defined by the Partnership Agreement) are generally
expected to decline as real property interests are sold or disposed of since
the Partnership no longer receives the results generated from such real
property interests. Accordingly, rental income, depreciation and amortization
expense, property operating expenses, repairs and maintenance expenses, real
estate taxes and insurance are expected to decline as well, but will continue
to comprise the significant components of net income and cash flows (as defined
by GAAP) as well as Cash Flow (as defined by the Partnership Agreement) until
the final property is sold. Also, during the disposition phase, cash and cash
equivalents increase as Sale and Refinancing Proceeds are received and decrease
as the Partnership utilizes these proceeds for the purposes of distributions to
Limited Partners, making capital improvements and incurring leasing costs at
the Partnership's remaining properties or other working capital requirements.
Prior to being utilized for such purposes, these proceeds are invested in
short-term money market instruments. Sale and Refinancing Proceeds are excluded
from the determination of Cash Flow (as defined by the Partnership Agreement).
 
OPERATIONS
The table below is a recap of certain operating results of each of the
Partnership's properties for the quarters and nine months ended September 30,
1995 and 1994. 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   For the Nine Months
                           Ended               Ended
                     9/30/95  9/30/94   9/30/95    9/30/94
------------------------------------------------------------
<S>                  <C>      <C>      <C>        <C>
PARK PLAZA PROFESSIONAL BUILDING
Rental revenues      $424,100 $451,600 $1,281,700 $1,346,300
------------------------------------------------------------
Property net income  $ 92,800 $124,700 $  326,600 $  354,600
------------------------------------------------------------
Average occupancy       85.2%    88.6%      87.1%      88.0%
------------------------------------------------------------
ELLIS BUILDING
Rental revenues      $281,800 $291,800 $  846,400 $  827,000
------------------------------------------------------------
Property net income  $ 68,500 $ 90,400 $  222,700 $  224,000
------------------------------------------------------------
Average occupancy       90.8%    97.9%      94.1%      93.1%
------------------------------------------------------------
</TABLE>
<TABLE>
<S>                         <C>      <C>     <C>      <C>
3120 SOUTHWEST FREEWAY OFFICE BUILDING
Rental revenues             $57,000  $62,900 $178,700 $177,500
--------------------------------------------------------------
Property net (loss) income  $(4,900) $ 6,800 $  3,500 $  6,300
--------------------------------------------------------------
Average occupancy             87.6%    86.5%    91.9%    88.8%
--------------------------------------------------------------
WELLINGTON C; WELLINGTON NORTH OFFICE COMPLEX (B)
Rental revenues                                       $215,400
--------------------------------------------------------------
Property net income                                   $  5,200
--------------------------------------------------------------
Average occupancy                                        (b)
--------------------------------------------------------------
</TABLE>
(a) Excludes certain income and expense items which are either not directly
    related to individual property operating results such as interest income,
    general and administrative expenses and income from participation in joint
    venture or are related to properties previously owned by the Partnership.
(b) Wellington C of the Wellington North Office Complex (Wellington C) was sold
    on June 8, 1994. The property net income excludes the loss on the sale of
    the property of approximately $(48,700) which is included in the Statement
    of Income and Expenses for the nine months ended September 30, 1994.
 
Net income for the Partnership decreased $124,000 or 29.1% for the quarter
ended September 30, 1995 when compared to the quarter ended September 30, 1994.
The primary reasons for the decrease were: 1) decreased operating results at
the Ellis Building ("Ellis"), Park Plaza Professional Building ("Park Plaza")
and 3120 Southwest Freeway ("Southwest Freeway") totaling approximately
$65,500; 2) a decrease in income from the Partnership's equity investment in
the joint venture which owns Holiday Office Park North and South ("Holiday") of
$98,200 and 3) a slight increase in general and administrative expenses due to
an increase in professional fees and printing and mailing costs. Partially
offsetting the decrease in net income for the quarterly periods under
comparison was increased interest income of $37,800 due to an increase in rates
available on the Partnership's short-term investments.
 
Net income for the Partnership increased $223,800 for the nine months ended
September 30, 1995 when compared to the nine months ended September 30, 1994.
The primary reasons for the increase in net income for the nine-month periods
under comparison were: 1) increased interest income of approximately $221,000
due to an increase in rates available on the Partnership's short-term
investments; 2) the absence of the loss on the sale of Wellington C (see note
(b) to the table above) and 3) the 1995 receipt of 1994 a partial refund of
real estate taxes of $19,500 relating to the Wellington C property. Partially
offsetting the increase in net income for the nine-month periods under
comparison was: 1) decreased operating results at the Ellis, Park Plaza and
Southwest Freeway totaling approximately $32,100; 2) decreased income from the
Partnership's equity investment in the joint venture which owns Holiday of
approximately $20,900 and 3) a slight increase in general and administrative
expenses as previously discussed.
 
For purposes of the following discussion, the comparative operating results of
Wellington C have been excluded.
 
5
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
Rental revenues decreased by approximately $43,400 or 5.4% and $44,000 or 3%,
respectively, for the quarter and nine months ended September 30, 1995 when
compared to the quarter and nine months ended September 30, 1994. The primary
factor which caused the decrease was a decrease in rental revenues at Park
Plaza due to the following: 1) lower tenant expense reimbursements as a result
of an overestimate of prior year billings; 2) a decrease in parking lot income;
3) the recognition of security deposits as income in 1994 for tenants who early
vacated their space and 4) lower average occupancy. Partially offsetting the
decrease in rental revenues for the comparable nine-month periods was: 1)
increased rental revenues at Ellis primarily due to an increase in base rents,
partially offset by a decrease in real estate tax escalations and 2) a slight
increase in rental income at Southwest Freeway due to an increase in base rents
resulting from an increase in occupancy.
 
Real estate tax expense increased by $6,500 and $19,200, respectively, for the
quarter and nine months ended September 30, 1995 when compared to the quarter
and nine months ended September 30, 1994. The increase in real estate tax
expense was primarily due to a projected increase in the property's assessed
valuation and tax rate at Park Plaza, partially offset by a decrease at Ellis
as a result of a lower estimated liability in 1995 when compared to 1994.
 
Repairs and maintenance expense increased $7,800 for the quarter ended
September 30, 1995 when compared to the quarter ended September 30, 1994. The
primary factors which caused the increase were: 1) increases in heating,
ventilation and air conditioning repairs at Southwest Freeway, Ellis and Park
Plaza; 2) window repairs in 1995 at Southwest Freeway and 3) increased cleaning
supplies and uniforms at Ellis. Partially offsetting the increase in repairs
and maintenance for the quarterly periods under comparison was a reduction in
salaries for maintenance personnel at Park Plaza. Repairs and maintenance
expense decreased $5,300 for the nine months ended September 30, 1995 when
compared to the nine months ended September 30, 1994 primarily due to the
reduction in salaries for maintenance personnel at Park Plaza.
 
Property operating expenses increased by $15,900 for the quarterly comparable
periods. The primary factors which caused the increase in property operating
expenses were: 1) increased salaries, management fees and utilities at Ellis
and 2) increased professional fees at Park Plaza. Property operating expenses
decreased by approximately $4,500 for the nine-month comparable periods. The
primary factors which caused the decrease in property operating expenses were:
1) decreased management fees at Park Plaza; 2) decreased utilities at Southwest
Freeway and Park Plaza and 3) decreased professional fees at Southwest Freeway,
Park Plaza and Ellis. Partially offsetting the decrease in property operating
expenses for the nine-month comparable periods was increased management fees
and utilities at Ellis resulting from an increase in occupancy.
 
Depreciation and amortization expenses decreased for the quarterly and nine-
month periods under comparison $7,400 and $18,300, respectively, primarily as a
result of the provision for value impairment recorded at Park Plaza as of
December 31, 1994, partially offset by the depreciation of additional
improvements at all the Partnership's remaining properties.
 
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 and addressing any
expansion needs these tenants may have; 3) promotion of local broker events and
networking with local brokers; 4) networking with national level retailers; 5)
cold-calling other businesses and tenants in the market area; and 6) providing
rental concessions or competitively pricing rental rates depending on market
conditions.
 
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, such excess distributions will be treated
as a return of capital. Cash Flow (as defined in the Partnership Agreement) is
generally not equal to Partnership net income or cash flows as defined 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 by the Partnership Agreement)
should be examined in conjunction with an analysis of net income or cash flows
(as defined by GAAP). The following table includes a reconciliation of Cash
Flow (as defined by 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 Nine Months Ended
                                                9/30/95         9/30/94
----------------------------------------------------------------------------
<S>                                         <C>              <C>
Amount of Cash Flow (as defined in the
 Partnership Agreement)                     $     1,831,700  $    1,813,500
Items of reconciliation:
 Income from participation in joint venture         252,000         272,900
 Distributions from joint venture                  (346,000)       (440,100)
 Decrease in current assets                          15,700          82,000
 Increase (decrease) in current liabilities          64,000        (128,500)
----------------------------------------------------------------------------
Net cash provided by operating activities   $     1,817,400  $    1,599,800
----------------------------------------------------------------------------
Net cash (used for) provided by investing
 activities                                 $       (79,300) $    1,659,100
----------------------------------------------------------------------------
Net cash (used for) financing activities    $    (1,855,100) $     (707,100)
----------------------------------------------------------------------------
</TABLE>
 
                                                                               6
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
The increase in Cash Flow (as defined by the Partnership Agreement) of $18,200
for the nine months ended September 30, 1995 when compared to nine months ended
September 30, 1994 was primarily due to the increase in net income net of
distributions from the Partnership's equity investment in joint venture, as
previously discussed, exclusive of depreciation and amortization.
 
The decrease in the Partnership's cash position of $117,000 as of September 30,
1995 when compared to December 31, 1994 was primarily due to distributions paid
to Partners and payments for capital and tenant improvements exceeding cash
flow provided by operating activities and distributions received from joint
venture. Liquid assets of the Partnership are comprised of amounts held for
working capital purposes.
 
The increase in net cash provided by operating activities of $217,600 for the
nine months ended September 30, 1995 when compared to the nine months ended
September 30, 1994 was primarily due to the increase in net income, as
previously discussed, and to a lesser extent the timing of the payment of
certain Partnership's expenses.
 
Net cash provided by (used for) investing activities changed from $1,659,100
for the nine months ended September 30, 1994 to $(79,300) for the nine months
ended September 30, 1995. The change was primarily due to the net proceeds
received from the sale of Wellington C on June 8, 1994. Also affecting the
change in net cash provided by investing activities was the decrease in
payments made for building and tenant improvements and leasing costs to the
Partnership's properties. The Partnership maintains working capital reserves to
pay for capital expenditures such as building and tenant improvements and
leasing costs. During the nine months ended September 30, 1995, the Partnership
spent $196,200 for building and tenant improvements and leasing costs and has
budgeted to spend approximately $521,000 during the remainder of 1995. Of the
remaining budgeted amount, approximately $391,000, $70,000 and $60,000 relates
to anticipated capital and tenant improvements and leasing costs expected to be
incurred at Ellis, Southwest Freeway, and Park Plaza, respectively. In
addition, approximately $490,000 is budgeted to be advanced to the
Partnership's joint venture investment in Holiday for capital and tenant
improvements and leasing costs. 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.
 
The increase in net cash used for financing activities of $1,148,000 for the
nine months ended September 30, 1995 when compared to the nine months ended
September 30, 1994 was due primarily to an increase in distributions paid to
Partners.
 
The General Partner continues to take a conservative approach to projections of
future rental income and to maintain higher 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. For the
nine months ended September 30, 1995, the Partnership utilized $150,200 of
previously undistributed Cash Flow (as defined by the Partnership Agreement) in
its 1995 distributions to the Partners.
 
Distributions to Limited Partners for the quarter ended September 30, 1995 were
declared in the amount of $13.50 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, there can be no
assurance of the availability of cash for distribution to Partners.
 
7
<PAGE>
   

                          PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

        (a) Exhibits: Financial Data Schedule

        (b) Reports on Form 8-K:

            There were no reports filed on Form 8-K during the quarter ended
            September 30, 1995.


<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: November 14, 1995      By: /s/ DOUGLAS CROCKER II
      -----------------          -----------------------------------------
                                     DOUGLAS CROCKER II
                                   President and Chief Executive Officer

Date: November 14, 1995      By: /s/ NORMAN M. FIELD
      -----------------          -----------------------------------------
                                     NORMAN M. FIELD
                                   Vice President - Finance and Treasurer