<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, 1998
                               ------------------------------------
 
                                      OR
 
[_[  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
 
     For the transition period from ____________________ to ____________________
 
     Commission File Number                            0-12945
                                    --------------------------------------------
 
 
               First Capital Institutional Real Estate, Ltd. - 2
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)

          Florida                                                59-2313852
-------------------------------                             --------------------
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                              Identification No.)

Two North Riverside Plaza, Suite 1000, Chicago, Illinois         60606-2607
--------------------------------------------------------    --------------------
       (Address of principal executive offices)                  (Zip Code)
 
                                (312) 207-0020
--------------------------------------------------------------------------------
             (Registrant's telephone number, including area code)
 
                                Not applicable
--------------------------------------------------------------------------------
             (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 Partnership's Prospectus dated October 19, 1983,
included in the Partnership's Registration Statement on Form S-11, is
incorporated herein by reference in Part I of this report.
<PAGE>
 
ITEM 2. 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, 1997 for a discussion of the Partnership's business.
 
Statements contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, which are not historical facts, may be
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof.
 
One of the Partnership's objectives is to dispose of its properties when market
conditions allow for the maximum possible sales price. 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. Components of the
Partnership's operating results are expected to decline as real property
interests are sold since the Partnership no longer receives income nor incurs
expenses from such real property interests. During the nine months ended
September 30, 1998, the Partnership sold its remaining three investments in
real property.
 
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,
1998 and 1997. 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
                                              9/30/98   9/30/97   9/30/98     9/30/97
-------------------------------------------------------------------------------------------
<S>                                           <C>       <C>      <C>         <C>        <C>
ELLIS BUILDING (50%) (B)
Rental revenues                               $180,100  $317,100 $  840,700  $  956,400
-------------------------------------------------------------------------------------------
Property net income                           $ 15,200  $109,400 $  261,600  $  328,600
-------------------------------------------------------------------------------------------
HOLIDAY OFFICE PARK NORTH AND SOUTH (50%) (B)
Rental revenues                               $428,600  $469,600 $1,236,900  $1,253,200
-------------------------------------------------------------------------------------------
Property net income                           $114,000  $108,500 $  284,900  $  280,500
-------------------------------------------------------------------------------------------
MARKETPLACE AT RIVERGATE SHOPPING CENTER (B)
Rental revenues                               $      0  $232,400 $  198,200  $  775,500
-------------------------------------------------------------------------------------------
Property net (loss) income                    $ (4,700) $ 98,000 $  142,300  $  392,600
-------------------------------------------------------------------------------------------
SOLD PROPERTIES (C)
Rental revenues                               $(26,600) $418,500 $  (26,200) $2,176,400
-------------------------------------------------------------------------------------------
Property net (loss) income                    $(27,900) $100,800 $  (17,500) $  719,700
-------------------------------------------------------------------------------------------
</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 from short-term investments and general and administrative expenses.
    The Partnership's share of results from its participation in a joint
    venture, treated under the equity method, is included above.
(b) Ellis Building ("Ellis"), Holiday Office Park North and South ("Holiday")
    and Marketplace at Rivergate ("Rivergate") were sold on August 21, 1998,
    September 22, 1998 and March 4, 1998, respectively. Property net income
    excludes the gains recorded on the sales of these properties.
(c) Sold Properties includes the results of Lakewood Square Shopping Center
    ("Lakewood"), 12621 Featherwood Office Building, Banana River Square
    Shopping Center ("Banana River") and Foxhall Square Office Building
    ("Foxhall") (all of which were sold in 1997). Property net income excludes
    the gains and loss recorded on the sales of these properties.
 
Unless otherwise disclosed, discussions of fluctuations between 1998 and 1997
refer to both the quarters and nine months ended September 30, 1998 and 1997.
 
Net income increased by $3,808,200 and $4,555,500 for the quarter and nine
months ended September 30, 1998 when compared to the quarter and nine months
ended September 30, 1997, respectively. The increases were primarily due to the
1998 gains recognized on the sales of Ellis, Holiday and Rivergate exceeding
the 1997 gains recorded on the sales of Banana River and Lakewood. The
Rivergate and Lakewood gains influenced the nine-month periods under comparison
only. The increases were partially offset by diminished operating results due
to the sales of the Partnership properties.
 
Net income, exclusive of properties sold in 1998 and 1997, decreased by $31,900
and $24,700 for the quarter and nine months ended September 30, 1998 when
compared to the quarter and nine months ended September 30, 1997, respectively.
The decrease for the quarterly periods under comparison was primarily due to a
decrease in interest earned on the Partnership's short-term investments due to
a decrease in cash available for investment. The decrease for the nine-month
periods under comparison was primarily due to the tax paid to the District of
Columbia.
 
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.
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 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 Nine
                                                 Months Ended
                                             9/30/98       9/30/97
----------------------------------------------------------------------
<S>                                        <C>           <C>
Cash Flow (as defined in the Partnership
 Agreement)                                $  1,376,000  $  3,065,500
Less: Cash Flow from joint venture             (525,100)     (497,000)
Items of reconciliation:
 (Increase) decrease in current assets          (90,300)       79,200
 (Decrease) in current liabilities             (127,800)     (128,500)
----------------------------------------------------------------------
Net cash provided by operating activities  $    632,800  $  2,519,200
----------------------------------------------------------------------
Net cash provided by investing activities  $ 20,088,500  $ 10,969,300
----------------------------------------------------------------------
Net cash (used for) financing activities   $(17,679,800) $(11,011,900)
----------------------------------------------------------------------
</TABLE>
 
The decrease in Cash Flow (as defined in the Partnership Agreement) of
$1,689,500 for the nine months ended September 30, 1998 when compared to nine
months ended September 30, 1997 was primarily the result of the absence of 1998
results from the Sold Properties, exclusive of depreciation, amortization and
gains on sale, as previously discussed.
 
 
                                                                               2
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
The increase in the Partnership's cash position of $3,041,500 for the nine
months ended September 30, 1998 was primarily the result of the receipt of
Sales Proceeds from Rivergate, Ellis and Holiday and net cash provided by
operating activities exceeding distributions paid to Partners and the net
additional investments in debt securities. Liquid assets (including cash, cash
equivalents and investments in debt securities) as of September 30, 1998 were
comprised of amounts held for working capital purposes and undistributed Sales
Proceeds.
 
The decrease of $1,886,400 in cash provided by operating activities for the
nine months ended September 30, 1998 when compared to the nine months ended
September 30, 1997 was primarily due to the absence of operating results from
the Sold Properties, exclusive or depreciation, amortization and gains and
sale, as previously discussed.
 
Net cash provided by investing activities increased by $9,119,200 for the nine
months ended September 30, 1998 when compared to the nine months ended
September 30, 1997. The increase was primarily due to the increase in
distributions received from the Partnership's equity investment in Holiday,
which was due to the sale of the property. The increase was also due to a
smaller increase in investments in debt securities in 1998. The investments in
debt securities are a result of the continued 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 or
prior to distribution to Limited Partners. These investments are of investment-
grade and generally mature less than one year from their date of purchase.
 
On September 22, 1998, the Partnership's investment in joint venture completed
the sale of Holiday. The Partnership's share of Sale Proceeds from this
transaction amounted to $6,526,800, which was net of actual and estimated
closing expenses. In connection with this sale, on February 28, 1999, the
Partnership intends to distribute $6,499,700 or $76.57 per Unit to Limited
Partners of record as of September 22, 1998.
 
On August 21, 1998, a joint venture in which the Partnership owned a 50%
interest completed the sale of Ellis. Sale Proceeds from this transaction
amounted to $6,679,000, which was net of actual and estimated closing expenses.
In connection with this sale, on February 28, 1999, the Partnership intends to
distribute $6,672,900 or $78.61 per Unit to Limited Partners of record as of
August 21, 1998.
 
On March 4, 1998, the Partnership completed the sale of Rivergate. Sale
Proceeds from this transaction amounted to $7,823,200, which was net of closing
expenses. In connection with this sale, on August 31, 1998, the Partnership
distributed $7,824,800 or $92.18 per Unit to Limited Partners of record as of
March 4, 1998.
 
The increase of $6,667,900 in net cash used for financing activities for the
nine months ended September 30, 1998 when compared to the nine months ended
September 30, 1997 was due primarily to the amount of 1998 special
distributions of Sales Proceeds exceeding the amount of 1997 special
distributions of Sales Proceeds.
 
Distributions to Limited Partners for the quarter ended September 30, 1998 were
declared in the amount of $169,700, or $2.00 per Unit. Cash distributions are
made 60 days after the last day of each fiscal quarter.
 
The Year 2000 problem is the result of the inability of existing computer
programs to distinguish between a year beginning with "20" rather than "19".
This is the result of computer programs using two rather than four digits to
define an applicable year. If not corrected, any program having time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a variety of problems including miscalculations,
loss of data and failure of entire systems. Critical areas that could be
effected are accounts receivable, accounts payable, general ledger, cash
management, investor services, computer hardware and telecommunications
systems.
 
The Partnership has engaged Affiliated and unaffiliated entities to perform all
of its critical functions that utilize software that may have time-sensitive
applications. All of these service providers are providing these services for
their own organizations as well as for their clients. The General Partner, on
behalf of the Partnership, has been in close communication with each of these
service providers regarding steps that they are taking to assure that there
will be no serious interruption of the operations of the Partnership resulting
from Year 2000 problems. Based on the results of these inquires, as well as a
review of the disclosures by these service providers, the General Partner
believes that the Partnership will be able to continue normal business
operations and will incur no material costs related to Year 2000 issues.
 
The Partnership has not formulated a contingency plan. However, the General
Partner believes that based on the status of the Partnership's real estate
portfolio and its limited number of transactions, aside from catastrophic
failures of banks, governmental agencies, etc., it could carry out
substantially all of its critical operations on a manual basis or easily
convert to systems that are Year 2000 compliant.
 
As described in Note 4 of Notes to Financial Statements, there is uncertainty
surrounding an environmental matter at Lakewood. The General Partner is
continuing to monitor the documentation delivered by the purchaser of Lakewood
regarding the purchaser's activities to remedy the hazardous substances at
Lakewood. There can be no assurance as to the actual timeframe for the
remediation or that it will be completed without cost to the Partnership.
 
As disclosed above, the Partnership consummated the sale of its last remaining
property in September 1998. The General Partner has begun the process of
winding up the affairs of the Partnership. This process will include the
resolution of all post closing property sale matters. In addition, the
environmental matter at Lakewood will be closely monitored. As result of these
matters, it will be necessary for the Partnership to remain open. Following the
February 28, 1999 distributions of Sales Proceeds, distributions will be
suspended. When the environmental matter is satisfactorily remediated and the
other post closing matters are resolved, the Partnership will pay a liquidating
distribution of the remaining assets held by the Partnership, less amounts
reserved for administrative expenses and any amounts deemed necessary for
contingencies and other post closing matters.
 
3
<PAGE>
 
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 
FIRST CAPITAL INSTITUTIONAL REAL ESTATE, LTD.-2
BALANCE SHEETS
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                                 September 30,
                                                     1998      December 31,
                                                  (Unaudited)      1997
---------------------------------------------------------------------------
<S>                                              <C>           <C>
ASSETS
Investment in commercial rental properties:
 Land                                             $            $ 3,848,300
 Buildings and improvements                                     11,067,100
---------------------------------------------------------------------------
                                                                14,915,400
Accumulated depreciation and amortization                       (4,804,100)
---------------------------------------------------------------------------
 Total investment properties, net of accumulated
  depreciation and amortization                                 10,111,300
Cash and cash equivalents                          17,486,100   14,444,600
Investments in debt securities                      1,500,000
Restricted cash                                        50,000       50,000
Rents receivable                                      166,100       67,300
Investment in joint venture                                      5,311,400
Other assets                                           26,600       35,100
---------------------------------------------------------------------------
                                                  $19,228,800  $30,019,700
---------------------------------------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
 Accounts payable and accrued expenses            $   208,100  $   220,100
 Due to Affiliates                                     44,900       52,100
 Distributions payable                             13,361,200    8,768,000
 Security deposits                                                  49,500
 Other liabilities                                      3,500       56,900
---------------------------------------------------------------------------
                                                   13,617,700    9,146,600
---------------------------------------------------------------------------
Partners' capital:
 General Partner                                       72,900          --
 Limited Partners (84,886 Units issued and
  outstanding)                                      5,538,200   20,873,100
---------------------------------------------------------------------------
                                                    5,611,100   20,873,100
---------------------------------------------------------------------------
                                                  $19,228,800  $30,019,700
---------------------------------------------------------------------------
</TABLE>
 
STATEMENTS OF PARTNERS' CAPITAL
For the nine months ended September 30, 1998 (Unaudited) and the year ended
December 31, 1997
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                          General     Limited
                                          Partner     Partners       Total
-------------------------------------------------------------------------------
<S>                                      <C>        <C>           <C>
Partners' (deficit) capital, January 1,
 1997                                    $(131,300)  $42,797,500   $42,666,200
Net income for the year ended December
 31, 1997                                  381,300     3,663,600     4,044,900
Distributions for the year ended
 December 31, 1997                        (250,000)  (25,588,000)  (25,838,000)
-------------------------------------------------------------------------------
Partners' capital, December 31, 1997           --     20,873,100    20,873,100
Net income for the nine months ended
 September 30, 1998                        195,500     6,766,000     6,961,500
Distributions for the nine months ended
 September 30, 1998                       (122,600)  (22,100,900)  (22,223,500)
-------------------------------------------------------------------------------
Partners' capital, September 30, 1998    $  72,900  $  5,538,200  $  5,611,100
-------------------------------------------------------------------------------
</TABLE>
    The accompanying notes are an integral part of the financial statements.
                                                                               4
<PAGE>
 
FIRST CAPITAL INSTITUTIONAL REAL ESTATE, LTD. - 2
STATEMENTS OF INCOME AND EXPENSES
For the quarters ended September 30, 1998 and 1997
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
 
<TABLE>
<CAPTION>
                                                              1998      1997
-------------------------------------------------------------------------------
 <S>                                                       <C>        <C>
 Income:
 Rental                                                    $  153,500 $ 989,500
 Interest                                                     205,500   254,300
 Gain on sales of property                                  2,947,100   251,300
-------------------------------------------------------------------------------
                                                            3,306,100 1,495,100
-------------------------------------------------------------------------------
 Expenses:
 Depreciation and amortization                                 39,700   216,600
 Property operating:
  Affiliates                                                   17,200    75,700
  Nonaffiliates                                                45,200   187,500
 Real estate taxes                                              8,200    81,000
 Insurance--Affiliate                                           1,700    13,200
 Repairs and maintenance                                       60,000   133,800
 General and administrative:
  Affiliates                                                    9,000    10,400
  Nonaffiliates                                                27,000    42,500
-------------------------------------------------------------------------------
                                                              208,000   760,700
-------------------------------------------------------------------------------
 Income before income from participation in joint venture   3,098,100   734,400
 Income from participation in joint venture:
 Operations                                                   114,000   108,500
 Gain on sale of property                                   1,439,000
-------------------------------------------------------------------------------
 Net income                                                $4,651,100 $ 842,900
-------------------------------------------------------------------------------
 Net income allocated to General Partner                   $   62,700 $  52,400
-------------------------------------------------------------------------------
 Net income allocated to Limited Partners                  $4,588,400 $ 790,500
-------------------------------------------------------------------------------
 Net income allocated to Limited Partners per Unit
  (84,886 Units outstanding)                               $    54.05 $    9.31
-------------------------------------------------------------------------------
</TABLE>
 
STATEMENTS OF INCOME AND EXPENSES
For the nine months ended September 30, 1998 and 1997
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
 
<TABLE>
<CAPTION>
                                                       1998       1997
-------------------------------------------------------------------------
 <S>                                                <C>        <C>
 Income:
 Rental                                             $1,012,700 $3,948,800
 Interest                                              613,800    514,200
 Gain on sales of property                           4,586,400    378,100
-------------------------------------------------------------------------
                                                     6,212,900  4,841,100
-------------------------------------------------------------------------
 Expenses:
 Depreciation and amortization                         199,700    821,100
 Property operating:
  Affiliates                                            63,700    206,800
  Nonaffiliates                                        183,200    667,100
 Real estate taxes                                      55,400    357,900
 Insurance--Affiliate                                    7,700     40,700
 Repairs and maintenance                               141,900    422,600
 General and administrative:
  Affiliates                                            26,700     26,300
  Nonaffiliates                                        125,800    172,100
-------------------------------------------------------------------------
                                                       804,100  2,714,600
-------------------------------------------------------------------------
 Income before income from participation in joint
  venture and state income tax expense               5,408,800  2,126,500
 Income from participation in joint venture:
  Operations                                           284,900    280,500
  Gain on sale of property                           1,439,000
-------------------------------------------------------------------------
 Income before state income tax expense              7,132,700  2,407,000
 State income tax expense                              171,200      1,000
-------------------------------------------------------------------------
 Net income                                         $6,961,500 $2,406,000
-------------------------------------------------------------------------
 Net income allocated to General Partner            $  195,500 $  329,400
-------------------------------------------------------------------------
 Net income allocated to Limited Partners           $6,766,000 $2,076,600
-------------------------------------------------------------------------
 Net income allocated to Limited Partners per Unit
  (84,886 Units outstanding)                        $    79.71 $    24.46
-------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1998 and 1997
(Unaudited)
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                                      1998         1997
----------------------------------------------------------------------------
 <S>                                               <C>          <C>
 Cash flows from operating activities:
 Net income                                        $ 6,961,500  $ 2,406,000
 Adjustments to reconcile net income to net cash
  provided by operating activities:
  Depreciation and amortization                        199,700      821,100
  (Income) from participation in joint venture      (1,723,900)    (280,500)
  Gain on sales of property                         (4,586,400)    (378,100)
  Changes in assets and liabilities:
   (Increase) decrease in rents receivable             (98,800)      32,800
   Decrease in other assets                              8,500       46,400
   (Decrease) in accounts payable and accrued
    expenses                                           (12,000)     (15,300)
   (Decrease) in due to Affiliates                      (7,200)      (6,800)
   (Decrease) in other liabiliities                    (53,400)    (106,400)
----------------------------------------------------------------------------
   Net cash provided by operating activities           688,000    2,519,200
----------------------------------------------------------------------------
 Cash flows from investing activities:
 Payments for capital and tenant improvements           (4,100)    (371,700)
 (Increase) in investments in debt securities,
  net                                               (1,500,000)  (4,391,900)
 Proceeds from sales of property                    14,502,100   15,096,200
 Distributions received from joint venture           7,090,500      636,700
----------------------------------------------------------------------------
   Net cash provided by investing activities        20,088,500   10,969,300
----------------------------------------------------------------------------
 Cash flows from financing activities:
 Distributions paid to Partners                    (17,630,300) (10,969,300)
 (Decrease) in security deposits                       (49,500)     (42,600)
----------------------------------------------------------------------------
   Net cash (used for) financing activities        (17,679,800) (11,011,900)
----------------------------------------------------------------------------
 Net increase in cash and cash equivalents           3,096,700    2,476,600
 Cash and cash equivalents at the beginning of
  the period                                        14,444,600    4,573,400
----------------------------------------------------------------------------
 Cash and cash equivalents at the end of the
  period                                           $17,541,300  $ 7,050,000
----------------------------------------------------------------------------
</TABLE>
    The accompanying notes are an integral part of the financial statements.
                                                                               5
<PAGE>
 
FIRST CAPITAL INSTITUTIONAL REAL ESTATE, LTD.-2
 
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
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"). The Partnership utilizes the accrual
method of accounting. Under this method, 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 quarter and nine months ended September 30, 1998 are not necessarily
indicative of the operating results for the year ending December 31, 1998.
 
The financial statements include the Partnership's 50% interest in a joint
venture with an Affiliated partnership. This joint venture was formed for the
purpose of acquiring a 100% interest in certain real property and until its
sale in August 1998, was 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' capital is included in
the financial statements.
 
Investment in joint venture represents 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 limited partnership with the sellers of the Lansing, Michigan
property ("Holiday"). Under the equity method of accounting, the Partnership
recorded its initial interest at cost and adjusts its investment account for
its share of Holiday's income or loss and its distributions of cash flow (as
defined in the limited partnership 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. Repair and maintenance costs are expensed
against operations as incurred; expenditures for improvements are capitalized
to the appropriate property accounts and depreciated over the estimated life of
such improvements.
 
The Partnership evaluates its rental properties for impairment when conditions
exist which indicate that it is probable that the sum of expected future cash
flows (undiscounted) from a property is less than its carrying basis. Upon
determination that an impairment has occurred, the 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. Any gain or loss is 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, which approximated fair
market value. All of these securities had maturities of less than one year when
purchased.
 
Certain reclassifications have been made to the previously reported 1997
statements in order to provide comparability with the 1998 statements. These
reclassifications have no effect on net income or Partners' capital.
 
Reference is made to the Partnership's annual report for the year ended
December 31, 1997 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 October 19, 1984,
the Termination of the Offering, the General Partner is entitled to 10% of 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: first, to the General Partner, in an
amount equal to the greater of the General Partner's Partnership Management Fee
or 1% of such Net Profits; second, the balance, if any, 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 the General Partner and the Limited 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
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 (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 Losses from the sale, disposition
or provision for value impairment of Partnership properties are allocated:
first, prior to giving
 
                                                                               6
<PAGE>
 
effect to any distributions of Sale Proceeds from the transaction, to the
extent that the balance in the General Partner's capital account exceeds its
Capital Investment or the balance in the capital accounts of the Limited
Partners exceeds the amount of their Capital Investment (the "Excess
Balances"), to the General Partner and the Limited Partners pro rata in
proportion to such Excess Balances until such Excess Balances are reduced to
zero; second, to the General Partner and the Limited Partners and among them
(in the ratio which balances) until the balance in their capital accounts shall
be reduced to zero; third, the balance, if any, 99% to the Limited Partners and
1% to the General Partner. Notwithstanding the foregoing, in all events there
shall be allocated to the General Partner not less than 1% of Net Profits and
Net Losses from the sale, disposition or provision for value impairment of a
Partnership property. For the quarter and nine months ended September 30, 1998,
the General Partner was paid a Partnership Management Fee, and allocated Net
Profits, of $18,800 and $122,600, respectively. In addition, the General
Partner was allocated Net Profits totaling $43,900 and $72,900 for the quarter
and nine months ended September 30, 1998, respectively, from the sales of
Partnership property.
 
Fees and reimbursements paid and (receivable)/payable by the Partnership to
Affiliates during the quarter and nine months ended September 30, 1998 were as
follows:
 
<TABLE>
<CAPTION>
                                                        Paid
                                                            Nine   (Receivable)
                                                  Quarter  Months    Payable
-------------------------------------------------------------------------------
<S>                                               <C>     <C>      <C>
Property management and leasing fees              $14,600 $ 66,100   $(8,000)
Reimbursement of property insurance premiums, at
 cost                                               3,100    7,700      None
Real estate commissions (a)                          None     None    40,300
Legal                                               7,600   44,700     9,000
Reimbursement of expenses, at costs
 --Accounting                                       2,300   12,200     2,200
 --Investor communications                          3,400    7,600     1,400
-------------------------------------------------------------------------------
                                                  $31,000 $138,300   $44,900
-------------------------------------------------------------------------------
</TABLE>
(a) As of September 30, 1998, 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 Capital Investment from the initial investment date).
 
3. PROPERTY SALES:
 
On September 22, 1998, the joint venture in which the Partnership owns a 50%
interest, treated under the equity method, consummated the sale of its
property, Holiday Office Park North and South, located in Ann Arbor, Michigan
for a sale price of $13,500,000. The Partnership's share of Sale Proceeds from
this transaction was $6,526,800, which was net of actual and estimated closing
expenses. The Partnership reported a gain of $1,439,000 for financial reporting
purposes in connection with this sale and will distribute $6,499,700 or $76.57
per Unit, on February 28, 1999 to Limited Partners of record as of September
22, 1998.
 
On August 21, 1998, a joint venture in which the Partnership owns a 50%
interest consummated the sale of the Ellis Building, located in Sarasota,
Florida for a sale price of $13,875,000. The Partnership's share of Sale
Proceeds from this transaction was $6,679,000, which was net of actual and
estimated closing expenses. The Partnership recorded a gain of $2,947,100 for
financial reporting purposes in connection with this sale and will distribute
$6,672,900 or $78.61 per Unit, on February 28, 1999 to Limited Partners of
record as of August 21, 1998.
 
On March 4, 1998, the Partnership consummated the sale of Marketplace at
Rivergate Shopping Center, located in Nashville, Tennessee, for a sale price of
$8,128,000. Sale Proceeds from this transaction amounted to $7,823,200, which
was net of closing expenses. The Partnership reported a gain of $1,639,300 for
the nine months ended September 30, 1998 and distributed $7,824,800 or $92.18
per Unit on August 31, 1998 to Limited Partners of record as of March 4, 1998.
 
4. ENVIRONMENTAL MATTER:
 
In December 1996, the General Partner became aware of the existence of
hazardous substances in the soil and groundwater under Lakewood Square Shopping
Center ("Lakewood"). In connection with the 1997 sale of Lakewood, the
purchaser assumed the obligation to remedy the hazardous substances in the
manner required by law, which includes, but is not limited to, payment of all
costs in connection with the remediation work. In addition, the purchaser
provided the Partnership with certain indemnification protection in relation to
clean-up costs and related expenses arising from the presence of these
hazardous substances. At the present time, the General Partner is unaware of
any claims or other matters referred to above against the Partnership. In
November 1998, the purchaser submitted its corrective action plan (the "Plan")
for the site to the California Regional Water Quality Control Board ("Water
Board"). The Plan provides for the recommended method for cleanup and the
obtaining of regulatory approval upon completion, together with a timetable.
Based upon this timetable, the purchaser expects Water Board approval of the
Plan by December 1998. The General Partner is monitoring the documentation
delivered by the purchaser regarding the purchaser's activities to remedy the
hazardous substances at Lakewood.
 
5. STATE INCOME TAX EXPENSE:
 
State income tax expense is comprised substantially of a tax imposed by the
District of Columbia based on taxable income.
 
7
<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. - 2

                                   By:    FIRST CAPITAL FINANCIAL CORPORATION
                                          GENERAL PARTNER

Date:  November 13, 1998           By:    /s/  DOUGLAS CROCKER II
       -----------------                  --------------------------------------
                                               DOUGLAS CROCKER II
                                          President and Chief Executive Officer

Date:  November 13, 1998           By:    /s/  NORMAN M. FIELD
       -----------------                  --------------------------------------
                                               NORMAN M. FIELD
                                          Vice President - Finance and Treasurer

                                       
<PAGE>
 
 
                          PART II. OTHER INFORMATION


Item 6.  Exhibits and Reports on Form 8-K:
------------------------------------------

         (a)  Exhibits: None

         (b)  Reports on Form 8-K:

                  A report on Form 8-K was filed on September 8, 1998, reporting
                    the sale of Ellis.
                  A report on Form 8-K was filed on October 6, 1998, reporting
                    the sale of Holiday.