<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, 1996
                          ------------------------------------------------------
 
                                      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 950, 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>
 
BALANCE SHEETS
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                          September 30,
                                              1996       December 31,
                                           (Unaudited)       1995
------------------------------------------------------------------------------
<S>                                       <C>            <C>           <C> <C>
ASSETS
Investment in commercial rental
 properties:
 Land                                     $ 10,237,400   $ 10,237,400
 Buildings and improvements                 35,924,000     35,221,500
------------------------------------------------------------------------------
                                            46,161,400     45,458,900
Accumulated depreciation and
 amortization                              (13,497,200)   (12,556,200)
------------------------------------------------------------------------------
 Total investment properties, net of
  accumulated depreciation and
  amortization                              32,664,200     32,902,700
Cash and cash equivalents                    3,040,800     12,268,000
Investments in debt securities               7,695,600
Restricted cash                                 50,000         25,000
Rents receivable                                87,600        169,800
Investment in joint venture                  4,828,400      4,620,200
Other assets (including amount due from
 joint venture of $895,800 and $804,400,
 respectively)                                 917,800        817,400
------------------------------------------------------------------------------
                                          $ 49,284,400   $ 50,803,100
------------------------------------------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
 Accounts payable and accrued expenses    $    450,800   $    491,000
 Due to Affiliates                              81,100         74,900
 Distributions payable                       5,857,100      1,273,300
 Security deposits                             132,800        136,200
 Other liabilities                              68,000        112,200
------------------------------------------------------------------------------
                                             6,589,800      2,087,600
------------------------------------------------------------------------------
Partners' capital:
 General Partners (deficit)                   (131,300)      (131,300)
 Limited Partners (84,886 Units issued
  and outstanding)                          42,825,900     48,846,800
------------------------------------------------------------------------------
                                            42,694,600     48,715,500
------------------------------------------------------------------------------
                                          $ 49,284,400   $ 50,803,100
------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF PARTNERS' CAPITAL
For the nine months ended September 30, 1996 (Unaudited) and the year ended
December 31, 1995
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                            General     Limited
                                            Partner    Partners       Total
-------------------------------------------------------------------------------
<S>                                        <C>        <C>          <C>
Partners' (deficit) capital, January 1,
 1995                                      $(121,300) $51,849,600  $51,728,300
Net income for the year ended December
 31, 1995                                    471,000    1,326,300    1,797,300
Distributions for the year ended December
 31, 1995                                   (481,000)  (4,329,100)  (4,810,100)
-------------------------------------------------------------------------------
Partners' (deficit) capital, December 31,
 1995                                       (131,300)  48,846,800   48,715,500
Net income for the nine months ended
 September 30, 1996                          339,500    2,043,300    2,382,800
Distributions for the nine months ended
 September 30, 1996                         (339,500)  (8,064,200)  (8,403,700)
-------------------------------------------------------------------------------
Partners' (deficit) capital, September
 30, 1996                                  $(131,300) $42,825,900  $42,694,600
-------------------------------------------------------------------------------
</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, 1996 and 1995
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
 
<TABLE>
<CAPTION>
                                                         1996       1995
---------------------------------------------------------------------------
<S>                                                   <C>        <C>
Income:
 Rental                                               $1,589,600 $1,502,600
 Interest                                                176,400    199,200
---------------------------------------------------------------------------
                                                       1,766,000  1,701,800
---------------------------------------------------------------------------
Expenses:
 Depreciation and amortization                           315,600    338,600
 Property operating:
 Affiliates                                               87,100     79,700
 Nonaffiliates                                           243,300    259,600
 Real estate taxes                                       139,100    143,300
 Insurance--Affiliate                                     19,400     16,200
 Repairs and maintenance                                 190,800    191,300
 General and administrative:
 Affiliates                                               17,000     32,800
 Nonaffiliates                                            44,400     48,100
---------------------------------------------------------------------------
                                                       1,056,700  1,109,600
---------------------------------------------------------------------------
Net income before income from participation in joint
 venture                                                 709,300    592,200
Income from participation in joint venture                62,600     61,200
---------------------------------------------------------------------------
Net income                                            $  771,900 $  653,400
---------------------------------------------------------------------------
Net income allocated to General Partner               $   84,800 $  122,600
---------------------------------------------------------------------------
Net income allocated to Limited Partners              $  687,100 $  530,800
---------------------------------------------------------------------------
Net income allocated to Limited Partners per Unit
 (84,886 Units outstanding)                           $     8.09 $     6.25
---------------------------------------------------------------------------
</TABLE>
 
STATEMENTS OF INCOME AND EXPENSES
For the nine months ended September 30, 1996 and 1995
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
<TABLE>
<CAPTION>
                                                         1996       1995
---------------------------------------------------------------------------
<S>                                                   <C>        <C>
Income:
 Rental                                               $4,779,800 $4,621,100
 Interest                                                532,900    678,000
---------------------------------------------------------------------------
                                                       5,312,700  5,299,100
---------------------------------------------------------------------------
Expenses:
 Depreciation and amortization                           941,000  1,003,700
 Property operating:
 Affiliates                                              290,900    282,200
 Nonaffiliates                                           708,900    681,100
 Real estate taxes                                       415,900    397,700
 Insurance--Affiliate                                     58,100     48,600
 Repairs and maintenance                                 532,700    524,100
 General and administrative:
 Affiliates                                               48,500     55,100
 Nonaffiliates                                           208,500    193,000
---------------------------------------------------------------------------
                                                       3,204,500  3,185,500
---------------------------------------------------------------------------
Net income before income from participation in joint
 venture                                               2,108,200  2,113,600
Income from participation in joint venture               274,600    252,000
---------------------------------------------------------------------------
Net income                                            $2,382,800 $2,365,600
---------------------------------------------------------------------------
Net income allocated to General Partner               $  339,500 $  353,700
---------------------------------------------------------------------------
Net income allocated to Limited Partners              $2,043,300 $2,011,900
---------------------------------------------------------------------------
Net income allocated to Limited Partners per Unit
 (84,886 Units outstanding)                           $    24.07 $    23.70
---------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1996 and 1995
(Unaudited)
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                                          1996          1995
---------------------------------------------------------------------------------
<S>                                                    <C>           <C>
Cash flows from operating activities:
 Net income                                            $ 2,382,800   $ 2,365,600
 Adjustments to reconcile net income to net cash
  provided by operating activities:
 Depreciation and amortization                             941,000     1,003,700
 (Income) from participation in joint venture             (274,600)     (252,000)
 Changes in assets and liabilities:
  Decrease in rents receivable                              82,200        12,300
  (Increase) decrease in other assets                       (9,000)      160,800
  (Decrease) increase in accounts payable and accrued
   expenses                                                (40,200)       57,700
  Increase in due to Affiliates                              6,200        33,000
  (Decrease) in other liabilities                          (44,200)      (10,600)
---------------------------------------------------------------------------------
   Net cash provided by operating activities             3,044,200     3,370,500
---------------------------------------------------------------------------------
Cash flows from investing activities:
 Payments for capital and tenant improvements             (702,500)     (283,300)
 (Increase) in investments in debt securities           (7,695,600)
 (Increase) in restricted cash                             (25,000)
 (Funding of) loans to joint venture                       (91,400)      (85,400)
 Distributions received from joint venture                  66,400       454,300
---------------------------------------------------------------------------------
   Net cash (used for) provided by investing
    activities                                          (8,448,100)       85,600
---------------------------------------------------------------------------------
Cash flows from financing activities:
 Distributions paid to Partners                         (3,819,900)   (3,348,300)
 (Decrease) increase in security deposits                   (3,400)        8,200
---------------------------------------------------------------------------------
   Net cash (used for) financing activities             (3,823,300)   (3,340,100)
---------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents    (9,227,200)      116,000
Cash and cash equivalents at the beginning of the
 period                                                 12,268,000    12,560,400
---------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period      $3,040,800   $12,676,400
---------------------------------------------------------------------------------
</TABLE>
    The accompanying notes are an integral part of the financial statements.
3
<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, 1995 for a discussion of the Partnership's business.
 
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,
1996 and 1995. 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
                     9/30/96  9/30/95   9/30/96    9/30/95
------------------------------------------------------------
<S>                  <C>      <C>      <C>        <C>
FOXHALL SQUARE BUILDING (50%)
Rental revenues      $397,600 $386,500 $1,183,200 $1,223,200
------------------------------------------------------------
Property net income  $ 82,900 $ 96,900 $  334,400 $  338,100
------------------------------------------------------------
Average occupancy         85%      86%        84%        86%
------------------------------------------------------------
LAKEWOOD SQUARE SHOPPING CENTER (50%)
Rental revenues      $332,300 $280,800 $  986,700 $  875,900
------------------------------------------------------------
Property net income  $170,100 $ 97,700 $  479,500 $  435,600
------------------------------------------------------------
Average occupancy         97%      90%        96%        87%
------------------------------------------------------------
ELLIS BUILDING (50%)
Rental revenues      $293,100 $281,800 $  875,300 $  846,400
------------------------------------------------------------
Property net income  $ 91,800 $ 68,500 $  288,000 $  222,700
------------------------------------------------------------
Average occupancy         95%      91%        94%        94%
------------------------------------------------------------
MARKET PLACE AT RIVERGATE SHOPPING CENTER
Rental revenues      $248,100 $236,000 $  771,800 $  720,100
------------------------------------------------------------
Property net income  $128,300 $103,300 $  366,200 $  340,700
------------------------------------------------------------
Average occupancy         94%      93%        97%        92%
------------------------------------------------------------
BANANA RIVER SQUARE SHOPPING CENTER
Rental revenues      $188,900 $190,300 $  563,600 $  573,600
------------------------------------------------------------
Property net income  $ 64,800 $ 77,100 $  194,000 $  228,500
------------------------------------------------------------
Average occupancy         93%      96%        94%        96%
------------------------------------------------------------
</TABLE>
 
<TABLE>
<S>                  <C>      <C>      <C>      <C>
12621 FEATHERWOOD BUILDING (50%)
Rental revenues      $129,600 $127,300 $399,100 $381,900
--------------------------------------------------------
Property net income  $ 49,700 $ 30,700 $162,700 $113,500
--------------------------------------------------------
Average occupancy        100%     100%     100%     100%
--------------------------------------------------------
</TABLE>
(a) The above table 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.
 
Unless otherwise disclosed, discussions of fluctuations between 1996 and 1995
refer to both the quarters and nine months ended September 30, 1996 and 1995.
 
Net income increased by $118,500 and $17,200 for the quarter and nine months
ended September 30, 1996, respectively, when compared to the quarter and nine
months ended September 30, 1995. The primary factors contributing to the
increases were improved operating results at Lakewood Square Shopping Center
("Lakewood"), Ellis Building ("Ellis"), 12621 Featherwood Building
("Featherwood") and Marketplace at Rivergate ("Rivergate") as well as decreased
general and administrative expenses for printing, mailing and data processing
costs. Partially offsetting the increases were decreases in interest income
which were the result of decreases in rates available on short-term investments
and to a lesser extent in the cash available for investment and diminished
operating results at Banana River Square Shopping Center ("Banana River") and
Foxhall Square Building ("Foxhall"). Also partially offsetting the income for
the nine-month comparable periods was an increase in accounting fees and taxes
paid at the state and county level.
 
Rental revenues increased by $87,000 or 5.8% and $158,700 or 3.4% for the
quarter and nine months ended September 30, 1996, respectively, when compared
to the quarter and nine months ended September 30, 1995. The primary factors
which caused the increases were: 1) increased tenant real estate tax expense
reimbursements at Featherwood, Lakewood and Ellis; 2) increases in base rents
at Lakewood and Rivergate as a result of increases in the average occupancy
rates and 3) increases in common area maintenance reimbursements at Lakewood
and Banana River. Partially offsetting the increases were decreases in rental
revenues at Foxhall which were the result of decreased base rental income due
to decreases in the average occupancy rate and revenues generated by the
parking facility.
 
Real estate tax expense increased by $18,200 for the nine months ended
September 30, 1996 when compared to the nine months ended September 30, 1995.
The increase was primarily due to the receipt of refunds in 1995 for prior
years' real estate taxes at Lakewood and Rivergate. The increase was partially
offset by decreases in real estate taxes at Foxhall and Featherwood due to a
reduction in the assessed valuation of the properties for real estate tax
purposes. Real estate tax expense remained relatively unchanged for the
quarterly periods under comparison.
 
Repairs and maintenance expense increased by $8,600 for the nine months ended
September 30, 1996 when compared to the nine months ended September 30, 1995.
The primary reason for the increase was increases in architectural costs at
Lakewood and repairs to the HVAC system at Foxhall and the
 
                                                                               4
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
roof at Banana River. Partially offsetting the increase were decreases in
repairs to the HVAC system at Featherwood and the roof at Rivergate. Repairs
and maintenance expense remained relatively unchanged for the quarterly periods
under comparison.
 
Property operating expenses decreased by $8,900 for the quarter ended September
30, 1996 when compared to the quarter ended September 30, 1995. The decrease
was primarily the result of a decrease in professional services at Lakewood and
a decrease in salaries at Ellis. The decrease was partially offset by an
increase in utility costs at Foxhall.
 
Property operating expenses increased by $36,500 for the nine months ended
September 30, 1996 when compared to the nine months ended September 30, 1995.
The increase was primarily the result of increases in utilities at Foxhall,
security at Lakewood and professional services at Rivergate and Banana River.
The increase was partially offset by a decrease in professional services at
Lakewood and utility costs at Ellis.
 
Depreciation and amortization expense decreased $23,000 and $62,700 for the
quarter and nine months ended September 30, 1996, respectively, when compared
to the quarter and nine months ended September 30, 1995. The decreases were
primarily due to the effects of the provisions for value impairment recorded
for the Partnership's properties during the year ended December 31, 1995.
 
The Partnership's share of net income from Holiday Office Park North and South
("Holiday") increased by $1,400 and $22,600, respectively, for the quarterly
and nine-month periods under comparison. The increases were primarily the
result of increased rental revenues due to an increase in occupancy and
decreased property operating expense primarily resulting from a decrease in
utilities, partially offset by increased repairs and maintenance 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 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 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 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 in 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 in the Partnership Agreement) to cash flow provided by operating
activities as defined 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
                                                        9/30/96      9/30/95
-------------------------------------------------------------------------------
<S>                                                   <C>          <C>
Cash Flow (as defined in the Partnership Agreement)   $ 3,457,300  $ 3,463,300
Less: Cash Flow (as defined in joint venture
 agreement) from joint venture                           (408,100)    (346,000)
Items of reconciliation:
 Decrease in current assets                                73,200      173,100
 (Decrease) increase in current liabilities               (78,200)      80,100
-------------------------------------------------------------------------------
Net cash provided by operating activities             $ 3,044,200  $ 3,370,500
-------------------------------------------------------------------------------
Net cash (used for) provided by investing activities  $(8,448,100) $    85,600
-------------------------------------------------------------------------------
Net cash (used for) financing activities              $(3,823,300) $(3,340,100)
-------------------------------------------------------------------------------
</TABLE>
 
Cash Flow (as defined in the Partnership Agreement) remained relatively
unchanged for the nine months ended September 30, 1996 when compared to the
nine months ended September 30, 1995. Notable items during the periods under
comparison were decreased interest income, as previously discussed, diminished
operating results at Banana River and Foxhall and improved operating results at
Ellis, Lakewood and Featherwood, exclusive of depreciation and amortization.
 
The decrease in the Partnership's cash position of $9,227,200 as of September
30, 1996 when compared to December 31, 1995 was primarily the result of
investments in debt securities, payments made for capital and tenant
improvements and leasing costs and distributions paid to partners exceeding net
cash provided by operating activities. Liquid assets (including cash, cash
equivalents and investments in debt securities) of the Partnership as of
September 30, 1996 are comprised of undistributed Sales Proceeds and Cash Flow
(as defined in the Partnership Agreement) held for working capital purposes.
 
The decrease of $326,300 in net cash provided by operating activities for the
nine months ended September 30, 1996 when compared to the nine months ended
September 30, 1995 was primarily due to the receipt of a rebate in 1995 for the
replacement of the air conditioner at Foxhall along with the timing of the
payment of expenses at Foxhall, Ellis and Holiday. The decrease was partially
offset by the increase in operating results, exclusive of depreciation and
amortization, as previously discussed.
 
Net cash provided by (used for) investing activities changed from $85,600 for
the nine months ended September 30, 1995 to $(8,448,100) for the nine months
ended September 30, 1996. The change was primarily due to the increase in
5
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
investments in debt securities, payments for capital and tenant improvements
and leasing costs at the Partnership's properties and the reduction in the
amount of distributions received from the Partnership's equity investment in
Holiday. 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 generally mature less than one year from their date of purchase. The
Partnership maintains working capital reserves to pay for capital expenditures
such as capital and tenant improvements and leasing costs. During the nine
months ended September 30, 1996, the Partnership spent $702,500 at its
consolidated properties for building improvements and leasing costs and has
projected to spend approximately $170,000 during the remainder of 1996. Of the
projected amount, $100,000 and $30,000 relates to anticipated improvement and
leasing costs expected to be incurred at Foxhall and Ellis, respectively.
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 increase and/or 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 reduction in distributions from Holiday is the result of
increased tenant improvements during 1996 when compared to 1995.
 
The increase of $483,200 in net cash used for financing activities for the nine
months ended September 30, 1996 when compared to the nine months ended
September 30, 1995 was due primarily to an increase in distributions paid to
Partners during 1996.
 
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. 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 nine months ended September 30, 1996 amounted
to $61,900.
 
Distributions to Limited Partners for the nine months ended September 30, 1996
were declared in the amount of $764,000, or $9.00 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,
there can be no assurance as to the amounts of cash for future distributions to
Partners.
 
As a result of the performance of the Partnership's remaining properties, the
General Partner has determined that Sales Proceeds previously reserved for
working capital purposes can be distributed to the Limited Partners.
Accordingly, the Partnership has declared a special distribution in the amount
of $5,008,300 or $59.00 per Unit, to Limited Partners of record as of October
1, 1996. This special distribution will be included with the third quarter
distribution to Limited Partners on November 30, 1996.
 
                                                                               6
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
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 quarter and nine months ended September 30, 1996 are not necessarily
indicative of the operating results for the year ending December 31, 1996.
 
The financial statements include the Partnership's 50% interest in four joint
ventures 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' 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 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 in the
joint venture agreement).
 
Commercial rental properties held for investment are recorded at cost, net of
any provisions for value impairment, and depreciated (exclusive of amounts, if
any, allocated to land and value impairments) on the straight-line method over
their estimated useful lives. Upon classifying a commercial rental property as
held for disposition, no further depreciation or amortization of such property
is provided for in the financial statements. 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.
 
During the first quarter of 1996, the Partnership adopted Financial Accounting
Standards Board Statement No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (the "Standard"). The
Standard established guidance for determining if the value of defined assets is
impaired, and if so, how impairment losses should be measured and reported in
the financial statements. The Standard also addressed the accounting for long-
lived assets that are expected to be disposed of. The adoption of the Standard
did not have a material effect on the Partnership's financial statements.
Evaluation of the potential impairment of the value of the Partnership's assets
is performed on an individual property basis.
 
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. At September 30, 1996, these
securities had a fair market value of $7,693,400 and unrealized losses of
$2,200. Substantially all of these securities had maturities of less than one
year when purchased.
 
Certain reclassifications have been made to the previously reported 1995
statements in order to provide comparability with the 1996 statements. These
reclassifications have no effect on net income or Partners' (deficit) capital.
 
Reference is made to the Partnership's annual report for the year ended
December 31, 1995 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 October 19, 1984,
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: 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 effect to any distributions of
 
                                                                               7
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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, 1996, the General Partner was entitled to a
Partnership Management Fee, and accordingly, allocated Net Profits, of $84,800
and $339,500, respectively.
 
Fees and reimbursements paid and payable by the Partnership to Affiliates
during the quarter and nine months ended September 30, 1996 were as follows:
 
 
<TABLE>
<CAPTION>
                                                          Paid
                                                  --------------------
                                                  Quarter  Nine Months Payable
------------------------------------------------------------------------------
<S>                                               <C>      <C>         <C>
Property management and leasing fees              $ 81,000  $250,900   $26,400
Reimbursement of property insurance premiums, at
 cost                                               19,400    58,100      None
Real estate commissions (a)                           None      None    40,300
Reimbursement of expenses, at cost:
 --Accounting                                        6,200    30,100     9,700
 --Investor  communications                          2,800    13,600     4,700
 --Legal                                             9,600    40,400      None
 --Other                                             4,200     7,100      None
------------------------------------------------------------------------------
                                                  $123,200  $400,200   $81,100
------------------------------------------------------------------------------
</TABLE>
(a) As of September 30, 1996, 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.
 
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 
September 30, 1996.


<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, 1996      By:  /s/  DOUGLAS CROCKER II
       -----------------          --------------------------------------------
                                        DOUGLAS CROCKER II
                                  President and Chief Executive Officer

Date:  November 13, 1996      By:  /s/  NORMAN M. FIELD
       -----------------         ---------------------------------------------
                                        NORMAN M. FIELD
                                  Vice President - Finance and Treasurer