<PAGE>

 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION

                          Washington, D.C. 20549-1004

                                   FORM 10-Q
 

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934

     For the period ended                     March 31, 1997
                          ------------------------------------------------------
 
                                      OR
 
[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from                        to
                                    ----------------------    ------------------
           
     Commission File Number                           0-12945
                                    --------------------------------------------
 
 
               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 1100, 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>
                                                  March 31,
                                                     1997      December 31,
                                                 (Unaudited)       1996
----------------------------------------------------------------------------
<S>                                              <C>           <C>
ASSETS
Investment in commercial rental properties:
 Land                                            $ 10,237,400  $ 10,237,400
 Buildings and improvements                        36,132,900    36,061,200
----------------------------------------------------------------------------
                                                   46,370,300    46,298,600
Accumulated depreciation and amortization         (14,143,300)  (13,818,600)
----------------------------------------------------------------------------
 Total investment properties, net of accumulated
  depreciation and amortization                    32,227,000    32,480,000
Cash and cash equivalents                           5,030,000     4,573,400
Investments in debt securities                        983,300     1,051,100
Restricted cash                                        50,000        50,000
Rents receivable                                      126,700        99,800
Investment in and loans to joint venture            5,606,000     5,852,800
Other assets                                           43,100        59,100
----------------------------------------------------------------------------
                                                 $ 44,066,100  $ 44,166,200
----------------------------------------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
 Accounts payable and accrued expenses           $    403,200  $    322,900
 Due to Affiliates                                     87,300        76,200
 Distributions payable                                848,900       848,900
 Security deposits                                    137,600       137,600
 Other liabilities                                     70,000       114,400
----------------------------------------------------------------------------
                                                    1,547,000     1,500,000
----------------------------------------------------------------------------
Partners' capital:
 General Partners (deficit)                          (131,300)     (131,300)
 Limited Partners (84,886 Units issued and
  outstanding)                                     42,650,400    42,797,500
----------------------------------------------------------------------------
                                                   42,519,100    42,666,200
----------------------------------------------------------------------------
                                                 $ 44,066,100  $ 44,166,200
----------------------------------------------------------------------------
</TABLE>
STATEMENTS OF PARTNERS' CAPITAL
For the quarter ended March 31, 1997 (Unaudited)
and the year ended December 31, 1996
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                          General      Limited
                                          Partner     Partners       Total
------------------------------------------------------------------------------
<S>                                      <C>         <C>          <C>
Partners' (deficit) capital, January 1,
 1996                                    $ (131,300) $48,846,800  $48,715,500
Net income for the year ended
 December 31, 1996                          424,400    2,778,800    3,203,200
Distributions for the year ended
 December 31, 1996                         (424,400)  (8,828,100)  (9,252,500)
------------------------------------------------------------------------------
Partners' (deficit) capital, December
 31, 1996                                  (131,300)  42,797,500   42,666,200
Net income for the quarter ended
 March 31, 1997                              84,900      616,900      701,800
Distributions for the quarter ended
 March 31, 1997                             (84,900)    (764,000)    (848,900)
------------------------------------------------------------------------------
Partners' (deficit) capital, March 31,
 1997                                    $ (131,300) $42,650,400  $42,519,100
------------------------------------------------------------------------------
</TABLE>
    The accompanying notes are an integral part of the financial statements.
                                                                               2
<PAGE>
 
STATEMENTS OF INCOME AND EXPENSES
For the quarters ended March 31, 1997 and 1996
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
 
<TABLE>
<CAPTION>
                                                         1997       1996
---------------------------------------------------------------------------
<S>                                                   <C>        <C>
Income:
 Rental                                               $1,569,500 $1,628,800
 Interest                                                 93,300    174,200
---------------------------------------------------------------------------
                                                       1,662,800  1,803,000
---------------------------------------------------------------------------
Expenses:
 Depreciation and amortization                           324,700    313,800
 Property operating:
  Affiliates                                              70,900    121,800
  Nonaffiliates                                          250,900    229,300
 Real estate taxes                                       149,000    136,400
 Insurance--Affiliate                                     16,000     19,400
 Repairs and maintenance                                 156,900    181,600
 General and administrative:
  Affiliates                                               9,000     18,600
  Nonaffiliates                                           66,400     77,900
---------------------------------------------------------------------------
                                                       1,043,800  1,098,800
---------------------------------------------------------------------------
Net income before income from participation in joint
 venture                                                 619,000    704,200
Income from participation in joint venture                82,800     60,900
---------------------------------------------------------------------------
Net income                                            $  701,800 $  765,100
---------------------------------------------------------------------------
Net income allocated to General Partner               $   84,900 $  127,200
---------------------------------------------------------------------------
Net income allocated to Limited Partners              $  616,900 $  637,900
---------------------------------------------------------------------------
Net income allocated to Limited Partners per Unit
 (84,886 Units outstanding)                           $     7.27 $     7.51
---------------------------------------------------------------------------
</TABLE>
 
STATEMENTS OF CASH FLOWS
For the quarters ended March 31, 1997 and 1996
(Unaudited)
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                                             1996        1995
----------------------------------------------------------------------------------
<S>                                                       <C>         <C>
Cash flows from operating activities:
 Net income                                               $  701,800  $   765,100
 Adjustments to reconcile net income to net cash
  provided by operating activities:
  Depreciation and amortization                              324,700      313,800
  (Income) from participation in joint venture               (82,800)     (60,900)
  Changes in assets and liabilities:
   (Increase) decrease in rents receivable                   (26,900)      42,400
   Decrease (increase) in other assets                        16,000      (23,000)
   Increase (decrease) in accounts payable and accrued
    expenses                                                  80,300     (113,400)
   Increase in due to Affiliates                              11,100       36,400
   (Decrease) in other liabilities                           (44,400)     (40,700)
----------------------------------------------------------------------------------
    Net cash provided by operating activities                979,800      919,700
----------------------------------------------------------------------------------
Cash flows from investing activities:
 Payments for capital and tenant improvements                (71,700)     (47,500)
 Decrease in investments in debt securities, net              67,800
 (Increase) in restricted cash                                            (25,000)
 Distributions received from joint venture                   329,600
----------------------------------------------------------------------------------
    Net cash provided by (used for) investing activities     325,700      (72,500)
----------------------------------------------------------------------------------
Cash flows from financing activities:
 Distributions paid to Partners                             (848,900)  (1,273,300)
 (Decrease) in security deposits                                             (700)
----------------------------------------------------------------------------------
    Net cash (used for) financing activities                (848,900)  (1,274,000)
----------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents         456,600     (426,800)
Cash and cash equivalents at the beginning of the period   4,573,400   12,268,000
----------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period        $5,030,000  $11,841,200
----------------------------------------------------------------------------------
</TABLE>
    The accompanying notes are an integral part of the financial statements.
3
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
March 31, 1997
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
DEFINITION OF SPECIAL TERMS:
Capitalized terms used in this report have the same meaning as those terms have
in the Partnership's Registration Statement filed with the Securities and
Exchange Commission on Form S-11. Definitions of these terms are contained in
Article III of the First Amended and Restated Certificate and Agreement of
Limited Partnership, which is included in the Registration Statement and
incorporated herein by reference.
 
ACCOUNTING POLICIES:
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP"). Under this method of accounting,
revenues are recorded when earned and expenses are recorded when incurred.
 
Preparation of the Partnership's financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
 
The financial information included in these financial statements is unaudited;
however, in management's opinion, all adjustments (consisting of only normal,
recurring accruals) necessary for a fair presentation of the results of
operations for the periods included have been made. Results of operations for
the three months ended March 31, 1997 are not necessarily indicative of the
operating results for the year ending December 31, 1997.
 
The financial statements include the Partnership's 50% interest in 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 and loans to 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 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 on the straight-line
method over the estimated life of such improvements.
 
The Partnership evaluates its rental properties 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.
 
Cash equivalents are considered all highly liquid investments with maturity of
three months or less when purchased.
 
Investments in debt securities are comprised of obligations of the United
States government totaling $983,300 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 1996
statements in order to provide comparability with the 1997 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, 1996 for a description of other accounting policies and additional
details of the Partnership's financial condition, results of operations,
changes in Partners' (deficit) capital and changes in cash balances for the
year then ended. The details provided in the notes thereto have not changed
except as a result of normal transactions in the interim or as otherwise
disclosed herein.
 
2. RELATED PARTY TRANSACTIONS:
 
In accordance with the Partnership Agreement, subsequent to 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 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,
 
                                                                               4
<PAGE>
 
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 three months
ended March 31, 1997 and 1996, the General Partner was entitled to a
Partnership Management Fee, and accordingly, allocated Net Profits, of $84,900
and $127,200, respectively.
 
Fees and reimbursements paid and payable by the Partnership to Affiliates
during the quarter ended March 31, 1997 were as follows:
 
<TABLE>
<CAPTION>
                                                        Paid   Payable
----------------------------------------------------------------------
<S>                                                    <C>     <C>
Property management and leasing
 fees (a)                                              $71,700 $22,000
Reimbursement of property insurance premiums, at cost     None  16,000
Real estate commissions (b)                               None  40,300
Reimbursement of expenses, at cost:
 --Accounting                                            3,900   5,600
 --Investor communications                               1,500   2,300
 --Legal                                                19,700   1,100
----------------------------------------------------------------------
                                                       $96,800 $87,300
----------------------------------------------------------------------
</TABLE>
(a) Effective on December 31, 1996, the Affiliate providing property management
    and certain leasing services for the Partnership's shopping centers, sold
    its interest in the property management agreements to an unrelated party.
(b) As of March 31, 1997, the Partnership owed $40,300 to the General Partner
    for real estate commissions earned in connection with the sales of
    Partnership properties. These commissions have been accrued but not paid.
    In accordance with the Partnership Agreement, the Partnership will not pay
    the General Partner or any Affiliate a real estate commission from the sale
    of a Partnership property until Limited Partners have received cumulative
    distributions of Sale or Financing Proceeds equal to 100% of their Original
    Capital Contribution, plus a cumulative return (including all Cash Flow (as
    defined in the Partnership Agreement) which has been distributed to the
    Limited Partners from the initial investment date) of 6% simple interest
    per annum on their Capital Investment.
 
3. SUBSEQUENT EVENT:
 
During 1997, the joint venture that owns Lakewood, of which the Partnership
owns a 50% interest, entered into an agreement to sell the property. Terms of
this agreement provide for a selling price of $17,750,000, of which the
Partnership's share is $8,875,000 and a one year indemnification related to all
matters associated with the environmental matter referred to in Note 4. The
closing of this transaction is scheduled for May 1997. There can be no
assurance that this transaction will be consummated.
 
4. ENVIRONMENTAL MATTER:
 
In December 1996, the General Partner became aware of the existence of
hazardous substances in the ground under Lakewood. The source of the hazardous
substances is believed to emanate from one or more of the tenants operating a
dry cleaning business at Lakewood. The Partnership and its Affiliated partner
in the joint venture which owns Lakewood are currently utilizing consultants to
evaluate the matter and propose courses of action. The effects on the
Partnership cannot be determined at this time, as the costs associated with
this matter are not yet known. The financial statements do not include any
adjustments that might result from this matter.
 
5
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Reference is made to the Partnership's Annual Report for the year ended
December 31, 1996 for a discussion of the Partnership's business.
 
OPERATIONS
The table below is a recap of the Partnership's share of certain operating
results of each of its properties for the three months ended March 31, 1997 and
1996. The discussion following the table should be read in conjunction with the
financial statements and notes thereto appearing in this report.
 
<TABLE>
<CAPTION>
                                              Comparative
                                           Operating Results
                                              (a) For the
                                            Quarters Ended
                                           3/31/97   3/31/96
-------------------------------------------------------------
<S>                                        <C>       <C>
FOXHALL SQUARE BUILDING (50%)
Rental revenues                            $421,100  $413,900
-------------------------------------------------------------
Property net income                        $124,500  $144,800
-------------------------------------------------------------
Average occupancy                               90%       84%
-------------------------------------------------------------
LAKEWOOD SQUARE SHOPPING
 CENTER (50%)
Rental revenues                            $366,600  $326,700
-------------------------------------------------------------
Property net income                        $198,200  $154,000
-------------------------------------------------------------
Average occupancy                               95%       96%
-------------------------------------------------------------
ELLIS BUILDING (50%)
Rental revenues                            $315,700  $288,000
-------------------------------------------------------------
Property net income                        $100,600  $ 89,800
-------------------------------------------------------------
Average occupancy                               96%       93%
-------------------------------------------------------------
MARKETPLACE AT RIVERGATE SHOPPING CENTER
Rental revenues                            $274,600  $281,200
-------------------------------------------------------------
Property net income                        $146,400  $123,000
-------------------------------------------------------------
Average occupancy                               94%      100%
-------------------------------------------------------------
BANANA RIVER SQUARE SHOPPING CENTER
Rental revenues                            $191,500  $191,700
-------------------------------------------------------------
Property net income                        $ 77,000  $ 66,200
-------------------------------------------------------------
Average occupancy                               90%       97%
-------------------------------------------------------------
12621 FEATHERWOOD BUILDING (50%)
Rental revenues                              (b)     $127,300
-------------------------------------------------------------
Property net (loss) income                 $(45,000) $ 48,700
-------------------------------------------------------------
Average occupancy                            (b)         100%
-------------------------------------------------------------
HOLIDAY OFFICE PARK NORTH AND SOUTH (50%)
Rental revenues                            $384,400  $376,200
-------------------------------------------------------------
Property net income                        $ 82,800  $ 60,900
-------------------------------------------------------------
Average occupancy                               85%       83%
-------------------------------------------------------------
</TABLE>
(a) The above table excludes certain income and expense items which are not
    directly related to individual property operating results such as interest
    income 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) Property has been vacant since December 14, 1996.
 
Net income decreased by $63,300 for the three months ended March 31, 1997 when
compared to the three months ended March 31, 1996. The primary factors
contributing to the decrease were diminished operating results at 12621
Featherwood Building ("Featherwood") and Foxhall Square Building ("Foxhall")
along with a decrease in interest earned on short-term investments which was
due to a decrease in the amount of funds available for investment. Partially
offsetting the decrease were improved operating results at Lakewood Square
Shopping Center ("Lakewood"), Marketplace at Rivergate Shopping Center
("Rivergate"), Ellis Building ("Ellis"), Banana River Square Shopping Center
("Banana River") and the Partnership's equity interest in Holiday Office Park
North and South ("Holiday"). In addition, the Partnership experienced lower
general and administrative expenses resulting from reduced personnel costs and
accounting fees.
 
Featherwood, due to the sole tenant vacating the property in December 1996,
currently generates no rental revenues for the Partnership. The General Partner
is attempting to keep expenses at the property to a minimum until such time as
the property can be retenanted or sold. The Partnership's share of
Featherwood's operating expenses, exclusive of depreciation, for the three
months ended March 31, 1997 amounted to $34,000. Exclusive of Featherwood, net
income for the Partnership increased by $30,400 for the periods under
comparison. For the purposes of the following discussion, the operating results
of Featherwood have been excluded in order to provide a comparison of the
operating results of the occupied properties.
 
Rental revenues increased by $67,900 or 4.5% for the three months ended March
31, 1997 when compared to the three months ended March 31, 1996. The primary
factors which caused the increase were increases in the base rental income at
Lakewood, which was due to an increase in the rates charged to new and renewing
tenants, and at Foxhall and Ellis, which is attributed to the increase in the
average occupancy rates at those properties. Also contributing to the increase
was an increase in tenant expenses reimbursements for real estate taxes at
Ellis, which is also related to the increase in occupancy. The increase was
partially offset by a decrease in base rental income at Rivergate which is the
result of the decline in occupancy.
 
Real estate tax expense increased by $8,300 for the three months ended March
31, 1997 when compared to the three months ended March 31, 1996. The increase
was primarily due to a budgeted increase in real estate taxes at Foxhall.
 
Repairs and maintenance expense decreased by $13,400 for the three months ended
March 31, 1997 when compared to the three months ended March 31, 1996. The
decrease was primarily the result of a decrease in architectural costs at
Lakewood and snow removal costs at Rivergate. The decrease was partially offset
by an increase in repairs to the HVAC at Ellis and to the electrical system at
Foxhall.
 
The Partnership's share of net income from Holiday increased by $21,900 for the
three-month periods under comparison. The increase was partially the result of
a decrease in salary expense which was due to the position of property manager
being vacant during the first quarter. Also
 
                                                                               6
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
contributing to the increase was a decrease in utility costs. Partially
offsetting the increase in net income were increases in snow removal costs and
depreciation and amortization expense.
 
To increase and/or maintain occupancy levels at the Partnership's properties,
the General Partner, through its Affiliated and nonaffiliated 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 in a fiscal year, such excess
distributions are treated as a return of capital. Cash Flow (as defined in the
Partnership Agreement) is generally not equal to net income or cash flows as
determined by generally accepted accounting principles ("GAAP"), since certain
items are treated differently under the Partnership Agreement than under GAAP.
Management believes that to facilitate a clear understanding of the
Partnership's operations, an analysis of Cash Flow (as defined in the
Partnership Agreement) should be examined in conjunction with an analysis of
net income or cash flows, as determined by GAAP. The following table includes a
reconciliation of Cash Flow (as defined in the Partnership Agreement) to cash
flow provided by operating activities as determined by GAAP. Such amounts are
not indicative of actual distributions to Partners and should not necessarily
be considered as an alternative to the results disclosed in the Statements of
Income and Expenses and Statements of Cash Flows.
 
<TABLE>
<CAPTION>
                                                      Comparative Cash Flow
                                                      Results For the Three
                                                           Months Ended
                                                       3/31/97      3/31/96
------------------------------------------------------------------------------
<S>                                                   <C>         <C>
Cash Flow (as defined in the Partnership Agreement)   $1,088,200  $ 1,121,200
Less: Cash Flow from joint venture                      (144,500)    (103,200)
Items of reconciliation:
 (Increase) decrease in current assets                   (10,900)      19,400
 Increase (decrease) in current liabilities               47,000     (117,700)
------------------------------------------------------------------------------
Net cash provided by operating activities             $  979,800  $   919,700
------------------------------------------------------------------------------
Net cash provided by (used for) investing activities  $  325,700  $   (72,500)
------------------------------------------------------------------------------
Net cash (used for) financing activities              $ (848,900) $(1,274,000)
------------------------------------------------------------------------------
</TABLE>
 
Cash Flow (as defined in the Partnership Agreement) decreased by $33,000 for
the three months ended March 31, 1997 when compared to the three months ended
March 31, 1996. The decrease was primarily the result of the overall decrease
in net income, exclusive of depreciation and amortization, as previously
discussed.
 
The increase in the Partnership's cash position of $456,600 for the three
months ended March 31, 1997 was primarily the result of the receipt of
distributions from the Partnership's investment in Holiday. In addition, net
cash provided by operating activities and the maturities in excess of the
reinvestments of the Partnership's investments in debt securities exceeded
payments made for capital and tenant improvements and leasing costs and
distributions paid to Partners. Liquid assets (including cash, cash equivalents
and investments in debt securities) of the Partnership as of March 31, 1997
were comprised of amounts held for working capital purposes.
 
The increase of $60,100 in net cash provided by operating activities for the
three months ended March 31, 1997 when compared to the three months ended March
31, 1996, was primarily due to the timing of the payment of certain expenses at
Foxhall. Partially offsetting the increase was the decrease in net income,
exclusive of depreciation and amortization, as previously discussed.
 
Net cash (used for) provided by investing activities changed from $(72,500) for
the three months ended March 31, 1996 to $325,700 for the three months ended
March 31, 1997. The change was primarily due to the receipt of distributions
from the Partnership's investment in Holiday and the maturities in excess of
reinvestments of the Partnership's investments in debt securities exceeding the
increase in capital and tenant improvements and leasing costs. During the three
months ended March 31, 1997, the Partnership received $329,600 of distributions
from Holiday. These distributions related to cash generated during 1996.
Certain of the Partnership's short-term investments are being classified as
investments in debt securities as a result of the extension of the maturities
of certain of the Partnerships short-term investments in an effort to maximize
the return on
 
7
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
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 three months ended March 31, 1997, the Partnership spent $71,700 at its
consolidated properties for building improvements and leasing costs and has
projected to spend approximately $750,000 during the remainder of 1997. Of the
projected amount, approximately $290,000, $200,000 and $150,000 relates to
anticipated improvement and leasing costs expected to be incurred at Foxhall,
Banana River and Ellis, respectively. The Partnership did not make any
expenditures for capital and tenant improvement and leasing costs at Holiday
but has projected to spend approximately $225,000 during the remainder of 1997.
Actual amounts expended may vary depending on a number of factors including
leasing activity, sales of properties and other market conditions throughout
the year. The General Partner believes these expenditures are necessary in
order to increase and/or maintain occupancy levels in very competitive markets,
maximize rental rates charged to new and renewing tenants and to prepare the
remaining properties for eventual disposition.
 
In December 1996, the sole tenant occupying Featherwood vacated the premises
upon the expiration of their lease. The General Partner is currently marketing
the property for sale, however, if a satisfactory sale cannot be completed, the
General Partner will attempt to retenant the building. The retenanting of the
building is projected to cost the Partnership as much as $600,000 if the
building is converted from single-tenant to multi-tenant use.
 
The decrease of $425,100 in net cash used for financing activities for the
three months ended March 31, 1997 when compared to the three months ended March
31, 1996 was due primarily to an decrease in distributions paid to Partners
during 1997. The decrease in distributions is the result of the General
Partner's adjustment of the distributions to an amount consistent with the
Partnership's remaining assets and their related earnings following the special
distribution of Sales Proceeds during 1996.
 
In December 1996, the Managing General Partner became aware of the existence of
hazardous substances in the ground under Lakewood. The source of the hazardous
substances is believed to emanate from one or more of the tenants operating a
dry cleaning business at Lakewood. The Partnership is currently attempting to
sell the property. If a sale of Lakewood is consummated the Partnership may
have no continuing obligations related to this matter. If no sale is
consummated, the Partnership will review its courses of action. The effects on
the Partnership cannot be determined at this time.
 
The General Partner continues to take a conservative approach to projections of
future rental income in its determination of adequate levels of cash reserves
due to the anticipated capital and tenant improvements and leasing costs
necessary to be made at the Partnerships properties during the next several
years. As a result, cash continues to be retained to supplement working capital
reserves. Cash Flow (as defined in the Partnership Agreement) retained to
supplement working capital reserves for the three months ended March 31, 1997
amounted to $239,300.
 
Distributions to Limited Partners for the three months ended March 31, 1997
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 amount of cash for future distributions to
Partners.
 
 
                                                                               8
<PAGE>
 

                           Part II OTHER INFORMATION


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

     (a)  Exhibits: None

     (b)  Reports on Form 8-K:

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

<PAGE>
 

                                  SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                               FIRST CAPITAL INSTITUTIONAL REAL ESTATE, LTD. - 2

                               By:  FIRST CAPITAL FINANCIAL CORPORATION
                                    GENERAL PARTNER
                               
Date: May 15, 1997             By:  /s/ DOUGLAS CROCKER II
      ------------                  --------------------------------------
                                        DOUGLAS CROCKER II
                                    President and Chief Executive Officer
                               
Date: May 15, 1997             By:  /s/ NORMAN M. FIELD
      ------------                  --------------------------------------
                                        NORMAN M. FIELD
                                    Vice President - Finance and Treasurer