<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, 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>
                                                 September 30,
                                                     1997      December 31,
                                                  (Unaudited)      1996
---------------------------------------------------------------------------
<S>                                              <C>           <C>
ASSETS
Investment in commercial rental properties:
 Land                                             $ 6,199,400  $10,237,400
 Buildings and improvements                        19,363,000   36,061,200
---------------------------------------------------------------------------
                                                  25,562,400    46,298,600
Accumulated depreciation and amortization          (8,249,900) (13,818,600)
---------------------------------------------------------------------------
 Total investment properties, net of accumulated
  depreciation and amortization                    17,312,500   32,480,000
Cash and cash equivalents                           7,050,000    4,573,400
Investments in debt securities                      5,443,000    1,051,100
Restricted cash                                        50,000       50,000
Rents receivable                                       67,000       99,800
Investment in and loans to joint venture            5,496,600    5,852,800
Other assets                                           12,700       59,100
---------------------------------------------------------------------------
                                                  $35,431,800  $44,166,200
---------------------------------------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
 Accounts payable and accrued expenses            $   307,600  $   322,900
 Due to Affiliates                                     69,400       76,200
 Distributions payable                              6,949,700      848,900
 Security deposits                                     95,000      137,600
 Other liabilities                                      8,000      114,400
---------------------------------------------------------------------------
                                                   7,429,700     1,500,000
---------------------------------------------------------------------------
Partners' capital:
 General Partners (deficit)                               --      (131,300)
 Limited Partners (84,886 Units issued and
  outstanding)                                     28,002,100   42,797,500
---------------------------------------------------------------------------
                                                   28,002,100   42,666,200
---------------------------------------------------------------------------
                                                  $35,431,800  $44,166,200
---------------------------------------------------------------------------
</TABLE>
STATEMENTS OF PARTNERS' CAPITAL
For the nine months ended September 30, 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 nine months ended
 September 30, 1997                          329,400    2,076,600    2,406,000
Distributions for the nine months ended
 September 30, 1997                         (198,100) (16,872,000) (17,070,100)
-------------------------------------------------------------------------------
Partners' capital, September 30, 1997      $       0  $28,002,100  $28,002,100
-------------------------------------------------------------------------------
</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, 1997 and 1996
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
 
<TABLE>
<CAPTION>
                                                            1997       1996
------------------------------------------------------------------------------
<S>                                                       <C>       <C>
Income:
 Rental                                                   $ 989,500 $1,589,600
 Interest                                                   254,300    176,400
 Gain on sale of Property                                   251,300
------------------------------------------------------------------------------
                                                          1,495,100  1,766,000
------------------------------------------------------------------------------
Expenses:
 Depreciation and amortization                              216,600    315,600
 Property operating:
 Affiliates                                                  75,700     87,100
 Nonaffiliates                                              187,500    243,300
 Real estate taxes                                           81,000    139,100
 Insurance--Affiliate                                        13,200     19,400
 Repairs and maintenance                                    133,800    190,800
 General and administrative:
 Affiliates                                                  10,400     17,000
 Nonaffiliates                                               42,500     44,400
------------------------------------------------------------------------------
                                                            760,700  1,056,700
------------------------------------------------------------------------------
Income before income from participation in joint venture    734,400    709,300
Income from participation in joint venture                  108,500     62,600
------------------------------------------------------------------------------
Net income                                                $ 842,900 $  771,900
------------------------------------------------------------------------------
Net income allocated to General Partner                   $  52,400 $   84,800
------------------------------------------------------------------------------
Net income allocated to Limited Partners                  $ 790,500 $  687,100
------------------------------------------------------------------------------
Net income allocated to Limited Partners per Unit
 (84,886 Units outstanding)                               $    9.31 $     8.09
------------------------------------------------------------------------------
</TABLE>
 
STATEMENTS OF INCOME AND EXPENSES
For the nine months ended September 30, 1997 and 1996
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
 
<TABLE>
<CAPTION>
                                                      1997       1996
------------------------------------------------------------------------
<S>                                                <C>        <C>
Income:
 Rental                                            $3,948,800 $4,779,800
 Interest                                             514,200    532,900
 Gain on sale of Property                             378,100
------------------------------------------------------------------------
                                                    4,841,100  5,312,700
------------------------------------------------------------------------
Expenses:
 Depreciation and amortization                        821,100    941,000
 Property operating:
 Affiliates                                           206,800    290,900
 Nonaffiliates                                        667,100    708,900
 Real estate taxes                                    357,900    415,900
 Insurance--Affiliate                                  40,700     58,100
 Repairs and maintenance                              422,600    532,700
 General and administrative:
 Affiliates                                            26,300     48,500
 Nonaffiliates                                        173,100    208,500
------------------------------------------------------------------------
                                                    2,715,600  3,204,500
------------------------------------------------------------------------
Income before income from participation in joint
 venture                                            2,125,500  2,108,200
Income from participation in joint venture            280,500    274,600
------------------------------------------------------------------------
Net income                                         $2,406,000 $2,382,800
------------------------------------------------------------------------
Net income allocated to General Partner            $  329,400 $  339,500
------------------------------------------------------------------------
Net income allocated to Limited Partners           $2,076,600 $2,043,300
------------------------------------------------------------------------
Net income allocated to Limited Partners per Unit
 (84,886 Units outstanding)                        $    24.46 $    24.07
------------------------------------------------------------------------
</TABLE>
 
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1997 and 1996
(Unaudited)
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                                           1997         1996
--------------------------------------------------------------------------------
<S>                                                     <C>          <C>
Cash flows from operating activities:
 Net income                                             $ 2,406,000  $2,382,800
 Adjustments to reconcile net income to net cash
  provided by operating activities:
 Depreciation and amortization                              821,100     941,000
 (Income) from participation in joint venture              (280,500)   (274,600)
 Gain on sale of Property                                  (378,100)
 Changes in assets and liabilities:
  Decrease in rents receivable                               32,800      82,200
  Decrease (increase) in other assets                        46,400      (9,000)
  (Decrease) in accounts payable and accrued expenses       (15,300)    (40,200)
  (Decrease) increase in due to Affiliates                   (6,800)      6,200
  (Decrease) in other liabilities                          (106,400)    (44,200)
--------------------------------------------------------------------------------
   Net cash provided by operating activities              2,519,200   3,044,200
--------------------------------------------------------------------------------
Cash flows from investing activities:
 Payments for capital and tenant improvements              (371,700)   (702,500)
 (Increase) in investments in debt securities, net       (4,391,900) (7,695,600)
 (Increase) in restricted cash                                          (25,000)
 Proceeds from sale of Property                          15,096,200
 Net distributions received from (contributions to)
  joint venture                                             636,700     (25,000)
--------------------------------------------------------------------------------
   Net cash provided by (used for) investing activities  10,969,300  (8,448,100)
--------------------------------------------------------------------------------
Cash flows from financing activities:
 Distributions paid to Partners                         (10,969,300) (3,819,900)
 (Decrease) in security deposits                            (42,600)     (3,400)
--------------------------------------------------------------------------------
Net cash (used for) financing activities                (11,011,900) (3,823,300)
Net increase (decrease) in cash and cash equivalents      2,476,600  (9,227,200)
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       $7,050,000  $3,040,800
--------------------------------------------------------------------------------
</TABLE>
    The accompanying notes are an integral part of the financial statements.
                                                                               3
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 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 quarter and nine months ended September 30, 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 and loans to 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). In addition, loans to and from the
joint venture are reflected in the financial statements.
 
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 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
obligations of the United States government 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' 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
 
4
<PAGE>
 
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, 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, 1997,
the General Partner was entitled to a Partnership Management Fee, and
accordingly, allocated Net Profits, of $51,900 and $198,100, respectively. In
addition, the General Partner was allocated Net Profits totaling $131,800 from
the sales of Lakewood and Banana River and a Net (Loss) of $(500) from the sale
of Featherwood.
 
Fees and reimbursements paid and payable by the Partnership to Affiliates
during the quarter and nine months ended September 30, 1997 were as follows:
 
<TABLE>
<CAPTION>
                                                          Paid
                                                  --------------------
                                                  Quarter  Nine Months Payable
------------------------------------------------------------------------------
<S>                                               <C>      <C>         <C>
Property management and leasing fees              $ 58,600  $184,800   $ 9,200
Reimbursement of property insurance premiums, at
 cost                                               16,600    40,700      None
Real estate
 commissions (a)                                      None      None    40,300
Legal                                               34,100    66,600    15,300
Reimbursement of expenses, at costs:
 --Accounting                                        3,100    14,100     2,600
 --Investor communications                           2,400     8,900     2,000
------------------------------------------------------------------------------
                                                  $114,800  $315,100   $69,400
------------------------------------------------------------------------------
</TABLE>
(a) As of September 30, 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 from the initial investment date).
 
3. PROPERTY SALES
 
On May 16, 1997, a joint venture in which the Partnership owns a 50% interest,
consummated the sale of Lakewood Square Shopping Center ("Lakewood"), located
in Lakewood, California, for a sale price of $17,750,000, of which the
Partnership's share was $8,875,000. The Partnership's share of proceeds from
this transaction was $8,661,300, which was net of closing expenses. The
Partnership reported a net gain of $167,800 for the nine months ended September
30,
1997 in connection with this sale and distributed $8,658,400 or $102.00 per
Unit on August 31, 1997 to Limited Partners of record as of May 16, 1997.
 
On June 27, 1997, a joint venture in which the Partnership owns a 50% interest,
consummated the sale of 12621 Featherwood Office Building, located in Houston,
Texas, for a sale price of $3,146,700, of which the Partnership's share was
$1,573,300. The Partnership's share of proceeds from this transaction was
$1,492,000, which is net of closing expenses. The Partnership reported a net
loss of $53,700 for the nine months ended September 30, 1997 in connection with
this sale and will distribute $1,495,700 or $17.62 per Unit on November 30,
1997 to Limited Partners of record as of June 27, 1997.
 
On July 24, 1997, the Partnership sold Banana River Square Shopping Center,
located in Cocoa Beach, Florida, for a sale price of $5,185,000. Proceeds from
this transaction were $4,942,900, which was net of actual and estimated closing
expenses. The Partnership reported a gain for financial reporting purposes of
$263,900 during the quarter ending September 30, 1997 from this sale and will
distribute $4,935,300 or $58.14 per Unit on November 30, 1997 to Limited
Partners of record as of July 24, 1997.
 
4. ENVIRONMENTAL MATTER:
 
In December 1996, the General Partner became aware of the existence of
hazardous substances in the ground under Lakewood. The sources of the hazardous
substances is believed to emanate from one or more of the tenants operating a
dry cleaning business at 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. Also included
was a one-year indemnification by the purchaser against and from any and all
claims, demands, losses, liabilities, costs, damages, expenses, clean-up costs
required by, and fines and damages imposed by governmental agencies with
jurisdiction over Lakewood, and all reasonable costs and expenses incurred by
the purchaser related to the hazardous substances.
 
5. SUBSEQUENT EVENT:
 
On November 10, 1997, a joint venture in which the Partnership owns a 50%
interest, consummated the sale of Foxhall Square Office Building, located in
Washington D.C., for a sale price of $17,125,000, of which the Partnership's
share was $8,562,500. The Partnership's share of proceeds from this transaction
was approximately $8,250,000, which is net of actual and estimated closing
expenses. The Partnership will report a net gain for financial reporting of
approximately $1,150,000 for the year ending December 31,1997 from this sale
and intends to distribute $8,249,200 or $97.18 per Unit on February 28, 1998 to
Limited Partners of record as of November 10, 1997.
 
                                                                               5
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Reference is made to the Partnership's annual report for the year ended
December 31, 1996 for a discussion of the Partnership's business.
 
OPERATIONS
The Partnership is in the disposition phase of its life cycle. During the
disposition phase, comparisons of operating results are complicated due to the
timing and affect of property sales. Partnership operating results are
generally expected to decline as real property interests are sold since the
Partnership no longer receives income generated from such real property
interests.
 
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,
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    For the Nine Months
                            Ended                Ended
                      9/30/97   9/30/96   9/30/97     9/30/96
---------------------------------------------------------------------------------------
<S>                  <C>       <C>       <C>         <C>        <C> <C> <C> <C> <C> <C>
FOXHALL SQUARE BUILDING (50%)
Rental revenues      $ 418,500 $ 397,600 $1,268,000  $1,183,200
---------------------------------------------------------------------------------------
Property net income  $ 100,800 $  82,900 $  369,700  $  334,400
---------------------------------------------------------------------------------------
Average occupancy          91%       85%        91%         84%
---------------------------------------------------------------------------------------
ELLIS BUILDING (50%)
Rental revenues      $ 317,100 $ 293,100 $  956,400  $  875,300
---------------------------------------------------------------------------------------
Property net income  $ 109,400 $  91,800 $  328,600  $  288,000
---------------------------------------------------------------------------------------
Average occupancy          98%       95%        97%         94%
---------------------------------------------------------------------------------------
MARKETPLACE AT RIVERGATE SHOPPING CENTER
Rental revenues      $ 232,400 $ 248,100 $  775,500  $  771,800
---------------------------------------------------------------------------------------
Property net income  $  98,000 $ 128,300 $  392,600  $  366,200
---------------------------------------------------------------------------------------
Average occupancy          97%       94%        96%         97%
---------------------------------------------------------------------------------------
HOLIDAY OFFICE PARK NORTH AND SOUTH
 (50%)
Rental revenues      $ 469,600 $ 392,900 $1,253,200  $1,184,500
---------------------------------------------------------------------------------------
Property net income  $ 108,500 $  62,600 $  280,500  $  274,600
---------------------------------------------------------------------------------------
Average occupancy          86%       85%        86%         84%
---------------------------------------------------------------------------------------
BANANA RIVER SQUARE SHOPPING CENTER (B)
Rental revenues      $         $ 188,900  $ 407,400  $  563,600
---------------------------------------------------------------------------------------
Property net income  $         $  64,800 $  137,500  $  194,000
---------------------------------------------------------------------------------------
Average occupancy                    93%                    94%
---------------------------------------------------------------------------------------
LAKEWOOD SQUARE SHOPPING CENTER (50%)
 (C)
Rental revenues      $         $ 332,300 $  501,000  $  986,700
---------------------------------------------------------------------------------------
Property net income  $         $ 170,100 $  253,000  $  479,500
---------------------------------------------------------------------------------------
Average occupancy                    97%                    96%
---------------------------------------------------------------------------------------
12621 FEATHERWOOD BUILDING (50%) (D)
Rental revenues      $         $ 129,600    (c)      $  399,100
---------------------------------------------------------------------------------------
Property net (loss)
 income              $         $  49,700 $  (40,500) $  162,700
---------------------------------------------------------------------------------------
Average occupancy                   100%                   100%
---------------------------------------------------------------------------------------
</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 was sold on July 24, 1997.
(c) Property was sold on May 16, 1997.
(d) Property was vacant from December 14, 1996 through its sale on June 27,
    1997. For further information regarding the three sales see Note 3 of Notes
    to the Financial Statements.
 
Unless otherwise disclosed, discussions of fluctuations between 1997 and 1996
refer to both the quarters and nine months ended September 30, 1997 and 1996.
 
Net income increased by $71,000 and $23,200 for the quarter and nine months
ended September 30, 1997 when compared to the quarter and nine months ended
September 30, 1996, respectively. The increases were primarily due to the gains
recognized on the sales of Banana River Square Shopping Center ("Banana River")
and Lakewood Square Shopping Center ("Lakewood"). Partially offsetting the
increases was the partial absence of operating results from the three
properties sold during 1997.
 
Net income exclusive of sold properties increased by $130,100 and $131,300 for
the quarter and nine months ended September 30, 1997 when compared to the
quarter and nine months ended September 30, 1996, respectively. The increases
were primarily due to improved operating results at Foxhall Square Office
Building ("Foxhall"), Ellis Building ("Ellis"), the Partnership's equity
investment in Holiday Office Park North and South ("Holiday") and for the nine
month period, Marketplace at Rivergate Shopping Center ("Rivergate"). Also
contributing to the increases was a decrease in general and administrative
expenses resulting from reduced personnel costs and accounting fees.
 
The following comparative discussion excludes the results of the Partnership's
properties that were sold prior to September 30, 1997.
 
Rental revenues increased by $29,200 or 3.1% and $169,600 or 6.0% for the
quarter and nine months ended September 30, 1997 when compared to the quarter
and nine months ended September 30, 1996, respectively. The increases were
primarily due to increases in base rental revenues at Foxhall and Ellis due to
the increases in their average occupancy and an increase in tenant expense
reimbursements at Ellis. Partially offsetting the increases were decreases in
tenant expense reimbursements at Rivergate.
 
Real estate tax expense increased by $4,800 and $17,500 for the quarter and
nine months ended September 30, 1997 when compared to the quarter and nine
months ended September 30, 1996, respectively. The increases were primarily due
to projected increases at Foxhall.
 
Depreciation and amortization expense increased by $7,700 and $20,600 for the
quarterly and nine-month periods under comparison, respectively. The increases
were primarily due to depreciable assets placed in service at Foxhall and Ellis
exceeding those assets whose depreciable lives expired.
 
Property operating expenses increased by $12,700 and $30,800 for the quarter
and nine months ended September 30, 1997 when compared to the quarter and nine
months ended September 30, 1996, respectively. The increases were primarily the
result of an increase in management fees due to a decrease in leasing
commissions paid to outside brokers in 1997 at Foxhall. Also contributing the
increases were increased utility costs at Ellis and Foxhall and an increase in
professional service costs at Rivergate.
 
Repair and maintenance expenses increased by $6,600 and $9,600 for the
quarterly and nine-month periods under comparison, respectively. The increases
were primarily due to an increase in salaries at Foxhall and Ellis partially
offset by a decrease in repairs to the elevators at Ellis.
 
The Partnership's share of net income from Holiday increased by $45,900 and
$5,900 for the quarterly and nine-month periods under comparison, respectively.
The increases were primarily the result of increased rental income due to
increases in tenant expense reimbursements. Also contributing to the increases
was a decrease in the estimated business tax payable to the state of Michigan.
Partially offsetting the net income increases were increases in depreciation
and amortization expense which was the result of an increase in improvements
made to the property along with increases in management fees which were the
result of lease commissions paid to brokers being less in 1997 than in 1996.
 
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
 
                                                                               6
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
actions: 1) implementation of marketing programs, including hiring of third-
party leasing agents or providing on-site leasing personnel, advertising,
direct mail campaigns and development of building brochures; 2) early renewal
of existing tenants' leases and addressing any expansion needs these tenants
may have; 3) promotion of local broker events and networking with local
brokers; 4) 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 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
                                                       9/30/97       9/30/96
-------------------------------------------------------------------------------
<S>                                                  <C>           <C>
Cash Flow (as defined in the Partnership Agreement)  $  3,065,500  $ 3,457,300
Less: Cash Flow from joint venture                       (497,000)    (408,100)
Items of reconciliation:
 Decrease in current assets                                79,200       73,200
 (Decrease) in current liabilities                       (128,500)     (78,200)
-------------------------------------------------------------------------------
Net cash provided by operating activities            $  2,519,200  $ 3,044,200
-------------------------------------------------------------------------------
Net cash provided by (used for) investing
 activities                                          $ 10,969,300  $(8,448,100)
-------------------------------------------------------------------------------
Net cash (used for) financing activities             $(11,011,900) $(3,823,300)
-------------------------------------------------------------------------------
</TABLE>
 
The decrease in Cash Flow (as defined in the Partnership Agreement) of $391,800
for the nine months ended September 30, 1997 when compared to nine months ended
September 30, 1996 was primarily due to the vacancy at Featherwood and the
partial absence of operating results from Lakewood and Banana River due to
their 1997 sales. Partially offsetting the decrease was the increase in net
income, exclusive of sold properties and depreciation and amortization, as
previously discussed.
 
The increase in the Partnership's cash position of $2,476,600 for the nine
months ended September 30, 1997 was primarily the result of the receipt of
Sales Proceeds from Featherwood and Banana River and net cash provided by
operating activities exceeding the increase in investments in debt securities.
Liquid assets (including cash, cash equivalents and investments in debt
securities) as of September 30, 1997 were comprised of amounts held for working
capital purposes and undistributed Sales Proceeds.
 
The decrease of $525,000 in cash provided by operating activities for the nine
months ended September 30, 1997 when compared to the nine months ended
September 30, 1996 was primarily due to the decrease in net income, excluding
gains on sales of properties, as previously discussed, partially offset by the
timing of the payment of certain expenses at Banana River and Foxhall.
 
Net cash (used for) provided by investing activities changed from $(8,448,100)
for the nine months ended September 30, 1996 to $10,969,300 for the nine months
ended September 30, 1997. The change was primarily due to the sales of
Lakewood, Banana River and Featherwood and the increase in distributions
received from the Partnership's equity investment in Holiday, together with a
smaller amount of investments in debt securities. 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 for
distribution to Limited Partners. 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, 1997, the Partnership spent $371,700 for
capital and tenant improvements and leasing costs. The amount of capital
expenditures to be made during the remainder of 1997 and beyond is to a large
extent contingent on the progress made with respect to selling the
Partnership's properties. Actual amounts expended in 1997 are dependent 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 increase of $7,188,600 in net cash used for financing activities for the
nine months ended September 30, 1997 when compared to the nine months ended
September 30, 1996 was due primarily to an increase in distributions paid to
Partners in 1997 resulting from the property sales.
 
On May 16, 1997, a joint venture in which the Partnership has a 50% interest,
completed the sale of Lakewood. The Partnership's share of net proceeds from
this sale amounted to $8,661,300. In connection with this sale, the Partnership
declared a special distribution in the amount of $8,658,400 or $102.00 per
Unit, which the Partnership distributed on August 31, 1997 to Limited Partners
of record as of May 16, 1997.
 
On June 27, 1997, a joint venture in which the Partnership has a 50% interest,
completed the sale of Featherwood. The Partnership's share of net proceeds from
this sale amounted to $1,492,000. In connection with this sale, the Partnership
declared a special distribution in the amount of $1,495,700 or $17.62 per Unit,
which the Partnership will distribute on November 30, 1997 to Limited Partners
of record as of June 27, 1997.
 
On July 24, 1997, the Partnership completed the sale of Banana River. Net
proceeds from this sale were $4,942,900. In connection with this sale, the
Partnership declared a special distribution in the amount of $4,935,300 or
$58.14 per Unit, which the Partnership will distribute on November 30, 1997 to
Limited Partners of record as of July 24, 1997.
 
On November 10, 1997, a joint venture in which the Partnership has a 50%
interest, completed the sale of Foxhall. The Partnership's share of net
proceeds from this sale amounted to approximately $8,250,000. In connection
with this sale, the Partnership declared a special distribution in the amount
of $8,249,200 or $97.18 per Unit, which the Partnership will distribute on
February 28, 1998 to Limited Partners of record as of November 10, 1997.
 
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 capital and tenant improvements and leasing costs that may be
necessary at the Partnership's properties during the next several years. As a
result, cash continues to be retained to supplement working capital reserves.
For the nine months ended September 30, 1997, Cash Flow (as defined in the
Partnership Agreement) retained to supplement working capital reserves amounted
to $1,084,800.
 
Distributions to Limited Partners for the quarter ended September 30, 1997 were
declared in the amount of $466,900, or $5.50 per Unit. Cash distributions are
made 60 days after the last day of each fiscal quarter. The amount of future
distributions to Partners will ultimately be dependent upon the performance of
the Partnership's investments as well as the General Partner's determination of
the amount of cash necessary to supplement working capital reserves to meet
future liquidity requirements of the Partnership. Accordingly, with the
exception of the distribution of Sales Proceeds disclosed herein, there can be
no assurance as to the amounts of cash for future distributions to Partners.
 
7
<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 August 8, 1997, reporting the 
               sale of Banana River Square Shopping Center, located in Cocoa
               Beach, Florida.
<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 14, 1997        By: /s/ DOUGLAS CROCKER II
      -----------------            --------------------------------------
                                       DOUGLAS CROCKER II
                                   President and Chief Executive Officer

Date: November 14, 1997        By: /s/ NORMAN M. FIELD
      -----------------            --------------------------------------
                                       NORMAN M. FIELD
                                   Vice President - Finance and Treasurer