<PAGE>
 

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION

                          Washington, D.C. 20549-1004

                                   FORM 10-Q
 


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

     For the period ended September 30, 1996
                          ------------------------------------------------------
 
                                      OR
 
[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
 

     For the transition period from                       to
                                    ---------------------    -------------------
 
     Commission File Number                             0-17610
                                    -------------------------------------------
                              
 
                          
             FIRST CAPITAL INSURED REAL ESTATE LIMITED PARTNERSHIP
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)


 
        Illinois                                                  36-3525946
-------------------------------                              -------------------
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)
 
Two North Riverside Plaza, Suite 950, Chicago, Illinois          60606-2607
-------------------------------------------------------      ------------------
      (Address of principal executive offices)                   (Zip Code)
 
 
                                (312) 207-0020
--------------------------------------------------------------------------------
             (Registrant's telephone number, including area code)
 
                                Not applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes  X   No
                                       ---     ---

DOCUMENTS INCORPORATED BY REFERENCE:

The First Amended and Restated Agreement of Limited Partnership filed as Exhibit
A to the definitive Prospectus dated August 1, 1988, included in the
Partnership's Registration Statement on Form S-11, is incorporated herein by
reference in Part I of this report.
<PAGE>
 
BALANCE SHEETS
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                                 September 30,
                                                     1996      December 31,
                                                  (Unaudited)      1995
---------------------------------------------------------------------------
<S>                                              <C>           <C>
ASSETS
Investment in commercial and residential rental
 properties:
 Land                                             $ 3,369,700  $ 3,369,700
 Buildings and improvements                        25,957,000   24,963,900
---------------------------------------------------------------------------
                                                   29,326,700   28,333,600
Accumulated depreciation and amortization          (6,103,700)  (5,359,700)
---------------------------------------------------------------------------
 Total investment properties, net of accumulated
  depreciation and amortization                    23,223,000   22,973,900
Cash and cash equivalents                           1,729,100    3,829,000
Investments in debt securities                      2,108,800
Rents receivable                                       96,600      124,100
Deferred insurance premium (net of accumulated
 amortization of $906,100 and $776,200,
 respectively)                                        750,700      880,600
Other assets                                              600       18,100
---------------------------------------------------------------------------
                                                  $27,908,800  $27,825,700
---------------------------------------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
 Accounts payable and accrued expenses            $   639,700  $   415,800
 Due to Affiliates                                     17,100       16,500
 Security deposits                                    103,500       93,300
 Distributions payable                                451,100      451,100
 Other liabilities                                     24,700       73,100
---------------------------------------------------------------------------
                                                    1,236,100    1,049,800
---------------------------------------------------------------------------
Partners' capital:
 General Partner (deficit)                         (1,081,200)    (958,400)
 Limited Partners (688,194 Units issued and
  outstanding)                                     27,753,900   27,734,300
---------------------------------------------------------------------------
                                                   26,672,700   26,775,900
---------------------------------------------------------------------------
                                                  $27,908,800  $27,825,700
---------------------------------------------------------------------------
</TABLE>
STATEMENTS OF PARTNERS' CAPITAL
For the nine months ended September 30, 1996 (Unaudited) and the year ended
December 31, 1995
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                           General      Limited
                                           Partner     Partners       Total
-------------------------------------------------------------------------------
<S>                                      <C>          <C>          <C>
Partners' (deficit) capital,
 January 1, 1995                         $  (783,200) $28,838,100  $28,054,900
Net income for the year ended December
 31, 1995                                      5,300      520,300      525,600
Distributions for the year ended
 December 31, 1995                          (180,500)  (1,624,100)  (1,804,600)
-------------------------------------------------------------------------------
Partners' (deficit) capital,
 December 31, 1995                          (958,400)  27,734,300   26,775,900
Net income for the nine months ended
 September 30, 1996                           12,500    1,237,700    1,250,200
Distributions for the nine months ended
 September 30, 1996                         (135,300)  (1,218,100)  (1,353,400)
-------------------------------------------------------------------------------
Partners' (deficit) capital,
 September 30, 1996                      $(1,081,200) $27,753,900  $26,672,700
-------------------------------------------------------------------------------
</TABLE>
    The accompanying notes are an integral part of the financial statements.
2
<PAGE>
 
STATEMENTS OF INCOME AND EXPENSES
For the quarters ended September 30, 1996 and 1995
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
 
<TABLE>
<CAPTION>
                                                      1996       1995
------------------------------------------------------------------------
<S>                                                <C>        <C>
Income:
 Rental                                            $1,063,200 $1,216,000
 Interest                                              50,300     52,800
------------------------------------------------------------------------
                                                    1,113,500  1,268,800
------------------------------------------------------------------------
Expenses:
 Depreciation and amortization                        273,000    228,600
 Property operating:
  Affiliates                                           45,900     54,800
  Nonaffiliates                                       153,000    156,700
 Real estate taxes                                    111,300     99,200
 Insurance--Affiliate                                  13,000     12,300
 Repairs and maintenance                              128,700    160,200
 General and administrative:
  Affiliates                                           12,500     16,400
  Nonaffiliates                                        24,100     34,200
------------------------------------------------------------------------
                                                      761,500    762,400
------------------------------------------------------------------------
Net income                                         $  352,000 $  506,400
------------------------------------------------------------------------
Net income allocated to General Partner            $    3,500 $    5,100
------------------------------------------------------------------------
Net income allocated to Limited Partners           $  348,500 $  501,300
------------------------------------------------------------------------
Net income allocated to Limited Partners per Unit
 (688,194 Units outstanding)                       $     0.51 $     0.73
------------------------------------------------------------------------
</TABLE>
 
STATEMENTS OF INCOME AND EXPENSES
For the nine months ended September 30, 1996 and 1995
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
 
<TABLE>
<CAPTION>
                                                      1996       1995
------------------------------------------------------------------------
<S>                                                <C>        <C>
Income:
 Rental                                            $3,492,700 $3,436,400
 Interest                                             156,100    162,900
------------------------------------------------------------------------
                                                    3,648,800  3,599,300
------------------------------------------------------------------------
Expenses:
 Depreciation and amortization                        873,900    684,800
 Property operating:
  Affiliates                                          152,800    193,900
  Nonaffiliates                                       450,300    437,400
 Real estate taxes                                    312,900    319,100
 Insurance--Affiliate                                  39,100     36,800
 Repairs and maintenance                              435,100    418,500
 General and administrative:
  Affiliates                                           36,200     32,000
  Nonaffiliates                                        98,300    121,600
------------------------------------------------------------------------
                                                    2,398,600  2,244,100
------------------------------------------------------------------------
Net income                                         $1,250,200 $1,355,200
------------------------------------------------------------------------
Net income allocated to General Partner            $   12,500 $   13,600
------------------------------------------------------------------------
Net income allocated to Limited Partners           $1,237,700 $1,341,600
------------------------------------------------------------------------
Net income allocated to Limited Partners per Unit
 (688,194 Units outstanding)                       $     1.80 $     1.95
------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1996 and 1995
(Unaudited)
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                                        1996        1995
-----------------------------------------------------------------------------
<S>                                                  <C>         <C>
Cash flows from operating activities:
 Net income                                          $1,250,200  $ 1,355,200
 Adjustments to reconcile net income to net cash
  provided by operating activities:
  Depreciation and amortization                         873,900      684,800
  Changes in assets and liabilities:
  Decrease in rents receivable                           27,500       22,600
  Decrease (increase) in other assets                    17,500      (24,600)
  Increase in accounts payable and accrued expenses     223,900      183,700
  Increase (decrease) in due to Affiliates                  600      (28,500)
  (Decrease) increase in other liabilities              (48,400)      44,000
-----------------------------------------------------------------------------
   Net cash provided by operating activities          2,345,200    2,237,200
-----------------------------------------------------------------------------
Cash flows from investing activities:
 Payments for capital and tenant improvements          (993,100)  (1,106,000)
 (Increase) in investments in debt securities        (2,108,800)
-----------------------------------------------------------------------------
   Net cash (used for) investing activities          (3,101,900)  (1,106,000)
-----------------------------------------------------------------------------
Cash flows from financing activities:
 Distributions paid to Partners                      (1,353,400)  (1,353,400)
 Increase in security deposits                           10,200       15,700
-----------------------------------------------------------------------------
   Net cash (used for) financing activities          (1,343,200)  (1,337,700)
-----------------------------------------------------------------------------
Net (decrease) in cash and cash equivalents          (2,099,900)    (206,500)
Cash and cash equivalents at the beginning of the
 period                                               3,829,000    4,005,200
-----------------------------------------------------------------------------
Cash and cash equivalents at the end of the period   $1,729,100  $ 3,798,700
-----------------------------------------------------------------------------
</TABLE>
    The accompanying notes are an integral part of the financial statements.
                                                                               3
<PAGE>
 
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
DEFINITION OF SPECIAL TERMS:
Capitalized terms used in this report have the same meaning as those terms have
in the Partnership's Registration Statement filed with the Securities and
Exchange Commission on Form S-11. Definitions of these terms are contained in
Article III of the First Amended and Restated Agreement of Limited Partnership,
which is included in the Registration Statement and incorporated herein by
reference.
 
ACCOUNTING POLICIES:
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP"). Under this method of accounting,
revenues are recorded when earned and expenses are recorded when incurred.
 
Preparation of the Partnership's financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
 
The financial information included in these financial statements is unaudited;
however, in management's opinion, all adjustments (consisting of only normal,
recurring accruals) necessary for a fair presentation of the results of
operations for the periods included have been made. Results of operations for
the quarter and nine months ended September 30, 1996, are not necessarily
indicative of the operating results for the year ending December 31, 1996.
 
The financial statements include the Partnership's 50% interest in a joint
venture with an Affiliated partnership. This joint venture was formed for the
purpose of acquiring a 100% interest in certain real property and is operated
under the common control of the General Partner. Accordingly, the Partnership's
pro rata share of the venture's revenues, expenses, assets, liabilities and
Partners' capital was included in the financial statements.
 
Commercial and residential rental properties held for investment are recorded
at cost, net of any provisions for value impairment, and depreciated (exclusive
of amounts, if any, allocated to land and value impairments) on the straight-
line method over their respective estimated useful lives. Upon classifying a
commercial or residential rental property as held for disposition, no further
depreciation or amortization of such property is provided for in the financial
statements. Lease acquisition fees are recorded at cost and amortized using the
straight-line method over the life of each respective lease. Repair and
maintenance costs are expensed as incurred; expenditures for improvements are
capitalized and depreciated on the straight-line method over the estimated life
of such improvements.
 
During the first quarter of 1996, the Partnership adopted Financial Accounting
Standards Board Statement No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (the "Standard"). The
Standard established guidance for determining if the value of defined assets is
impaired, and if so, how impairment losses should be measured and reported in
the financial statements. The Standard also addressed the accounting for long-
lived assets that are expected to be disposed of. The adoption of the Standard
did not have a material effect on the Partnership's financial statements.
Evaluation of the potential impairment of the value of the Partnership's assets
is performed on an individual property basis.
 
Cash equivalents are considered all highly liquid investments with an original
maturity of three months or less when purchased.
 
Investments in debt securities are comprised of corporate debt securities and
are classified as held-to-maturity. These investments are carried at their
amortized cost basis in the financial statements. As of September 30, 1996,
these securities had a fair market value of $2,107,600 and unrealized (losses)
of $(1,200). Substantially all of these securities had maturities of less than
one year when purchased.
 
Deferred insurance premiums paid on the Continental Casualty Company (CNA)
insurance policy are amortized on the straight-line method over a ten-year
period ending in the year 2001.
 
Certain reclassifications have been made to the previously reported 1995
statements in order to provide comparability with the 1996 statements. These
reclassifications had no effect on net income or Partners' (deficit) capital.
 
Reference is made to the Partnership's annual report for the year ended
December 31, 1995, for a description of other accounting policies and
additional details of the Partnership's financial condition, results of
operations, changes in Partners' 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, as compensation for services
rendered in managing the affairs of the Partnership, the General Partner is
entitled to receive subsequent to July 31, 1990, the Termination of the
Offering, a Portfolio Management Fee, payable quarterly, with respect to such
fiscal quarter. The Portfolio Management Fee is an amount equal to the lesser
of (i) 0.625% of the gross value of the Partnership's assets plus, to the
extent the Portfolio Management Fee paid in any prior quarter was less than
0.625% of the gross value of the Partnership's assets in such prior quarter,
the amount of such deficit, or (ii) an amount equal to the remainder obtained
by subtracting the aggregate amount previously paid to the General Partner as
Portfolio Management Fees during such fiscal quarter, from an amount equal to
10% of the Partnership's aggregate distributable Cash Flow (as defined in the
Partnership Agreement) (computed prior to deduction for Portfolio Management
Fees) for such fiscal quarter. For the quarter and nine months ended September
30, 1996, the General Partner was entitled to a Portfolio Management Fee of
$45,100 and $135,300, respectively.
 
In accordance with the Partnership Agreement, Net Profits and Net Losses
(exclusive of Net Profits and Net Losses from a Major Capital Event) are
allocated 1% to the General Partner and 99% to the Limited Partners as a group.
Net Losses from a Major Capital Event are allocated (prior to giving effect to
any distributions of Sale Proceeds from said Major Capital Event): first, to
the General Partner and Limited Partners with positive balances in their
Capital Accounts, in proportion to and to the extent of such positive balances;
and second, the balance, if any, 1% to the General Partner and 99% to the
Limited Partners as a group. Net Profits from a Major Capital Event are
allocated (prior to giving effect to any distribution of Sale Proceeds from
said Major Capital Event): first, Net Profits in the amount of the Minimum Gain
attributable to the property that is the subject of such Major Capital Event
are allocated to the General Partner and Limited Partners with negative
balances in their Capital Accounts, in proportion to and to the extent of such
negative balances; second, to the General Partner and each Limited Partner in
proportion to and to the extent of the amounts, if any, of Sale Proceeds to be
distributed to the General Partner or each such Limited Partner with respect to
such Major Capital Event pursuant to the Partnership Agreement; and third, the
balance, if any, 1% to the General Partner and 99% to the Limited Partners as a
group. Notwithstanding the foregoing, there shall be allocated to the General
Partner not less than 1% of all items of Partnership income, gain, loss,
deduction and credit during the existence of the Partnership. For the quarter
and nine months ended September 30, 1996, the General Partner was allocated Net
Profits of $3,500 and $12,500, respectively.
 
Fees and reimbursements paid and payable by the Partnership to Affiliates
during the quarter and nine months ended September 30, 1996 were as follows:
 
<TABLE>
<CAPTION>
                                                         Paid
                                                  -------------------
                                                  Quarter Nine Months Payable
-----------------------------------------------------------------------------
<S>                                               <C>     <C>         <C>
Property management and leasing fees              $54,000  $144,900   $ 9,200
Reimbursement of property insurance premiums, at
 cost                                              13,000    39,100      None
Reimbursement of expenses, at cost:
 --Accounting                                       4,400    19,700     5,400
 --Investor communication                           3,300     7,600     2,500
 --Legal                                              900    17,200      None
-----------------------------------------------------------------------------
                                                  $75,600  $228,500   $17,100
-----------------------------------------------------------------------------
</TABLE>
 
On-site property management for the Partnership's properties is provided by
Affiliates of the General Partner for fees ranging from 3% to 6% of gross rents
received from the properties.
 
3. SUBSEQUENT EVENT:
 
On October 15, 1996 the Partnership consummated the sale of Telegraph Hill
Apartments, located in Albuquerque, New Mexico, for a sale price of $8,100,000.
Sale Proceeds (as defined in the Partnership Agreement) from this transaction
approximated $7,962,000, which is net of estimated selling expenses. The
Partnership will record a net gain of $2,497,600 in connection with this sale.
On November 30, 1996 the Partnership will distribute substantially all of the
Sale Proceeds to Limited Partners of record as of October 15, 1996. For
additional information, see Form 8-K filed by the Partnership dated October 15,
1996.
 
                                                                               4
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Reference is made to the Partnership's annual report for the year ended
December 31, 1995 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 quarters and nine months ended
September 30, 1996 and 1995. The discussion following the table should be read
in conjunction with the financial statements and notes thereto appearing in
this report.
 
<TABLE>
<CAPTION>
                        Comparative Operating Results (a)
                     For the Quarters   For the Nine Months
                           Ended               Ended
                     9/30/96  9/30/95   9/30/96    9/30/95
------------------------------------------------------------
<S>                  <C>      <C>      <C>        <C>
LAKEVIEW OFFICE PARK, BUILDINGS II & III
Rental revenues      $458,200 $583,600 $1,615,100 $1,527,200
------------------------------------------------------------
Property net income  $ 87,600 $223,400 $  446,400 $  461,200
------------------------------------------------------------
Average occupancy         83%      85%        85%        84%
------------------------------------------------------------
TELEGRAPH HILL APARTMENTS
Rental revenues      $315,200 $361,600 $  975,200 $1,054,700
------------------------------------------------------------
Property net income  $139,900 $167,200 $  426,800 $  501,000
------------------------------------------------------------
Average occupancy         85%      92%        86%        92%
------------------------------------------------------------
CARROLLTON CROSSROADS SHOPPING CENTER (50%)
Rental revenues      $289,900 $270,800 $  902,500 $  854,500
------------------------------------------------------------
Property net income  $159,800 $135,800 $  497,700 $  455,700
------------------------------------------------------------
Average occupancy         98%      97%        98%        97%
------------------------------------------------------------
</TABLE>
(a) Excludes certain income and expense items which are not directly related to
    individual property operating results such as Partnership interest income,
    general and administrative expenses and amortization of the deferred
    insurance premium on the CNA policy.
 
Unless otherwise disclosed, discussions of fluctuations between 1996 and 1995
refer to both the quarters and nine months ended September 30, 1996 and 1995.
 
Net income for the quarter and nine months ended September 30, 1996 decreased
$154,400 and $105,000, respectively, when compared to the quarter and nine
months ended September 30, 1995. The decreases were primarily the result of
diminished operating results at Lakeview Office Park, Buildings II & III
("Lakeview") and Telegraph Hill Apartments ("Telegraph"). Partially offsetting
the decreases were improved operating results at Carrollton Crossroads Shopping
Center ("Carrollton") along with a decrease in general and administrative
expenses which was primarily due to a decrease in printing, mailing and data
processing costs.
 
Rental revenues decreased $152,800 or 12.6% for the quarter ended September 30,
1996 when compared to the quarter ended September 30, 1995. The decrease for
the quarterly periods under comparison was primarily due to a decrease in base
rents at Lakeview, which was the result of the largest tenant vacating the
building as of April 30, 1996. On September 16, 1996, the Gardner and White
Corporation, took occupancy in 22% of the leasable square footage of Lakeview,
which brought the occupancy at Lakeview to 100%. Also contributing to the
decrease in rental revenues was a decrease in base rental income at Telegraph
due to the decline in the average occupancy rate, which was the result of
increased competition in the region.
 
Rental revenues increased $56,300 or 1.6% for the nine months ended September
30, 1996 when compared to the nine months ended September 30, 1995. The
increase was primarily the result of an increase in: 1) the base rental rate
charged to the prior major tenant at Lakeview to an above market rate to allow
the tenant to extend its lease for a period of ten months beginning July 1,
1995, 2) the base rental income at Carrollton due to an increase in the rates
charged to new and renewing tenants and 3) escalation income for common area
maintenance at Carrollton. Partially offsetting the increase was a decrease in
base rents at Telegraph which was primarily the result of a decrease in the
average occupancy rate, as previously discussed.
 
Depreciation and amortization expense increased $44,400 and $189,100,
respectively, for the quarterly and nine-month periods under comparison. The
increases were primarily the result of an increase in depreciation expense at
Lakeview resulting from significant tenant improvements over the past several
years. Partially offsetting the increase at Lakeview was a decrease in
depreciation expense due to the effect of the provision for value impairment
recorded for Lakeview during the year ended December 31, 1995.
 
Property operating expenses decreased $12,600 and $28,200, respectively, for
the quarterly and nine-month periods under comparison. The decreases were
primarily the result of decreased property management fees at Lakeview and
decreased property management fees and salaries at Telegraph. Partially
offsetting the decreases were increases in administrative salaries at Lakeview
and leasing expense, due to an increase in referral costs, at Telegraph.
 
Repairs and maintenance decreased $31,500 for the quarter ended September 30,
1996 when compared to the quarter ended September 30, 1995. The decrease was
primarily the result of decreases in architectural services at Lakeview,
partially offset by an increase in maintenance staff salaries at Lakeview.
 
Repairs and maintenance increased $16,600 for the nine months ended September
30, 1996 when compared to the nine months ended September 30, 1995. The
increase was primarily due to increased maintenance staff salaries and snow
removal costs at Lakeview together with expenditures in 1996 to fix the boiler
at Telegraph and roof repairs completed in 1996 at Carrollton. Partially
offsetting the increase was a decrease in architectural services at Lakeview.
 
To increase and/or maintain occupancy levels at the Partnership's properties,
the General Partner, through its Affiliated asset and property management
groups, continues to take the following actions: 1) implementation of marketing
programs, including hiring of third-party leasing agents or providing on-site
leasing personnel, advertising, direct mail campaigns and development of
property 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
5
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
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 it properties.
Notwithstanding the Partnership's intention relative to property sales, another
primary objective of the Partnership is to provide cash distributions to
Partners from Partnership operations. To the extent cumulative cash
distributions exceed net income, such excess distributions will be treated as a
return of capital. Cash Flow (as defined in the Partnership Agreement) is
generally not equal to net income or cash flows as defined by generally
accepted accounting principles ("GAAP"), since certain items are treated
differently under the Partnership Agreement than under GAAP. Management
believes that to facilitate a clear understanding of the Partnership's
operations, an analysis of Cash Flow (as defined in the Partnership Agreement)
should be examined in conjunction with an analysis of net income or cash flows
as defined by GAAP. The following table includes a reconciliation of Cash Flow
(as defined in the Partnership Agreement) to cash flow provided by operating
activities as defined by GAAP. Such amounts are not indicative of actual
distributions to Partners and should not be considered as an alternative to the
results disclosed in the Statements of Income and Expenses and Statements of
Cash Flow.
 
<TABLE>
<CAPTION>
                                                   Comparative
                                                Cash Flow Results
                                            For the Nine Months Ended
                                              9/30/96       9/30/95
-----------------------------------------------------------------------
<S>                                         <C>           <C>
Cash Flow (as defined in the Partnership
 Agreement)                                 $  1,988,800  $  1,904,700
Items of Reconciliation:
 General Partner's Portfolio Management Fee      135,300       135,300
 Decrease (increase) in current assets            45,000        (2,000)
 Increase in current liabilities                 176,100       199,200
-----------------------------------------------------------------------
Net cash provided by operating activities   $  2,345,200  $  2,237,200
-----------------------------------------------------------------------
Net cash (used for) investing activities    $ (3,101,900) $ (1,106,000)
-----------------------------------------------------------------------
Net cash (used for) financing activities    $ (1,343,200) $ (1,337,700)
-----------------------------------------------------------------------
</TABLE>
 
Cash Flow (as defined in the Partnership Agreement) increased by $84,100 for
the nine months ended September 30, 1996 when compared to the nine months ended
September 30, 1995 due primarily to improved operating results at Lakeview and
Carrollton, partially offset by diminished operating results at Telegraph,
exclusive of depreciation and amortization.
 
The decrease in the Partnership's cash position for the nine months ended
September 30, 1996 was primarily the result of investments in debt securities,
distributions paid to Partners and expenditures for capital and tenant
improvements and leasing costs exceeding net cash provided by operating
activities. Liquid assets (including cash, cash equivalents and investments in
debt securities) of the Partnership, as of September 30, 1996 were comprised of
amounts held for working capital purposes.
 
Net cash provided by operating activities, which continues to be the
Partnership's primary source of funds increased by $108,000 for the nine months
ended September 30, 1996 when compared to the nine months ended September 30,
1995. This increase was due to increases in the net cash provided by operating
activities from Carrollton and Lakeview together with the timing of the payment
of expenses at Lakeview, partially offset by reduced net cash provided by
operating activities from Telegraph.
 
Net cash used for investing activities increased by $1,995,900 for the nine
months ended September 30, 1996 when compared to the nine months ended
September 30, 1995. The increase was due to an increase in investments in debt
securities, partially offset by decreases in expenditures made for capital and
tenant improvements and leasing costs. The increase in investments in debt
securities is a result of the extension of the maturities of certain of the
Partnership's short-term investments in an effort to maximize the return on
these amounts as they are held for working capital purposes. These investments
are of investment-grade and generally mature less than one year from their date
of purchase. The Partnership maintains working capital reserves to pay for
capital expenditures, such as capital and tenant improvements and leasing
costs. The Partnership expended $993,100 during the nine months ended September
30, 1996 and has projected to spend approximately $375,000 during the remainder
of 1996. This projected amount relates to anticipated improvements and leasing
costs of approximately $300,000 at Lakeview and $75,000 at Carrollton. Actual
amounts expended may vary depending on a number of factors including actual
leasing activity and other market conditions throughout the year. The General
Partner believes these improvements and leasing costs are necessary in order to
increase and/or maintain occupancy levels in competitive markets, maximize
rental rates charged to new and renewing tenants and to prepare the properties
for eventual disposition.
On October 15, 1996, the Partnership completed the sale of Telegraph. Net
proceeds generated from this sale amounted to approximately $7,962,000. In
connection with the sale, the Partnership declared a special distribution in
the amount of $7,962,000 or $11.57 per Unit. This special distribution will be
paid on November 30, 1996 to Limited Partners of record as of October 15, 1996.
 
Net cash used for financing activities, comprised substantially of
distributions paid to Partners, remained relatively unchanged for the periods
under comparison.
 
The General Partner continues to take a conservative approach to projections of
future rental income and to maintain higher levels of cash reserves due to the
anticipated capital and tenant improvements and leasing costs necessary to be
made at the Partnership's properties during the next several years. As a result
of this, cash continues to be retained to supplement working capital reserves.
For the nine months ended September 30, 1996, Cash Flow (as defined in the
Partnership Agreement) retained to supplement working capital reserves amounted
to $770,700.
 
Distributions to Limited Partners for the quarter ended September 30, 1996 were
declared in the amount of $406,100 or $0.59 per Unit. Cash distributions are
made 60 days after the last day of each fiscal quarter. The amount of future
distributions to Limited Partners will ultimately be dependent upon the
performance of the Partnership's investments as well as the General Partner's
determination of the amount of cash necessary to supplement working capital
reserves to meet future liquidity requirements of the Partnership. Accordingly,
there can be no assurance as to the amounts of cash for future distributions to
Partners.
 
                                                                               6
<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 October 30, 1996 reporting the sale
          of Telegraph Hill Apartments, located in Albuquerque, New Mexico.
 

<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 INSURED REAL ESTATE LIMITED PARTNERSHIP

                           By:  FIRST CAPITAL FINANCIAL CORPORATION
                                GENERAL PARTNER

Date:  November 13, 1996   By:  /s/  DOUGLAS CROCKER II
       -----------------        -------------------------------------
                                     DOUGLAS CROCKER II
                                President and Chief Executive Officer

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