<PAGE>   1
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q

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

                For the quarterly period ended September 30, 1999
                                               ------------------

                                       OR

             [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                     For the transition period from      to
                                                   ------  ------

                         Commission file number: 1045281
                                                 -------

                          CAPTEC NET LEASE REALTY, INC.
                          -----------------------------
             (Exact name of registrant as specified in its charter)

                                    Delaware
                                    --------
         (State or other jurisdiction of incorporation or organization)

                                   38-3368333
                                   ----------
                      (IRS Employer Identification Number)

             24 Frank Lloyd Wright Drive, Ann Arbor, Michigan 48106
             ------------------------------------------------------
                    (Address of principal executive offices,
                               including zip code)

                                 (734) 994-5505
                                 --------------
                         (Registrant's telephone number)

                                 Not Applicable
                                 --------------
(Former name, former address and former fiscal year, if changed since last year)

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 filing requirements
for the past 90 days. Yes X No
                         ---  ---


    APPLICABLE ONLY TO CORPORATE  ISSUERS:  Indicate the number of shares
outstanding of each of the registrant's classes of common equity, as of the
latest practicable date.

          9,508,108 share of Common Stock, $.01 par value, outstanding
                            as of November 15, 1999.

                                       1
<PAGE>   2



                          CAPTEC NET LEASE REALTY, INC.
                                AND SUBSIDIARIES

                                    CONTENTS
<TABLE>
<CAPTION>

             ITEM NO.                                                                                             PAGE
             --------                                                                                             ----
<S>                                <C>                                                                          <C>

              PART I                 FINANCIAL INFORMATION

               Item 1.               Financial Statements:

                                     Consolidated Balance Sheets                                                      3
                                     Consolidated Statements of Operations                                            4
                                     Consolidated Statement of Changes in Stockholders' Equity                        5
                                     Consolidated Statements of Cash Flows                                            6
                                     Consolidated Notes to Financial Statements                                   7 - 9

               Item 2.               Management's Discussion and Analysis of
                                     Financial Condition and Results of Operations                              10 - 13

               Item 3.               Quantitative and Qualitative Disclosures about Market Risk                      13

              PART II                OTHER INFORMATION
                                     Other Information                                                          13 - 16

</TABLE>
                                       2

<PAGE>   3

                 CAPTEC NET LEASE REALTY, INC. and SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                             September 30,       December 31,
                                                                                 1999                1998
                                                                                 ----                ----
ASSETS                                                                        (unaudited)
<S>                                                                       <C>                 <C>
Cash and cash equivalents                                                  $    1,582,454      $   4,488,565

Investments:
   Properties subject to operating leases, net                                221,155,070        221,349,661
   Properties subject to financing leases, net                                  4,369,655          3,128,824
   Loans to affiliates, collateralized by mortgage loans                        9,598,752          8,915,523
   Investment in joint venture                                                  7,144,808                  -
   Investment in affiliated limited partnerships                                4,395,000          4,395,000
   Other loans, related party                                                     394,466            405,775
                                                                           --------------      -------------
             Total investments                                                247,057,751        238,194,783

Short-term loans to affiliates                                                  1,809,026          2,505,294
Unbilled rent, net                                                              5,591,785          3,710,487
Accounts receivable                                                               303,270            144,642
Due from affiliates                                                               436,511          1,242,675
Other assets                                                                    1,299,250          1,724,283
                                                                           --------------      -------------

             Total assets                                                  $  258,080,047      $ 252,010,729
                                                                           ==============      =============

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
   Notes payable                                                           $  120,972,699      $ 113,984,988
   Accounts payable and accrued expenses                                          409,979          1,428,041
   Due to affiliates                                                               88,308             76,513
   Federal income tax payable                                                     719,000            719,000
   Security deposits held on leases                                               280,906            194,406
                                                                           --------------      -------------

             Total liabilities                                                122,470,892        116,402,948
                                                                           --------------      -------------

Stockholders' Equity:
   Common stock, ($.01 par value) authorized: 40,000,000
     shares; issued and outstanding: 9,508,108                                     95,081             95,081
   Paid in capital                                                            134,711,056        134,711,056
   Retained earnings                                                              803,018            801,644
                                                                           --------------      -------------

             Total stockholders' equity                                       135,609,155        135,607,781
                                                                           --------------      -------------

             Total liabilities and stockholders' equity                    $  258,080,047      $ 252,010,729
                                                                           ==============      =============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                       3


<PAGE>   4

                 CAPTEC NET LEASE REALTY, INC. and SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                     Three Months Ended                    Nine Months Ended
                                                                        September 30,                        September 30,
                                                              ----------------------------------------------------------------------
                                                                   1999                1998               1999              1998
                                                                   ----                ----               ----              ----
                                                                        (unaudited)                            (unaudited)
<S>                                                           <C>                <C>                <C>               <C>
Revenue:
     Rental income from operating leases                      $ 6,165,542         $ 6,329,897        $ 18,332,955      $ 16,591,995
     Earned income from financing leases                          161,231                   -             476,777            47,880
     Interest income on loans to affiliates                       320,634             511,991             951,005         1,449,851
     Other income, principally affiliated ventures                724,277             570,683           1,695,106         1,359,068
                                                              -----------         -----------        ------------      ------------

              Total revenue                                     7,371,684           7,412,571          21,455,843        19,448,794
                                                              -----------         -----------        ------------      ------------
Expenses:
     Interest                                                   2,347,837           2,087,771           6,831,505         4,502,375
     Management fees, affiliates                                   52,426             342,862             (23,102)          883,973
     General and administrative                                   421,734             342,928           1,146,769         1,140,880
     Depreciation and amortization                                850,527             825,364           2,532,602         2,173,983
     Provision for unbilled rent                                        -             865,311                   -          865,311
                                                              -----------         -----------        ------------      ------------

              Total expenses                                    3,672,524           4,464,236          10,487,774         9,566,522
                                                              -----------         -----------        ------------      ------------
              Net income before equity income of
                  joint venture, gain (loss) on
                  sale of properties and accounting change      3,699,160           2,948,335          10,968,069         9,882,272

Equity income of joint venture                                     95,636                   -              95,636                 -

Gain (loss) on sale of properties                                 127,665            (891,722)             66,246        (1,144,891)
                                                              -----------         -----------        ------------       -----------

              Net income before accounting change               3,922,461           2,056,613          11,129,951         8,737,381

Cumulative effect of accounting change                                  -                   -            (336,875)                -
                                                              -----------         -----------        ------------       -----------

              Net Income                                      $ 3,922,461         $ 2,056,613        $ 10,793,076      $  8,737,381
                                                              ===========         ===========        ============      ============
              Basic and Diluted EPS:(1)
                  Income before accounting change             $      0.41         $      0.22        $       1.17      $       0.92
                                                              ===========         ===========        ============      ============
                  Accounting change                           $         -         $         -        $      (0.04)     $          -
                                                              ===========         ===========        ============      ============
                  Net Income                                  $      0.41         $      0.22        $       1.14      $       0.92
                                                              ===========         ===========        ============      ============

Weighted average number of common shares
     outstanding                                                9,508,108           9,508,108           9,508,108         9,508,108
                                                              ===========         ===========        ============       ===========
</TABLE>

(1) Calculated independently for each item, and consequently, the sum of the
items may differ from actual amount due to the effects of rounding.

The accompanying notes are an integral part of the consolidated financial
statements.


                                       4

<PAGE>   5


                 CAPTEC NET LEASE REALTY, INC. and SUBSIDIARIES
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
                                   (unaudited)
<TABLE>
<CAPTION>

                                            Common Stock                                                       Total
                                 -----------------------------------     Paid-In         Retained           Stockholders'
                                     Shares           Amount             Capital         Earnings              Equity
                                     ------           ------             -------         --------              ------
<S>                               <C>            <C>             <C>                  <C>                <C>

BALANCE, JANUARY 1, 1999           9,508,108      $   95,081      $  134,711,056       $   801,644        $  135,607,781

Net Income                                 -               -                   -        10,793,076            10,793,076

Common stock dividends                     -               -                   -       (10,791,702)          (10,791,702)
                                   ---------      ----------      --------------       -----------        --------------

BALANCE, SEPTEMBER 30, 1999        9,508,108      $   95,081      $  134,711,056       $   803,018        $  135,609,155
                                   =========      ==========      ==============       ===========        ==============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

                                       5

<PAGE>   6


                 CAPTEC NET LEASE REALTY, INC. and SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                           Nine Months Ended
                                                                                             September 30,
                                                                                ----------------------------------------
                                                                                           1999                 1998
                                                                                           ----                 ----
<S>                                                                                 <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                                            $ 10,793,076          $ 8,737,381
Adjustments to net income:
   Depreciation and amortization                                                         2,532,602            2,173,984
   Accounting change                                                                       336,875                    -
   Amortization of debt issuance costs                                                     474,628              264,202
   Equity income of joint venture                                                          (95,636)                   -
   (Gain) loss on sale of property                                                         (66,246)             891,722
   Increase in unbilled rent                                                            (1,881,298)            (902,247)
   Decrease (increase) in accounts receivable and other assets                             177,600             (129,852)
   (Decrease) increase in accounts payable and accrued expenses                         (1,018,062)             934,731
                                                                                      ------------          -----------

   Net cash provided by operating activities                                            11,253,539           11,969,921
                                                                                      ------------          -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties subject to operating leases                                  (14,712,463)         (74,495,244)
Acquisition of properties subject to financing leases                                   (1,153,037)                   -
Collection (advances) on short-term loans to affiliates, net                               696,268           (1,452,511)
Proceeds from the transfer of properties to
  joint venture                                                                          3,385,972                    -
Investment in joint venture                                                             (7,113,000)                   -
Proceeds from the disposition of properties                                              9,062,193            1,475,935
Advances (collection) on loans to affiliates, collateralized by
   mortgage loans, net                                                                    (683,229)           7,043,045
Collection of principal on other loans                                                      11,309              716,494
Investments in affiliated partnerships                                                           -           (4,395,000)
Distributions from joint venture                                                            63,828                    -
Lease security deposits                                                                     86,500               52,514
                                                                                      ------------          -----------

   Net cash used in investing activities                                               (10,355,659)         (71,054,767)
                                                                                      ------------          -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on common stock                                                         (10,791,702)          (8,985,161)
Notes payable borrowings                                                                11,000,000          109,984,988
Debt issuance costs                                                                              -           (1,438,954)
Repayments of notes payable                                                             (4,012,289)         (42,746,189)
                                                                                      ------------          -----------

   Net cash (used in) provided by financing activities                                  (3,803,991)          56,814,684
                                                                                      ------------          -----------

NET CASH FLOWS                                                                          (2,906,111)          (2,270,162)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                           4,488,565            3,528,129
                                                                                      ------------          -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                              $  1,582,454          $ 1,257,967
                                                                                      ============          ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Cash paid for interest                                                             $  7,022,623          $ 2,683,944
                                                                                      ============          ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

                                       6
<PAGE>   7





                 CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         ORGANIZATION: Captec Net Lease Realty, Inc., a Delaware corporation
         (the "Company"), which operates as a real estate investment trust
         ("REIT"), was formed in August 1997 to invest in high-quality
         freestanding properties leased principally on a long-term triple-net
         basis to national and regional and franchised restaurants and
         retailers. The Company completed its initial public offering in
         November 1997 and has subsequently operated as a REIT.

         UNAUDITED INTERIM FINANCIAL INFORMATION: The consolidated balance sheet
         as of September 30, 1999 and the consolidated statements of operations
         and cash flows for the three and nine months ended September 30, 1999
         and 1998 have not been audited. In the opinion of management, all
         adjustments (consisting of normal recurring accruals) considered
         necessary for a fair presentation have been reflected therein. Results
         of operations for the interim periods are not necessarily indicative of
         results for the full year. These unaudited financial statements should
         be read in conjunction with the financial statements and notes thereto
         included in the Company's Annual Report on Form 10-K for the year ended
         December 31, 1998 as filed with the United States Securities and
         Exchange Commission on March 30, 1999.

         NEW PRONOUNCEMENTS: In June 1998 the Financial Accounting Standards
         Board issued Statement of Financial Accounting Standards No. 133,
         "Accounting for Derivative Instruments and Hedging Activities," which
         is effective for all quarters of all fiscal years beginning after June
         15, 2000 (January 1, 2001 for the Company). The statement requires that
         all derivative instruments be recorded at fair value on the balance
         sheet with changes in fair value recorded each period in current
         earnings or other comprehensive income, depending on whether a
         derivative is designated as part of a hedge transaction and, if it is,
         the type of hedge transaction. Management has not yet determined the
         impact, if any, that the adoption of the statement will have on the
         Company's earnings or statement of financial position.

         In April 1998, the Accounting Standards Executive Committee issued
         Statement of Position 98-5, "Reporting on the Costs of Start-Up
         Activities". This statement requires start-up activities and
         organization costs to be expensed as incurred. In accordance with the
         provisions of the statement, the Company has recorded a $337,000
         non-cash charge during the three months ended March 31, 1999 for the
         balance of unamortized organization costs.

         RECLASSIFICATIONS: Certain prior period financial statement amounts
         have been reclassified to conform to the 1999 presentations.

     2.  PROPERTIES SUBJECT TO OPERATING LEASES:

         The Company's real estate portfolio is leased to tenants under
         long-term net operating leases. The lease agreements generally provide
         for monthly rents based upon a percentage of the property's cost. The
         initial term of the leases typically ranges from 15 to 20 years,
         although the Company in certain cases will enter into leases with terms
         that are shorter or longer. Most leases also provide for one or more
         five year renewal options. In addition, certain leases provide the
         tenant one or more options to purchase the properties at a
         predetermined price, generally only during stated window periods during
         the fifth to seventh lease years.


                                       7
<PAGE>   8



                 CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         The Company's investment in real estate includes capitalized
         acquisition and interest costs which have been allocated between land
         and buildings and improvements on a pro rata basis. The net investment
         in properties subject to operating leases as of September 30, 1999 is
         comprised of the following:

<TABLE>
<S>                                                                    <C>
                   Land                                                 $   85,007,096
                   Buildings and improvements                              135,061,836
                   Construction draws on properties                          8,101,241
                                                                       ---------------
                                                                           228,170,173
                   Less accumulated depreciation                            (7,015,103)
                                                                       ---------------

                   Total                                                $  221,155,070
                                                                       ===============
</TABLE>

         The Company periodically invests in properties under construction. All
         construction draws are subject to the terms of standard lease
         agreements with the Company which fully obligate the tenant to the
         long-term lease for all amounts advanced under construction draws. At
         September 30, 1999 the Company had approximately $3.9 million of
         unfunded commitments on properties under construction.

3.       FINANCING LEASES:

         Properties subject to financing leases is comprised of four properties
         whereby the company owns only the building and the land is subject to
         a ground lease between the tenant and an unrelated third party.  The
         net investment in financing leases as of September 30, 1999 is
         comprised of the following:

<TABLE>
<S>                                                                    <C>
         Minimum lease payments to be received                          $  10,270,037
         Estimated residual value                                                   -
                                                                       --------------
                Gross investment in financing leases                       10,270,037
         Unearned income                                                   (5,900,382)
                                                                       --------------
                Net investment in financing leases                     $    4,369,655
                                                                       ==============
</TABLE>

4.       JOINT VENTURE:

         During 1999 the Company has invested in a 22.6% membership interest in
         FC Venture I, LLC ("FC Venture"). The investment is accounted for under
         the equity method. Summarized financial information of the Company's
         joint venture investment for the nine months ended September 30, 1999
         is set forth below:

<TABLE>
<S>                                                                   <C>
         Investment in properties subject to leases                    $   30,617,059
         Total assets                                                      30,983,182
         Members equity                                                    30,665,267
         Revenues                                                             746,888
         Net income                                                           423,166

</TABLE>

     5.  NOTES PAYABLE:

         The Company's credit facility, as amended (the "Credit Facility"),
         provides up to $125 million for the acquisition of properties and
         working capital. The Credit Facility has a three year term and is
         subject to certain borrowing base restrictions. The Company had
         approximately $121 million of aggregate outstanding borrowings under
         the Credit Facility at September 30, 1999.


                                       8
<PAGE>   9

                 CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


    6.   EARNINGS PER SHARE:

         Stock options currently outstanding under the Company's Long-Term
         Incentive Plan were excluded from the computation of diluted earnings
         per share because their exercise price was in excess of the average
         market price of the Common Stock during the three and nine months ended
         September 30, 1999.

     7.  RELATED PARTY TRANSACTIONS:

         The Company is party to an Advisory Agreement with Captec Net Lease
         Realty Advisors, Inc. ("Captec Advisors") an affiliate, whereby the
         Company pays to Captec Advisors a management fee. In December 1998 the
         Advisory Agreement was amended to reduce the management fee to Captec
         Advisors by the amount of acquisition and other fees paid directly to
         Captec Advisors as a result of acquisitions made by affiliates of the
         Company (which acquisition fees were previously paid to the Company).
         During the nine months ended September 30, 1999 the Company incurred
         approximately $957,000 in management fees prior to reductions. Captec
         Advisors earned approximately $980,000 of fees resulting in an equal
         reduction in the management fee paid by the Company to Captec Advisors.

     8.  SUBSEQUENT EVENTS:

         In October 1999, the Company declared dividends to its shareholders of
         $3,613,081, or $0.38 per share of Common Stock, which was paid on
         October 15, 1999.

                                       9

<PAGE>   10



ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS


         OVERVIEW

         The Company, which operates as a REIT, acquires, develops and owns
         freestanding properties which are leased on a long-term triple-net
         basis to operators of national and regional chain restaurants and
         retailers. Triple-net leases generally impose on the lessee
         responsibility for all operating costs and expense of the property,
         including the costs of repairs, maintenance, real property taxes,
         assessments, utilities and insurance. The Company's triple-net leases
         (the "Leases") typically provide for minimum rent plus specified fixed
         periodic rent. Other revenues are derived primarily from interest
         income on loans to affiliates and fee income earned from affiliated
         ventures.

         As of September 30, 1999, the Company owned 167 properties, located in
         30 states, subject to long-term net Leases with 63 different lessees
         (the "Lessees") under major restaurant and retail concepts including
         Bennigan's, Applebee's, Denny's, Best Buy, Athlete's Foot, Blockbuster
         Video, and Office Depot.


         RESULTS OF OPERATIONS

         THREE MONTHS ENDED SEPTEMBER 30, 1999. During the three months ended
         September 30, 1999 (the "Quarter") total revenue was $7.4 million which
         remained consistent with the three months ended September 30, 1998 (the
         "1998 Quarter"). Rental revenue from operating leases for the Quarter
         decreased 3% to 6.2 million as compared to $6.3 million for the 1998
         Quarter primarily due to rental revenues related to vacant properties
         (principally from properties formerly leased to Boston Chicken, Inc.),
         partially offset by the benefit of a full period of rental revenue from
         properties acquired and leased in preceding periods. Earned income
         from financing leases for the Quarter increased to $161,000 as compared
         to $0 for the 1998 Quarter as a result of the addition of four
         financing leases that began lease payments on January 1, 1999. Interest
         income on loans to affiliates decreased 37% to $320,000 for the Quarter
         as compared to $512,000 for the 1998 Quarter as a result of principal
         payments received on loans to affiliates in preceding periods. Other
         income increased 27% to $724,000 for the Quarter as compared to
         $571,000 for the 1998 Quarter primarily due to fees earned for the
         acquisition, development and management of properties on behalf of it's
         affiliated ventures.

         Interest expense for the Quarter increased 13% to $2.4 million as
         compared to $2.1 million for the 1998 Quarter. The increase was
         principally due to the increased borrowings under the Credit Facility
         used to fund the acquisition and development of properties. General and
         administrative expenses, including management fees to affiliates,
         decreased 31% to $474,000 for the Quarter as compared to $686,000 for
         the 1998 Quarter primarily due to offsetting reductions in management
         fees to affiliates due to acquisitions and other fees earned by Captec
         Advisors (see Note 7 of the Financial Statements). Depreciation and
         amortization increased 3% to $851,000 for the Quarter as compared to
         $825,000 for the 1998 Quarter, primarily due to the continued
         acquisition of net leased properties and the effect of a full period of
         depreciation of properties acquired and leased in preceding periods.
         Provision for unbilled rent decreased 100% with no provision for the
         Quarter as compared to $865,000 for the 1998 Quarter due to a one-time
         non-cash charge related to unbilled rents on properties leased to
         Boston Chicken, Inc. and its subsidiaries and affiliates recorded in
         the 1998 Quarter.

         The Company invested in a 22.6% membership interest in FC Venture I,
         LLC ("FC Venture") and recorded $96,000 representing its proportionate
         share of FC Venture's income during the Quarter (see Note 4 of the
         Financial Statements for summarized financial information of FC
         Venture).

         The Company sold three properties for $6.1 million during the Quarter
         for a gain of $128,000.

                                       10

<PAGE>   11

         As result of the foregoing, the Company's net income increased 91% to
         $3.9 million for the Quarter as compared to $2.1 million for the 1998
         Quarter.

         NINE MONTHS ENDED SEPTEMBER 30, 1999. During the nine months ended
         September 30, 1999 total revenue increased 10% to $21.5 million as
         compared to $19.4 million for the nine months ended September 30, 1998.
         Rental revenue from operating leases for the nine months ended 1999
         increased 11% to 18.3 million as compared to $16.6 million for the nine
         months ended 1998 primarily from the benefit of a full period of rental
         revenue from properties acquired and leased in preceding periods,
         offset by the elimination of rental revenues related to vacant
         properties (principally from properties formerly leased to Boston
         Chicken, Inc.). Earned income from financing leases for the nine months
         ended September 30, 1999 increased to $477,000 as compared to $48,000
         for the nine months ended September 30, 1998 as a result of the
         addition of four financing leases during the nine months ended
         September 30, 1999.  Interest income on loans to affiliates decreased
         34% to $951,000 for 1999 as compared to $1.4 million for 1998 as a
         result of principal payments received on loans to affiliates in
         preceding periods. Other income increased 25% to $1.7 million for the
         nine months ended September 30, 1999 as compared to $1.4 million for
         the nine months ended September 30, 1998 primarily due to fees earned
         for the acquisition, development and management of properties on behalf
         of its affiliated ventures.

         Interest expense for the nine months ended September 30, 1999 increased
         52% to $6.8 million as compared to $4.5 million for the nine months
         ended September 30, 1998. The increase was principally due to the
         increased borrowings under the Credit Facility used to fund the
         acquisition and development of properties. General and administrative
         expenses, including management fees to affiliates, decreased 45% to
         $1.1 million for the nine months ended September 30, 1999 as compared
         to $2.0 million for the nine months ended September 30, 1998 primarily
         due to offsetting reductions in management fees to affiliates due to
         acquisitions and other fees earned by Captec Advisors (see Note 7 of
         the Financial Statements). Depreciation and amortization increased 17%
         to $2.5 million for the nine months ended September 30, 1999 as
         compared to $2.2 million for the nine months ended September 30, 1998,
         primarily due to the continued acquisition of net leased properties and
         the effect of a full period of depreciation of properties acquired and
         leased in the preceding periods. Provision for unbilled rent decreased
         100% with no provision for the nine months ended September 30, 1999 as
         compared to $865,000 for the nine months ended September 30, 1998 due
         to a one-time non-cash charge related to unbilled rents on properties
         leased to Boston Chicken and its subsidiaries and affiliates recorded
         in the 1998 Quarter.

         The Company invested in a 22.6% membership interest in FC Venture I,
         LLC, a joint venture, ("FC Venture") and recorded $96,000 representing
         its portion of FC Venture's equity earnings for the nine months ended
         September 30, 1999 (see Note 4 of the Financial Statements for
         summarized financial information of FC Venture).

         The Company sold six properties for $9.0 million during the nine months
         ended September 30, 1999 for a gain of $66,000.

         As result of the foregoing, the Company's net income before accounting
         change increased 27% to $11.1 million for the nine months ended
         September 30, 1999 as compared to $8.7 million for the nine months
         ended September 30, 1998.

         In April 1998, the Accounting Standards Executive Committee issued
         Statement of Position 98-5, "Reporting on the Costs of Start-Up
         Activities". This statement requires start-up activities and
         organization costs to be expensed as incurred. In accordance with the
         provisions of the statement, the Company recorded a $336,875 non-cash
         charge for the balance of unamortized organization costs which resulted
         in net income for the nine months ended September 30, 1999 of $10.8
         million.

         LIQUIDITY AND CAPITAL RESOURCES

         The Company's principal use of funds is for property development and
         acquisition, payment of interest on its outstanding indebtedness, and
         payment of operating expenses and dividends. The Company anticipates
         that cash flows from operating activities will continue to provide
         adequate funds for interest expense, operating expenses and dividend
         payments in accordance with REIT requirements. Property acquisition and
         development has been typically funded out of proceeds from borrowings
         available under the Credit Facility. The Company expects to

                                       11
<PAGE>   12

         obtain the necessary capital to achieve continued growth (principally
         property development and acquisition) through cash on hand, borrowings
         available under the Credit Facility, as well as select property
         dispositions and other debt and equity alternatives, including joint
         venture capital.

         The Leases generally provide for specified periodic rent increases
         including fixed increase amounts and, in limited circumstances
         indexation to CPI and/or percentage rent. In addition, most of the
         Company's Leases require the Lessee to pay all operating costs and
         expenses including repairs, maintenance, real property taxes,
         assessments, utilities and insurance, thereby substantially reducing
         the Company's exposure to increases in costs and operating expenses.
         Based upon these factors, the Company does not anticipate significant
         capital demands related to the management of its properties other than
         potential costs of re-leasing vacant properties.

         At September 30, 1999 the Company had cash and cash equivalents of $1.6
         million. For the nine months ended September 30, 1999 the Company
         generated cash from operations of $11.3 million as compared to $12.0
         million for the same period in 1998. Cash generated from operations
         provides funds for interest expense, operating expenses and
         distributions to stockholders in the form of quarterly dividends. Any
         excess cash from operations may also be used for investment in
         properties.

         CREDIT FACILITY. In February 1998, the Company entered into the Credit
         Facility, which is used to provide funds for the acquisition and
         development of properties and working capital, and repaid all amounts
         outstanding under a prior credit facility. On December 1, 1998 the
         Credit Facility was amended to provide up to $125.0 million of debt
         which is secured by the Company's properties. At September 30, 1999 the
         Company had $121.0 million of aggregate outstanding borrowings under
         the Credit Facility.

         The Credit Facility has a three year term and the revolving credit
         borrowings are subject to borrowing base restrictions. The Credit
         Facility is subject to covenants which, among other restrictions,
         require the Company to maintain a minimum net worth, a maximum leverage
         ratio, and specified interest and fixed charge coverage ratios. The
         Credit Facility bears interest at an annual rate of LIBOR plus a spread
         ranging from 1.25% to 1.75%, set quarterly depending on the Company's
         leverage ratio or, at the Company's option, the lender's base rate. In
         connection with the Credit Facility the Company incurred issuance costs
         of $1.7 million and is also required to pay an unused commitment fee
         ranging from .125% to .20% per annum on the unused amount of the
         commitment.

         The Credit Facility expires in February 2001 and may be renewed
         annually thereafter, one year in advance of maturity subject to the
         consent of the lender. Upon expiration, the entire outstanding balance
         of the Credit Facility will mature and become immediately due and
         payable. At that time, the Company expects to refinance such debt
         either through additional debt financings secured by individual
         properties or groups of properties, by unsecured private or public debt
         offerings or by additional equity offerings.

         JOINT VENTURE. In April 1999, the Company, through a wholly-owned
         subsidiary, formed FC Venture with an affiliate of Fidelity Management
         Trust Company ("Fidelity"). FC Venture was formed to acquire and
         develop net-leased restaurant and retail properties similar to those
         which the Company acquires and develops. FC Venture's objective is to
         leverage its capital through borrowing to acquire and develop up to
         $100 million in properties. At September 30, 1999 the Company had
         contributed $7.1 million in equity capital and the FC Venture has
         invested $30.6 million in properties subject to leases. During the nine
         months ended September 30, 1999 the Company received $63,828 in cash
         distributions from FC Venture.

         PROPERTY ACQUISITIONS AND COMMITMENTS. During the nine months ended
         September 30, 1999 the Company invested $15.9 million to acquire and
         develop properties and transferred to FC Venture as part of the initial
         capital contribution two properties with aggregate costs of $3.4
         million. As of September 30, 1999, the Company had entered into
         commitments to acquire or develop 87 properties totaling $203.2
         million. The commitments are subject to various conditions to closing
         which are described in the contracts or letters of intent relating to
         those properties. In addition, in the ordinary course of business the
         Company negotiates regarding the acquisition of other properties and
         related co-development opportunities. The Company may enter into
         commitments to acquire or develop some of these prospective properties
         in the future. The Company expects to finance its acquisition and
         development commitments through cash on hand, borrowings under the
         Credit Facility as

                                       12

<PAGE>   13

         well as select property dispositions and other debt and equity
         alternatives, including joint venture capital.

         Property acquisition commitments are expected to generate the primary
         demand for additional capital in the future.

         DIVIDENDS. The Company intends to pay a regular quarterly dividend on
         its common stock of $.38 per share (annually $1.52 per share).
         Dividends of $3,613,081 were paid on October 15, 1999 with respect to
         the dividend declared by the Board of Directors on October 1, 1999 for
         the second quarter of 1999. The Company expects to pay future dividends
         from cash available for distributions. The Company believes that cash
         from operations will be sufficient to allow the Company to make
         distributions necessary to enable the Company to continue to qualify as
         a REIT.

         YEAR 2000

         The Year 2000 issue is a result of the way computer programs manipulate
         date information based on a two-digit year ("99" instead of "1999").
         The issue is that the "00" year designation can potentially cause
         miscalculations or failures within the computer system if "00" is
         interpreted as the year 1900 instead of the year 2000. These failures
         could potentially lead to temporary disruption of operations and the
         inability to conduct normal business activities.

         The Company predominantly uses standard application software supported
         by third party vendors. Information has been obtained from key
         third-party financial software vendors that comprise the core business
         applications indicating the core software systems are currently Year
         2000 compliant.

         The Company has collected Year 2000 readiness information from its key
         business suppliers such as financial institutions, and currently no
         issues have been identified. The Company continues to monitor the
         readiness of each business partner based on the relative importance of
         the business relationship.

         The Company's major software applications are currently Year 2000
         compliant, and the core computing infrastructure including personal
         computers and network server hardware and software are all compliant.

         The Company does not anticipate that the total cost of Year 2000
         compliance will have a material adverse effect on the Company's
         business or results of operations. The Company has incurred minimal
         costs to date related to Year 2000 compliance.

         The failure to identify and correct material Year 2000 problems
         adequately could result in an interruption to or failure of certain
         normal business activities or operations. These interruptions or
         failures could adversely affect the Company's financial condition;
         however, the extent of the impact cannot presently be determined. The
         Company is dependent upon the Year 2000 readiness information provided
         by its vendors and external business partners, and their ability to
         achieve Year 2000 compliance with their computer systems.


         ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not Applicable.


                           PART II - OTHER INFORMATION


         ITEM 1. LEGAL PROCEEDINGS.   None.

                                       13

<PAGE>   14






         ITEM 2. CHANGES IN SECURITIES.

         On September 17, 1999, the Company's Board of Directors adopted a
         Stockholder Rights Agreement (the "Rights Agreement"). The following
         description of the Rights (as defined herein) does not purport to be
         complete and is qualified in its entirety by reference to the Rights
         Agreement, including the exhibits thereto, which are incorporated
         herein by reference and included in a Form 8-A Registration Statement
         filed by the Company with the United States and Exchange Commission on
         October 21, 1999. Pursuant to the Rights Agreement, the Board of
         Directors declared a dividend distribution of one Preferred Stock
         Purchase Right (a "Right") for each outstanding share of common stock,
         par value $.01 per share, of the Company (the "Common Stock") to
         stockholders of record as of the close of business on October 11, 1999
         (the "Record Date") and for each share of Common Stock issued between
         the Record Date and the Distribution Date (as defined herein). Each
         Right entitles the registered holder thereof to purchase from the
         Company a unit (a "Preferred Unit") consisting of one one-thousandth of
         a share of Class A Series 1999-A Cumulative Preferred Stock, par value
         $.01 per share (the "Preferred Stock"), at a cash exercise price of
         $45.00 per Preferred Unit (the "Exercise Price"), subject to
         adjustment.

         Initially, the Rights are not exercisable and are attached to and trade
         with the Common Stock outstanding as of, and all Common Stock issued
         after, the Record Date. The Rights will separate from the Common Stock,
         separate certificates will be distributed to holders of the Common
         Stock and the Rights will become exercisable upon the earlier of (i)
         the close of business on the 10th calendar day following the first
         public announcement (the date of that announcement, the "Stock
         Acquisition Date") that a person or a group of affiliated or associated
         persons has acquired beneficial ownership of 15% or more of the
         outstanding Common Stock (an "Acquiring Person"), or (ii) the close of
         business on the 10th business day following the commencement of a
         tender offer or exchange offer that would result, upon its
         consummation, in a person or group becoming the beneficial owner of 15%
         or more of the outstanding Common Stock (the earlier of (i) and (ii),
         the "Distribution Date"). The Rights Agreement exempts from the
         definition of Acquiring Person any person who the Board of Directors
         determines acquired in excess of 15% of the Common Stock inadvertently,
         if that person promptly divests enough Common Stock to reduce the
         number of shares beneficially owned by that person to below the 15%
         threshold. The Rights Agreement provides that, FREAM No. 17 LLC, a
         ,member of FC Venture, will not become an Acquiring Person solely as a
         result of an acquisition of shares acquired under its agreements
         entered into with the Company in March 1999, in connection with the
         formation of FC Venture.

         Until the Distribution Date (or the earlier redemption, exchange or
         expiration of the Rights): (i) the Rights will be evidenced by the
         Common Stock certificates and will be transferred only with the Common
         Stock certificates, (ii) new Common Stock certificates issued after the
         Record Date will include a notation incorporating the Rights Agreement
         by reference, and (iii) the surrender for transfer of any certificate
         for Common Stock also will constitute the transfer of the Rights
         associated with the Common Stock represented by that certificate.

         The Rights are not exercisable until the Distribution Date and will
         expire at the close of business on September 17, 2009, unless
         previously redeemed or exchanged by the Company as described below.

         Upon a Stock Acquisition Date, provision will be made so that each
         holder of a Right (other than an Acquiring Person or associates or
         affiliates thereof, whose Rights will become null and void) thereafter
         has the right to receive upon exercise that number of Preferred Units
         having a market value of two times the exercise price of the Right
         (that right being referred to as the "Subscription Right"), any time
         following the Stock Acquisition Date: (i) the Company consolidates
         with, or merges with and into, any Acquiring Person or any associate or
         affiliate thereof, and the Company is not the continuing or surviving
         corporation, (ii) any Acquiring Person or any associate or affiliate
         thereof consolidates with the Company, or merges with and into the
         Company and the Company is the continuing or surviving corporation of
         that merger and, in connection with that merger, all or part of the
         Common Stock is changed into or exchanged for stock or other securities
         of any other person or cash or any other property, or (iii) 50% or more
         of the Company's assets or earning power is sold or otherwise
         transferred, each holder of a Right will thereafter have the right to
         receive, upon exercise, capital stock of the acquiring company having a
         market value equal to two times the exercise price of the Right (that
         right being referred to as the "Merger Right"). Each holder of a Right
         will continue to have the Merger Right whether or not that holder has
         exercised the Subscription Right, but Rights that are or were
         beneficially owned by an Acquiring Person may (under certain
         circumstances specified in the Rights Agreement) become null and void.


                                       14

<PAGE>   15

         At any time after a Stock Acquisition Date, the Board of Directors may,
         at its option, exchange Common Stock or Preferred Units for all or any
         part of the then outstanding and exercisable Rights (which excludes
         Rights held by an Acquiring Person) at an exchange ratio of one share
         of Common Stock or one Preferred Unit per Right. The Board of Directors
         generally will not be empowered to effect any such exchange at any time
         after any person becomes the beneficial owner of 50% or more of the
         Common Stock.

         The Exercise Price payable, and the number of Preferred Units or other
         securities or property issuable, upon exercise of the Rights are
         subject to adjustment from time to time to prevent dilution (i) in the
         event of a share dividend on, or a subdivision, combination or
         reclassification of, the Preferred Stock, (ii) if holders of the
         Preferred Stock are granted certain rights or warrants to subscribe for
         Preferred Stock or convertible securities at less than the current
         market price of the Preferred Stock, or (iii) upon the distribution to
         holders of the Preferred Stock of evidences of indebtedness or assets
         (excluding regular quarterly cash dividends) or of subscription rights
         or warrants (other than those referred to in (i) and (ii)).

         The Rights may be redeemed in whole, but not in part, at a price of
         $0.01 per Right (payable in cash, Common Stock or other consideration
         considered appropriate by the Board of Directors) by the Board of
         Directors only until the earlier of (i) the close of business on the
         calendar day after the Stock Acquisition Date, and (ii) the expiration
         date of the Rights Agreement. Immediately upon any action of the Board
         of Directors ordering redemption of the Rights, the Rights will
         terminate and thereafter the only right of the holders of Rights will
         be to receive the redemption price.

         The Rights Agreement may be amended by the Board of Directors in its
         sole discretion until the earlier of the Distribution Date and the date
         on which the Rights become nonredeemable, as described above. After the
         earlier of those two dates, the Board of Directors may, subject to
         certain limitations set forth in the Rights Agreement, amend the Rights
         Agreement only to cure any ambiguity, defect or inconsistency, to
         shorten or lengthen any time period, or to make changes that do not
         adversely affect the interests of Rights holders (excluding the
         interests of an Acquiring Person or associates or affiliates thereof).

         Until a Right is exercised, the holder will have no rights as a
         stockholder of the Company (beyond those as an existing stockholder),
         including the right to vote or to receive dividends. While the
         distribution of the Rights will not be taxable to stockholders or to
         the Company, stockholders may, depending upon the circumstances,
         recognize taxable income if the Rights become exercisable for Preferred
         Units, other securities of the Company or other consideration, or for
         capital stock of an acquiring company.

         The Rights have certain anti-takeover effects. The Rights will cause
         substantial dilution to a person or group that attempts to acquire the
         Company in a transaction not approved by the Board of Directors of the
         Company. The Rights should not interfere with any merger or other
         business combination approved by the Board of Directors of the Company,
         since the Rights Agreement may be amended prior to the Distribution
         Date, as described above, and the Rights may be redeemed until the
         calendar day after a Share Acquisition Date, as described above.

         ITEM 3. DEFAULTS UPON SENIOR SECURITIES.   None.


         ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.   None.


         ITEM 5. OTHER INFORMATION.   None.


         ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

<TABLE>
<CAPTION>
                 Exhibits
                 --------
<S>                                                   <C>
                 Exhibit  27                           Financial Data Schedule.

</TABLE>
                 No reports on Form 8-K were filed during the quarter ended
September 30, 1999.

                                       15

<PAGE>   16
                           FORWARD LOOKING STATEMENTS

         This Form 10-Q contains certain "forward looking statements" which
         represent the Company's expectations or beliefs, including, but not
         limited to, statements concerning industry performance and the
         Company's operations, performance, financial condition, plans, growth
         and strategies. Any statements contained in this Form 10-Q which are
         not statements of historical fact may be deemed to be forward-looking
         statements. Without limiting the generality of the foregoing, words
         such as "may," "will," "expect," "anticipate," "intend," "could,"
         "estimate" or "continue" or the negative or other variations thereof or
         comparable terminology are intended to identify forward-looking
         statements. These statements by their nature involve substantial risks
         and uncertainties, certain of which are beyond the Company's control,
         and actual results may differ materially depending on a variety of
         important factors many of which are beyond the control of the Company.


                                       16
<PAGE>   17



                                   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.

                               CAPTEC NET LEASE REALTY, INC.

November 15, 1999              By:      /s/ Patrick L. Beach
                                        --------------------------------
                                        Patrick L. Beach
                                        Chief Executive Officer and President

November 15, 1999              By:      /s/ W. Ross Martin
                                        --------------------------------
                                        W. Ross Martin
                                        Chief Financial Officer and
                                        Executive Vice President


















                                       17

<PAGE>   18
<TABLE>
<CAPTION>

                                 Exhibit Index
                                 -------------

Exhibit No.              Description
-----------              -----------
<S>                     <C>
    27                   Financial Data Schedule

</TABLE>