<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                  June 30, 1998
                                                -------------


                                       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                          38-3368333
              --------                          ----------
 (State or other jurisdiction                (IRS Employer
 of incorporation or organization)            Identification Number)

             24 Frank Lloyd Wright Drive, Ann Arbor, Michigan 48106
             ------------------------------------------------------
             (Address of principal executive offices)         (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 August
14, 1998 (the latest practicable date).


              Common Stock, $.01 par value       9,508,108
              ----------------------------       ---------
              (Class)                            (Number of shares)

                                       1

<PAGE>   2

                          CAPTEC NET LEASE REALTY, INC.
                                    CONTENTS


<TABLE>
<CAPTION>
ITEM NO.                                                                   PAGE
--------                                                                   ----
<S>      <C>                                                               <C>
 PART I  FINANCIAL INFORMATION

      1  Financial Statements:

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

      2  Management's Discussion and Analysis of
         Financial Condition and Results of Operations                     10 - 13
       
      3  Quantitative and Qualitative Disclosures about Market Risk          13

PART II  OTHER INFORMATION
         Other Information                                                   14
</TABLE>


                                       2
<PAGE>   3

                         CAPTEC NET LEASE REALTY, INC.
                           (A DELAWARE CORPORATION)
                                 BALANCE SHEET


<TABLE>
<CAPTION>
                                                                     JUNE 30,             DECEMBER 31,
                                                                       1998                   1997
                                                                       ----                   ----
ASSETS                                                             (unaudited)
------
<S>                                                               <C>                    <C>
Cash and cash equivalents                                         $     840,742          $   3,528,129

Investments:
   Properties subject to operating leases, net                      215,349,475            151,491,551
   Loans to affiliates, collateralized by mortgage loans              8,531,486             13,061,845
   Other loans                                                                -                703,950
   Other loans, related party                                           412,895                421,920
   Financing leases, net                                              1,122,269              1,274,044
                                                                  -------------          -------------
                Total investments                                   225,416,125            166,953,310

Short-term loans to affiliates                                       11,979,864              7,449,505
Unbilled rent                                                         3,316,575              2,271,043
Accounts receivable                                                     469,255                651,481
Due from affiliates                                                      55,347                186,625
Other assets                                                          2,202,993                661,875
                                                                  -------------          -------------

                Total assets                                      $ 244,280,901          $ 181,701,968
                                                                  =============          =============


LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
   Notes payable                                                  $ 104,984,988          $  42,746,189
   Accounts payable                                                     336,314              1,434,668
   Due to affiliates                                                    124,828                      -
   Dividends payable                                                          -              1,854,082
   Federal income tax payable                                           719,000                719,000
   Security deposits held on leases                                     194,406                141,892
                                                                  -------------          -------------

                Total liabilities                                   106,359,536             46,895,831
                                                                  -------------          -------------

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                                                  3,115,228                      -
                                                                  -------------          -------------

                Total stockholders' equity                          137,921,365            134,806,137
                                                                  -------------          -------------

                Total liabilities and stockholders' equity        $ 244,280,901          $ 181,701,968
                                                                  =============          =============
</TABLE>

                                       3

<PAGE>   4

                        CAPTEC NET LEASE REALTY, INC.
                           (A DELAWARE CORPORATION)
                           STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                   Three Months Ended                  Six Months Ended
                                                                       June 30,                             June 30,
                                                           --------------------------------    -----------------------------
                                                                             PREDECESSOR                          PREDECESSOR
                                                                 1998           1997                   1998            1997
                                                                 ----           ----                   ----            ----  
                                                                     (unaudited)                            (unaudited)
<S>                                                        <C>               <C>               <C>               <C>
Revenue:
     Rental income                                         $  5,442,628      $  2,731,348      $ 10,262,098      $  4,996,677
     Interest income on loans to affiliates                     253,709           247,281           550,119           507,770
     Interest income on short-term loans to affiliates          199,162           105,735           358,628           246,972
     Interest and other income                                  517,120            88,904           865,378           132,740
                                                           ------------      ------------      ------------      ------------

               Total revenue                                  6,412,619         3,173,268        12,036,223         5,884,159
                                                           ------------      ------------      ------------      ------------

Expenses:
     Interest                                                 1,344,283         1,519,494         2,414,604         2,707,201
     Management fees, affiliates                                287,796           573,798           541,111           823,798
     General and administrative                                 447,587           166,162           797,952           250,928
     Depreciation and amortization                              687,500           364,480         1,348,619           677,649
                                                           ------------      ------------      ------------      ------------

               Total expenses                                 2,767,166         2,623,934         5,102,286         4,459,576
                                                           ------------      ------------      ------------      ------------

               Income before gain (loss) on sale of
                   properties and income tax                  3,645,453           549,334         6,933,937         1,424,583

Gain (loss) on sale of properties                              (205,581)                -          (253,169)          (58,687)
                                                           ------------      ------------      ------------      ------------

               Income before income tax                       3,439,872           549,334         6,680,768         1,365,896

Provision for income tax                                              -           (39,000)                -           (39,000)
                                                           ------------      ------------      ------------      ------------

               Net income                                  $  3,439,872           588,334      $  6,680,768         1,404,896
                                                           ============                        ============

Redeemable preferred stock dividend requirements                                2,625,000                           3,750,000
                                                                             ------------                        ------------

               Loss attributable to common stock                             $ (2,036,666)                       $ (2,345,104)
                                                                             ============                        ============
               Income (Loss) per common share:
                 Basic                                     $       0.36      $      (2.08)     $       0.70      $      (2.39)
                                                           ============      ============      ============      ============
                 Diluted                                   $       0.36                        $       0.70
                                                           ============                        ============

Weighted average number of common shares
     outstanding                                              9,508,108           980,330         9,508,108           980,330
                                                           ============      ============      ============      ============
</TABLE>

                                       4

<PAGE>   5

                          CAPTEC NET LEASE REALTY, INC.
                            (A DELAWARE CORPORATION)
                  STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                     FOR THE SIX MONTHS ENDED JUNE 30, 1998
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                                                Total
                                               Common              Paid-In               Retained           Stockholders'
                                                Stock              Capital               Earnings              Equity
                                                -----              -------               --------              ------
<S>                                          <C>                <C>                     <C>                 <C>          
BALANCE, JANUARY 1, 1998                     $ 95,081           $ 134,711,056           $         -         $ 134,806,137

Net income                                          -                       -             6,680,768             6,680,768

Common stock dividends ($0.375 per share)           -                       -            (3,565,540)           (3,565,540)
                                             --------           -------------           -----------           -----------

BALANCE, JUNE 30, 1998                       $ 95,081           $ 134,711,056           $ 3,115,228         $ 137,921,365
                                             ========           =============           ===========         =============
</TABLE>

                                       5

<PAGE>   6

                          CAPTEC NET LEASE REALTY, INC.
                            (A DELAWARE CORPORATION)
                            STATEMENTS OF CASH FLOWS
                 FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                   Predecessor
                                                              1998                    1997
                                                              ----                    ----
<S>                                                         <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                 $  6,680,768           $  1,404,896
Adjustments to net income:
   Depreciation and amortization                              1,348,619                677,649
   Amortization of debt issuance costs                          176,480                262,500
   Loss on sale of property                                     253,169                 58,687
   Increase in unbilled rent                                 (1,045,532)              (797,601)
   Increase in receivables and other assets                     226,463                135,482
   Increase (decrease) in payables                           (1,098,354)               470,635
                                                           ------------           ------------

   Net cash provided by operating activities                  6,541,613              2,212,248
                                                           ------------           ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties                                   (66,468,325)           (25,976,893)
Advances on loans to affiliates, collateralized by
   mortgage loans                                                     -             (5,123,234)
Acquisition of financing leases                                       -               (370,164)
Advances on short-term loans to affiliates                   (4,530,359)                     -
Collections on short-term loans to affiliates                         -              1,767,705
Proceeds from the sale of property                            1,093,613                200,522
Collections on loans to affiliates, collateralized by
   mortgage loans                                             4,530,359              2,540,234
Collection of principal on other loans                          712,975                 25,729
Collection of principal on financing leases                                                  -
Change in lease security deposits                                52,514                 19,081
                                                           ------------           ------------

   Net cash used in investing activities                    (64,609,223)           (26,917,020)
                                                           ------------           ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on common stock                               (5,419,622)                     -
Proceeds from the issuance of notes payable                 104,984,988             24,803,825
Debt issuance costs                                          (1,438,954)                     -
Principal payments of notes payable                         (42,746,189)               (42,193)
Dividends paid on redeemable preferred stock                         -              (2,375,000)
                                                           ------------           -------------

   Net cash provided by financing activities                 55,380,223             22,386,632
                                                           ------------           ------------

NET CASH FLOWS                                               (2,687,387)            (2,318,140)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                3,528,129              3,862,159
                                                           ------------           ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                   $    840,742           $  1,544,019
                                                           ============           ============



SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Cash paid for interest                                  $  2,403,133           $  2,292,606
                                                           ============           ============
</TABLE>

                                       6
<PAGE>   7


                          CAPTEC NET LEASE REALTY, INC.
                          NOTES TO FINANCIAL STATEMENTS


1.   THE COMPANY AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES:

     a. MERGER: Captec Net Lease Realty, Inc., a Delaware corporation ("Captec"
     or the "Company") was formed in August 1997 to continue and expand the
     acquisition and investment activities of Captec Net Lease Realty, Inc., a
     Michigan corporation ("Net Lease Michigan"), and Captec Net Lease Realty
     Advisors, Inc., a Michigan corporation ("Advisors Michigan"). Net Lease
     Michigan was formed in October 1994 for the purpose of investing in
     long-term net leased restaurant and retail real estate and commenced
     operations in February 1995. Advisors Michigan was formed in October 1994
     for the purpose of providing certain advisory services to Net Lease
     Michigan and also commenced operations in February 1995. The Company
     completed its initial public offering (the "Offering") in November 1997 and
     has subsequently operated as a real estate investment trust ("REIT").

     In connection with the Offering, Net Lease Michigan and Advisors Michigan
     were merged into the Company effective September 30, 1997 in exchange for
     1,315,440 shares of the Company's common stock, par value $.01 (the "Common
     Stock") and 50,000 shares of redeemable preferred stock. Subsequently, a
     reverse split of .745249 shares for each share of Common Stock was
     effected, resulting in 980,330 shares outstanding. The accompanying
     financial statements account for the merger as a purchase of Net Lease
     Michigan by Advisors Michigan in accordance with Accounting Principles
     Board Opinion No. 16. Accordingly, the cost of the acquisition was
     $5,161,000 (318,607 split adjusted shares issued to the shareholders of
     Advisors Michigan at an assumed fair value of $16.20 per share) and the
     assets acquired and liabilities assumed of Net Lease Michigan were recorded
     at their estimated fair values (resulting in an increase to historical
     recorded value of properties subject to operating leases of $5,161,000). In
     addition, as the principal business activities of the Company consist of
     the activities performed by Net Lease Michigan, Net Lease Michigan is
     deemed to be the "predecessor" company for financial reporting purposes and
     the accompanying statements of operations and cash flows for the period
     ended June 30, 1997 are of Net Lease Michigan.

     b. UNAUDITED INTERIM FINANCIAL INFORMATION: The balance sheet as of June
     30, 1998 and the statements of operations and cash flows for the three
     months and six months ended June 30, 1998 and 1997 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.

                                       7

<PAGE>   8


                          CAPTEC NET LEASE REALTY, INC.
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


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.

     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 June 30, 1998 is comprised of the following:

            Land                                $ 76,313,520
            Buildings and improvements           126,019,922
            Construction draws on properties      16,174,426
                                                ------------
                                                 218,507,868
            Less accumulated depreciation         (3,158,393)
                                                ------------
            Total                               $215,349,475
                                                ============

     The Company periodically invests in properties under construction. All
     construction draws are subject to the terms of a standard lease agreement
     with the Company which fully obligates the tenant to the long-term lease
     for all amounts advanced under construction draws.

3.   NOTES PAYABLE:

     In February 1998, the Company entered into a credit facility (the "Credit
     Facility"), which is used to provide funds for the acquisition of
     properties and working capital, and repaid all amounts outstanding under
     the Company's prior credit facility. Under the Credit Facility, which has a
     three year term, the Company may borrow up to $175.0 million subject to
     certain borrowing base restrictions that are dependent on cash basis lease
     revenue. At June 30, 1998, the Company had borrowing capacity under the
     borrowing base formula of approximately $113.0 million, $105.0 million of
     which was drawn upon. By formula the borrowing base increases as new
     leases commence, thereby creating additional availability under the 
     Credit Facility. The Credit Facility contains covenants which, among other
     restrictions, require the Company to maintain a minimum net worth, a
     maximum leverage ratio, and specified interest coverage and fixed charge
     coverage ratios. The Credit Facility bears interest at an annual rate of
     LIBOR plus a spread ranging from 1.25% to 1.50%, set quarterly depending on
     the Company's leverage ratio. Commitment fees and closing expenses paid in
     conjunction with the Credit Facility have been capitalized in other assets
     and are being amortized and classified as interest expense over the initial
     term of the Credit Facility.

                                       8

<PAGE>   9

                          CAPTEC NET LEASE REALTY, INC.
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


4.   INCOME TAX:

     The Company has elected to be taxed as a REIT effective September 1, 1997
     under the Internal Revenue Code of 1986, as amended (the "Code"). As
     a  result, the Company generally will not be subject to federal income
     taxation at the corporate level provided it distributes annually at least
     95.0% of its REIT taxable income, as defined in the Code, to its
     stockholders and satisfies certain other requirements.

5.   EARNINGS PER SHARE:

     Stock options representing 650,000 shares of Common Stock 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 Company's Common
     Stock during the three months and six months ended June 30, 1998.

6.   DERIVATIVE FINANCIAL INSTRUMENTS:

     The Company uses derivative financial instruments to manage interest rate
     exposures which exist as a part of its ongoing business operations. At June
     30, 1998 the Company had interest rate swap contracts outstanding with a
     total notional amount of $50 million, and interest rate cap contracts
     outstanding with a total notional amount of $25 million.

     On June 15, 1998, the Financial Accounting Standards Board issued
     Statement of Financial Accounting Standards No. 133, "Accounting for
     Derivative Instruments and Hedging Activities" ("FAS 133").  FAS 133 is
     effective for all fiscal quarters of all fiscal years beginning after June
     15, 1999 (January 1, 2000 for the Company).  FAS 133 requires that all
     derivative instruments be recorded on the balance sheet at their fair
     value.  Changes in the fair value of derivatives are 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 of the Company has not yet
     determined the impact that the adoption of FAS 133 will have on its
     earnings or statement of financial position.

7.   SUBSEQUENT EVENTS:

     In August, 1998, the Company purchased the general partnership interests in
     affiliated limited partnerships which are engaged in substantially the same
     business as the Company. The Company acquired the interests for $4.4
     million in the aggregate, $4.0 million of which was used to offset amounts
     included in short-term loans to affiliates.

     In July, 1998, the Company declared dividends to its shareholders of
     $3,565,540, or $0.375 per share of common stock, payable on July 15, 1998.

                                       9

<PAGE>   10

                         PART I - FINANCIAL INFORMATION

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

     OVERVIEW

     The Company 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 all of the obligations of repairs, maintenance, real
     property taxes, assessments, utilities and insurance. The Company's leases
     typically provide for minimum rent plus specified fixed periodic rent
     increases or, in certain limited circumstances, indexation to CPI and/or
     percentage rent.

     As of June 30, 1998, Captec owned 156 properties, located in 31 states,
     with a cost basis of $218.5 million. The properties are leased to 47
     operators of 30 distinct restaurant concepts such as Applebee's, Boston
     Market and Denny's; 12 retailers such as Athlete's Foot, Blockbuster Video
     and Office Depot; and 2 automotive dealers operating under the BMW and
     Nissan brands. The restaurant, retail and automobile dealership markets
     represent 76%, 20%, and 4%, respectively, of annual rental revenue from
     the aggregate portfolio as of June 30, 1998.

     The Company completed the Offering in November 1997. Subsequent to the
     Offering, the Company has operated and elected to be taxed as a REIT.

     RESULTS OF OPERATIONS

     THREE MONTHS ENDED JUNE 30, 1998. During the three months ended June 30,
     1998 (the "Quarter"), total revenue increased 102% to $6.4 million as
     compared to $3.2 million for the three months ended June 30, 1997 (the
     "1997 Quarter"). Rental revenue increased 99% to $5.4 million for the
     Quarter as compared to $2.7 million for the 1997 Quarter. The increase in
     rental revenue resulted principally from the acquisition of 26 net leased
     properties for the Quarter and the benefit of a full period of rental
     revenue from properties acquired and leased in preceding periods. Interest
     and other income on investments, including interest income on loans to
     affiliates, increased by 119% to $970,000 for the Quarter as compared to
     $442,000 for the 1997 Quarter, primarily as a result of fee income earned
     from affiliated limited partnerships.

     Interest expense decreased by 12% to $1.3 million for the Quarter as
     compared to $1.5 million for the 1997 Quarter. The decrease was primarily
     due to the reduction of debt in November, 1997 related to the Offering,
     offset by interest on $105.0 million of additional debt used to fund the
     acquisition of properties since the Offering. General and administrative
     expenses, including management fees to affiliates, were $735,000 for the
     Quarter as compared to $740,000 for the 1997 Quarter, as the commencement
     of salaries and benefits and other incremental costs related to operating
     as a public REIT were offset by reductions in management fees paid to
     affiliates. Depreciation and amortization increased 89% to $688,000 for the
     Quarter as compared to $364,000 for the 1997 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 the preceding
     periods.

                                       10
<PAGE>   11

     As a result of a termination of a direct financing lease, the Company
     incurred a loss of $206,000 on the disposition of the related assets.

     As a result of the foregoing, the Company's net income increased 485% to
     $3.4 million for the Quarter as compared to $588,000 for the 1997 Quarter.


     SIX MONTHS ENDED JUNE 30, 1998. During the six months ended June 30, 1998
     ("1998"), total revenue increased 105% to $12.0 million as compared to
     $5.9 million for the six months ended June 30, 1997 ("1997"). Rental
     revenue increased 105% to $10.3 million for 1998 as compared to $5.0
     million for 1997. The increase in rental revenue resulted principally from
     the acquisition of 45 net leased properties in 1998 and the benefit of a
     full period of rental revenue from properties acquired and leased in
     preceding periods. Interest and other income on investments, including
     interest income on loans to affiliates, increased by 100% to $1.8 million
     for 1998 as compared to $887,000 for 1997, primarily as a result of fee
     income earned from the affiliated limited partnerships.

     Interest expense decreased by 11% to $2.4 million in 1998 as compared to
     $2.7 million for 1997. The decrease was primarily due to the reduction of
     debt in November, 1997 related to the Offering, offset by interest on
     $105.0 million of additional debt used to fund the acquisition of
     properties since the Offering. General and administrative expenses,
     including management fees to affiliates, increased 25% to $1.3 million for
     1998 as compared to $1.1 million for 1997, primarily due to the
     commencement of salaries and benefits and other incremental costs related
     to operating as a public REIT, offset by reductions in management fees
     paid to affiliates. Depreciation and amortization increased 99% to $1.3
     million for 1998 as compared to $678,000 for 1997, 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.

     As a result of the foregoing, the Company's net income increased 376% to
     $6.7 million for 1998 as compared to $1.4 million for 1997.

     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. Historically, interest
     expense, operating expenses and dividends have been paid out of cash flows
     from operations. Property acquisitions have typically been funded out of
     proceeds from equity offerings and borrowings. The Company expects to meet
     its liquidity requirements (principally property development and
     acquisition) through a variety of future sources of capital, including
     long-term secured and unsecured indebtedness and the issuance of
     additional equity or debt securities. In addition, in the third quarter the
     Company expects to begin receiving principal repayments of certain loans
     to Affiliates in amounts estimated to total up to $11.0 million.

     The Company's 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.

                                       11
<PAGE>   12

     At June 30, 1998, the Company had cash and cash equivalents of $840,000.
     For 1998, the Company generated cash from operations of $6.5 million as
     compared to $2.2 million for 1997. Cash generated from operations provides
     funds for distributions to shareholders in the form of quarterly
     dividends. Any excess cash from operations may also be used for investment
     in properties.

     CREDIT FACILITY. On February 26, 1998 the Company entered into the Credit
     Facility which is used to provide funds for the acquisition of properties
     and working capital, and repaid all amounts outstanding under the prior
     credit facility.

     The Credit Facility has a three year term and borrowings are subject to
     borrowing base restrictions that are dependent on cash basis lease
     revenue. At June 30, 1998, the Company had borrowing capacity under the
     borrowing base formula of approximately $113.0 million, $105.0 million of
     which was drawn upon. By formula the borrowing base increases as new
     leases commence, thereby creating additional availability under the 
     Credit Facility. The Credit Facility contains 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 1.50%, set quarterly depending on the
     Company's leverage ratio, or at the Company's option, the bank's base
     rate. At June 30, 1998, the spread over LIBOR was 1.40%. The Credit
     Facility will expire 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.

     PROPERTY ACQUISITIONS AND COMMITMENTS. During 1998, the Company acquired
     $53.9 million of completed properties and the balance of investments in
     properties under construction increased $12.6 million, resulting in a net
     increase in investments in properties of $66.5 million.

     As of June 30, 1998 the Company had entered into commitments to acquire 49
     properties totaling $87.6 million. The commitments are subject to various
     conditions to closing which are described in the contracts or letters of
     intent relating to these properties. The Company expects to finance its
     acquisition commitments through a variety of future sources of capital,
     including borrowings under the Credit Facility, other long-term secured
     and unsecured indebtedness and the issuance of additional equity or debt
     securities.

     In addition, in the ordinary course of business the Company is in
     negotiations regarding the proposed acquisition of other properties and
     related co-development opportunities. The Company may enter into
     commitments to acquire some of these prospective properties in the future.
     Property acquisition commitments arising out of these negotiations are
     expected to generate the primary demand for additional capital in the
     future.

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<PAGE>   13

     DIVIDENDS. The Company intends to pay a regular quarterly dividend on its
     common stock of $.375 per share (which if annualized would be $1.50 per
     share). Dividends of $3,565,540 were paid on April 16, 1998, and July
     14,1998, related to the first and second quarter declared dividends,
     respectively. The Company expects to pay future dividends from cash
     available for distributions, which the Company believes will exceed
     historical cash available for distributions due to the reduction in debt
     service and preferred stock dividend requirements, the decrease in
     advisory fee rates and the anticipated growth of the portfolio of net
     leased properties. 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.

     The Company historically has paid quarterly dividends on its redeemable
     preferred stock. After payment of the accrued preferred stock dividends
     and the redemption and exchange of the Company's outstanding redeemable
     preferred stock from the proceeds of the Offering, the Company's preferred
     stock dividend requirement has been eliminated.


     ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not Applicable

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<PAGE>   14

                           PART II - OTHER INFORMATION

     ITEM 1. LEGAL PROCEEDINGS. None.

     ITEM 2. CHANGES IN SECURITIES. None.

     ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.

     ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     The Company held its annual meeting of stockholders ( the "Meeting") on
     May 8, 1998. The Company's stockholders elected Patrick L. Beach, W. Ross
     Martin, H. Reid Sherard, Richard J. Peters, Creed L. Ford, III, William H.
     Krul, II and Lee C. Howley (collectively, the "Nominees") to the Company's
     Board of Directors. The following lists the number of shares of Common
     Stock voted for and withheld from each of the Nominees.

              NOMINEES                 Votes for         Votes Withheld 
              ----------------         ----------        ---------------
            Patrick L. Beach           6,447,776         100,590        
            W. Ross Martin             6,446,626         101,740        
            H. Reid Sherard            6,446,626         101,740        
            Richard J. Peters          6,447,776         100,590        
            Creed L. Ford, II          6,447,476         100,890        
            William H. Krul, II        6,447,776         100,590        
            Lee C. Howley              6,447,776         100,590        

     ITEM 5. OTHER INFORMATION. None.

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


               Exhibit 27.1           Financial Data Schedule.

                            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," intent," "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.

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     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.

August 14, 1998                By: /s/ Patrick L. Beach
                                       ------------------------
                                       Patrick L. Beach
                                       Chief Executive Officer and President

August 14, 1998                By: /s/ W. Ross Martin
                                       ------------------------
                                       W. Ross Martin
                                       Chief Financial Officer and
                                       Executive Vice President



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