| |  |                                                                                   | 
| |  | --------------------------------------------------------------------------------- | 
| |  | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 | 

|                               |  |               
|------------------------------ |  | --------------
|For the quarterly period ended |  | March 31, 2001

| |  |                                                                                    | 
| |  | ---------------------------------------------------------------------------------- | 
| |  | 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  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 shares of Common Stock, $.01 par value,
outstanding as of May 15, 2001.

1



---

TABLE OF CONTENTS



|                                                                                                                 |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                                                                                                                 | PART I. FINANCIAL INFORMATION                                                                
|                                                                                                                 | ITEM 1. FINANCIAL STATEMENTS                                                                 
|CONSOLIDATED BALANCE SHEETS                                                                                     
|CONSOLIDATED STATEMENTS OF OPERATIONS                                                                           
|CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001 (unaudited)
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                      
|                                                                                                                 | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                                                                                 | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II  OTHER INFORMATION                                                                                     
|                                                                                                                 | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                                                                                                 | ITEM 2. CHANGES IN SECURITIES                                                                
|                                                                                                                 | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                                                                                                                 | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                                                                                                                 | ITEM 5. OTHER INFORMATION                                                                    
|                                                                                                                 | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.                                                    
|SIGNATURES                                                                                                      





|         |  |                                                            |  |         |    | 
|-------- |  | ---------------------------------------------------------- |  | ------- | -- | 
|Item No. |  |                                                            |  | Page    |   
|         |  |                                                            |  |         |   
|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  12 |   
|        
|        
|        
|        
|        
|Item 3.  |  | Quantitative and Qualitative Disclosures about Market Risk |  |         | 12 | 
|        
|        
|        
|        
|        
|PART II  |  | OTHER INFORMATION                                         
|        
|        
|        
|        
|        
|Item 1.  |  | Legal Proceedings                                          |  |         | 13 | 
|        
|        
|        
|        
|Item 2.  |  | Changes in Securities                                      |  |         | 13 | 
|        
|        
|        
|        
|Item 3.  |  | Defaults upon Senior Securities                            |  |         | 13 | 
|        
|        
|        
|        
|Item 4.  |  | Submission of Matters to a Vote of Security Holders        |  |         | 13 | 
|        
|        
|        
|        
|Item 5.  |  | Other Information                                          |  |         | 13 | 
|        
|        
|        
|        
|Item 6.  |  | Exhibits and Report on Form 8-K                            |  |         | 13 | 

2



---



Part I. Financial Information

Item 1. Financial Statements

|                                     |                                                                                                 |                                            |           |             |             |   |           |              |             |  | 
|------------------------------------ | ----------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ----------- | ----------- | - | --------- | ------------ | ----------- |  | 
|                                     |                                                                                                 |                                            |           |             | March 31,   |   |           | December 31, |            
|                                     |                                                                                                 |                                            |           |             | 2001        |   |           | 2000         |            
|                                     |                                                                                                 |                                            |           |             |             |   |           |              |            
|                                     |                                                                                                 |                                            |           |             | (unaudited) |  
|ASSETS                              
|                                    
|                                    
|                                    
|                                    
|Cash and cash equivalents            |                                                                                                 | $                                          | 587,490   |             |             | $ | 665,408   |             
|                                    
|                                    
|                                    
|                                    
|Investments:                        
|                                    
|                                    
|                                    
|                                    
|                                     | Properties subject to operating leases, net                                                     |                                            |           | 198,388,060 |             |   |           | 195,842,231  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Properties subject to financing leases, net                                                     |                                            |           | 7,237,225   |             |   |           | 4,535,446    |            
|                                    
|                                    
|                                    
|                                    
|                                     | Loans to affiliates, collateralized by mortgage loans                                           |                                            |           | 11,246,212  |             |   |           | 11,280,234   |            
|                                    
|                                    
|                                    
|                                    
|                                     | Investment in joint venture                                                                     |                                            |           | 7,121,255   |             |   |           | 7,031,073    |            
|                                    
|                                    
|                                    
|                                    
|                                     | Investment in affiliated limited partnerships, net                                              |                                            |           | 4,146,856   |             |   |           | 4,163,069    |            
|                                    
|                                    
|                                    
|                                    
|                                     | Other loans                                                                                     |                                            |           | 281,152     |             |   |           | 283,323      |            
|                                    
|                                    
|                                    
|                                    
|                                     | Other loans, related party                                                                      |                                            |           | 369,374     |             |   |           | 373,799      |            
|                                     |                                                                                                 |                                            |           |             |             |   |           |              |            
|                                     |                                                                                                 | Total investments                          |           |             | 228,790,134 |   |           |              | 223,509,175 | 
|                                    
|                                    
|                                    
|                                    
|                                    
|Unbilled rent, net                   |                                                                                                 |                                            | 7,237,913 |             |             |   | 6,840,646 |             
|                                    
|                                    
|                                    
|                                    
|Accounts receivable                  |                                                                                                 |                                            | 737,474   |             |             |   | 693,101   |             
|                                    
|                                    
|                                    
|                                    
|Due from affiliates                  |                                                                                                 |                                            | 912,279   |             |             |   | 1,856,950 |             
|                                    
|                                    
|                                    
|                                    
|Other assets                         |                                                                                                 |                                            | 1,216,679 |             |             |   | 1,005,796 |             
|                                     |                                                                                                 |                                            |           |             |             |   |           |              |            
|                                    
|                                     |                                                                                                 | Total assets                               |           | $           | 239,481,969 |   |           | $            | 234,571,076 | 
|                                     |                                                                                                 |                                            |           |             |             |   |           |              |            
|LIABILITIES AND STOCKHOLDERS EQUITY
|                                    
|                                    
|                                    
|                                    
|Liabilities:                        
|                                    
|                                    
|                                    
|                                    
|                                     | Notes payable                                                                                   |                                            | $         | 103,517,909 |             |   | $         | 98,365,915   |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable and accrued expenses                                                           |                                            |           | 1,055,621   |             |   |           | 952,252      |            
|                                    
|                                    
|                                    
|                                    
|                                     | Security deposits held on leases                                                                |                                            |           | 218,529     |             |   |           | 225,612      |            
|                                     |                                                                                                 |                                            |           |             |             |   |           |              |            
|                                    
|                                     |                                                                                                 | Total liabilities                          |           |             | 104,792,059 |   |           |              | 99,543,779  | 
|                                     |                                                                                                 |                                            |           |             |             |   |           |              |            
|                                    
|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  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated other comprehensive income (loss)                                                   |                                            |           | (40,170     | )           |   |           |             |            
|                                    
|                                    
|                                    
|                                    
|                                     | Retained earnings (distributions in excess of earnings)                                         |                                            |           | (76,057     | )           |   |           | 221,160      |            
|                                     |                                                                                                 |                                            |           |             |             |   |           |              |            
|                                    
|                                     |                                                                                                 | Total stockholders equity                 |           |             | 134,689,910 |   |           |              | 135,027,297 | 
|                                     |                                                                                                 |                                            |           |             |             |   |           |              |            
|                                    
|                                     |                                                                                                 | Total liabilities and stockholders equity |           | $           | 239,481,969 |   |           | $            | 234,571,076 | 
|                                     |                                                                                                 |                                            |           |             |             |   |           |              |            

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

3



---



|                                                                        |                                               |                                                                              |           |           |           |                    |           |           |           |      |  | 
|----------------------------------------------------------------------- | --------------------------------------------- | ---------------------------------------------------------------------------- | --------- | --------- | --------- | ------------------ | --------- | --------- | --------- | ---- |  | 
|                                                                        |                                               |                                                                              |           |           |           | Three Months Ended |          
|                                                                        |                                               |                                                                              |           |           |           | March 31,          |          
|                                                                        |                                               |                                                                              |           |           |           |                    |          
|                                                                        |                                               |                                                                              |           |           |           | 2001               |           |           | 2000      |     
|                                                                        |                                               |                                                                              |           |           |           |                    |           |           |           |     
|Revenue:                                                               
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Rental income from operating leases           |                                                                              | $         | 5,481,911 |           |                    | $         | 6,138,749 |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Earned income from financing leases           |                                                                              |           | 165,404   |           |                    |           | 156,849   |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Interest income on loans to affiliates        |                                                                              |           | 311,552   |           |                    |           | 316,061   |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Other income, principally affiliated ventures |                                                                              |           | 370,311   |           |                    |           | 1,019,705 |          
|                                                                        |                                               |                                                                              |           |           |           |                    |           |           |           |     
|                                                                       
|                                                                        |                                               | Total revenue                                                                |           |           | 6,329,178 |                    |           |           | 7,631,364 |     
|                                                                        |                                               |                                                                              |           |           |           |                    |           |           |           |     
|                                                                       
|Expenses:                                                              
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Interest                                      |                                                                              |           | 2,190,047 |           |                    |           | 2,546,192 |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Management fees, affiliates, net              |                                                                              |           | 119,153   |           |                    |           |          |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | General and administrative                    |                                                                              |           | 383,719   |           |                    |           | 342,596   |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Depreciation and amortization                 |                                                                              |           | 841,934   |           |                    |           | 864,968   |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Non-recurring merger costs                    |                                                                              |           | 37,222    |           |                    |           | 1,143,000 |          
|                                                                        |                                               |                                                                              |           |           |           |                    |           |           |           |     
|                                                                       
|                                                                        |                                               | Total expenses                                                               |           |           | 3,572,075 |                    |           |           | 4,896,756 |     
|                                                                        |                                               |                                                                              |           |           |           |                    |           |           |           |     
|                                                                       
|                                                                        |                                               | Income before equity income of joint
venture, and gain on sale of properties |           |           | 2,757,103 |                    |           |           | 2,734,608 |     
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Equity in net income of joint venture                                   |                                               |                                                                              | 177,762   |           |           |                    | 150,542   |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Gain on sale of properties, net                                         |                                               |                                                                              | 380,999   |           |           |                    | 625,647   |          
|                                                                        |                                               |                                                                              |           |           |           |                    |           |           |           |     
|                                                                       
|                                                                        |                                               | Net income                                                                   |           | $         | 3,315,864 |                    |           | $         | 3,510,797 |     
|                                                                        |                                               |                                                                              |           |           |           |                    |           |           |           |     
|                                                                        |                                               | Net income per share:                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                               |                                                                              | Basic     |           | $         | 0.35               |           |           | $         | 0.37 | 
|                                                                        |                                               |                                                                              |           |           |           |                    |           |           |           |     
|                                                                        |                                               |                                                                              | Diluted   |           | $         | 0.35               |           |           | $         | 0.37 | 
|                                                                        |                                               |                                                                              |           |           |           |                    |           |           |           |     
|Weighted average number of common shares
outstanding, basic and diluted |                                               |                                                                              | 9,508,108 |           |           |                    | 9,508,108 |          
|                                                                        |                                               |                                                                              |           |           |           |                    |           |           |           |     

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

4



---



|                                         |                             |                         |                      |   |              |   |        |         |   |   |               |   |   |        |   |           |          |           | 
|---------------------------------------- | --------------------------- | ----------------------- | -------------------- | - | ------------ | - | ------ | ------- | - | - | ------------- | - | - | ------ | - | --------- | -------- | --------- | 
|                                         |                             |                         |                      |   | Common Stock |  
|                                         |                             |                         |                      |   |              |   |        | Paid-In |   |   | Comprehensive |   |   |       
|                                         |                             |                         |                      |   | Shares       |   |        | Amount  |   |   | Capital       |   |   | Income |  
|                                         |                             |                         |                      |   |              |   |        |         |   |   |               |   |   |        |  
|BALANCE, JANUARY 1, 2001                 |                             |                         | 9,508,108            |   |              | $ | 95,081 |         |   | $ | 134,711,056   |   |   | $      |  |          
|                                        
|                                        
|                                        
|                                        
|                                        
|Comprehensive income:                   
|                                        
|                                        
|                                        
|                                        
|                                         | Net Income                  |                         |                      |  |              |   |        |        |   |   |               |  |   |        |   | 3,315,864 |         
|                                        
|                                        
|                                        
|                                        
|                                        
|                                         | Other comprehensive income:
|                                        
|                                        
|                                        
|                                        
|                                         |                             | Net loss on derivatives |                      |   |             |   |        |         |  |   |               |   |  |        |   |           | (246,569 | )        
|                                         |                             |                         |                      |   |              |   |        |         |   |   |               |   |   |        |  
|                                         |                             |                         | Comprehensive income |   |              |   |        |         |   |   |               |   |   |        |   |           |          | 3,069,295 | 
|                                         |                             |                         |                      |   |              |   |        |         |   |   |               |   |   |        |  
|Common stock dividends ($0.38 per share) |                             |                         |                     |   |              |   |       |         |   |   |              |   |   |        |   |          
|                                        
|                                         |                             |                         |                      |   |              |   |        |         |   |   |               |   |  
|BALANCE, MARCH 31, 2001                  |                             |                         | 9,508,108            |   |              | $ | 95,081 |         |   | $ | 134,711,056   |   |   |        |   |          
|                                         |                             |                         |                      |   |              |   |        |         |   |   |               |   |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                         |                             |                         |                      |           |                          |   |         |                   |          |   |               |           |          |   | 
|---------------------------------------- | --------------------------- | ----------------------- | -------------------- | --------- | ------------------------ | - | ------- | ----------------- | -------- | - | ------------- | --------- | -------- | - | 
|                                         |                             |                         |                      |           | Retained Earnings        |   |         | Accumulated Other |          |   | Total         |          
|                                         |                             |                         |                      |           | (Distributions in excess |   |         | Comprehensive     |          |   | Stockholders' |          
|                                         |                             |                         |                      |           | of earnings)             |   |         | Income (Loss)     |          |   | Equity        |          
|                                         |                             |                         |                      |           |                          |   |         |                   |          |   |               |          
|BALANCE, JANUARY 1, 2001                 |                             | $                       | 221,160              |           |                          | $ | 206,399 |                   |          | $ | 135,233,696   |          
|                                        
|                                        
|                                        
|                                        
|                                        
|Comprehensive income:                   
|                                        
|                                        
|                                        
|                                        
|                                         | Net Income                  |                         |                      | 3,315,864 |                          |   |         |                  |          |   |               | 3,315,864 |         
|                                        
|                                        
|                                        
|                                        
|                                        
|                                         | Other comprehensive income:
|                                        
|                                        
|                                        
|                                        
|                                         |                             | Net loss on derivatives |                      |           |                         |   |         |                   | (246,569 | ) |               |           | (246,569 | )
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                         |                             |                         | Comprehensive income |           |                          |   |        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|Common stock dividends ($0.38 per share) |                             |                         | (3,613,081           | )         |                          |   |        |                   |          |   | (3,613,081    | )        
|                                         |                             |                         |                      |           |                          |   |         |                   |         
|                                        
|BALANCE, MARCH 31, 2001                  |                             | $                       | (76,057              | )         |                          | $ | (40,170 | )                 |          | $ | 134,689,910   |          
|                                         |                             |                         |                      |           |                          |   |         |                   |         

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

5



---



|                                                                     |                                                     |   |            |            |   |                    |            |            |      |  |  | 
|-------------------------------------------------------------------- | --------------------------------------------------- | - | ---------- | ---------- | - | ------------------ | ---------- | ---------- | ---- |  |  | 
|                                                                     |                                                     |   |            |            |   | Three Months Ended |           
|                                                                     |                                                     |   |            |            |   | March 31,          |           
|                                                                     |                                                     |   |            |            |   |                    |           
|                                                                     |                                                     |   |            |            |   | 2001               |            |            | 2000 | 
|                                                                     |                                                     |   |            |            |   |                    |            |            |      | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                               
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Net income                                                           |                                                     | $ | 3,315,864  |            |   | $                  | 3,510,797  |           
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Adjustments to net income:                                          
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Depreciation and amortization                       |   |            | 841,934    |   |                    |            | 864,968    |     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Amortization of debt issuance costs                 |   |            | 320,482    |   |                    |            | 198,990    |     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Equity in net income of joint venture               |   |            | (177,762   | ) |                    |            | (150,542   | )   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Gain on sale of properties, net                     |   |            | (380,999   | ) |                    |            | (625,647   | )   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Increase in unbilled rent                           |   |            | (397,267   | ) |                    |            | (499,961   | )   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Increase in accounts receivable and other assets    |   |            | 349,287    |   |                    |            | (1,530,406 | )   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Decrease in accounts payable and accrued expenses   |   |            | 63,199     |   |                    |            | 479,126    |     
|                                                                     |                                                     |   |            |            |   |                    |            |            |      | 
|                                                                    
|                                                                     | Net cash provided by operating activities           |   |            | 3,934,738  |   |                    |            | 2,247,325  |     
|                                                                     |                                                     |   |            |            |   |                    |            |            |     
|                                                                    
|CASH FLOWS FROM INVESTING ACTIVITIES:                               
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Acquisition of properties subject to operating leases                |                                                     |   | (8,321,041 | )          |   |                    | (3,954,479 | )         
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Acquisition of properties subject to financing leases                |                                                     |   | (2,686,203 | )          |   |                    |           |           
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Advances on short-term loans to affiliates, net                      |                                                     |   |           |            |   |                    | (5,100,626 | )         
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Proceeds from the disposition of properties                          |                                                     |   | 5,350,136  |            |   |                    | 5,866,346  |           
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Collections on loans to affiliates, collateralized by
mortgage loans |                                                     |   | 34,022     |            |   |                    | 5,124,256  |           
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Collection of principal on other loans                               |                                                     |   | 6,596      |            |   |                    | 8,368      |           
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Proceeds from joint venture distributions                            |                                                     |   | 87,580     |            |   |                    |           |           
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Collection of principal on financing leases                          |                                                     |   | (15,576    | )          |   |                    | (35,350    | )         
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Lease security deposits                                              |                                                     |   | (7,083     | )          |   |                    |           |           
|                                                                     |                                                     |   |            |            |   |                    |            |            |      | 
|                                                                    
|                                                                     | Net cash (used in) provided by investing activities |   |            | (5,551,569 | ) |                    |            | 1,908,515  |     
|                                                                     |                                                     |   |            |            |   |                    |            |            |     
|                                                                    
|CASH FLOWS FROM FINANCING ACTIVITIES:                               
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Dividends paid on common stock                                       |                                                     |   | (3,613,081 | )          |   |                    | (3,613,081 | )         
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Borrowings of notes payable                                          |                                                     |   | 11,000,000 |            |   |                    | 7,000,000  |           
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Repayments of notes payable                                          |                                                     |   | (5,848,006 | )          |   |                    | (7,636,721 | )         
|                                                                     |                                                     |   |            |            |   |                    |            |            |     
|                                                                    
|                                                                     | Net cash provided by (used in) financing activities |   |            | 1,538,913  |   |                    |            | (4,249,802 | )   
|                                                                     |                                                     |   |            |            |   |                    |            |            |     
|                                                                    
|NET CASH FLOWS                                                       |                                                     |   | (77,918    | )          |   |                    | (93,962    | )         
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                       |                                                     |   | 665,408    |            |   |                    | 1,035,607  |           
|                                                                     |                                                     |   |            |            |   |                    |            |            |      | 
|                                                                    
|CASH AND CASH EQUIVALENTS, END OF PERIOD                             |                                                     | $ | 587,490    |            |   | $                  | 941,645    |           
|                                                                     |                                                     |   |            |            |   |                    |            |            |     
|                                                                    
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Cash paid for interest                              |   | $          | 1,767,400  |   |                    | $          | 2,704,879  |     
|                                                                     |                                                     |   |            |            |   |                    |            |           

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

6



---





|1. |  | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
|-- |  | ------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Organization: Captec Net Lease Realty, Inc. (the Company), which has
operated as a REIT since November 1997, 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
national 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 leases typically
provide for minimum rent plus specified fixed periodic rent increases.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Unaudited Interim Financial Information: The consolidated balance sheet
as of March 31, 2001 and the consolidated statements of operations,
stockholders equity and cash flows for the three months ended March
31, 2001 and 2000 have not been audited. In the opinion of management,
all adjustments (including normal recurring adjustments) 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, 2000 filed with the United States Securities and Exchange
Commission on March 30, 2001.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Derivatives: In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities (FAS
133). In June 2000, the FASB issued SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, (FAS
138) which amends FAS 133. 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 and/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. Any change in fair value resulting from ineffectiveness,
as defined by FAS 133 is recognized immediately in current earnings.
The Company adopted FAS 133, as amended, on January 1, 2001.



|2. |  | PROPERTIES SUBJECT TO OPERATING LEASES:
|-- |  | ---------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Properties subject to operating leases represent various properties
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
periods during the fifth to seventh lease years.



| |                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys investment in properties subject to operating leases
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 is
comprised of the following as of:

|                                 |  |           |             |   |              |   |             |  
|-------------------------------- |  | --------- | ----------- | - | ------------ | - | ----------- | -
|                                 |  | March 31, |             |   | December 31, |  
|                                 |  | 2001      |             |   | 2000         |  
|                                 |  |           |             |   |              |  
|Land                             |  | $         | 80,529,614  |   |              | $ | 79,432,815  |  
|                                
|                                
|                                
|                                
|Buildings and improvements       |  |           | 127,921,648 |   |              |   | 124,194,854 |  
|                                
|                                
|                                
|                                
|Construction draws on properties |  |           |            |   |              |   | 1,698,032   |  
|                                 |  |           |             |   |              |  
|                                 |  |           | 208,451,262 |   |              |   | 205,325,701 |  
|                                
|                                
|                                
|                                
|Less accumulated depreciation    |  |           | (10,063,202 | ) |              |   | (9,483,470  | )
|                                 |  |           |             |   |              |  
|Total                            |  | $         | 198,388,060 |   |              | $ | 195,842,231 |  
|                                 |  |           |             |   |              |  

7



---





| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company sold five properties during the three months ended March
31, 2001, collecting total net proceeds of $5.4 million and reflected a
net gain totaling approximately $445,000 on the sale of these
properties.



|3. |  | FINANCING LEASES:
|-- |  | -----------------



| |                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Properties subject to financing leases is comprised of six properties
with respect to which 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 is comprised of the following as of:

|                                      |                                      |   |            |            |  |              |            |           | 
|------------------------------------- | ------------------------------------ | - | ---------- | ---------- |  | ------------ | ---------- | --------- | 
|                                      |                                      |   | March 31,  |            |  | December 31, |           
|                                      |                                      |   | 2001       |            |  | 2000         |           
|                                     
|                                      |                                      |   |            |            |  |              |           
|Minimum lease payments to be received |                                      | $ | 15,802,101 |            |  | $            | 9,703,037  |          
|                                     
|                                     
|                                     
|                                     
|Estimated residual value              |                                      |   |           |            |  |              |           |          
|                                      |                                      |   |            |            |  |             
|                                      | Gross investment in financing leases |   |            | 15,802,101 |  |              |            | 9,703,037 | 
|                                     
|                                     
|                                     
|                                     
|Unearned income                       |                                      |   | (8,564,876 | )          |  |              | (5,167,591 | )        
|                                      |                                      |   |            |            |  |             
|                                      | Net investment in financing leases   |   | $          | 7,237,225  |  |              | $          | 4,535,446 | 
|                                      |                                      |   |            |            |  |             



|4. |  | INVESTMENT IN JOINT VENTURE:
|-- |  | ----------------------------



| |                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has invested $7.1 million for 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 as of and for the three months ended
March 31, 2001 and 2000 is set forth below:

|                                                |  |      |            |  |      |   |            | 
|----------------------------------------------- |  | ---- | ---------- |  | ---- | - | ---------- | 
|                                                |  | 2001 |            |  | 2000 |  
|                                                |  |      |            |  |      |  
|Investment in properties subject to leases, net |  | $    | 50,102,738 |  |      | $ | 40,530,058 | 
|                                               
|                                               
|                                               
|                                               
|Total assets                                    |  |      | 53,368,034 |  |      |   | 42,863,730 | 
|                                               
|                                               
|                                               
|                                               
|Notes payable                                   |  |      | 22,488,011 |  |      |   | 9,111,594  | 
|                                               
|                                               
|                                               
|                                               
|Total liabilities                               |  |      | 22,806,741 |  |      |   | 10,819,340 | 
|                                               
|                                               
|                                               
|                                               
|Members equity                                 |  |      | 30,561,293 |  |      |   | 32,044,390 | 
|                                               
|                                               
|                                               
|                                               
|Revenues                                        |  |      | 1,464,843  |  |      |   | 997,257    | 
|                                               
|                                               
|                                               
|                                               
|Net income                                      |  |      | 786,559    |  |      |   | 666,113    | 



|5. |  | NOTES PAYABLE:
|-- |  | --------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys credit facility, as amended February 26, 2001, provides
up to $105 million for the acquisition and development of properties
and working capital. The credit facility expires on August 31, 2001 and
is subject to certain borrowing base restrictions. The Company had
approximately $101.6 million of aggregate outstanding borrowings under
the credit facility at March 31, 2001. The Company also has an option
to extend the maturity of the credit facility an additional three
months.



| |                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2000, the Company entered into three promissory notes for an
aggregate amount of $1,945,000 with a lending institution. The notes
are collateralized by certain properties in the Companys property
portfolio. The notes have terms ranging from 15 years to 20 years and
bear interest at 9.0% per annum. As of March 31, 2001, the outstanding
balance of the promissory notes is $1,893,111.

8



---





|6. |  | DERIVATIVE INSTRUMENTS:
|-- |  | -----------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At March 31, 2001, the Company had two derivative instruments, an
interest rate cap agreement and an interest rate swap agreement. These
instruments have been entered into to meet the Companys risk management
objective, which is to manage the interest rate exposure associated with
borrowings under its floating rate credit facility. The Company has
designated these instruments as cash flow hedges as they are used to
hedge fluctuations in interest payments. In accordance with the
provisions of FAS 133, the Company recorded a cumulative-effect-type
transition adjustment of $206,399 in accumulated other comprehensive
income to recognize at fair value the two derivatives that are
designated as cash-flow hedging instruments. At March 31, 2001, the fair
value of these instruments represented a liability of $40,170. During the
three months ended March 31, 2001, the Company recorded a loss on the
interest rate instruments of $246,569, which has been recognized in
accumulated other comprehensive loss. The remaining $40,120 will be
reclassified into earnings through July 2001, the termination date of
the hedges. The cash flow hedges had no ineffectiveness for the period
and accordingly, no amounts were recorded in the statement of
operations.



|7. |  | EARNINGS PER SHARE:
|-- |  | -------------------



| |                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stock options currently outstanding 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 ended March 31, 2001 and 2000.



|8. |  | NON-RECURRING ITEMS:
|-- |  | --------------------



| |                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On May, 1, 2000, the Company terminated a merger agreement that resulted
in the Company recognizing expense of $1.1 million in non-recurring
merger costs in the three months ended March 31, 2000. During the
three months ended March 31, 2001, the Company incurred approximately
$37,000 in costs associated with the on-going assessment of strategic
alternatives.



|9. |  | RELATED PARTY TRANSACTIONS:
|-- |  | ---------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is party to an advisory agreement, as amended, with Captec
Net Lease Realty Advisors, Inc., ("Captec Advisors") an affiliate, whereby the Company pays
to Captec Advisors a management fee. During the three months ended
March 31, 2001, the Company incurred approximately $319,000 in
management fees to Captec Advisors, of which $200,000 was paid by
Family Realty II, Inc., an affiliate of the Company.



| |                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the three months ended March 31, 2001, the Company purchased
three properties from Family Realty II, Inc., an affiliate, for an
aggregated purchase price of $6,285,400. In addition, during the three
months ended March 31, 2001, the Company purchased one property from FC
Venture, an affiliate, for $1,156,203.



|10. |  | SUBSEQUENT EVENTS:
|--- |  | ------------------



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | In April 2001, the Company declared dividends to its shareholders of
$3,613,081, or $0.38 per share of common stock, which was paid on April
18, 2001.

9



---



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. The Companys triple-net leases generally impose on the
lessee responsibility for all operating costs and expenses of the
property, including the costs of repairs, maintenance, real property
taxes, assessments, utilities and insurance. The Companys leases
typically provide for minimum rent plus specified fixed periodic rent.
Other revenues are derived primarily from fee income earned from
affiliates and interest income on loans to affiliates.

As of March 31, 2001, the Company owned 139 properties, located in 27
states, subject to long-term net leases with 58 different lessees under
major restaurant and retail concepts including Bennigans, Applebees,
Dennys, Best Buy, Blockbuster Video, and Jared Jewelers.

RESULTS OF OPERATIONS

During the three months ended March 31, 2001, total revenue decreased
17.1% to $6.3 million as compared to $7.6 million for the three months
ended March 31, 2000. Rental revenue from operating leases for the
three months ended March 31, 2001 decreased 11.0% to $5.5 million as
compared to $6.1 million for the three months ended March 31, 2000, due
to the reduction of the Companys property portfolio as a result of
property sales. Earned income from financing leases for the three
months ended March 31, 2001 increased 5.5% to approximately $165,000
for the three months ended March 31, 2001 as compared to approximately
$157,000 for the three months ended March 31, 2000. The increase is the
result of the addition of two financing leases during the three months
ended March 31, 2001. Interest income on loans to affiliates decreased
1.4% to approximately $312,000 for the three months ended March 31,
2001 as compared to approximately $316,000 for the three months ended
March 31, 2000. The decrease is the result of principal collections.
Other income decreased 63.7% to approximately $370,000 for the three
months ended March 31, 2001 as compared to $1.0 million for the three
months ended March 31, 2000. The decrease is the result of the
affiliated ventures approaching completion of their acquisition
phases, resulting in reduced one-time acquisition related fees. The
amount of fees earned for the acquisition, development and management
of properties on behalf of affiliated ventures are subject to
variations, principally by the amount of new properties identified and
acquired by the affiliated ventures.

Total expenses decreased 27.1% to $3.6 million for the three months
ended March 31, 2001 as compared to $4.9 million for the three months
ended March 31, 2000. Interest expense decreased 14.0% to $2.2 million
for the three months ended March 31, 2001 as compared to $2.5 million
for the three months ended March 31, 2000. The decrease was due to a
$20.4 million decrease in the average outstanding borrowings under the
Companys credit facility and a 31 basis point decrease in the weighted
average interest rate, partially offset by an increase in amortization
of deferred financing costs of approximately $121,000. Management fees
increase 100% to approximately $119,000 during the three months ended
March 31, 2001. The increase is the result of reduced acquisition
levels for the affiliated ventures, which provide for a reduction in
the management fee paid by the Company to Captec Advisors, an
affiliate. During the three months ended March 31, 2000,
the acquisition levels of the affiliated ventures fully supported the
management fee paid by the Company. The management fee paid and
reductions received are subject to variations, principally changes in
the Companys property portfolio balance caused by property
acquisitions and dispositions, and the amount of new properties
identified and acquired by the affiliated ventures. General and
administrative expenses increased 12.0% to approximately $384,000 for
the three months ended March 31, 2001 as compared to approximately
$343,000 for the three months ended March 31, 2000 primarily as a
result of an increase in payroll related costs. Depreciation and
amortization decreased 2.7% to approximately $842,000 for the three
months ended March 31, 2001 as compared to approximately $865,000 for
the three months ended March 31, 2000. The decrease is due to the
reduction of the Companys property portfolio as a result of property
sales. Non-recurring items decreased to approximately $37,000 during
the three months ended March 31, 2001 as compared to $1.1 million for
the three months ended March 31, 2000. The costs incurred during the
three months ended March 31, 2001

10



---



represent costs related to the planned sale of the Company. The $1.1
million expensed during the three months ended March 31, 2000 relates
to the termination of a merger agreement that was announced on May 1,
2000.

The Company has invested $7.1 million in a 22.6% membership interest in
FC Venture I, LLC. During the three months ended March
31, 2001, the Company recorded approximately $178,000 as its portion of
FC Ventures equity earnings as compared to approximately $151,000 for
the three months ended March 31, 2000. The increase is primarily due to
growth of FC Ventures property portfolio.

The Company sold five properties during the three months ended March
31, 2001, collecting total net proceeds of $5.4 million and reflected a
net gain totaling approximately $381,000 on the sale of these
properties.

As a result of the foregoing, the Companys net income decreased 5.6%
to $3.3 million for the three months ended March 31, 2001 as compared
to $3.5 million for the three months ended March 31, 2000.

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 acquisition and development have been
typically funded out of proceeds from borrowings. The Company expects
to meet its liquidity requirements, which are principally property
acquisition and development and scheduled debt maturities, through a
variety of future sources of capital, including long-term
collateralized and uncollateralized indebtedness, the issuance of
additional equity or debt securities and off-balance sheet financing
through the formation of joint ventures.

The Companys leases generally provide for specified periodic rent
increases. 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.

At March 31, 2001, the Company had cash and cash equivalents of
approximately $587,000. For the three months ended March 31, 2001, the
Company generated cash from operations of $3.9 million as compared to
$2.2 million for the three months ended March 31, 2000. Cash generated
from operations provides funds for dividends. Any excess cash from
operations may also be used for investment in properties. For the three
months ended March 31, 2001, the Company utilized $5.6 million in
investing activities as compared to generating $1.9 million during the
three months ended March 31, 2000. The Company received $1.5 million
for financing activities during the three months ended March 31, 2001
as compared to using $4.2 million during the three months ended March
31, 2000.

CREDIT FACILITY. In February 2001, the Company amended and extended the
maturity of its credit facility with First Union National Bank. The
effect of the amendment was to extend the maturity to August 31, 2001.
The amendment also resulted in an increased interest rate spread over
LIBOR to a range of 2.25% to 2.50%, dependent upon the ratio of debt to
asset value, and reduced the facility borrowing capacity to $105
million. The Company also has an option to extend the maturity of the
credit facility an additional three months. The extension of the credit
facility has been designed to be short-term in nature to enable the
Company to continue to operate with a flexible capital structure. Upon
expiration of the credit facility, the Company intends to refinance its
indebtedness under the credit facility through a new facility or loan
with an institutional lender and/or through the issuance of debt
securities. The terms of the Companys obligations with respect to any
indebtedness incurred in refinancing the credit facility will be based
on market conditions applicable to such form of indebtedness at the
time, which may cause the terms of any such indebtedness to vary
materially from the terms of the credit facility. No assurances can be
made that the Company will be able to refinance such debt. At March 31,
2001, the Company had $101.6 million outstanding under the credit
facility.

11



---



PROPERTY SALES. The Company periodically has explored the marketability of
certain properties in its portfolio that would contribute to greater
diversification levels in tenants, geography, property type and
property size thereby increasing the strength of its current portfolio.
At March 31, 2001 no properties in the Company's portfolio are being actively marketed.

DIVIDENDS. During the three months ended March 31, 2001 the Company
paid dividends of $3,613,081. In April 2001, the Company declared a
first quarter dividend on its common stock in the amount of $0.38 per
share or $3,613,081. The dividend was payable to stockholders of record
on April 11, 2001 and was paid on April 18, 2001. The Company expects
to pay future dividends from cash available for distribution. 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents a risk of loss arising from adverse changes in
market prices and interest rates. The Companys market risk arises from
interest rate risk inherent in its financial instruments. The Company
is not subject to foreign currency exchange rate risk or commodity
price risk.

The Company monitors and manages interest rate exposure as an integral
part of its overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the
potentially adverse effect on its results. At March 31, 2001,
approximately 98% of the Companys debt bore interest at variable
rates of LIBOR plus 2.25% to 2.50%.

The following table presents certain information on the Companys
assets and liabilities which are sensitive to interest rate changes at
March 31, 2001:

|             |                           |  |          |              |   |       |   |             | 
|------------ | ------------------------- |  | -------- | ------------ | - | ----- | - | ----------- | 
|             |                           |  | Maturity |             
|             |                           |  |          |             
|             |                           |  | 0 to 6   |             
|             |                           |  | Months   |              |   | Total |  
|             |                           |  |          |              |   |       |  
|Assets:     
|            
|            
|            
|            
|             | Cash and cash equivalents |  | $        | 587,490      |   |       | $ | 587,490     | 
|             |                           |  |          |              |   |      
|Liabilities:
|             | Notes payable             |  | $        | 101,624,798  |   |       | $ | 101,624,798 | 
|             |                           |  |          |              |   |      
|             | Reprice difference        |  | $        | (101,037,308 | )
|            
|            
|            
|            
|             | Cumulative gap            |  | $        | (101,037,308 | )

A 1.0% increase in the variable interest rate for the three months ended
March 31, 2001 would have resulted in additional interest expense of
approximately $116,000.

The Company uses derivative financial instruments in the normal course
of business to manage its exposure to fluctuations in interest rates.
Those instruments involve, to varying degrees, market risk, as the
instruments are subject to rate and price fluctuations, and elements of
credit risk in the event the counterparty should default. The Company
does not enter into derivative transactions for trading purposes. At
March 31, 2001, the Company had an interest rate swap contract
outstanding with a total notional amount of $50 million, and an interest
rate cap contract outstanding with a total notional amount of $25
million. The notional amounts serve solely as a basis for the
calculation of payments to be exchanged and are not a measure of the
exposure of the Company through the use of derivatives. Under the
interest rate swap contract, the Company agrees to pay a fixed rate of
5.8% and the counterparty agrees to make payments based on 3-month
LIBOR. Under the interest rate cap agreement the counterparty agrees to
make payments to the Company if LIBOR exceeds 7.5%. Both the
interest rate swap contract and interest rate cap contract terminate in
July 2001.

12



---





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.   None.

ITEM 5. OTHER INFORMATION.   None.

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

|    |  |                                                                                                                                                                                                                           
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Reports on Form 8-K                                                                                                                                                                                                       
|   
|   
|   
|   
|   
|    |  | The Registrant filed the following Current Reports on
Form 8-K during the three months ended March 31, 2001:                                                                                                              
|   
|   
|   
|   
|   
|    |  | Current Report on Form 8-K dated January 23, 2001 as filed
with the United States Securities and Exchange Commission
on January 23, 2001 included information regarding the
dismissal of two lawsuits against the Company.



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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.

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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.                                                    
|            
|May 15, 2001 |  | By:   /s/ Patrick L. Beach                                                       
|             |  | Patrick L. Beach
     Chief Executive Officer and
      President                
|            
|May 15, 2001 |  | By:    /s/ W. Ross Martin                                                        
|             |  | W. Ross Martin
       Chief Financial Officer and
       Executive Vice President

14