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


                                    FORM 10-Q

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

                  For the quarterly period ended June 30, 1999

                                       OR

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

                     For the transition period from __ to__

                         Commission file number: 1045281


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

                                    Delaware
         (State or other jurisdiction of incorporation or organization)

                                   38-3368333
                      (IRS Employer Identification Number)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes X No __


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

9,508,108 share of Common Stock, $.01 par value, outstanding as of
August 13, 1999.




                                       1
<PAGE>   2

                          CAPTEC NET LEASE REALTY, INC.
                                AND SUBSIDIARIES

                                    CONTENTS


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 - 13

  Item 3.    Quantitative and Qualitative Disclosures about Market Risk    13

 PART II     OTHER INFORMATION
             Other Information                                           13 - 14

















                                       2
<PAGE>   3
PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                           June 30,    DECEMBER 31,
                                                                            1999          1998
                                                                        ------------   ------------
ASSETS                                                                   (unaudited)

<S>                                                                     <C>            <C>
Cash and cash equivalents                                               $  1,008,360   $  4,488,565

Investments:
   Properties subject to operating leases, net                           219,507,442    221,349,661
   Properties subject to financing leases, net                             4,329,925      3,128,824
   Loans to affiliates, collateralized by mortgage loans                   4,466,588      8,915,523
   Investment in joint venture                                             2,712,000              -
   Investment in affiliated limited partnerships                           4,395,000      4,395,000
   Other loans, related party                                                398,322        405,775
                                                                        ------------   ------------
            Total investments                                            235,809,277    238,194,783

Short-term loans to affiliates                                             6,954,229      2,505,294
Unbilled rent, net                                                         5,013,950      3,710,487
Accounts receivable                                                          184,952        144,642
Due from affiliates                                                          774,080      1,242,675
Other assets                                                               1,568,924      1,724,283
                                                                        ------------   ------------

            Total assets                                                $251,313,772   $252,010,729
                                                                        ============   ============


LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
   Notes payable                                                        $114,550,582   $113,984,988
   Accounts payable and accrued expenses                                     463,509      1,428,041
   Due to affiliates                                                               -         76,513
   Federal income tax payable                                                719,000        719,000
   Security deposits held on leases                                          280,906        194,406
                                                                        ------------   ------------

            Total liabilities                                            116,013,997    116,402,948
                                                                        ------------   ------------


Stockholders' Equity:
   Common stock, ($.01 par value) authorized: 40,000,000
     shares; issued and outstanding: 9,508,108                                95,081         95,081
   Paid in capital                                                       134,711,056    134,711,056
   Retained earnings                                                         493,638        801,644
                                                                        ------------   ------------

            Total stockholders' equity                                   135,299,775    135,607,781
                                                                        ------------   ------------

            Total liabilities and stockholders' equity                  $251,313,772   $252,010,729
                                                                        ============   ============
</TABLE>

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





                                       3
<PAGE>   4


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


<TABLE>
<CAPTION>
                                                            Three Months Ended              Six Months Ended
                                                                June 30,                        June 30,
                                                     ----------------------------    ----------------------------
                                                          1999           1998            1999            1998
                                                     ------------    ------------    ------------    ------------
                                                             (unaudited)                      (unaudited)
<S>                                                  <C>             <C>             <C>             <C>
Revenue:
     Rental income from operating leases             $  6,214,835    $  5,442,628    $ 12,219,913    $ 10,262,098
     Earned income from financing leases                  163,339               -         315,546          47,880
     Interest income on loans to affiliates               311,016         459,914         630,371         937,860
     Other income                                         359,337         510,077         918,328         788,385
                                                     ------------    ------------    ------------    ------------

              Total revenue                             7,048,527       6,412,619      14,084,158      12,036,223
                                                     ------------    ------------    ------------    ------------

Expenses:
     Interest                                           2,243,787       1,344,283       4,483,667       2,414,604
     Management fees, affiliates, net                      (7,515)        287,796         (75,528)        541,111
     General and administrative                           294,130         447,587         725,035         797,952
     Depreciation and amortization                        848,666         687,500       1,682,075       1,348,619
                                                     ------------    ------------    ------------    ------------

              Total expenses                            3,379,068       2,767,166       6,815,249       5,102,286
                                                     ------------    ------------    ------------    ------------

              Net income before loss on sale of
                  properties and accounting change      3,669,459       3,645,453       7,268,909       6,933,937

Loss on sale of properties                                (10,446)       (205,581)        (61,419)       (253,169)
                                                     ------------    ------------    ------------    ------------

              Net income before accounting change       3,659,013       3,439,872       7,207,490       6,680,768

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

              Net Income                             $  3,659,013    $  3,439,872    $  6,870,615    $  6,680,768
                                                     ============    ============    ============    ============

              Basic and Diluted EPS:
                  Income before accounting change    $       0.38    $       0.36    $       0.76    $       0.70
                                                     ============    ============    ============    ============
                  Accounting change                  $          -    $          -    $      (0.04)   $          -
                                                     ============    ============    ============    ============
                  Net Income                         $       0.38    $       0.36    $       0.72    $       0.70
                                                     ============    ============    ============    ============


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

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



                                       4
<PAGE>   5
                 CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                     FOR THE SIX MONTHS ENDED JUNE 30, 1999
                                   (unaudited)

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

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

Net Income                             -               -               -       6,870,615        6,870,615

Common stock dividends                 -               -               -      (7,178,621)      (7,178,621)
                           -------------   -------------   -------------   -------------    -------------

BALANCE, JUNE 30, 1999         9,508,108   $      95,081   $ 134,711,056   $     493,638    $ 135,299,775
                           =============   =============   =============   =============    =============
</TABLE>

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















                                       5
<PAGE>   6

                 CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                        Six Months Ended
                                                                            June 30,
                                                                 ----------------------------
                                                                     1999            1998
                                                                 ------------    ------------
<S>                                                              <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                       $  6,870,615    $  6,680,768
Adjustments to net income:
   Depreciation and amortization                                    1,682,075       1,348,619
   Accounting change                                                  336,875               -
   Amortization of debt issuance costs                                295,977         176,480
   Loss on sale of property                                            61,419         253,169
   Increase in unbilled rent                                       (1,303,463)     (1,045,532)
   Decrease (increase) in accounts receivable and other assets       (178,763)        226,463
   Decrease in accounts payable and accrued expenses                 (964,532)     (1,098,354)
                                                                 ------------    ------------

   Net cash provided by operating activities                        6,800,203       6,541,613
                                                                 ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties subject to operating leases              (6,219,165)    (66,468,325)
Acquisition of properties subject to financing leases, net         (1,153,037)              -
Advances on short-term loans to affiliates                         (4,448,935)     (4,530,359)
Proceeds from the transfer of properties to
  joint venture                                                     3,385,972               -
Proceeds from the disposition of properties                         2,936,896       1,093,613
Collections on loans to affiliates, collateralized by
   mortgage loans                                                   4,448,935       4,530,359
Collection of principal on other loans                                  7,453         712,975
Investment in corporate joint venture                              (2,712,000)              -
Lease security deposits                                                86,500          52,514
                                                                 ------------    ------------

   Net cash used in investing activities                           (3,667,381)    (64,609,223)
                                                                 ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on common stock                                     (7,178,621)     (5,419,622)
Borrowings of notes payable                                           565,594     104,984,988
Debt issuance costs                                                         -      (1,438,954)
Repayments of notes payable                                                 -     (42,746,189)
                                                                 ------------    ------------

   Net cash (used in) provided by financing activities             (6,613,027)     55,380,223
                                                                 ------------    ------------

NET CASH FLOWS                                                     (3,480,205)     (2,687,387)

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

CASH AND CASH EQUIVALENTS, END OF PERIOD                         $  1,008,360    $    840,742
                                                                 ============    ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Cash paid for interest                                        $  4,848,712    $  2,403,133
                                                                 ============    ============
</TABLE>

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






                                       6
<PAGE>   7

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


     1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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

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

         INVESTMENT IN CORPORATE JOINT VENTURE: During 1999 the Company has
         invested in a 22.6% membership interest in FC Venture I, LLC ("FC
         Venture"). The investment is accounted for under the equity method.

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

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

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

     2.  PROPERTIES SUBJECT TO OPERATING LEASES:

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

                                       7
<PAGE>   8

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


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

<TABLE>
<CAPTION>
<S>                                                         <C>
               Land                                         $   82,446,330
               Buildings and improvements                      134,133,488
               Construction draws on properties                  9,178,109
                                                            --------------
                                                               225,757,927
               Less accumulated depreciation                    (6,250,485)
                                                            --------------
               Total                                        $  219,507,442
                                                            ==============
</TABLE>

         The Company periodically invests in properties under construction. All
         construction draws are subject to the terms of standard lease
         agreements with the Company which fully obligates the tenant to the
         long-term lease for all amounts advanced under construction draws. At
         June 30, 1999 the Company had approximately $2.6 million of unfunded
         commitments on properties under construction.

3.       FINANCING LEASES:

         The net investment in financing leases as of June 30, 1999 is comprised
of the following:

<TABLE>
<CAPTION>
<S>                                                                <C>
         Minimum lease payments to be received                     $ 10,432,037
         Estimated residual value                                             -
                                                                   ------------
                Gross investment in financing leases                 10,432,037
         Unearned income                                             (6,102,112)
                Net investment in financing leases                 $  4,329,925
                                                                   ============
</TABLE>

     4.  NOTES PAYABLE:

         The Company's credit facility, as amended (the "Credit Facility"),
         provides up to $125 million for the acquisition of properties and
         working capital. The Credit Facility has a three year term and is
         subject to certain borrowing base restrictions. The Company had
         approximately $114.6 million of aggregate outstanding borrowings under
         the Credit Facility at June 30, 1999.

    5.   EARNINGS PER SHARE:

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

     6.  RELATED PARTY TRANSACTIONS:

         The Company is party to an Advisory Agreement with Captec Net Lease
         Realty Advisors, Inc. ("Captec Advisors") an affiliate, whereby the
         Company pays to Captec Advisors a management fee. In December 1998 the
         Advisory Agreement was amended to reduce the management fee to Captec
         Advisors by the amount of acquisition and other fees paid directly to
         Captec Advisors as a result of acquisitions made by affiliates of the
         Company (which acquisition fees were previously paid to the Company).
         During the six months ended June 30, 1999 the Company incurred
         approximately $605,000 in management fees prior to reductions. Captec
         Advisors earned approximately $680,000 of fees resulting in an equal
         reduction in the management fee paid by the Company to Captec Advisors.


                                       8
<PAGE>   9

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


     7.  SUBSEQUENT EVENTS:

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


























                                       9
<PAGE>   10

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


         OVERVIEW

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

         As of June 30, 1999, the Company owned 160 properties, located in 30
         states, subject to long-term net Leases with 55 different lessors (the
         "Lessees") under major restaurant and retail concepts including
         Bennigan's, Applebee's, Denny's, Best Buy, Athlete's Foot, Blockbuster
         Video, and Office Depot.


         RESULTS OF OPERATIONS

         THREE MONTHS ENDED JUNE 30, 1999. During the three months ended June
         30, 1999 (the "Quarter") total revenue increased 10% to $7.0 million as
         compared to $6.4 million for the three months ended June 30, 1998 (the
         "1998 Quarter"). Rental revenue from operating leases for the Quarter
         increased 14% to 6.2 million as compared to $5.4 million for the 1998
         Quarter primarily from the benefit of a full period of rental revenue
         from properties acquired and leased in preceeding periods, offset by
         the elimination of rental revenues related to vacant properties. Earned
         income from financing Leases for the Quarter increased to $163,000 as
         compared to $0 for the 1998 Quarter as a result of the addition of
         four financing leases that began lease payments on January 1, 1999.
         Interest income on loans to affiliates decreased 32% to $311,000 for
         the Quarter as compared to $459,000 for the 1998 Quarter as a result of
         principal payments received on loans to affiliates in preceeding
         periods. Interest and other income decreased 30% to $359,000 for the
         Quarter as compared to $510,000 for the 1998 Quarter primarily due to
         offsetting reductions in management fees paid to Captec Advisors (see
         Note 6 of the Financial Statements).

         Interest expense for the Quarter increased 67% to $2.2 million as
         compared to $1.3 million for the 1998 Quarter. The increase was
         principally due to the increased borrowings under the Credit Facility
         used to fund the acquisition and development of properties. General and
         administrative expenses, including management fees to affiliates,
         decreased 61% to $287,000 for the Quarter as compared to $735,000 for
         the 1998 Quarter primarily due to offsetting reductions in management
         fees to affiliates due to acquisitions and other fees earned by Captec
         Advisors (see Note 6 of the Financial Statements). Depreciation and
         amortization increased 23% to $849,000 for the Quarter as compared to
         $688,000 for the 1998 Quarter, primarily due to the continued
         acquisition of net leased properties and the effect of a full period of
         depreciation of properties acquired and leased in preceeding periods.

         The Company sold two properties during the Quarter, collecting gross
         proceeds of $2.5 million and reflecting a loss of $10,000 on the sale
         of these properties.

         As result of the foregoing, the Company's net income increased 6% to $
         3.7 million for the Quarter as compared to $3.4 million for the 1998
         Quarter.

         SIX MONTHS ENDED JUNE 30, 1999. During the six months ended June 30,
         1999 total revenue increased 17% to $14.1 million as compared to $12.0
         million for the six months ended June 30, 1998. Rental revenue from
         operating leases for the six months ended 1999 increased 19% to 12.2
         million as compared to $10.2 million for the six months ended 1998
         primarily from the benefit of a full period of rental revenue from
         properties acquired and leased in preceeding periods, offset by the
         elimination of rental revenues related to vacant properties. Earned
         income from financing leases for the six months ended 1999 increased to
         $316,000 as compared to $48,000 for the six months

                                       10
<PAGE>   11

         ended 1998 as a result of the addition of four financing leases that
         began lease payments on January 1, 1999. Interest income on loans to
         affiliates decreased 33% to $630,000 for 1999 as compared to $938,000
         for 1998 as a result of principal payments received on loans to
         affiliates in preceeding periods. Interest and other income increased
         16% to $918,000 for the six months ended 1999 as compared to $788,000
         for the six months ended 1998 primarily due to fee income earned from
         affiliates.

         Interest expense for the six months ended 1999 increased 86% to $4.5
         million as compared to $2.4 million for the six months ended 1998. The
         increase was principally due to the increased borrowings under the
         Company's Credit Facility used to fund the acquisition and development
         of properties. General and administrative expenses, including
         management fees to affiliates, decreased 49% to $650,000 for the six
         months ended 1999 as compared to $1.3 million for the six months ended
         1998 primarily due to offsetting reductions in management fees to
         affiliates due to acquisitions and other fees earned by Captec Advisors
         (see Note 6 of the Financial Statements). Depreciation and amortization
         increased 25% to $1.7 million for the six months ended 1999 as compared
         to $1.3 million for the six months ended 1998, primarily due to the
         continued acquisition of net leased properties and the effect of a full
         period of depreciation of properties acquired and leased in the
         preceeding periods.

         The Company sold three properties during the six months ended 1999,
         collecting gross proceeds of $2.9 million and reflecting a loss of
         $61,000 on the sale of these properties.

         As result of the foregoing, the Company's net income before accounting
         change increased 8% to $7.2 million for the six months ended 1999 as
         compared to $6.7 million for the six months ended 1998.

         In April 1998, the Accounting Standards Executive Committee issued
         Statement of Position 98-5, "Reporting on the Costs of Start-Up
         Activities". This statement requires start-up activities and
         organization costs to be expensed as incurred. In accordance with the
         provisions of the statement, the Company has recorded a $336,875
         non-cash charge during the three months ended March 31, 1999 for the
         balance of unamortized organization costs which resulted in net income
         for the six months ended 1999 of $6.9 million.

         LIQUIDITY AND CAPITAL RESOURCES

         The Company's principal use of funds is for property development and
         acquisition, payment of interest on its outstanding indebtedness, and
         payment of operating expenses and dividends. The Company anticipates
         that cash flows from operating activities will continue to provide
         adequate capital for interest expense, operating expenses and dividend
         payments in accordance with REIT requirements. Property acquisition and
         development has been typically funded out of proceeds from borrowings
         available under the Credit Facility. The Company expects to obtain the
         necessary capital to achieve continued growth (principally property
         development and acquisition) through cash on hand, borrowings available
         under the Credit Facility, as well as other debt and equity
         alternatives, including joint venture capital.

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

         At June 30, 1999 the Company had cash and cash equivalents of $1.0
         million. For the six months ended June 30, 1999 the Company generated
         cash from operations of $6.8 million as compared to $6.5 million for
         the same period in 1998. Cash generated from operations provides funds
         for interest expense, operating expenses and distributions to
         shareholders in the form of quarterly dividends. Any excess cash from
         operations may also be used for investment in properties.

         CREDIT FACILITY. In February 1998, the Company entered into the Credit
         Facility, which is used to provide funds for the acquisition and
         development of properties and working capital, and repaid all amounts
         outstanding


                                       11
<PAGE>   12

         under a prior credit facility. On December 1, 1998 the Credit Facility
         was amended to provide up to $125 million of debt which is secured by
         the Company's properties. At June 30, 1999 the Company had $114.6
         million of aggregate outstanding borrowings under the Credit Facility.

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

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

         JOINT VENTURE. In April 1999, the Company , through a wholly-owned
         subsidiary, formed a joint venture with an affiliate of Fidelity
         Management Trust Company ("Fidelity"). The joint venture was formed to
         acquire and develop net-leased restaurant and retail properties similar
         to those which the Company acquires and develops. The Company and
         Fidelity have committed to provide $7 million and $24 million,
         respectively, in equity capital for the joint venture. The joint
         venture's objective is to leverage its capital through borrowing to
         acquire and develop up to $100 million in properties. At June 30, 1999
         the Company had contributed $2.7 million in equity capital.

         PROPERTY ACQUISITIONS AND COMMITMENTS. During the six months ended June
         30, 1999 the Company invested $7.4 million to acquire and develop its
         properties and transferred to the joint venture as part of the initial
         capital contribution two properties with costs of $3.4 million. As of
         June 30, 1999, the Company had entered into commitments to acquire or
         develop 74 properties totaling $160 million. The commitments are
         subject to various conditions to closing which are described in the
         contracts or letters of intent relating to these properties. In
         addition, in the ordinary course of business the Company is in
         negotiations regarding the proposed acquisition of other properties and
         related co-development opportunities. The Company may enter into
         commitments to acquire or develop some of these prospective properties
         in the future. The Company expects to finance its acquisition and
         development commitments through cash on hand, borrowings under the
         Credit Facility as well as other debt and equity alternatives,
         including joint venture capital.

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

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

         YEAR 2000

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

         The Company predominantly uses standard application software supported
         by third party vendors. Information has been obtained from key
         third-party financial software vendors that comprise the core business
         applications


                                       12
<PAGE>   13

         indicating the core software systems are currently Year 2000 compliant.

         The Company is in the process of obtaining Year 2000 compliance updates
         from its key business partners, such as financial institutions and
         Lessees, to assess their Year 2000 readiness. Upon completion of the
         assessment process, a strategy on how to address each partner will be
         developed based on the relative importance of each relationship.
         Documentation regarding the state of readiness of business partners
         will be compiled as the assessment progresses.

         The Company's major software applications are currently Year 2000
         compliant, and the core computing infrastructure including personal
         computers and network server hardware and software are all compliant.
         Therefore, the Company does not anticipate the total cost of Year 2000
         compliance will have a material adverse effect on the Company's
         business or results of operations. The Company has incurred minimal
         costs to date related to Year 2000 compliance.

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


         ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not Applicable.


                                       PART II - OTHER INFORMATION


         ITEM 1. LEGAL PROCEEDINGS.   None.


         ITEM 2. CHANGES IN SECURITIES.   None.


         ITEM 3. DEFAULTS UPON SENIOR SECURITIES.   None.


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

         The Company held its annual meeting of shareholders (the "Meeting") on
         June 3, 1999. The Company's shareholders elected Patrick L. Beach, W.
         Ross Martin, H. Reid Sherard, Richard J. Peters, Creed L. Ford, III,
         William H. Krul, II, Lee C. Howley, Albert T. Adams and William J.
         Chadwick (collectively, the "Nominees") to the Company's Board of
         Directors. The following lists the number of shares of Common Stock
         voted for and withheld from each of the Nominees.

<TABLE>
<CAPTION>
                                                                       VOTES
                     NOMINEES                 VOTES FOR              WITHHELD

<S>                                           <C>                     <C>
                 Patrick L. Beach             8,464,159               50,067
                 W. Ross Martin               8,464,159               50,067
                 H. Reid Sherard              8,464,159               50,067
                 Richard J. Peters            8,464,159               50,067
                 Creed L. Ford, II            8,464,159               50,067
                 William H. Krul, II          8,464,159               50,067
                 Lee C. Howley                8,464,159               50,067
                 Albert T. Adams              8,464,159               50,067
                 William J. Chadwick          8,464,159               50,067
</TABLE>




                                       13
<PAGE>   14


         ITEM 5. OTHER INFORMATION.   None.


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


                 (a)  Exhibits

                      Exhibit  10.14            FC Venture I, LLC Limited
                                                Liability Company Agreement*

                      Exhibit  27.1             Financial Data Schedule.


                 (b) Reports on Form 8-K

                      The Registrant filed the following Current Reports on Form
                      8-K during the three months ended June 30, 1999:

                      Current Report on Form 8-K dated April 12, 1999 included
                      information regarding the formation of a joint venture, FC
                      Venture I, LLC, with an affiliate of Fidelity Management
                      Trust Company.

                 ---------------

                 *  Incorporated by reference from the Company's Current Report
                    on Form 8-K filed with the Commission on April 22, 1999.

                           FORWARD LOOKING STATEMENTS

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



                                       14
<PAGE>   15

                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
         the registrant has duly caused this report to be signed on its behalf
         by the undersigned thereunto duly authorized.

                                                 CAPTEC NET LEASE REALTY, INC.

         August 13, 1999                         By: /s/ Patrick L. Beach
                                                     ---------------------
                                                     Patrick L. Beach
                                                     Chief Executive
                                                     Officer and President

         August 13, 1999                         By: /s/ W. Ross Martin
                                                     ---------------------
                                                     W. Ross Martin
                                                     Chief Financial
                                                     Officer and Executive
                                                     Vice President























                                       15
<PAGE>   16

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



Exhibit No.                           Description
-----------                           -----------

   10.14                            FC Venture I, LLC Limited Liability Company
                                    Agreement*

    27.1                            Financial Data Schedule


-----------

* Incorporated by reference from the Company's Current Report on Form 8-K filed
  with the Commission on April 22, 1999.