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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-QSB
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 33-77510-C
 CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
  (State or other jurisdiction of incorporation or organization)
 (IRS Employer Identification Number)
 th   (Address of principal executive offices, including zip code)
 (Issuers telephone number)
 (Former name, former address and former fiscal year, if changed since last year)
 þ o
 o o
 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
 Not applicable
 APPLICABLE ONLY TO CORPORATE ISSUERS
 Not applicable
 o þ




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##### 



CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
 Index to Form 10-QSB
 Item No.

    
    
    
    PagePART I

    
    FINANCIAL INFORMATIONItem 1.

    
    Financial Statements:Balance Sheets, September 30, 2006 and December 31, 2005
    
    
    3Statements of Discontinued Operations for the three and nine months ended September 30, 2006 and 2005
    
    
    4Statement of Changes in Partners Capital for the nine months ended September 30, 2006
    
    
    5Statements of Cash Flows for the nine months ended September 30, 2006 and 2005
    
    
    6Notes to Financial Statements
    
    
    7  9Item 2.

    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9 - 12Item 3.

    
    Controls and Procedures
    
    
    12 - 13PART II

    
    OTHER INFORMATIONOther Information
    
    
    14SIGNATURES

    
    
    
    
    15CERTIFICATION

    
    Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
    
    
    16 - 18Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 302Certification Pursuant to 18 U.S.C. Section 1350
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##### Table of Contents



CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
 
 PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 Captec Franchise Capital Partners L.P. III
 
 Balance Sheets
 September 30,
    
    
    December 31,2006
    
    
    2005(unaudited)AssetsCash and cash equivalents
    
    $
    521,706
    
    
    $
    935,510Assets Held for Sale:Operating leases, net
    
    
    844,469
    
    
    
    1,948,256Unbilled rent, net
    
    
    
    
    
    
    121,650Due from related parties
    
    
    151
    
    
    
    151Total assets
    
    $
    1,366,326
    
    
    $
    3,005,567Liabilities and Partners CapitalLiabilities:Accounts payable and accrued expenses
    
    $
    70,373
    
    
    $
    57,626Due to Affiliates
    
    
    2,890
    
    
    
    145,371Total liabilities
    
    
    73,263
    
    
    
    202,997Partners capital:Limited partners capital accounts
    
    
    1,263,385
    
    
    
    2,772,309General partners capital account
    
    
    29,678
    
    
    
    30,261Total partners capital
    
    
    1,293,063
    
    
    
    2,802,570Total liabilities and partners capital
    
    $
    1,366,326
    
    
    $
    3,005,567
 The accompanying notes are an integral part of the financial statements.
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Captec Franchise Capital Partners L.P. III
 
 Statements of Discontinued Operations
  Three months
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating revenue:Rental income
    
    $
    33,075
    
    
    $
    91,599
    
    
    $
    99,225
    
    
    $
    864,734Finance income
    
    
    
    
    
    
    1,259
    
    
    
    
    
    
    
    7,827Total operating revenue
    
    
    33,075
    
    
    
    92,858
    
    
    
    99,225
    
    
    
    872,561Operating costs and expenses:Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    232,123Depreciation
    
    
    5,531
    
    
    
    
    
    
    
    16,591
    
    
    
    Provision for impaired operating lease
    
    
    
    
    
    
    
    
    
    
    34,978
    
    
    
    General and administrative
    
    
    33,584
    
    
    
    44,578
    
    
    
    146,934
    
    
    
    154,855Total operating costs and expenses
    
    
    39,115
    
    
    
    44,578
    
    
    
    198,503
    
    
    
    386,978Income (loss) from discontinued operations before other income
    
    
    (6,040
    )
    
    
    48,280
    
    
    
    (99,278
    )
    
    
    485,583Other income (expense):Loss on sale of equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (581
    )Debt Retirement costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (905,118
    )Gain on sale of assets
    
    
    
    
    
    
    526,332
    
    
    
    428,852
    
    
    
    4,957,450Interest and other income
    
    
    6,694
    
    
    
    52,095
    
    
    
    40,989
    
    
    
    53,553Total other income
    
    
    6,694
    
    
    
    578,427
    
    
    
    469,841
    
    
    
    4,105,304Net income from discontinued operations
    
    $
    654
    
    
    $
    626,707
    
    
    $
    370,563
    
    
    $
    4,590,887Net income (loss) from discontinued operations allocable to general partner
    
    $
    7
    
    
    $
    1,004
    
    
    $
    (583
    )
    
    $
    5,386Net income from discontinued operations allocable to limited partners
    
    $
    647
    
    
    $
    625,703
    
    
    $
    371,146
    
    
    $
    4,585,501Net income from discontinued operations per limited partnership unit
    
    $
    0.03
    
    
    $
    31.87
    
    
    $
    18.90
    
    
    $
    233.56Weighted average number of limited partnership
units outstanding
    
    
    19,633
    
    
    
    19,633
    
    
    
    19,633
    
    
    
    19,633
 The accompanying notes are an integral part of the financial statements.
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Captec Franchise Capital Partners L.P. III
 
 Statement of Changes in Partners Capital
   Limited
    
    
    Limited
    
    
    General
    
    
    TotalPartners
    
    
    Partners
    
    
    Partners
    
    
    PartnersUnits
    
    
    Accounts
    
    
    Account
    
    
    CapitalBalance, December 31, 2005
    
    
    19,633
    
    
    $
    2,772,309
    
    
    $
    30,261
    
    
    $
    2,802,570Distributions  ($95.76 per weighted average limited partnership unit)
    
    
    
    
    
    
    (1,880,070
    )
    
    
    
    
    
    
    (1,880,070
    )Net income (loss) from discontinued operations
    
    
    
    
    
    
    371,146
    
    
    
    (583
    )
    
    
    370,563Balance, September 30, 2006
    
    
    19,633
    
    
    $
    1,263,385
    
    
    $
    29,678
    
    
    $
    1,293,063
 The accompanying notes are an integral part of the financial statements.
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Captec Franchise Capital Partners L.P. III
 
 Statements of Cash Flows
   2006
    
    
    2005Cash flows from operating activities:Net income from discontinued operations
    
    $
    370,563
    
    
    $
    4,590,887Adjustments to net income:Depreciation
    
    
    16,591
    
    
    
    Amortization of debt issuance costs
    
    
    
    
    
    
    19,912Loss on sale of equipment
    
    
    
    
    
    
    581Provision for impaired operating lease
    
    
    34,978
    
    
    
    Gain on sale of real estate
    
    
    (428,852
    )
    
    
    (4,957,450
    )Loss on investments in financing leases
    
    
    
    
    
    
    17,515Decrease (increase) in unbilled rent
    
    
    770
    
    
    
    (24,791
    )Decrease in accounts receivable
    
    
    
    
    
    
    4,228Increase (decrease) in accounts payable and accrued expenses
    
    
    12,747
    
    
    
    (53,349
    )Decrease in restricted cash
    
    
    
    
    
    
    664,680Decrease in due to related parties
    
    
    (142,481
    )
    
    
    Net cash (used in) provided by operating activities
    
    
    (135,684
    )
    
    
    262,213Cash flows from investing activities:Net proceeds from sale of real estate
    
    
    1,601,950
    
    
    
    16,993,471Net proceeds from sale of equipment
    
    
    
    
    
    
    101,812Principal payments on financing leases
    
    
    
    
    
    
    99,263Net cash provided by investing activities
    
    
    1,601,950
    
    
    
    17,194,546Cash flows from financing activities:Repayments of notes payable
    
    
    
    
    
    
    (5,548,515
    )Distributions to limited partners
    
    
    (1,880,070
    )
    
    
    (10,514,965
    )Net cash used in financing activities
    
    
    (1,880,070
    )
    
    
    (16,063,480
    )Net (decrease) increase in cash and cash equivalents
    
    
    (413,804
    )
    
    
    1,393,279Cash and cash equivalents, beginning of period
    
    
    935,510
    
    
    
    1,556,320Cash and cash equivalents, end of period
    
    $
    521,706
    
    
    $
    2,949,599
 The accompanying notes are an integral part of the financial statements.
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
 
 NOTES TO FINANCIAL STATEMENTS
 1.
    
    THE PARTNERSHIP AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES:
        7




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2.
    
    LAND AND BUILDING SUBJECT TO OPERATING LEASES:
  September 30, 2006
    
    
    December 31, 2005Land
    
    $
    217,665
    
    
    $
    721,665Building and improvements
    
    
    849,857
    
    
    
    1,580,9851,067,522
    
    
    
    2,302,650Less accumulated depreciation
    
    
    (223,053
    )
    
    
    (354,394
    )Total
    
    $
    844,469
    
    
    $
    1,948,256
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3.
    
    NOTES PAYABLE:
     
 ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  9




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RESULTS OF OPERATIONS
 Three Months Ended September 30, 2006
     Nine months ended September 30, 2006
  10




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LIQUIDITY AND CAPITAL COMMITMENTS
   11




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ITEM 3. Controls and Procedures
  12




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PART II  OTHER INFORMATION
 ITEM 1.
    
    LEGAL PROCEEDINGS.None.ITEM 2.
    
    CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY 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.NoneITEM 6.
    
    EXHIBITSThe following exhibits are included herein or incorporated by reference:
 Number
    
    Exhibit2
    
    Plan of Liquidation and Dissolution (Incorporated by reference to the
Registrants Definitive Proxy Statement on Schedule 14A, filed on September 21, 2004)4
    
    Amended Agreement of Limited Partnership of Registrant. (Incorporated by
reference to the corresponding exhibit in the Registrants Form 10-KSB for the year
ended December 31, 1998)10.1
    
    Promissory Note dated November 28, 1998 between Registrant and National
Realty Funding L.C. (Incorporated by reference to the corresponding exhibit in the
Registrants Form 10-KSB for the year ended December 31, 1998)10.2
    
    Promissory Note dated March 31, 1999 between Registrant and National Realty
Funding L.C. (Incorporated by reference to the corresponding exhibit in the
Registrants Form 10-QSB for the quarter ended March 31, 1999)31
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
  By:
    
    Captec Franchise Capital Partners L.P. IIIGP3 Asset Acquisition, LLCIts ManagerBy:
    
    /s/ Patrick L. BeachPatrick L. BeachPresidentDate:
    
    November 13, 2006
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EXHIBIT INDEX
 Number
    
    Exhibit31
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 16