<PAGE>   1
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549


                                  FORM 10-QSB


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

For the quarterly period ended June 30, 1997
----------------------------------------------  -------------------

[    ]     TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE
               EXCHANGE ACT

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

Commission file number  33-77510-C
                                   ----------------------  -------------------


                 CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
       (Exact name of small business issuer as specified in its charter)


           Delaware                           38-3160141
           ---------------------------------  ----------------------
           (State or other jurisdiction       (IRS Employer
           of incorporation or organization)  Identification Number)


                24 Frank Lloyd Wright Drive, Lobby L, 4th Floor
                P.O. Box 544, Ann Arbor, Michigan  48106-0544
                    (Address of principal executive offices)
                               (313)  994-5505
                          (Issuer's telephone number)

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

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

               APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court.  Yes      No     .
                                                ------  -----

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:   Not Applicable

Transitional Small Business Disclosure Format (check one)    Yes      No   X
                                                                ------  -------
<PAGE>   2


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

                              INDEX TO FORM 10-QSB



<TABLE>
<CAPTION>
PART I     FINANCIAL INFORMATION                                               Page
<S>                                                                            <C>
Item 1.    Financial Statements                                                 1

           Balance Sheet, June 30, 1997                                         2

           Statement of Operations for the three month periods
           ended June 30, 1997 and 1996                                         3

           Statement of Operations for the six month periods
           ended June 30, 1997 and 1996                                         4

           Statement of Cash Flows for the six month periods
           ended June 30, 1997 and 1996                                         5

           Notes to Financial Statements                                        6

Item 2.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                            11


PART II    OTHER INFORMATION

Item 1.    Legal Proceedings                                                     14

Item 2.    Changes in Securities                                                 14

Item 3.    Defaults Upon Senior Securities                                       14

Item 4.    Submission of Matters to a Vote of Security Holders                   14

Item 5.    Other Information                                                     14

Item 6.    Exhibits and Reports on Form 8-K                                      14


SIGNATURES                                                                       15

</TABLE>


                                       i



<PAGE>   3


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                         PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

     The balance sheet of Captec Franchise Capital Partners L.P. III (the
"Partnership") as of June 30, 1997 and the statements of operations and cash
flows for the periods ending June 30, 1997 and 1996 are unaudited and have not
been examined by independent public accountants.  In the opinion of the
Management, these unaudited financial statements contain all adjustments
necessary to present fairly the financial position and results of operations
and cash flows of the Partnership for the periods then ended.  All such
adjustments are of a normal and recurring nature.

     These financial statements should be read in conjunction with the audited
financial statements and accompanying notes thereto included in the
Partnership's report on Form 10-KSB for the fiscal year ended December 31,
1996.

     When used in this discussion, the words, "intends", "anticipates",
"expects", and similar expressions are intended to identify forward-looking
statements.  Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from those projected.
Such risks and uncertainties include the following: (I)  a tenant may default
in making rent payments, (ii) a fire or other casualty may interrupt the cash
flow stream from a property, (iii) the properties may not be able to be leased
at the assumed rental rates, (iv) unexpected expenses may be incurred in the
ownership of the properties, and (v) properties may not be able to be sold at
the presently anticipated prices and times.

     As a result of these and other factors, the Partnership may experience
material fluctuations in future operating results on a quarterly or annual
basis, which could materially and adversely affect its business, financial
condition and operating results.  These forward-looking statements speak only
as of the date hereof.  The Partnership undertakes no obligation to publicly
release the results of any revisions to these forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.

                                       1



<PAGE>   4


                 Captec Franchise Capital Partners L.P. III
                                Balance Sheet
                                June 30, 1997
                                 (Unaudited)


<TABLE>
<CAPTION>

                                   Assets
<S>                                                       <C>
Cash                                                      $   252,853
Investment in property under leases:
   Operating leases, net                                   14,557,320
   Financing leases, net                                    2,697,900
Accounts receivable                                               114
Unbilled rent                                                 294,384
Due from related parties                                       10,189
                                                          -----------
Total assets                                              $17,812,760
                                                          ===========

                        Liabilities & Partners' Capital

Liabilities:
   Accounts payable                                       $     5,881
   Due to related parties                                     470,911
   Security deposits held on leases                            59,329
                                                          -----------

Total liabilities                                             536,121
                                                          -----------

Partners' Capital:
Limited partners' capital accounts                         17,251,313
General partners' capital accounts                             25,326
                                                          -----------

Total partners' capital                                    17,276,639
                                                          -----------

Total liabilities & partners' capital                     $17,812,760
                                                          ===========
</TABLE>



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



                                      2
<PAGE>   5

                   Captec Franchise Capital Partners L.P. III
                            Statement of Operations
            for the three month periods ended June 30, 1997 and 1996
                                  (Unaudited)


<TABLE>
<CAPTION>
                                                     1997        1996

<S>                                              <C>         <C>
Operating revenue:
   Rental income                                 $429,622    $216,890
   Finance income                                  86,311      89,732
                                                 --------    --------
          Total operating revenue                 515,933     306,622
                                                 --------    --------

Operating costs and expenses:
   Depreciation                                    52,357      63,750
   General and administrative                      17,615      17,111
                                                 --------    --------

          Total operating costs and expenses       69,972      80,861
                                                 --------    --------

          Income from operations                  445,961     225,761
                                                 --------    --------

Other income (expense):
   Interest income                                 29,903      33,295
   Interest expense                                (5,631)          0
   Other                                              128          96
                                                 --------    --------

          Total other income, net                  24,400      33,391
                                                 --------    --------

Net income                                        470,361     259,152

Net income allocable to general partners            4,704       2,592
                                                 --------    --------

Net income allocable to limited partners         $465,657    $256,560
                                                 ========    ========
Net income per limited partnership unit          $  23.28    $  18.67
                                                 ========    ========

Weighted average number of limited partnership
   units outstanding                               20,000      13,744
                                                 ========    ========
</TABLE>



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


                                      3
<PAGE>   6

                   Captec Franchise Capital Partners L.P. III
                            Statement of Operations
             for the six month periods ended June 30, 1997 and 1996
                                  (Unaudited)


<TABLE>
<CAPTION>
                                                     1997        1996

<S>                                              <C>         <C>
Operating revenue:
   Rental income                                 $822,737    $335,107
   Finance income                                 170,803     162,665
                                                 --------    --------
          Total operating revenue                 993,540     497,772
                                                 --------    --------

Operating costs and expenses:
   Depreciation                                   101,188      85,344
   General and administrative                      63,124      31,910
                                                 --------    --------

          Total operating costs and expenses      164,312     117,254
                                                 --------    --------

          Income from operations                  829,228     380,518
                                                 --------    --------

Other income (expense):
   Interest income                                 58,573      52,449
   Interest expense                                (5,712)          0
   Other                                              440       1,003
                                                 --------    --------

          Total other income, net                  53,301      53,452
                                                 --------    --------

Net income                                        882,529     433,970

Net income allocable to general partners            8,825       4,340
                                                 --------    --------

Net income allocable to limited partners         $873,704    $429,630
                                                 ========    ========

Net income per limited partnership unit          $  43.69    $  37.40
                                                 ========    ========

Weighted average number of limited partnership
   units outstanding                               20,000      11,486
                                                 ========    ========
</TABLE>



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






                                      4
<PAGE>   7

                   Captec Franchise Capital Partners L.P. III
                            Statement of Cash Flows
             for the six month periods ended June 30, 1997 and 1996
                                  (Unaudited)


<TABLE>
<CAPTION>
                                                    1997        1996

<S>                                              <C>         <C>
Cash flows from operating activities:
   Net Income                                    $882,529    $433,970
   Adjustments to net income:
        Depreciation                              101,188      85,345
        Increase in unbilled rent                 (83,711)    (66,275)
        Decrease (increase) in receivables          1,845     (11,834)
        Increase (decrease) in payables           (42,887)    478,588
        Security deposits received                 (6,624)     24,854
                                                 --------  ----------
Net cash provided by operating activities         852,340     944,648
                                                 --------  ----------

Cash flows from investing activities:
   Purchase of real estate for operating lease (1,865,965) (4,008,569)
   Reduction of construction loan draws           939,778           0
   Purchase of equipment for financing leases           0    (958,288)
   Reduction of net investment in financing le    207,851     129,644
                                                 --------  ----------

Net cash used in investing activities            (718,336) (4,837,213)
                                                 --------  ----------

Cash flows from financing activities:
   Decrease in due from related parties            10,400           0
   Increase in due to related parties             463,183           0
   Issuance of limited partnership units                0   9,110,562
   Offering costs                                       0  (1,168,083)
   Distributions to limited partners           (1,044,909)   (486,325)
                                                ---------  ----------

Net cash provided by financing activities        (571,326)  7,456,154
                                                 --------  ----------

Net increase in cash                             (437,322)  3,563,589

Cash, beginning of period                         690,175   1,283,655
                                                 --------  ----------

Cash, end of period                              $252,853  $4,847,244
                                                 ========  ==========
</TABLE>



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



                                      5

<PAGE>   8


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                         NOTES TO FINANCIAL STATEMENTS


1.   THE PARTNERSHIP AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES:

    Captec Franchise Capital Partners L.P. III (the "Partnership"), a Delaware
    limited partnership, was formed on February 18, 1994 for the purpose of
    acquiring income-producing commercial real properties and equipment leased
    on a "triple net" basis, primarily to operators of national and regional
    franchised businesses.  The general partners of the Partnership are Captec
    Franchise Capital Corporation III (the "Corporation"), a wholly owned
    subsidiary of Captec Financial Group, Inc. ("Captec"), and Patrick L.
    Beach, an individual, hereinafter collectively referred to as the Sponsor.
    Patrick L. Beach is also the Chairman of the Board of Directors, President
    and Chief Executive Officer of the Corporation and Captec.  The general
    partners have each contributed $100 in cash to the Partnership as a capital
    contribution.

    The Partnership commenced a public offering of limited partnership
    interests ("Units") on August 12, 1994.  A minimum of 1,150 Units and a
    maximum of 20,000 Units, priced at $1,000 per Unit, were offered on a "best
    efforts, part or none" basis.  The Partnership broke impound on January 24,
    1995, at which time funds totaling $1,155,255 were released from escrow and
    the Partnership immediately commenced operations.  At June 30, 1997, the
    Partnership had accepted subscriptions for the entire 20,000 Units, and
    funds totaling $20,000,000.

    Allocation of profits, losses and cash distributions from operations and
    cash distributions from sale or refinancing are made pursuant to the terms
    of the Partnership Agreement.  Profits and losses from operations are
    allocated among the limited partners based upon the number of Units owned.
    In no event will the Sponsor be allocated less than one percent of profits
    and losses in any year.

    Following is a summary of the Partnership's significant accounting
    policies:

    a.   RENTAL INCOME FROM OPERATING LEASES:   The Partnership's
         operating leases have scheduled rent increases which occur at various
         dates throughout the lease terms.  The Partnership recognizes the
         total rent, as stipulated by the lease agreement, as income on a
         straight-line basis over the term of each lease.  To the extent rental
         income on the straight-line basis exceeds rents billable per the lease
         agreement, an amount is recorded as unbilled rent.

    b.   LAND AND BUILDING ON OPERATING LEASES:   Land and buildings
         subject to operating leases are stated at cost less accumulated
         depreciation.  Buildings are depreciated on the straight-line method
         over their estimated useful lives (40 years).



                                       6



<PAGE>   9


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                         NOTES TO FINANCIAL STATEMENTS


1.   THE PARTNERSHIP AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES, CONTINUED:

    c.   NET INVESTMENT IN FINANCING LEASES:   Leases classified as
         financing leases are stated as the sum of the minimum lease payments
         plus the unguaranteed residual value accruing to the benefit of the
         lessor, less unearned income.  Unearned income is amortized to income
         over the lease term so as to produce a constant periodic rate of
         return on the net investment in the lease.

    d.   NET INCOME PER LIMITED PARTNERSHIP INTEREST:   Net income per
         limited partnership interest is calculated using the weighted average
         number of limited partnership units outstanding during the period and
         the limited partners' allocable share of the net income.

    e.   INCOME TAXES:   No provision for income taxes is included in the
         accompanying financial statements, as the Partnership's results of
         operations are passed through to the partners for inclusion in their
         respective income tax returns.

    f.   ESTIMATES:   The preparation of financial statements in
         conformity with generally accepted accounting principles requires
         management to make estimates and assumptions that affect the reported
         amounts of assets and liabilities and disclosure of contingent assets
         and liabilities at the date of the financial statements and the
         reported amounts of revenues and expenses during the reporting period.
         Actual results could differ from those estimates.


2.   DISTRIBUTIONS:

    Cash flows of the Partnership are allocated ninety-nine percent (99%) to
    the limited partners and one percent (1%) to the Sponsor, except that the
    Sponsor's share is subordinated to a ten percent (10%) preferred return to
    the limited partners.  Net sale or refinancing proceeds of the Partnership
    will be allocated ninety percent (90%) to the limited partners and ten
    percent (10%) to the Sponsor, except that the Sponsor's share will be
    subordinated to a eleven percent (11%) preferred return plus return of the
    original contributions to the limited partners.

    The Partnership distributed approximately $542,000 during the three month
    period ended June 30, 1997, representing quarterly distributions of cash
    flow from operations for the quarter ended March 31, 1997 and elective
    monthly distributions for the current quarter.



                                       7



<PAGE>   10


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                         NOTES TO FINANCIAL STATEMENTS


3.   RELATED PARTY TRANSACTIONS AND AGREEMENTS:

    Organization and offering expenses, excluding selling commissions, were
    initially paid by the General Partners and/or their Affiliates and were
    reimbursed by the Partnership in an amount equal to up to three percent
    (3%) of the gross proceeds of the offering (less any amounts paid directly
    by the Partnership).  In addition, the Sponsors and/or their affiliates
    were  paid a non-accountable expense allowance by the Partnership in an
    amount equal to two percent (2%) of the gross proceeds of the offering.
    There were no organizational and offering costs paid during the three month
    period ended June 30, 1997.

    The Partnership also paid to Participating Dealers, including affiliates of
    the general partners, selling commissions in an amount equal to eight
    percent (8%) of the purchase price of all Units placed by them directly.
    There were no commissions paid or incurred during the three month period
    ended June 30, 1997.  The Sponsor had also guaranteed payment of
    organization and offering expenses which exceed 13%, including selling
    commissions, of the gross proceeds of the offering.

    An acquisition fee is charged, not to exceed the lesser of: (i) four
    percent (4%) of gross proceeds plus an additional .0624% for each 1% of
    indebtedness incurred in acquiring properties and/or equipment but in no
    event will acquisition fees exceed five percent (5%) of the aggregate
    purchase prices of properties and equipment; or (ii) compensation
    customarily charged in arm's length transactions by others rendering
    similar services.   Acquisition fees paid by the Partnership during the
    three month period ended June 30, 1997 were $7,768.

    The Partnership has entered into an asset management agreement with the
    Sponsor and its affiliates, whereby the Sponsor provides various property
    and equipment management services for the Partnership.

    A subordinated asset management fee is charged, in an amount equal to one
    percent (1%) of the gross rental revenues derived from the properties and
    equipment.  Payment of the asset management fee is subordinated to receipt
    by the limited partners of annual distributions equal to a cumulative,
    noncompounded return of ten percent (10%) per annum on their adjusted
    invested capital.  There were $5,623 of subordinated asset management fees
    paid to the Sponsor during the three month period ended June 30, 1997.

                                       8



<PAGE>   11


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                         NOTES TO FINANCIAL STATEMENTS


3.   RELATED PARTY TRANSACTIONS AND AGREEMENTS, CONTINUED:

    An equipment liquidation fee limited to the lesser of three percent (3%) of
    the sales price or customary fees for similar services will be paid in
    conjunction with asset liquidation services.  There were no equipment
    liquidations during the six month period ended June 30, 1997.

    The Partnership Agreement provides for the Sponsor to receive a real estate
    liquidation fee limited to the lesser of three percent (3%) of the gross
    sales price or fifty percent (50%) of the customary real estate commissions
    in the event of a real estate liquidation.  This fee is payable only after
    the limited partners have received distributions equal to a cumulative,
    noncompounded return of eleven percent (11%) per annum on their adjusted
    invested capital plus distributions of sale or refinancing proceeds equal
    to 100% of their original contributions.  There were no real estate
    liquidations during the six month period ended June 30, 1997.

    The Partnership has agreed to indemnify the Sponsor and their affiliates
    against certain costs paid in settlement of claims which might be sustained
    by them in connection with the Partnership.  Such indemnification is
    limited to the assets of the Partnership and not the limited partners.


4.   LAND AND BUILDING SUBJECT TO OPERATING LEASES:

    The net investment in operating leases as of June 30, 1997 is comprised of
    the following:


                     Land                          $5,682,875
                     Building and improvements      9,123,882
                                                   ----------
                                                   14,806,757

                  Less accumulated depreciation      (249,437)
                                                  -----------

                  Total                           $14,557,320
                                                  ===========


    At June 30, 1997 the Partnership had completed all investments in
    properties under construction.  At June 30, 1997, the Partnership had no
    unfunded commitments on properties under construction.

    The following is a schedule of future minimum lease payments to be received
    on the operating leases as of June 30, 1997.

                                       9



<PAGE>   12


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                         NOTES TO FINANCIAL STATEMENTS


4.   LAND AND BUILDING SUBJECT TO OPERATING LEASES, CONTINUED:


                            1997        $   783,380
                            1998          1,578,452
                            1999          1,595,008
                            2000          1,616,709
                            2001          1,655,796
                            Thereafter   23,725,711
                                        -----------

                            Total       $30,955,056
                                        ===========



5.   NET INVESTMENT IN FINANCING LEASES:

    The net investment in financing leases as of June 30, 1997 is comprised of
    the following:


                Minimum lease payments to be received  $3,200,892
                Estimated residual value                  252,730
                                                       ----------

                Gross investment in financing leases    3,453,622
                Less unearned income                     (755,722)
                                                       ----------

                Net investment in financing leases     $2,697,900
                                                       ==========

             The following is a schedule of future minimum lease
             payments to be received on the direct financing
             leases as of June 30, 1997:

                1997                                   $  427,511
                1998                                      814,904
                1999                                      806,823
                2000                                      609,582
                2001                                      269,333
                Thereafter                                272,739
                                                       ----------

                Total                                  $3,200,892
                                                       ==========



6.   SUBSEQUENT EVENT:

    On July 15, 1997, the Partnership made a distribution to its limited
    partners totaling approximately $479,856, which represented the aggregate
    quarterly distribution of cash flow from operations for the quarter ended
    June 30, 1997 in the amount of $550,000 less $70,144 of elective monthly
    distributions previously distributed during that quarter.


                                       10



<PAGE>   13


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                         PART I - FINANCIAL INFORMATION


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

LIQUIDITY AND CAPITAL COMMITMENTS:

     The Partnership commenced the Offering of up to 20,000 limited partnership
units ("Units") registered under the Securities Act of 1933, as amended by
means of a Registration Statement, filed on form SB-2 which was declared
effective by the Securities and Exchange Commission on August 12, 1994.

     The Partnership accepted subscriptions for the Minimum Number of Units on
January 24, 1995 and immediately commenced operations.  The Offering reached
final funding as of August 12, 1996, having accepted subscriptions for the
entire 20,000 Units and funds totaling $20,000,000.

     At  June 30, 1997, the Partnership had invested in eleven net leased real
estate properties and ten equipment packages in amounts totaling approximately
$17,946,535, including capitalized acquisition fees.

     On April 2, 1997, the Partnership provided funding in the amount of
$194,197 for the re-imaging of the Kettle Restaurant located in Virginia Beach,
Virginia to a Denny's Restaurant (the "Virginia Beach Property").  The
Partnership provided funding for the reimaging and acquisition fees by
borrowing the funds from Captec Net Lease Realty, a Michigan corporation and an
affiliate of the Managing General Partner ("CNLR").  The Virginia Beach
Property is currently being operated as a Denny's Restaurant.  The Partnership
entered into the First Amendment to the Lease Agreement with DenAmerica Corp.,
a Delaware corporation, ("DenAmerica") whereby DenAmerica shall pay minimum
annual rent in an amount equal to $106,244, payable in equal monthly
installments of $8,854.  The option price that DenAmerica shall pay for the
Virginia Beach Property will be equal to the greater of (a) the then fair
market value of the Virginia Beach Property as determined as described in the
Lease Agreement dated August 25, 1995 (the "Lease") or (b) $1,192,534.  In all
other respects the Lease shall remain unchanged and in full force and effect.

     On May 21, 1997, the Partnership made the final disbursement to Corral
South Store 3, Inc., a Florida corporation ("Corral South 3") under the
agreement dated August 6, 1997, for the construction of a Golden Corral
restaurant (the "Golden Corral Property").  The total purchase price of the
Golden Corral Property was $1,600,000.  Of the $1,600,000 total purchase price,
$1,262,000 was made in cash from offering proceeds, $113,000 of borrowed
proceeds from Captec Financial Group, Inc., Michigan corporation ("CFG") and an
affiliate of the Managing General Partner, and $225,000 of borrowed proceeds
from CNLR.

     On July 25, 1997, the Partnership sold an undivided 34.375% interest in
the Golden Corral Property, as a tenant in common to Captec Franchise Capital
Partners L.P. IV, a Delaware limited partnership and an affiliate of the
Managing General Partner for $550,000.  The proceeds of the sale were used to
retire the debt owed to CFG and CNLR.  Interest paid on the loans at June 30,
1997 was $8,345.

                                       11



<PAGE>   14



     The Partnership had cash totaling $252,853 as of June 30, 1997, none of
which is available for investment.  The Partnership presently does not have any
existing investment commitments.

     During 1997, the Partnership expects to obtain leverage of up to 30% of
the sum of gross proceeds and the aggregate amount of Partnership indebtedness
secured by Partnership assets (approximately 35% of the aggregate purchase
prices of the Partnership's assets).  Such leverage, when incurred, will
provide additional funds to be used by the Partnership to purchase additional
income-producing commercial Properties and Equipment which will be leased on a
"triple net" basis primarily to operators of nationally franchised fast-food,
family style and dinner house restaurants as well as other franchised
service-type businesses.  The Property leases are expected to provide for a
base minimum annual rent, with provisions for fixed increases on specific dates
or indexation of rent to indices such as the Consumer Price Index and/or
percentage rents.  Equipment will be leased only pursuant to Full Payout
Leases.  Presently, the Partnership does not have a financing commitment for
this leverage.

     During the three month period ending June 30, 1997, the Partnership did
not acquire any additional properties.  The number of Properties and/or the
amount of Equipment to be acquired will depend upon the additional debt.

     Once substantially all of the Partnership's funds have been applied as
intended, the Partnership expects to require limited amounts of liquid assets
since the form of lease which it intends to use for its Properties and
Equipment will require lessees to pay all taxes and assessments, maintenance
and repairs and insurance premiums, including casualty insurance.  The general
partners expect that the cash flow to be generated by the Partnership's
Properties and Equipment will be adequate to pay operating expenses and provide
distributions to Limited Partners.

     The General Partners are not aware of any known trends or uncertainties,
other than national economic conditions, which reasonably may be expected to
have a material impact, favorable or unfavorable, on liquidity and capital
resources of the Partnership other than those referred to herein and in the
Partnership's Prospectus.


RESULTS OF OPERATIONS:

     For the six month period ended June 30, 1997 the Partnership earned
revenues totaling approximately $1,053,000, compared to approximately $551,000
for the corresponding period of the preceding year.  The increase in
year-to-date revenues over the prior year's period (91%) was due to the effect
of the Partnership's additional investment in income producing triple net
leased real estate properties and full payout equipment leases.

     For the six month period ended June 30, 1997, the Partnership incurred
expenses totaling approximately $170,000, compared to approximately $117,000
for the corresponding period of the preceding year.  The increase in
year-to-date expenses over the prior year's period (45%) was due to the same
effects which produced the increase in revenues.  This growth caused
corresponding increases in depreciation expense (due to the growth in
depreciable assets) and general and administrative expenses.


                                       12



<PAGE>   15


     For the six month period ended June 30, 1997, the Partnership earned net
income of  approximately $883,000, compared to approximately $434,000 for the
corresponding period of the previous year.  The increase in year-to-date net
income over the prior year's period (103%) was primarily due to the increase in
revenues discussed above.

     Based upon the results of operations for the three month period ended June
30, 1997, the Partnership distributed to its limited partners a total of
$550,000 representing cash flow from operations for that period.  These amounts
were distributed as follows: $34,609 paid in April 1997 and $35,763 paid in May
1997 to investors that have elected to receive monthly distributions and
$479,628 paid in July 1 1997 to all investors.  On a comparative basis, the
Partnership distributed to its limited partners a total of $370,000 for the
corresponding three month period of the preceding year.  The increase in
distributions over the prior year's period (48%) was due to the increase in net
income discussed above and the reduction in net investment in financing leases
(i.e. capital returned on equipment lease investments) resulting from the
growth in the equipment lease portfolio.

                                       13



<PAGE>   16


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                          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
                   None
          Item 5.  Other Information
                   None
          Item 6.  Exhibits and Reports on Form 8-K

  
                   (a) Exhibits.

                       No.    Exhibit

                       4    Agreement of Limited Partnership of Registrant
                            (Incorporated by reference from Exhibit A of the 
                            final Prospectus dated August 12, 1994, as 
                            supplemented and filed with the Securities and 
                            Exchange Commission, S.E.C. File No. 33-77510C).

                      27    Financial Data Schedule

                   (b)  Reports on Form 8-K.  There were no reports on Form 
                   8-K filed during the three month period ending June 30, 1997.




                                       14



<PAGE>   17


                                   SIGNATURES



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


                                By:  Captec Franchise Capital Corporation III
                                     Managing General Partner of
                                     Captec Franchise Capital Partners L.P. III



                                By:  /s/ W. Ross Martin                      
                                   --------------------------------------------
                                     W. Ross Martin
                                     Chief Financial Officer and Vice President,
                                     a duly authorized officer

                                Date: August 14, 1997



                                       15

<PAGE>   18
                              INDEX TO EXHIBITS


EXHIBIT NO.                                      DESCRIPTION

    27                                           Financial Data Schedule