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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 June 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
 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
 Not applicable
 APPLICABLE ONLY TO CORPORATE ISSUERS
 Not applicable
 o þ
 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, June 30, 2006 and December 31, 2005
    
    
    3Statements of Operations for the three and six months ended June 30, 2006 and 2005
    
    
    4Statement of Changes in Partners Capital for the six months ended June 30, 2006
    
    
    5Statements of Cash Flows for the six months ended June 30, 2006 and 2005
    
    
    6Notes to Financial Statements
    
    
    7 - 9Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10-11Item 3.
    
    Controls and Procedures
    
    
    14PART II
    
    OTHER INFORMATIONOther Information
    
    
    15SIGNATURES
    
    
    
    
    16CERTIFICATION
    
    Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002Certification Pursuant to Section 302Certification Pursuant to Section 906
    
    
    18-19Certification Pursuant to Section 302Certification Pursuant to Section 906
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
 
 PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 Captec Franchise Capital Partners L.P. III
 
 Balance Sheets
 June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)AssetsCash and cash equivalents
    
    $
    502,816
    
    
    $
    935,510Assets Held for Sale:Operating leases, net
    
    
    
    
    
    
    1,052,218Unbilled rent, net
    
    
    
    
    
    
    121,650Investment in leases:Operating leases, net
    
    
    850,000
    
    
    
    896,038Due from related parties
    
    
    151
    
    
    
    151Total assets
    
    $
    1,352,967
    
    
    $
    3,005,567Liabilities and Partners CapitalLiabilities:Accounts payable and accrued expenses
    
    $
    57,119
    
    
    $
    57,626Due to Affiliates
    
    
    3,369
    
    
    
    145,371Total liabilities
    
    
    60,488
    
    
    
    202,997Partners capital:Limited partners capital accounts
    
    
    1,262,807
    
    
    
    2,772,309General partners capital account
    
    
    29,672
    
    
    
    30,261Total partners capital
    
    
    1,292,479
    
    
    
    2,802,570Total liabilities and partners capital
    
    $
    1,352,967
    
    
    $
    3,005,567
 The accompanying notes are an integral part of the financial statements.
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##### Table of Contents



Captec Franchise Capital Partners L.P. III
 
 Statements of Operations
  Three Months
    
    
    Six Months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating revenue:Rental income
    
    $
    33,075
    
    
    $
    33,075
    
    
    $
    66,150
    
    
    $
    66,150Total operating revenue
    
    
    33,075
    
    
    
    33,075
    
    
    
    66,150
    
    
    
    66,150Operating costs and expenses:Depreciation
    
    
    5,530
    
    
    
    
    
    
    
    11,060
    
    
    
    Provision for impaired operating lease
    
    
    34,978
    
    
    
    
    
    
    
    34,978
    
    
    
    General and administrative
    
    
    58,104
    
    
    
    60,275
    
    
    
    113,350
    
    
    
    110,277Total operating costs and expenses
    
    
    98,612
    
    
    
    60,275
    
    
    
    159,388
    
    
    
    110,277Loss from continued operations before other income
    
    
    (65,537
    )
    
    
    (27,200
    )
    
    
    (93,238
    )
    
    
    (44,127
    )Other income:Interest and other income
    
    
    18,835
    
    
    
    1,237
    
    
    
    34,295
    
    
    
    1,458Total other income
    
    
    18,835
    
    
    
    1,237
    
    
    
    34,295
    
    
    
    1,458Loss from continued operations
    
    
    (46,702
    )
    
    
    (25,963
    )
    
    
    (58,943
    )
    
    
    (42,669
    )Discontinued operations:Net income from discontinued operations, net
    
    
    
    
    
    
    224,997
    
    
    
    
    
    
    
    481,430Loss on sale of equipment
    
    
    
    
    
    
    (581
    )
    
    
    
    
    
    
    (581
    )Gain on sale of real estate
    
    
    
    
    
    
    4,431,118
    
    
    
    428,852
    
    
    
    4,431,118Debt retirement costs
    
    
    
    
    
    
    (905,118
    )
    
    
    
    
    
    
    (905,118
    )Income from discontinued operations
    
    
    
    
    
    
    3,750,416
    
    
    
    428,852
    
    
    
    4,006,849Net (loss) income
    
    $
    (46,702
    )
    
    $
    3,724,453
    
    
    $
    369,909
    
    
    $
    3,964,180Net (loss) income allocable to general partner
    
    $
    (467
    )
    
    $
    37,245
    
    
    $
    (589
    )
    
    $
    39,642Net (loss) income allocable to limited partners
    
    $
    (46,235
    )
    
    $
    3,687,208
    
    
    $
    370,498
    
    
    $
    3,924,538Net loss from continued operations per limited partnership unit
    
    $
    (2.35
    )
    
    $
    (1.31
    )
    
    $
    (2.97
    )
    
    $
    (2.15
    )Net income from discontinued operations per limited partnership unit
    
    $
    
    
    
    $
    189.12
    
    
    $
    21.84
    
    
    $
    202.04Net (loss) income per limited partnership unit
    
    $
    (2.35
    )
    
    $
    187.81
    
    
    $
    18.87
    
    
    $
    199.89Weighted 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
    
    
    
    
    
    
    (1,880,000
    )
    
    
    
    
    
    
    (1,880,000
    )Net income (loss)
    
    
    
    
    
    
    370,498
    
    
    
    (589
    )
    
    
    369,909Balance, June 30, 2006
    
    
    19,633
    
    
    $
    1,262,807
    
    
    $
    29,672
    
    
    $
    1,292,479
 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
    
    $
    369,909
    
    
    $
    3,964,180Adjustments to net income:Depreciation
    
    
    11,060
    
    
    
    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
    )
    
    
    (4,431,118
    )Loss on investments in financing leases
    
    
    
    
    
    
    17,515Decrease (increase) in unbilled rent
    
    
    770
    
    
    
    (33,997
    )Decrease in accounts receivable
    
    
    
    
    
    
    4,228Decrease in accounts payable and accrued expenses
    
    
    (507
    )
    
    
    (56,012
    )Decrease in restricted cash
    
    
    
    
    
    
    664,680Decrease in due to related parties
    
    
    (142,002
    )
    
    
    Net cash (used in) provided by operating activities
    
    
    (154,644
    )
    
    
    149,969Cash flows from investing activities:Net proceeds from sale of real estate
    
    
    1,601,950
    
    
    
    15,229,519Net proceeds from sale of equipment
    
    
    
    
    
    
    75,501Principal payments on financing leases
    
    
    
    
    
    
    65,892Net cash provided by investing activities
    
    
    1,601,950
    
    
    
    15,370,912Cash flows from financing activities:Repayments of notes payable
    
    
    
    
    
    
    (5,548,515
    )Distributions to limited partners
    
    
    (1,880,000
    )
    
    
    (511,085
    )Net cash used in financing activities
    
    
    (1,880,000
    )
    
    
    (6,059,600
    )Net increase (decrease) in cash and cash equivalents
    
    
    (432,694
    )
    
    
    9,461,281Cash and cash equivalents, beginning of period
    
    
    935,510
    
    
    
    1,556,320Cash and cash equivalents, end of period
    
    $
    502,816
    
    
    $
    11,017,601
 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:
  June 30, 2006
    
    
    December 31, 2005Land
    
    $
    217,665
    
    
    $
    721,665Building and improvements
    
    
    849,857
    
    
    
    1,580,9851,067,522
    
    
    
    2,302,650Less accumulated depreciation
    
    
    (217,522
    )
    
    
    (354,394
    )Total
    
    $
    850,000
    
    
    $
    1,948,256
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3.
    
    NOTES PAYABLE:
     4.
    
    DISCONTINUED OPERATIONS:
  Three months
    
    
    Six monthsEnded 6/30/05
    
    
    Ended 6/30/05Revenues
    
    $
    329,049
    
    
    $
    713,553Interest expense
    
    
    104,052
    
    
    
    232,123Income from discontinued operations, net
    
    $
    224,997
    
    
    $
    481,430
   9




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  10




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RESULTS OF OPERATIONS
 Three Months Ended June 30, 2006
     Revenues
    
    $
    329,049Interest expense
    
    
    104,052Income from discontinued operations, net
    
    $
    224,997
     Six months ended June 30, 2006
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Revenues
    
    $
    713,553Interest expense
    
    
    232,123Income from discontinued operations, net
    
    $
    481,430
     LIQUIDITY AND CAPITAL COMMITMENTS
  12




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13




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ITEM 3. Controls and Procedures
   14




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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.None
 ITEM 6.
    
    EXHIBITS
  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:
    
    August 11, 2006
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EXHIBIT INDEX
 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
 17