<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 September 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



PART I   FINANCIAL INFORMATION                                    Page
------------------------------


Item 1.  Financial Statements                                        1

         Balance Sheet, September 30, 1997                           2
                                                             
         Statement of Operations for the three month periods 
         ended September 30, 1997 and 1996                           3
                                                             
         Statement of Operations for the nine month periods  
         ended September 30, 1997 and 1996                           4
                                                             
         Statement of Cash Flows for the nine month periods  
         ended September 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
----------

                                      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 September 30, 1997 and the statements of operations and
cash flows for the periods ending September 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
                               September 30, 1997
                                  (Unaudited)


                                    ASSETS
             
<TABLE>                                                                    
<S>                                                   <C>                  
Cash                                                  $       548,117      
Investment in leases:                                                      
   Operating leases, net                                   13,931,548      
   Financing leases, net                                    2,401,037      
Accounts receivable                                            (1,054)     
Unbilled rent                                                 341,297      
Due from related parties                                       10,225      
                                                      ---------------      
Total assets                                          $    17,231,170      
                                                      ===============      
                                                                           
                        LIABILITIES & PAARTNERS'CAPITAL
                                                                           
Liabilities:                                                               
   Accounts payable                                   $         4,936      
   Due to related parties                                      11,410      
   Security deposits held on leases                            59,329      
                                                      ---------------      
Total liabilities                                              75,675      
                                                      ---------------      
Partners' Capital:                                                         
Limited partners' capital accounts                         17,125,869      
General partners' capital accounts                             29,626      
                                                      ---------------      
Total partners' capital                                    17,155,495      
                                                      ---------------      
Total liabilities & partners' capital                 $    17,231,170      
                                                      ===============      
</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 September 30, 1997 and 1996
                                  (Unaudited)


<TABLE>
<CAPTION>

                                                                       1997                 1996

Operating revenue:
<S>                                                               <C>                 <C>
   Rental income                                                  $    404,593        $    270,008
   Finance income                                                       83,251              86,749
                                                                  ------------        ------------
         Total operating revenue                                       487,844             356,757
                                                                  ============        ============ 
Operating costs and expenses:
   Depreciation                                                         53,772             (19,904)
   General and administrative                                           12,655              11,758
                                                                  ------------        ------------
         Total operating costs and expenses                             66,427              (8,146)
                                                                  ------------        ------------  
         Income from operations                                        421,417             364,903
                                                                  ------------        ------------
Other income (expense):
   Gain on sale of equipment                                             9,299                 -
   Interest expense                                                     (2,559)             61,958
   Other                                                                 1,851              10,262
                                                                  ------------        ------------
         Total other income, net                                         8,591              72,220
                                                                  ------------        ------------
Net income                                                             430,008             437,123

Net income allocable to general partners                                 4,300               4,371
                                                                  ------------        ------------
Net income allocable to limited partners                          $    425,708        $    432,752
                                                                  ============        ============
Net income per limited partnership unit                           $      21.29        $      22.52
                                                                  ============        ============
Weighted average number of limited partnership
   units outstanding                                                    20,000              19,213
                                                                  ============        ============
</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 nine month periods ended September 30, 1997 and 1996
                                  (Unaudited)


<TABLE>
<CAPTION>

                                                                      1997                  1996

Operating revenue:
<S>                                                               <C>                 <C>        
   Rental income                                                  $  1,227,330        $    602,516
   Finance income                                                      254,054             252,014
                                                                  ------------        ------------
         Total operating revenue                                     1,481,384             854,530
                                                                  ------------        ------------
Operating costs and expenses:
   Depreciation                                                        154,960              65,441
   General and administrative                                           75,779              43,668
                                                                  ------------        ------------
         Total operating costs and expenses                            230,739             109,109
                                                                  ------------        ------------ 
         Income from operations                                      1,250,645             745,421
                                                                  ------------        ------------
Other income (expense):
   Gain on sale of equipment                                             9,299                 -
   Interest income                                                      50,302             114,406
   Other                                                                 2,292              11,266
                                                                  ------------        ------------
         Total other income, net                                        61,893             125,672
                                                                  ------------        ------------
Net income                                                           1,312,538             871,093

Net income allocable to general partners                                13,125               8,711
                                                                  ------------        ------------
Net income allocable to limited partners                          $  1,299,413        $    862,382
                                                                  ============        ============ 
Net income per limited partnership unit                           $      64.97        $      61.24
                                                                  ============        ============
Weighted average number of limited partnership
   units outstanding                                                    20,000              14,081
                                                                  ============        ============

</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 nine month periods ended September 30, 1997 and 1996
                                  (Unaudited)


<TABLE>
<CAPTION>

                                                                       1997                1996

Cash flows from operating activities:
<S>                                                               <C>                 <C>        
   Net Income                                                     $  1,312,538        $    871,093
   Adjustments to net income:
        Depreciation                                                   154,960              65,441
        Increase in unbilled rent                                     (130,624)           (111,971)
        Gain on sale of equipment                                       (9,299)                -
        Decrease (increase) in receivables                               3,013             (16,041)
        Increase  in payables                                               84             325,508
        Increase (decrease) in prepaid rents                           (43,916)             49,974
        Security deposits received(earned)                              (6,624)             38,584
                                                                  ------------        ------------
Net cash provided by operating activities                            1,280,132           1,222,588
                                                                  ------------        ------------
Cash flows from investing activities:
   Purchase of real estate for operating leases                     (1,865,965)         (9,537,532)
   Disposition of real estate for operating leases                     572,000                 -
   Reduction of construction loan draws                                939,778            (685,126)
   Purchase of equipment for financing leases                              -            (1,357,856)
   Proceeds from sale of equipment                                      15,842                 -
   Reduction of net investment in financing leases                     498,171             229,625
                                                                  ------------        ------------
Net cash used in investing activities                                  159,826         (11,350,889)
                                                                  ------------        ------------
Cash flows from financing activities:
   Decrease in due from related parties                                 10,364                 -
   Increase in due to related parties                                    3,682                 -
   Issuance of limited partnership units                                   -            12,584,631
   Offering costs                                                          -            (1,626,915)
   Distributions to limited partners                                (1,596,062)           (879,167)
                                                                  ------------        ------------
Net cash provided by financing activities                           (1,582,016)         10,078,549
                                                                  ------------        ------------
Net increase in cash                                                  (142,058)            (49,752)

Cash, beginning of period                                              690,175           1,283,655
                                                                  ------------        ------------
Cash, end of period                                               $    548,117        $  1,233,903
                                                                  ============        ============
</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 September 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 $551,153 during the three month
     period ended September 30, 1997, representing quarterly distributions of
     cash flow from operations for the quarter ended June 30, 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 September 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 September 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.   There were no acquisition fees paid by the Partnership
    during the three month period ended September 30, 1997.  The Partnership
    received reimbursement of acquisition fees of  $22,000 from an affiliate of
    the General Partners for the partial sale of a real estate property.

    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 $5,779 of subordinated asset management fees
    paid to the Sponsor during the three month period ended September 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 was one equipment
    liquidation during the nine month period ended September 30, 1997.  The
    equipment liquidation fees paid during the nine month period ended
    September 30, 1997 were $475.

    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 nine month period ended September 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 September 30, 1997 is
    comprised of the following:


                   Land                           $5,309,287
                   Building and improvements       8,925,470
                                                  -----------
                                                  14,234,757
                   Less accumulated depreciation   (303,209)
                                                  -----------

                   Total                          $13,931,548
                                                  ===========


    At September 30, 1997 the Partnership had completed all investments in
    properties under construction.  At September 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 September 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:


<TABLE>
        <S>                                             <C>
        1997                                            $   348,115
        1998                                              1,518,499
        1999                                              1,535,055
        2000                                              1,556,756
        2001                                              1,595,843
        Thereafter                                       22,649,764
                                                        -----------

        Total                                           $29,205,675
                                                        ===========
</TABLE>



5.  NET INVESTMENT IN FINANCING LEASES:

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


<TABLE>
        <S>                                             <C>
        Minimum lease payments to be received           $2,800,064
        Estimated residual value                           241,327
                                                        ----------

        Gross investment in financing leases             3,041,391
        Less unearned income                              (640,354)
                                                        ----------

        Net investment in financing leases              $2,401,037
                                                        ==========

</TABLE>

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

<TABLE>
        <S>                                             <C>
        1997                                            $  195,260
        1998                                               753,603
        1999                                               745,522
        2000                                               563,606
        2001                                               269,333
        Thereafter                                         272,740
                                                        ----------

        Total                                           $2,800,064
                                                        ==========
</TABLE>



6.  SUBSEQUENT EVENT:

    On October 15, 1997, the Partnership made a distribution to its limited
    partners totaling approximately $478,474, which represented the aggregate
    quarterly distribution of cash flow from operations for the quarter ended
    September 30, 1997 in the amount of $549,999 less $71,525 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  September 30, 1997, the Partnership had invested in eleven net leased
real estate properties and nine equipment packages in amounts totaling
approximately $17,365,396, including capitalized acquisition fees.

     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 September
30, 1997 was $8,345.

     Roasters Corp. assigned all their right, title and interest in and to the
lease dated July 26, 1995 ("the Lease") to KRR Nashanooga, Inc. as of May 29,
1996.  On October 11, 1996, the Partnership consented to an assignment of a
lease from KRR Nashanooga, Inc. Corporation to BC Superior L.L.C., a Delaware
limited liability company ("BC Superior").  The headquarter officess of BC
Superior are located at 5454 Wisconsin Ave., Suite 810, Chevy Chase, Maryland.
The equipment is currently being used in the operation of a Boston Market
restaurant located at 5390 Highway 153, Chattanooga, Tennessee.  Under the
terms of Lease Transfer and Assumption Agreement dated October 11, 1997, KRR
Nashonooga, Inc. sold, transfered and conveyed, assigned and delivered all
right, title and interest in and to the Lease.  At the time of the transfer,
there were 69 successive monthly rentals due in the amount of $4,393 due on the
15th of each month.  All terms of the Lease remain unchanged.  Roasters Corp.
acknowledges that its obligations to the Partnership under the Lease shall
continue in full force and effect.  In the event of any default or breach by BC
Superior under the Lease, the obligations of Roasteres Corp. to the Partnership
shall be as fully extensive as BC Superior's obligations to Lessor.

     On August 4, 1997, the Partnership sold the equipment that was used in the
operation of an Arby's Restaurant located at 912 Mabe Blvd., Greenville, North
Carolina (the "Arby's Equipment').  The equpment was purchased on December 29,
1995, for a total cost of $228,055 and was leased to Charmes, Inc., a North
Carolina corporation. The Partnership

                                     11



<PAGE>   14

received 21 rental payments totaling $107,277 from Charmes, Inc.  In addition,
the Partnership received $199,399 in sale proceeds from Charmes, Inc.  The
internal rate of return to the Partnership on the investment of the Arby's
Equipment is 17.17%.  The Partnership intends to use the proceeds of the sale to
invest in additional assets.

     The Partnership had cash totaling $548,117 as of September 30, 1997, of
which $183,986 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 September 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 nine month period ended September 30, 1997 the Partnership earned
revenues totaling approximately $1,543,277, compared to approximately $980,202
for the corresponding period of the preceding year.  The increase in
year-to-date revenues over the prior year's period (57%) 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 nine month period ended September 30, 1997, the Partnership
incurred expenses totaling approximately $230,739, compared to approximately
$109,109 for the corresponding period of the preceding year.  The increase in
year-to-date expenses over the prior year's period (111%) was due to the same
effects which produced the increase in

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<PAGE>   15

revenues.  This growth caused corresponding increases in depreciation expense
(due to the growth in depreciable assets) and general and administrative
expenses.

     For the nine month period ended September 30, 1997, the Partnership earned
net income of  approximately $1,312,538, compared to approximately $871,093 for
the corresponding period of the previous year.  The increase in year-to-date
net income over the prior year's period (51%) was primarily due to the increase
in revenues discussed above.

     Based upon the results of operations for the three month period ended
September 30, 1997, the Partnership distributed to its limited partners a total
of $549,999 representing cash flow from operations for that period.  These
amounts were distributed as follows: $35,763 paid in August 1997, and $35,763
paid in September 1997, to investors that have elected to receive monthly
distributions; and $478,473 paid in October 1997, to all investors.  On a
comparative basis, the Partnership distributed to its limited partners a total
of $485,000 for the corresponding three month period of the preceding year.
The increase in distributions over the prior year's period (13%) 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 September 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:  /w/ W. Ross Martin                        
                                ------------------------------------------     
                                W. Ross Martin
                                Chief Financial Officer and Vice President
                                a duly authorized officer

                                Date:  November 14, 1997
                                       



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