##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-QSB

X IN BALLOT BOX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

OR

OPEN BALLOT BOX 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

---

Delaware

---

38-3160141

---

24 Frank Lloyd Wright Drive, Lobby L, 4th Floor
P.O. Box 544, Ann Arbor, Michigan 48106-0544

---

(734) 994-5505

---

Not Applicable

---

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

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: Not applicable

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 OPEN BALLOT BOX No X IN BALLOT BOX





---

TABLE OF CONTENTS



|                             |                                                                                               |  |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION
|Item 1. Financial Statements
|                             | Balance Sheets, June 30, 2002 and December 31, 2001                                          
|                             | Statement of Operations for the three and six months ended June 30, 2002 and 2001            
|                             | Statement of Changes in Partners Capital for the six months ended June 30, 2002             
|                             | Statement of Cash Flows for the six months ended June 30, 2002 and 2001                      
|                             | Notes to Financial Statements                                                                
|                             | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|PART II OTHER INFORMATION   
|                             | Other Information                                                                            
|SIGNATURES                  
|CERTIFICATION               



---



##### Table of Contents



CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

Index to Form 10-QSB

|           |  |                                                                                       |         |      |  | 
|---------- |  | ------------------------------------------------------------------------------------- | ------- | ---- |  | 
|Item No.   |  |                                                                                       |         | Page |  | 
|           |  |                                                                                       |         |      |  | 
|PART I     |  | FINANCIAL INFORMATION                                                                 |         |      |  | 
|Item 1.    |  | Financial Statements:                                                                 |         |      |  | 
|           |  | Balance Sheets, June 30, 2002 and December 31, 2001                                   | 3      
|           |  | Statement of Operations for the three and six months
ended June 30, 2002 and 2001     | 4      
|           |  | Statement of Changes in Partners Capital for the six months
ended June 30, 2002      | 5      
|           |  | Statement of Cash Flows for the six months
ended June 30, 2002 and 2001               | 6      
|           |  | Notes to Financial Statements                                                         | 7
 8  
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations | 9
 11 
|PART II    |  | OTHER INFORMATION
Other Information                                                   | 12
 13
|SIGNATURES |  |                                                                                       | 14-15  

2



---



##### Table of Contents












Captec Franchise Capital Partners L.P. III
Balance Sheet

|                                     |                                       |                                         |                                   |            |            |             |            |            |              |  |  | 
|------------------------------------ | ------------------------------------- | --------------------------------------- | --------------------------------- | ---------- | ---------- | ----------- | ---------- | ---------- | ------------ |  |  | 
|                                     |                                       |                                         |                                   |            |            | June 30,    |            |            | December 31, | 
|                                     |                                       |                                         |                                   |            |            | 2002        |            |            | 2001         | 
|                                     |                                       |                                         |                                   |            |            | (Unaudited) |            |            |              | 
|                                     |                                       |                                         |                                   | Assets     |            |             |            |            |              |  |  | 
|Cash and cash equivalents            |                                       | $                                       | 400,932                           |            |            | $           | 781,658    |           
|Restricted cash                      |                                       |                                         | 481,263                           |            |            |             | 387,302    |           
|Investment in property under leases: |                                       |                                         |                                   |            |            |             |            |           
|                                     | Operating leases, net                 |                                         |                                   | 17,425,573 |            |             |            | 17,565,762 |             
|                                     | Financing leases, net                 |                                         |                                   | 942,429    |            |             |            | 1,111,307  |             
|                                     | Impaired financing leases, net        |                                         |                                   | 12,693     |            |             |            | 48,693     |             
|Accounts receivable                  |                                       |                                         | 9,901                             |            |            |             | 60,401     |           
|Unbilled rent, net                   |                                       |                                         | 1,262,911                         |            |            |             | 1,190,584  |           
|Due from related parties             |                                       |                                         | 8,914                             |            |            |             | 5,524      |           
|Deferred financing costs, net        |                                       |                                         | 310,641                           |            |            |             | 334,536    |           
|                                     |                                       |                                         |                                   |            |            |            
|                                     |                                       | Total assets                            |                                   | $          | 20,855,257 |             |            | $          | 21,485,767   | 
|                                     |                                       |                                         |                                   |            |            |            
|                                     |                                       |                                         | Liabilities and Partners Capital |            |            |             |            |            |              |  | 
|Liabilities:                         |                                       |                                         |                                   |            |            |             |            |           
|                                     | Notes payable                         |                                         | $                                 | 7,955,314  |            |             | $          | 8,042,570  |             
|                                     | Accounts payable and accrued expenses |                                         |                                   | 82,729     |            |             |            | 161,935    |             
|                                     | Due to related parties                |                                         |                                   | 1,477      |            |             |            | 15,025     |             
|                                     | Security deposits held on leases      |                                         |                                   | 31,960     |            |             |            | 45,607     |             
|                                     |                                       |                                         |                                   |            |            |            
|                                     |                                       | Total liabilities                       |                                   |            | 8,071,480  |             |            |            | 8,265,137    | 
|                                     |                                       |                                         |                                   |            |            |            
|Partners capital:                   |                                       |                                         |                                   |            |            |             |            |           
|Limited partners capital            |                                       |                                         | 12,745,403                        |            |            |             | 13,188,344 |           
|General partners capital            |                                       |                                         | 38,374                            |            |            |             | 32,286     |           
|                                     |                                       |                                         |                                   |            |            |            
|                                     |                                       | Total partners capital                 |                                   |            | 12,783,777 |             |            |            | 13,220,630   | 
|                                     |                                       |                                         |                                   |            |            |            
|                                     |                                       | Total liabilities and partners capital |                                   | $          | 20,855,257 |             |            | $          | 21,485,767   | 
|                                     |                                       |                                         |                                   |            |            |            

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

3



---



##### Table of Contents






Captec Franchise Capital Partners L.P. III
Statement of Operations
(Unaudited)

|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |           |   |         |           |           |  
|---------------------------------------------------------------- | --------------------------------------- | ---------------------------------- | ------- | ------------------ | ------- | - | ---------------- | ------- | ------- | ---- | ------- | --------- | --------- | - | ------- | --------- | --------- | -
|                                                                 |                                         |                                    |         | Three months ended |         |   | Six months ended |        
|                                                                 |                                         |                                    |         | June 30,           |         |   | June 30,         |        
|                                                                 |                                         |                                    |         |                    |         |   |                  |        
|                                                                 |                                         |                                    |         | 2002               |         |   | 2001             |         |         | 2002 |         |           | 2001      |  
|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |           |  
|Operating revenue:                                               |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |           |   |         |          
|                                                                 | Rental income                           |                                    | $       | 551,477            |         |   | $                | 540,993 |         |      | $       | 1,104,273 |           |   | $       | 1,081,987 |          
|                                                                 | Finance income                          |                                    |         | 18,841             |         |   |                  | 31,202  |         |      |         | 39,210    |           |   |         | 68,171    |          
|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |          
|                                                                 |                                         | Total operating revenue            |         |                    | 570,318 |   |                  |         | 572,195 |      |         |           | 1,143,483 |   |         |           | 1,150,158 |  
|Operating costs and expenses:                                    |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |           |   |         |          
|                                                                 | Interest expense                        |                                    |         | 179,355            |         |   |                  | 182,991 |         |      |         | 359,630   |           |   |         | 366,623   |          
|                                                                 | Depreciation                            |                                    |         | 70,094             |         |   |                  | 73,737  |         |      |         | 140,189   |           |   |         | 147,474   |          
|                                                                 | General and administrative              |                                    |         | 28,466             |         |   |                  | 24,079  |         |      |         | 47,979    |           |   |         | 40,967    |          
|                                                                 | Provision for impaired financing leases |                                    |         |                   |         |   |                  |        |         |      |         |          |           |   |         | 92,908    |          
|                                                                 | Provision for unbilled rent             |                                    |         |                   |         |   |                  |        |         |      |         | 36,000    |           |   |         | 77,000    |          
|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |          
|                                                                 |                                         | Total operating costs and expenses |         |                    | 277,915 |   |                  |         | 280,807 |      |         |           | 583,798   |   |         |           | 724,972   |  
|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |          
|                                                                 |                                         | Income from operations             |         |                    | 292,403 |   |                  |         | 291,388 |      |         |           | 559,685   |   |         |           | 425,186   |  
|Other income (expense):                                          |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |           |   |         |          
|                                                                 | Interest and other income               |                                    |         | 5,383              |         |   |                  | 2,792   |         |      |         | 6,270     |           |   |         | 4,525     |          
|                                                                 | Gain (loss) on sale of equipment        |                                    |         | 42,874             |         |   |                  | (27,357 | )       |      |         | 42,874    |           |   |         | (18,271   | )        
|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |          
|                                                                 |                                         | Total other income (expense)       |         |                    | 48,257  |   |                  |         | (24,565 | )    |         |           | 49,144    |   |         |           | (13,746   | )
|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |          
|Net income                                                       |                                         |                                    | 340,660 |                    |         |   | 266,823          |         |         |      | 608,829 |           |           |   | 411,440 |          
|Net income allocable to general partner                          |                                         |                                    | 3,407   |                    |         |   | 2,668            |         |         |      | 6,088   |           |           |   | 4,114   |          
|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |          
|Net income allocable to limited partners                         |                                         | $                                  | 337,253 |                    |         | $ | 264,155          |         |         | $    | 602,741 |           |           | $ | 407,326 |          
|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |          
|Net income per limited partnership unit                          |                                         | $                                  | 17.05   |                    |         | $ | 13.31            |         |         | $    | 30.48   |           |           | $ | 20.53   |          
|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |          
|Weighted average number of limited partnership
units outstanding |                                         |                                    | 19,776  |                    |         |   | 19,842           |         |         |      | 19,776  |           |           |   | 19,842  |          

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

4



---



##### Table of Contents






Captec Franchise Capital Partners L.P. III
Statement of Changes in Partners Capital
for the six months ended June 30, 2002
(Unaudited)

|                                  |  |           |        |  |           |   |            |           |  |   |           |  |  |   |            |  
|--------------------------------- |  | --------- | ------ |  | --------- | - | ---------- | --------- |  | - | --------- |  |  | - | ---------- | -
|                                  |  | Limited   |        |  | Limited   |   |            | General   |  |   | Total     | 
|                                  |  | Partners' |        |  | Partners' |   |            | Partner's |  |   | Partners' | 
|                                  |  | Units     |        |  | Accounts  |   |            | Accounts  |  |   | Capital   | 
|                                  |  |           |        |  |           |   |            |           |  |   |           | 
|Balance, December 31, 2001        |  |           | 19,776 |  |           | $ | 13,188,344 |           |  | $ | 32,286    |  |  | $ | 13,220,630 |  
|Distributions  ($52.88 per unit) |  |           |       |  |           |   | (1,045,682 | )         |  |   |          |  |  |   | (1,045,682 | )
|Net income                        |  |           |       |  |           |   | 602,741    |           |  |   | 6,088     |  |  |   | 608,829    |  
|                                  |  |           |        |  |           |   |            |           |  |   |           | 
|Balance, June 30, 2002            |  |           | 19,776 |  |           | $ | 12,745,403 |           |  | $ | 38,374    |  |  | $ | 12,783,777 |  
|                                  |  |           |        |  |           |   |            |           |  |   |           | 

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

5



---



##### Table of Contents






Captec Franchise Capital Partners L.P. III
Statement of Cash Flows
for the six months ended June 30, 2002 and 2001
(Unaudited)

|                                                     |                                        |                                                              |            |            |         |   |            |          |         |  
|---------------------------------------------------- | -------------------------------------- | ------------------------------------------------------------ | ---------- | ---------- | ------- | - | ---------- | -------- | ------- | -
|                                                     |                                        |                                                              |            | 2002       |         |   | 2001       |         
|                                                     |                                        |                                                              |            |            |         |   |            |         
|Cash flows from operating activities:                |                                        |                                                              |            |            |         |   |            |         
|                                                     | Net Income                             |                                                              | $          | 608,829    |         |   | $          | 411,440  |        
|                                                     | Adjustments to net income:             |                                                              |            |            |         |   |            |          |        
|                                                     |                                        | Depreciation                                                 |            |            | 140,189 |   |            |          | 147,474 |  
|                                                     |                                        | Amortization of debt issuance costs                          |            |            | 23,895  |   |            |          | 23,895  |  
|                                                     |                                        | (Gain) loss on sale of equipment                             |            |            | (42,874 | ) |            |          | 18,271  |  
|                                                     |                                        | Provision for credit losses                                  |            |            | 36,000  |   |            |          | 77,000  |  
|                                                     |                                        | Increase in unbilled rent                                    |            |            | (72,327 | ) |            |          | (13,409 | )
|                                                     |                                        | Decrease (increase) in accounts receivable                   |            |            | 50,500  |   |            |          | (26,524 | )
|                                                     |                                        | (Decrease) increase in accounts payable and accrued expenses |            |            | (79,206 | ) |            |          | 49,029  |  
|                                                     |                                        | Increase in restricted cash                                  |            |            | (93,961 | ) |            |          | (43,125 | )
|                                                     |                                        | Increase in due from related parties                         |            |            | (3,390  | ) |            |          | (8,737  | )
|                                                     |                                        | Decrease in due to related parties                           |            |            | (13,549 | ) |            |          | (2,715  | )
|                                                     |                                        | Decrease in security deposits                                |            |            | (13,647 | ) |            |          |        |  
|                                                     |                                        |                                                              |            |            |         |  
|Net cash provided by operating activities            |                                        |                                                              | 540,459    |            |         |   | 632,599    |         
|                                                     |                                        |                                                              |            |            |         |  
|Cash flows from investing activities:                |                                        |                                                              |            |            |         |   |            |         
|                                                     | Proceeds from sale of equipment        |                                                              |            | 85,548     |         |   |            | 267,745  |        
|                                                     | Principal payments on financing leases |                                                              |            | 126,205    |         |   |            | 130,959  |        
|                                                     |                                        |                                                              |            |            |         |  
|Net cash provided by investing activities            |                                        |                                                              | 211,753    |            |         |   | 398,704    |         
|                                                     |                                        |                                                              |            |            |         |  
|Cash flows from financing activities:                |                                        |                                                              |            |            |         |   |            |         
|                                                     | Repayments of notes payable            |                                                              |            | (87,256    | )       |   |            | (47,578  | )      
|                                                     | Distributions to limited partners      |                                                              |            | (1,045,682 | )       |   |            | (970,656 | )      
|                                                     | Distributions to general partner       |                                                              |            |           |         |   |            |         |        
|                                                     |                                        |                                                              |            |            |         |  
|Net cash used in financing activities                |                                        |                                                              | (1,132,938 | )          |         |   | (1,018,234 | )       
|                                                     |                                        |                                                              |            |            |         |  
|Net (decrease) increase in cash and cash equivalents |                                        |                                                              | (380,726   | )          |         |   | 13,069     |         
|Cash and cash equivalents, beginning of period       |                                        |                                                              | 781,658    |            |         |   | 95,992     |         
|                                                     |                                        |                                                              |            |            |         |  
|Cash and cash equivalents, end of period             |                                        | $                                                            | 400,932    |            |         | $ | 109,061    |         
|                                                     |                                        |                                                              |            |            |         |  

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

6



---



##### Table of Contents






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 upon formation of the Partnership were Captec
Franchise Capital Corporation III (the Corporation), a wholly owned
subsidiary of Captec Financial Group, Inc. (Captec), an affiliate and
Patrick L. Beach, the Chairman of the Board of Directors, President and
Chief Executive Officer of the Corporation and Captec. In August 1998,
the general partnership interests of the Partnership were acquired by
Captec Net Lease Realty, Inc., an affiliate. In December 2001, Captec Net
Lease Realty, Inc. merged with and into Commercial Net Lease Realty, Inc.
In connection with the merger, Commercial Net Lease agreed to sell and
assign its general partnership interest in the Partnership to GP3 Asset
Acquisition, LLC, which is wholly-owned by Mr. Beach and is an affiliate
of Captec. The Limited Partners have consented to the transfer of the
general partner interest. In accordance with the terms of an agreement
with Commercial Net Lease, immediately upon the closing of the merger and
until such time as the consent of the Partnerships secured lender is
obtained, GP3 Asset Acquisition has assumed all of the General Partners
obligations and liabilities prescribed under the terms of the Partnership
Agreement.
|
| |    |  | The Partnership commenced a public offering of 20,000 limited partnership
interests (units), priced at $1,000 per unit, on August 12, 1994. The
Partnership commenced operations on January 24, 1995. In August 1996 the
Partnership had accepted subscriptions for all 20,000 units. During 1997
the Partnership repurchased a total of 37 units for $31,450, or
approximately $850 per unit. In 1999 the Partnership repurchased a total
of 79 units for $59,625, or approximately $755 per unit. During 2000 the
Partnership repurchased a total of 42 units for $28,432, or approximately
$677 per unit. In 2001 the Partnership repurchased a total of 66 units
for $42,839, or approximately $649 per unit. At June 30, 2002, the
Partnership had 19,776 units issued and outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |    |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |    |  | The balance sheet of the Partnership as of June 30, 2002, the statements
of operations and cash flows for the periods ending June 30, 2002 and
June 30, 2001 and the statement of changes in partners capital for the
period ending June 30, 2002 have not been audited. In the opinion of
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.
Results of operations for the interim periods are not necessarily
indicative of results for the full year. These unaudited financial
statements should be read in conjunction with the financial statements
and notes thereto included in the Partnerships annual report on Form
10-KSB for the year ended December 31, 2001 filed with the United States
Securities and Exchange Commission on March 29, 2002.                                                                                                                                                                                                                                                                                                                                            

7



---



##### Table of Contents



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



| | 2. |  | LAND AND BUILDING SUBJECT TO OPERATING LEASES:                                           
| | -- |  | -----------------------------------------------------------------------------------------
|
| |    |  | The net investment in operating leases as of June 30, 2002 is comprised
of the following:

|                              |  |   |            |  
|----------------------------- |  | - | ---------- | -
|Land                          |  | $ | 7,695,896  |  
|Building and improvements     |  |   | 11,214,344 |  
|                              |  |   |           
|                              |  |   | 18,910,240 |  
|Less accumulated depreciation |  |   | (1,484,667 | )
|                              |  |   |           
|Total                         |  | $ | 17,425,573 |  
|                              |  |   |           



| | 3. |  | NET INVESTMENT IN FINANCING LEASES:                                                      
| | -- |  | -----------------------------------------------------------------------------------------
|
| |    |  | The net investment in financing leases as of June 30, 2002 is comprised
of the following:

|                                      |  |   |             |  
|------------------------------------- |  | - | ----------- | -
|Minimum lease payments to be received |  | $ | 1,065,305   |  
|Estimated residual value              |  |   | 48,736      |  
|                                      |  |   |            
|Gross investment in financing leases  |  |   | 1,114,041   |  
|Less unearned income                  |  |   | (156,770    | )
|Less direct origination costs         |  |   | (    14,842 | )
|                                      |  |   |            
|Net investment in financing leases    |  | $ | 942,429     |  
|                                      |  |   |            



| | 4. |  | NOTES PAYABLE:                                                                                                                                                                                                                      
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | In November 1998, the Partnership entered into a $6.2 million term note.
The note has a ten-year term, is collateralized by certain properties
subject to operating leases, and bears interest at a rate of 8.37% per
annum.        
|
| |    |  | In March 1999, the Partnership entered into an additional $2.0 million
term note. The note has a ten-year term, is collateralized by certain
properties subject to operating leases, and bears interest at a rate of
8.5% per annum.
|
| |    |  | Debt issuance costs of approximately $477,909 in the aggregate were
incurred in connection with the issuance of the notes, and are being
amortized using the straight-line method over the ten-year term.                           

8



---



##### Table of Contents



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


This Quarterly Report or Form 10-Q contains forward-looking statements which
represent the Partnerships beliefs or expectations with respect to matters
which may arise in the future. Any statements in this Form 10-Q which are not
statements of historical fact may be deemed to be forward-looking statements.
When used in this discussion, words such as intends, anticipates,
expects, will, could, estimate 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 described herein. Such risks and uncertainties, some of which are
beyond the Partnerships control, include the following: (i) tenant defaults
in making rent payments, (ii) a fire or other casualty may interrupt the cash
flow stream from a property, (iii) properties may not be able to be leased at
the assumed rental rates, (iv) unexpected expenses may be incurred and (v)
properties may not be able to be sold at the presently anticipated prices and /
or 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. Undue reliance should not be placed on these forward-looking
statements which 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.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2002.During the three months ended June 30, 2002
total operating revenue was approximately $570,000, nearly unchanged as
compared to $572,000 for the three months ended June 30, 2001.

Operating expenses were approximately $278,000 for the three months ended June
30, 2002, nearly unchanged as compared to approximately $281,000 for the three
months ended June 30, 2001.

Other income for the three months ended June 30, 2002 was approximately $48,000
as compared to other expense of approximately $25,000 for the three months
ended June 30, 2001. The other income for the three months ended June 30, 2002
is primarily due to a gain on the disposition of an equipment lease in April
2002. The other expense during the three months ended June 30, 2001 is
primarily due to a loss on the sale of equipment.

As a result of the foregoing, the Partnerships net income increased 27.7% to
approximately $341,000 for the three months ended June 30, 2002 as compared to
approximately $267,000 for the three months ended June 30, 2001.

Six Months Ended June 30, 2002.During the six months ended June 30, 2002
total operating revenue was approximately $1,143,000, nearly unchanged as
compared to $1,150,000 for the six months ended June 30, 2001. Rental revenue
from operating leases for the six months ended June 30, 2002 increased 2.1% to
approximately $1,104,000, as compared to $1,082,000 for the six months ended
June 30, 2001. The increase in rental income is the result of rent escalations
since the prior year period attributed to changes in the Consumer Price Index.
Such rent escalations are in addition to any fixed, contractual rental
increases that are recognized as rental income on a straight-line basis over
the term of each lease. Earned income from financing leases for the six months
ended June 30, 2002 decreased 42.5% to approximately
$39,000 as compared to approximately $68,000 for the six months ended June 30,
2001 as a result of the amortization of principal balances.

9



---



##### Table of Contents



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

Operating expenses were approximately $584,000 for the six months ended June
30, 2002, a decrease of 19.5% as compared to approximately $725,000 for the six
months ended June 30, 2001. The decrease is principally due to a decline of
approximately $134,000 in non-recurring charges related to reserves for
defaults on operating and financing leases that occurred in 2001.

Other income for the six months ended June 30, 2002 was approximately $49,000
as compared to other expense of approximately $14,000 for the six months ended
June 30, 2001. The other income for the six months ended June 30, 2002 is
primarily due to a gain on the disposition of an equipment lease in April 2002.
The other expense during the six months ended June 30, 2001 is primarily due
to a loss on the sale of equipment.

As a result of the foregoing, the Partnerships net income increased 48.0% to
approximately $609,000 for the six months ended June 30, 2002 as compared to
approximately $411,000 for the six months ended June 30, 2001.

Distributions.The Partnership announced second quarter distributions of
$340,000, of which $281,905 was distributed to limited partners on July 15,
2001. The balance of $58,095 was distributed to those partners who elected to
receive distributions on a monthly basis on May 15, 2002 and June 15, 2002.

10



---



##### Table of Contents



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

LIQUIDITY AND CAPITAL COMMITMENTS

The Partnership commenced an offering of up to 20,000 limited partnership units
registered under the Securities Act of 1933, as amended, by means of a
registration statement that was declared effective by the Securities and
Exchange Commission on August 12, 1994. The offering reached final funding on
August 12, 1996 with subscriptions for the entire offering of 20,000 units.
Net proceeds after offering expenses were approximately $17.4 million.

In November 1998 the Partnership entered into a $6.2 million term note. The
Partnership entered into an additional $2.0 million term note in March 1999.
Proceeds from the notes were used to acquire additional properties. The notes
each have a ten-year term, are collateralized by certain properties subject to
operating leases, and bear interest at rates ranging from 8.37 % to 8.5% per
annum. Debt issuance costs of approximately $478,000 in the aggregate incurred
in connection with the issuance of the notes are being amortized into interest
expense over the life of the notes using the straight-line method.

At June 30, 2002, the Partnership had a portfolio of 14 properties located in
10 states, with a total cost basis of $19.0 million and 7 performing equipment
leases with an original investment of $2.0 million. The partnership also has a
net investment of approximately $13,000 in one repossessed equipment package,
which amount is net of an allowance for losses of approximately $169,000.

The Partnership expects that only limited amounts of liquid assets will be
required for existing properties and equipment since its property and equipment
leases require lessees to pay all taxes, assessments, maintenance, repairs and
casualty and other insurance premiums thereby minimizing the Partnerships
operating expenses and capital requirements. The Partnership management expects
that the cash flow to be generated by the Partnerships properties and
equipment will provide adequate liquidity and capital resources to pay
operating expenses and provide distributions to limited partners.

11



---



##### Table of Contents









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.

12



---



##### Table of Contents



CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
PART II  OTHER INFORMATION

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



| | (a) |  | The following exhibits are included herein or incorporated by
reference:
| | --- |  | ------------------------------------------------------------------------

|       |  |                                                                                                                                                                                                                                                                                             
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Exhibit                                                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                             
|4.1    |  | Amended Agreement of Limited Partnership of Registrant.
(Incorporated by reference to the corresponding exhibit in the
Registrants Form 10-K 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-K 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)                                                                      
|      
|99.1   |  | Pages 12-16 of the final Prospectus dated August 12, 1994, as
supplemented. (Incorporated by reference from the final Prospectus
filed with the Securities and Exchange Commission pursuant to Rule
424(b) promulgated under the Securities Act of 1933, as amended.
SEC File No. 33-77510C)



| | (b) |  | Reports on Form 8-K:                                                        
| | --- |  | ----------------------------------------------------------------------------
|
| |     |  | There were no reports filed on Form 8-K for the quarter ended June 30,
2002.

13



---



##### Table of Contents






SIGNATURES

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

| |                                            |       |                                                
| | ------------------------------------------ | ----- | -----------------------------------------------
| | CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
|
| |                                            | By:   | GP3 Asset Acquisition, LLC
Its Manager         
|
| |                                            | By:   | /s/ Patrick L. BeachPatrick L Beach
Sole Member
|
| |                                            | Date: | August 14, 2002                                

14



---



##### Table of Contents






CERTIFICATION



| |                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | I, Patrick L. Beach, the President of GP3 Asset Acquisition, LLC, the
manager of Captec Franchise Capital Partners L.P. III (the Partnership),
certify that:                                                                             
|
| | (1) The Quarterly Report on Form 10-Q of the Partnership for the period
ended June 30, 2002 which this certification accompanies fully complies
with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
|
| | (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Partnership.                                                                               

| |                                                                          
| | -------------------------------------------------------------------------
| | /s/ Patrick L. Beach
President
GP3 Asset Acquisition, LLC
August 14, 2002

15