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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

(Mark One)

x   ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

OR

o   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition period from      to      Commission file number 33-77510C

CAPTEC FRANCHISE CAPITAL PARTNERS
L.P. III
(Name of small business issuer in its charter)

|                                  |  |                    
|--------------------------------- |  | -------------------
|Delaware                          |  | 38-3160141         
|(State or other jurisdiction      |  | (I.R.S. Employer   
|of incorporation or organization) |  | Identification No.)

|                                                                                   |           
|---------------------------------------------------------------------------------- | ----------
|24 Frank Lloyd Wright Drive, Lobby L, 4th Floor, P.O. Box 544, Ann Arbor, Michigan | 48106-0544
|                                                                                   |           
|(Address of principal executive offices)                                           | (Zip Code)

Issuers telephone number: (734) 994-5505
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Units of limited partnership interest
(Title of Class)

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. x Yes   o No

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. x

State Issuers revenues for its most recent fiscal year: $2,278,158

At December 31, 2002, subscriptions for 20,000 Units of limited partnership
interest (the Units) had been accepted, representing an aggregate amount of
$20,000,000. At December 31, 2002, there were 19,653 Units were issued and
outstanding. The aggregate sales price does not reflect market value and
reflects only the price at which the Units were offered to the public.
Currently, there is no market for the Units and no market is expected to
develop.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference in Part III of this Annual Report on Form 10-KSB:
(1) Portions of the Registrants Form 10-KSB for the fiscal year ended December 31, 1998; and
(2) A portion of the Registrants Form 10-QSB for the quarter ended March 31, 1999.





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TABLE OF CONTENTS



|                                           |  |  |  |  |  |  |  | 
|------------------------------------------ |  |  |  |  |  |  |  | 
|PART I                                    
|PART II                                   
|PART III                                  
|Certifications                            
|Report of Independent Accountants         
|Balance Sheets                            
|Statements of Operations                  
|Statements of Changes in Partners Capital
|Statements of Cash Flows                  
|Exhibit Index                             
|Certification Pursuant to Section 906     



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PART I

Item 1. Description of Business

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, Captec Net Lease Realty,
Inc., an affiliate, acquired the General Partnership interests of the
Partnership. In December 2001, Captec Net Lease Realty, Inc. merged with and
into Commercial Net Lease Realty, Inc. (Commercial Net Lease). 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 (GP3
Asset Acquisition), which is wholly-owned by Mr. Beach and is an affiliate of
Captec. The Limited Partners of the Partnership (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 (the Offering) of up to
20,000 Units of limited partnership interests, priced at $1,000 per Unit,
registered under the Securities Act of 1933, as amended, by means of a
Registration Statement 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 March 24, 1995 and
immediately commenced operations. The Offering reached final funding in August
1996 having received subscriptions for the entire 20,000 Units. Since 1997,
347 Units have been repurchased by the Partnership pursuant to the terms of the
Repurchase Plan set forth in the Partnerships August 12, 1994 prospectus with
respect to the Offering. At December 31, 2002, the Partnership had 19,653
Units issued and outstanding.

The principal investment objectives of the Partnership are: (i) preservation
and protection of capital; (ii) distribution of cash flow generated by the
Partnerships leases; (iii) capital appreciation of the Partnerships
properties; (iv) generation of increased income and protection against
inflation through contractual escalation of base rents or participation in
gross revenues of tenants of the Partnerships properties; and (v) deferred
taxation of cash distributions to the Limited Partners.

The Properties generally are leased on terms which provide for a base
minimum annual rent with fixed increases on specific dates or indexation of
rent to indices such as the Consumer Price Index. The Equipment is leased only
pursuant to leases under which the present value of non-cancellable rental
payments payable during the initial term of the lease is at least sufficient to
permit a lessor to recover the purchase price of the equipment.

The Partnership has no employees. The General Partner and its affiliates,
however, are permitted to perform services for the Partnership pursuant to the
Partnership Agreement.

Item 2. Description of Properties

As of December 31, 2002, the Partnership had a portfolio of 14 properties
located in 10 states, with a cost basis of $18.9 million, 7 performing
equipment leases with an original investment of $2.0 million and one
repossessed equipment package related to a defaulted equipment contract. The
Properties are leased to 11 operators of restaurant concepts including, Red
Robin and Dennys, and one retail operator, Hollywood Video. As of December 31,
2002, leases to Red Robin International, Inc., Foodmaker, Inc. and Gourmet
Systems, Inc. represented 14.25%, 9.61%, and 9.14%, respectively, of the
annualized rent from the total portfolio. Any performance failure under these
leases could materially adversely affect the Partnerships income and financial
position.

As of December 31, 2002, all of the properties owned by the Partnership
are occupied, and the related leases are performing, and all of its investments
in equipment subject to financing leases are performing.

The Partnership has one equipment lease outstanding for which rental
payments are delinquent by more than 90 days, and income accrual has been
suspended by the Partnership. The lessee, an Arbys restaurant franchisee, had
experienced sales decline that resulted in reduced operating cash flows and
subsequently, past due lease payments. However, over the past 18 months, the
lessee has

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been able to reverse these negative trends. As a result of the improving
sales and cash flow trends, the Partnership worked with the lessee on a plan to
restructure the terms of the equipment lease that will allow the company to pay
the lease, in its entirety, by its currently scheduled maturity date. The
restructure will likely close by the middle of 2003, but will be effective
retroactively to May 1, 2002. Upon closure of the restructure, the lessee will
make all payments required to bring the lease current from its effective date
of May 1, 2002. No loss is anticipated on this equipment lease and no reserve
has been recorded against this asset.

The Partnership has repossessed equipment previously leased to a former
Boston Market licensee, who has gone out of business. The Partnership
recovered the equipment package from the lessees premises and expects to sell
the equipment package. At December 31, 2002, the Partnership had a remaining
investment in this asset of approximately $13,000, net of an allowance of
approximately $169,000 recorded in prior years to reflect the loss expected to
be realized from the sale of the equipment.

The following is a summary description of the leased Property and
Equipment as of December 31, 2002.

|                                   |       |                 |         |          |          |  |            |         |         |                  |           |   |           |       |            |            |  |          |           |  |             |         |         |         |  |  |        |   |  |  |       |  |  |  |        |  | 
|---------------------------------- | ----- | --------------- | ------- | -------- | -------- |  | ---------- | ------- | ------- | ---------------- | --------- | - | --------- | ----- | ---------- | ---------- |  | -------- | --------- |  | ----------- | ------- | ------- | ------- |  |  | ------ | - |  |  | ----- |  |  |  | ------ |  | 
|                                   |       |                 |         |          |          |  |            |         |         |                  |           |   |           |       | Original   |            |  |          |           |  |             |         |         |         |  |  |        |   |  |  |       |  |  |  |        | 
|                                   |       |                 |         |          |          |  |            |         |         |                  |           |   |           |       | Asset Cost |            |  | Asset    |           |  |             |         |         | Date of |  |  | Annual |   |  |  |       | 
|                                   |       |                 | Concept |          | Date of  |  |            | Date of |         |                  | Including |   |           | State |            | Monthly    |  |          | Next Rent |  |             | Rate of |         |         |  |  |       
|Tenant/Lessee Name                 |       | Name            |         | Commence |          |  | Expiration |         |         | Acquisition Fees |           |   | Location  |       | Rent       |            |  | Increase |           |  | Increase(4) |         |         | Sq. Ft. | 
|                                   |       |                 |         |          |          |  |            |         |         |                  |           |   |           |       |            |            |  |          |           |  |             |         |         |         | 
|PROPERTIES                         |       |                 |         |          |          |  |            |         |         |                  |           |   |           |       |            |            |  |          |           |  |             |         |         |         |  |  |        |   |  |  |       |  |  |  |        | 
|                                   |       |                 |         |          |          |  |            |         |         |                  |           |   |           |       |            |            |  |          |           |  |             |         |         |         |  |  |        |   |  |  |       |  |  |  |        | 
|Americas Favorite Chicken Co.     |       | Church's        |         |          | 11/1/95  |  |            |         | 11/1/15 |                  |           | $ | 661,500   |       |            | TX         |  | $        | 6,353     |  |             |         | 11/1/05 |         |  |  | 1.92   | % |  |  | 1,850 | 
|Gourmet Systems, Inc.              |       | Applebee's      |         |          | 8/1/95   |  |            |         | 8/1/15  |                  |           |   | 1,724,583 |       |            | IL         |  |          | 18,489    |  |             |         | 8/1/03  |         |  |  | 3.00   | % |  |  | 5,580 | 
|Dennys Inc.                       |       | Denny's         |         |          | 10/1/96  |  |            |         | 9/1/15  |                  |           |   | 1,032,927 |       |            | VA         |  |          | 9,740     |  |             |         | 9/1/05  |         |  |  | 1.92   | % |  |  | 3,012 | 
|Red Robin International, Inc.      |       | Red Robin       |         |          | 4/1/96   |  |            |         | 4/1/16  |                  |           |   | 2,846,963 |       |            | TX         |  |          | 28,824    |  |             |         | 4/1/03  |         |  |  | 2.50   | % |  |  | 7,485 | 
|Golden Restaurant Operations, Inc. |       | Boston Market   |         |          | 7/1/96   |  |            |         | 11/1/11 |                  |           |   | 1,200,150 |       |            | NJ         |  |          | 9,901     |  |             |         | 6/1/03  |         |  |  | 13.1   | % |  |  | 3,333 | 
|Foodmaker, Inc.                    |       | Jack in Box     |         |          | 10/1/96  |  |            |         | 10/1/14 |                  |           |   | 987,000   |       |            | TX         |  |          | 9,223     |  |             |         | 10/1/06 |         |  |  | (1)  0 | % |  |  | 2,860 | 
|Hollywood Entertainment Corp.      |       | Hollywood Video |         |          | 9/1/96   |  |            |         | 5/1/11  |                  |           |   | 1,102,500 |       |            | OK         |  |          | 11,025    |  |             |         | 9/1/06  |         |  |  | (2)  0 | % |  |  | 7,500 | 
|Corral South Store #3, Inc.        |       | Golden Corral   |         |          | 6/1/97   |  |            |         | 6/1/17  |                  |           |   | 1,680,000 |       |            | FL         |  |          | 15,696    |  |             |         | 6/1/07  |         |  |  | 2.39   | % |  |  | 8,825 | 
|Dynamic Management                 |       | Black Eyed Pea  |         |          | 10/1/96  |  |            |         | 10/1/16 |                  |           |   | 1,561,106 |       |            | TX         |  |          | 14,480    |  |             |         | 10/1/06 |         |  |  | (3)  0 | % |  |  | 5,445 | 
|Foodmaker, Inc.                    |       | Jack in Box     |         |          | 1/1/99   |  |            |         | 1/1/17  |                  |           |   | 1,286,250 |       |            | WA         |  |          | 10,209    |  |             |         | 1/1/04  |         |  |  | 1.50   | % |  |  | 2,669 | 
|Tec-Foods, Inc.                    |       | Taco Bell       |         |          | 1/1/99   |  |            |         | 1/1/19  |                  |           |   | 840,000   |       |            | MI         |  |          | 6,970     |  |             |         | 1/1/05  |         |  |  | 0.66   | % |  |  | 2,356 | 
|Romacorp, Inc.                     |       | Tony Roma's     |         |          | 1/1/99   |  |            |         | 1/1/14  |                  |           |   | 1,942,500 |       |            | FL         |  |          | 16,342    |  |             |         | 1/1/05  |         |  |  | 1.96   | % |  |  | 6,297 | 
|RTM, Inc.                          |       | Arby's          |         |          | 8/1/99   |  |            |         | 8/1/19  |                  |           |   | 706,011   |       |            | NC         |  |          | 5,463     |  |             |         | 9/1/03  |         |  |  | 1.49   | % |  |  | 2,554 | 
|Border Foods                       |       | Taco Bell       |         |          | 4/1/99   |  |            |         | 4/1/19  |                  |           |   | 1,338,750 |       |            | MN         |  |          | 10,148    |  |             |         | 4/1/03  |         |  |  | 2.00   | % |  |  | 2,687 | 
|                                   |       |                 |         |          |          |  |            |         |         |                  |           |   |           |       |            |            |  |          |           |  |             |         |         |         |  |  |        |   |  |  |       |  | 
|                                   |       |                 |         |          |          |  |            |         |         |                  |           |   |           |       | 18,910,240 |            |  |          |           |  |             |         | 172,863 |         |  |  |        |   |  |  |       |  |  |  | 62,453 | 
|                                   |       |                 |         |          |          |  |            |         |         |                  |           |   |           |       |            |            |  |          |           |  |             |         |         |         |  |  |        |   |  |  |       |  | 
|EQUIPMENT                          |       |                 |         |          |          |  |            |         |         |                  |           |   |           |       |            |            |  |          |           |  |             |         |         |         |  |  |        |   |  |  |       |  |  |  |        | 
|                                   |       |                 |         |          |          |  |            |         |         |                  |           |   |           |       |            |            |  |          |           |  |             |         |         |         |  |  |        |   |  |  |       |  |  |  |        | 
|J.M.C. Limited Partnership         |       | Applebee's      |         |          | 4/1/99   |  |            |         | 4/1/06  |                  |           |   | 391,112   |       |            | UT         |  |          | 6,136     |  |             |         |         |         |  |  |        |   |  |  |       | 
|Roma Texarkoma Joint Venture       |       | Johnny Carino's |         |          | 4/1/99   |  |            |         | 4/1/06  |                  |           |   | 446,250   |       |            | TX         |  |          | 7,241     |  |             |         |         |         |  |  |        |   |  |  |       | 
|Morgans Foods of Ohio, Inc.       |       | KFC             |         |          | 6/1/99   |  |            |         | 6/1/06  |                  |           |   | 196,469   |       |            | OH         |  |          | 3,019     |  |             |         |         |         |  |  |        |   |  |  |       | 
|Chi-Co, Inc.                       |       | Arby's          |         |          | 6/1/99   |  |            |         | 6/1/06  |                  |           |   | 105,000   |       |            | IL         |  |          | 1,671     |  |             |         |         |         |  |  |        |   |  |  |       | 
|American Hospitality Corp.         |       | Taco Bell       |         |          | 10/01/01 |  |            |         | 5/01/14 |                  |           |   | 195,430   |       |            | NC         |  |          | 662       |  |             |         |         |         |  |  |        |   |  |  |       | 
|Checkers Corp.                     |       | Checkers        |         |          | 3/15/96  |  |            |         | 3/15/03 |                  |           |   | 236,250   |       |            | FL         |  |          | 4,050     |  |             |         |         |         |  |  |        |   |  |  |       | 
|J.M.C. Limited Partnership         |       | Applebee's      |         |          | 9/15/96  |  |            |         | 9/15/03 |                  |           |   | 403,411   |       |            | UT         |  |          | 6,624     |  |             |         |         |         |  |  |        |   |  |  |       | 
|                                   |       |                 |         |          |          |  |            |         |         |                  |           |   |           |       |            |            |  |          |           |  |             |         |         |         |  |  |        |   |  |  |       |  |  | 
|                                   |       |                 |         |          |          |  |            |         |         |                  |           |   |           |       | 1,973,922  |            |  |          |           |  |             |         | 29,403  |         |  |  |        |   |  |  |       |  |  |  |        | 
|                                   |       |                 |         |          |          |  |            |         |         |                  |           |   |           |       |            |            |  |          |           |  |             |         |         |         |  |  |        |   |  |  |       |  |  | 
|REPOSSESSED EQUIPMENT              |       |                 |         |          |          |  |            |         |         |                  |           |   |           |       |            |            |  |          |           |  |             |         |         |         |  |  |        |   |  |  |       |  |  |  |        | 
|                                   |       |                 |         |          |          |  |            |         |         |                  |           |   |           |       |            |            |  |          |           |  |             |         |         |         |  |  |        |   |  |  |       |  |  |  |        | 
|B.C. Superior, LLC                 |       | Boston Market   |         |          | 4/1/99   |  |            |         | 4/1/06  |                  |           |   | 261,646   |       |            | IN         |  |          |           |  |             |         |         |         |  |  |        |   |  |  |       | 
|                                   |       |                 |         |          |          |  |            |         |         |                  |           |   |           |       |            |            |  |          |           |  |             |         |         |         |  |  |        |   |  |  |       |  |  |  |       
|                                   | Total |                 |         |          |          |  |            |         |         |                  |           |   |           |       | $          | 21,145,808 |  |          |           |  |             |         | $       | 202,266 |  |  |        |   |  |  |       |  |  |  |        |  | 
|                                   |       |                 |         |          |          |  |            |         |         |                  |           |   |           |       |            |            |  |          |           |  |             |         |         |         |  |  |        |   |  |  |       |  |  | 



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|(1) |  | Rent Increase equals the lesser of CPI or 10.0%.             
|--- |  | -------------------------------------------------------------
|   
|(2) |  | Rent Increase equals the lesser of CPI or 12.0%.             
|   
|(3) |  | Rent Increase equals the lesser of CPI or 10.0%.             
|   
|(4) |  | Rate of increase was calculated on a compounded annual basis.

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Leases

Real Estate Leases:All of the properties are subject to leases which are
triple net leases whereby the tenant is responsible for all expenses related to
the cost of operating the Properties including real estate taxes, insurance,
maintenance and repair costs. As of December 31, 2002, original base terms of
the property leases ranged from 14 to 20 years, and the weighted average
remaining base term of the property lease portfolio was 12.8 years. Certain of
the leases provide the tenant with one or more options to renew the lease upon
expiration of the base term at predetermined or market rental rates. All of
the leases provide for increases in the monthly rents during the base term of
the lease, with most of these determined based upon fixed, contractual rates of
increases. Three of the leases provide for rental increases based upon the
lesser of a fixed percentage or changes in the Consumer Price Index. The
timing of rental increases is specified in the leases, but generally occurs no
more often than annually and no less often than once every five years.

Equipment Leases: All of the equipment leases are on the Partnerships
standard form of lease pursuant to which the lessee is responsible for all
expenses related to the equipment, including taxes, insurance, maintenance and
repair costs. All of the equipment was purchased with cash from Offering
proceeds. As of December 31, 2002, original base terms of the equipment leases
ranged from 5 to 8 years, and the weighted average remaining base term of the
equipment lease portfolio was 42 months. All of the leases provide for fixed
monthly rents during the entire term of the lease. Approximately 68% of the
equipment leases provide the lessee with the option to purchase the equipment
for a nominal purchase price ($1) upon expiration of the base lease term.

Summary of Investment Objectives and Policies

The Partnership acquires income-producing property and equipment which is
leased primarily to operators of nationally franchised fast-food, family style
and dinner house restaurants as well as other franchised service-type
businesses such as automotive and specialty retail franchises. Properties are
selected for acquisition based on an examination and evaluation by the General
Partner or an affiliate of the potential value of the site, the financial
condition and business history of the proposed tenant or lessee, area
demographics, prospective purchase price and lease terms, geographic and market
diversification, and potential operating results. Similar analyses are utilized
in selecting equipment for inclusion in lease packages. The Partnership
anticipates that fee interests in real property will be acquired, although
other interests (including acquisitions of buildings subject to a long-term
ground lease) may be acquired if it is deemed to be advantageous to the
Partnership. In no event is property or equipment acquired unless a
satisfactory lease commitment has been obtained from a suitable tenant or
lessee as further described below.

In selecting specific properties, the General Partner generally requires
the following:

(i)  Base annual rent that provides a specified minimum return on the
contract purchase price of the property; and

(ii)  An initial lease term between ten and twenty years.

In selecting specific equipment, the General Partner typically requires
the following:

(i)  Leases providing for fixed rents structured to return 100% of the cost
of the equipment plus yield a return equivalent to market interest rates over
the lease term; and

(ii)  Terms of five to seven years with residual values of equipment at
the end of such terms expected to be minimal.

The determination of whether particular properties or equipment should be
sold or otherwise disposed of is made after consideration of relevant factors,
including performance or projected performance of the property or equipment and
market conditions, with a view toward achieving the principal investment
objectives of the Partnership.

Item 3. Legal Proceedings

The Partnership is not a party to any material legal proceeding nor, to
the best of its knowledge, are any such proceedings either pending or
threatened.

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

Captec Net Lease merged with and into Commercial Net Lease effective on
December 1, 2001. In connection with the merger, Commercial Net Lease agreed
to sell and assign its general partnership interest in the Partnership to GP3
Asset Acquisition. In order to complete this transaction, the consent of a
majority in interest of the Limited Partners and the Partnerships lender was
required. Effective January 15, 2002, the requisite Limited Partner consent
was obtained and the consent solicitation was closed. Lender consent is still
pending.




PART II

Item 5. Market for Registrants Limited Partnership Interests and Related Security Holder Matters

There is no public market for the Units and the Partnership does not
currently expect that any market will develop. There are restrictions upon the
transferability of Units, including the requirement that the General Partner
consent to any transferee becoming a substituted Limited Partner (which consent
may be granted or withheld at the sole discretion of the General Partner). In
addition, restrictions on transfer may be imposed under state securities laws. As of December 31, 2002, Units were held by 1,357 investors of record.

The Internal Revenue Code of 1986, as amended, contains provisions that
may have an adverse impact on investors in certain publicly traded
partnerships. If the Partnership were to be classified as a publicly traded
partnership, income attributable to the Units would be characterized as
portfolio income and the gross income attributable to Units acquired by
tax-exempt entities would be unrelated business income, with the result that
the Units could be less marketable. The General Partner will, if necessary,
take appropriate steps to ensure that the Partnership will not be deemed a
publicly traded partnership.

Item 6. Managements Discussion and Analysis of Financial Condition and Results of Operations

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 but are not limited to the following:
(i) the possibility that tenants and lessees may default in making rent
payments, (ii) the risk of fire or another casualty interrupting the cash flow
stream from a property, (iii) the inability to enter into leases at the assumed
rental rates, (iv) unexpected expenses, and (v) the inability to sell
properties at 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. Any statements contained in this report or
any document incorporated herein by reference that are not statements of
historical fact may be deemed to be forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, some of
which are beyond the Partnerships control, and actual results may differ
materially depending on a variety of important factors, many of which are also
beyond the Partnerships control. You should not place undue reliance on these
forward-looking statements, which speak only as of the date of this report. The
Partnership disclaims, except as may be required by law, any obligations to
update or release revisions to these forward-looking statements to reflect
events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events.

Results of Operations

For the year ended December 31, 2002, total operating revenue was
approximately $2.3 million, nearly unchanged as compared to the year ended
December 31, 2001. Rental revenue from operating leases for the year ended
December 31, 2002 increased 1.2% to approximately $2,206,000 as compared to
$2,180,000 for the year ended December 31, 2001. The increase in rental income
is the result of rent escalations 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 year ended
December 31, 2002 decreased 41.7% to approximately $72,000 as compared to
approximately $124,000 for the year ended December 31, 2001 as a result of the
amortization of principal balances on the finance leases.

Operating expenses decreased 20% to approximately $1.2 million for 2002 as
compared to approximately $1.5 million for 2001. The decrease is principally
due to a decline of approximately $312,000 in charges related to reserves for
defaults on operating and financing leases. At December 31, 2002, the
Partnership had a remaining net investment in one impaired financing lease of

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approximately $13,000, net of an allowance of approximately $169,000
recorded in prior years to reflect the losses expected to be realized from the
sale of the equipment.

Other income for the year ended December 31, 2002 was approximately
$40,000 as compared to other expense of approximately $278,000 for the year
ended December 31, 2001. The other income for 2002 is primarily due to a gain
on the disposition of an equipment lease in April 2002. The other expense for
2001 is primarily due to losses on the sale of two equipment leases, a charge
on a restructured equipment lease and a loss on the sale of a property that had
been abandoned by the lessee.

As a result of the foregoing, the Partnerships net income for 2002
increased 108.9% to approximately $1.1 million from approximately $542,000 in
2001. The Partnership is not subject to income taxation as all of its income
and expenses flow through to the Partners. During the year ended December 31,
2002, the Partnership made distributions to Limited Partners totaling
approximately $1,715,000 as compared with approximately $1,712,000 for the
preceding year.

Critical Accounting Policies

The financial statements are prepared in accordance with Generally
Accepted Accounting Principles, which require the Partnership to make certain
estimates and assumptions. A summary of the Partnerships significant
accounting policies is provided in note 1 to the financial statements. The
following section is a summary of certain aspects of those accounting policies
that require management estimates and judgement.

When real estate properties are acquired, acquisition costs are allocated
to components of the property using relative fair values based on historical
experience and the Partnerships current judgement. These assumptions and
estimates impact the amount of costs allocated between land and building,
depreciation expense, and gains or losses recorded on sales of properties.

Receivables are reported net of allowance for doubtful accounts and may be
uncollectible in the future. The Partnership reviews its receivables regularly
for potential collection problems in computing the allowance recorded against
its receivables. This review process requires the Partnership to make certain
judgements regarding collections that are inherently difficult to predict.

Liquidity and Capital Resources

The Partnership commenced the Offering of up to 20,000 Units, priced at
$1,000 per Unit, 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 on August 12, 1996, having
received subscriptions for the entire 20,000 Units and funds totaling
$20,000,000. Net proceeds after Offering expenses were $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 and
equipment. The notes each have a 10-year term, are collateralized by certain
properties subject to operating leases, and bear interest rates ranging from
8.37% to 8.5% per annum. Debt issuance costs of approximately $478,000 incurred
in connection with the issuance of the notes are being amortized over the life
of the notes to interest expense using the straight-line method.

As of December 31, 2002, the Partnership had invested $18.9 million in 14
net leased real estate properties and $2.0 million in 7 performing equipment
leases. The remaining net investment in the Partnerships leased equipment is
$809,000, after cumulative principal collections of $1.2 million. Inclusive of
the above amount, the Partnership has received approximately $3.0 million of
aggregate principal collections on its financing leases during the life of
those investments. The Partnership also has a net investment of approximately
$13,000 in a repossessed equipment package, net of an allowance for loss of
approximately $169,000. As of December 31, 2002, the Partnership has not made
any commitments to purchase additional properties or equipment, nor does it
intend to make any such commitments.

The Partnership annually considers written requests to repurchase Units
pursuant to the terms of the repurchase plan set forth in the Partnerships
prospectus with respect to the Offering. Since 1997, a total of 347 Units have
been repurchased by the Partnership. During 1997, the Partnership repurchased
a total of 37 Units for $31,450, or an average of $850 per Unit. In 1999 the
Partnership repurchased a total of 79 Units for $59,625, or an average of $755
per Unit. During 2000, the Partnership repurchased 42 Units for $28,432, or an
average of $677 per Unit and, in 2001, the Partnership repurchased 66 Units for
$42,839, or an average of $649 per Unit. During 2002, the Partnership
repurchased 123 Units for $74,789, or an average of $608 per Unit. The
Partnership expects to fund future Unit repurchases out of working capital
reserves and Net Sale or Refinancing Proceeds, but may also fund such

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repurchases out of Cash Flow. The Partnership is not obligated to accept
Unit repurchase requests if the General Partner determines that such purchases
would impair the capital or operation of the Partnership and the Partnership
may suspend or cancel the Repurchase Plan at any time in its sole discretion.

The Partnership expects that only limited amounts of liquid assets will be
required for existing properties since its property and equipment leases
require tenants and lessees to pay all taxes and assessments, maintenance and
repairs and insurance premiums, including casualty insurance thereby minimizing
the Partnerships operating expenses and capital requirements. The General
Partner 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.

Item 7. Financial Statements

See Index to Financial Statements on Page F-I of this Form 10-KSB for
Financial Statements.

Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.




PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act of the Registrant.

The Partnership does not have directors, officers or employees.

Patrick L. Beach is
the sole member of CRC Asset Acquisition LLC, the sole Member of GP3 Asset
Acquisition and the President of GP3 Asset Acquisition, the Partnerships General Partner.

Mr. Beach attended
the University of Michigan and graduated from its School of Business
Administration in 1977 with a Bachelor of Business Administration
degree. From 1997 until 2001, Mr. Beach served as the Chairman,
President and Chief Executive Officer of Captec Net Lease. Since
1981, he has served as Chairman and Chief Executive Officer of Captec
Financial Group, Inc., an affiliate of the Partnership, that is
involved in the acquisition and development of single tenant
restaurant properties, shopping centers, and multi-family residential
properties.

Item 10. Executive Compensation

The Partnership has no officers or other employees. All amounts paid by
the Partnership for management and administrative services are pursuant to
agreements described under Item 12 Certain Relationships and Related
Transactions.

Item 11. Security Ownership of Certain Beneficial Owners and Management

To the best knowledge of the Partnership, as of December 31, 2002, no
person beneficially owned more than 5% of the outstanding Units.

Item 12. Certain Relationships and Related Transactions

Pursuant to the Partnership Agreement, the General Partner receives
acquisition fees of 4%, plus an additional .00624% for each 1% of indebtedness
incurred in acquiring properties and equipment, of the aggregate purchase
prices of properties and equipment (not to exceed a total 5% acquisition fee).
The Partnership did not incur any acquisition fees during 2002 and 2001.
Acquisition fees incurred in earlier years were capitalized as part of the
Partnerships investment in land and buildings subject to operating leases and
net investment in financing leases.

The Partnership has entered into an asset management agreement with the
General Partner and its affiliates, whereby the General Partner and the General
Partners affiliates provide various property and equipment management services
for the Partnership. A subordinated asset management fee is charged, in an
amount equal to 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
non-compounded return of 10% per annum on their adjusted invested capital.
Management fees of $24,807 and $22,934 were incurred during 2002 and 2001,
respectively.

The Partnership Agreement provides for the General Partner to receive real
estate liquidation fees limited to the lesser of 3% of the gross sales price or
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 11% per annum on
their

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adjusted invested capital plus distributions of sale or refinancing
proceeds equal to 100% of their original contributions. The Partnership did
not incur any real estate liquidation fees during 2002 and 2001.

The Partnership Agreement provides for the General Partner to receive
equipment liquidation fees in the amount of 3% of the contract sales price. The
Partnership did not incur any equipment liquidation fees during 2002 and 2001.

An affiliate of the
Partnership, a Small Business Investment Corporation
(SBIC), has invested in certain entities that have leases
with the Partnership. As a result of the investments made through the
SBIC, Mr. Beach or his associates in the SBIC, may have board
representation in these companies. The Partnership and its General
Partner believe that the leases are at market rates for such
properties and equipment.

In December 2001, Captec Net Lease merged with and into Commercial Net
Lease. 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, a wholly-owned subsidiary of CRC Asset Acquisition LLC, a
Michigan limited liability company of which Patrick L. Beach is the sole
member. Patrick L. Beach is the former Chairman of the Board of Directors and
President and Chief Executive Officer of Captec Net Lease and an original
General Partner of the Partnership. In order to complete the assignment of the
General Partnership interest, a majority in interest of the Limited Partners and
the Partnerships lender were required to consent to the transfer to GP3 Asset
Acquisition. A majority in interest of the Limited Partners consented to the
transfer to GP3 Asset Acquisition in January 2002 and the lender consent is
pending. Until such time that the transfer of the General Partnership interest
to GP3 Asset Acquisition is completed, Commercial Net Lease and GP3 Asset
Acquisition have entered into an agreement pursuant to which Commercial Net
Lease assigned to GP3 Asset Acquisition all economic interest as general
partner, GP3 Asset Acquisition assumed all obligations to be performed relative
to such economic interest and Commercial Net Lease contracted with GP3 Asset
Acquisition to perform all management services previously performed by the
General Partner under the terms of the Partnership Agreement.

The agreements and arrangements, including those relating to compensation,
between the Partnership and the General Partner or any of its affiliates have
not been and will not be the result of arms-length negotiations, although the
General Partner believes that such agreements and arrangements will approximate
those which would be arrived at through arms-length negotiations. While the
Partnership will make no loans to the General Partner or its affiliates, the
Partnership may borrow money from the General Partner or its affiliates but
only on such terms as to interest rate, security, fees and other charges at
least as favorable to the Partnership as are charged by unaffiliated lending
institutions in the same locality on comparable loans for the same purpose. The
General Partner and its affiliates are not prohibited from providing services
to, and otherwise dealing or doing business with, persons (for example,
franchisees), who may deal with the Partnership. However, the Partnership
Agreement prohibits receipt of rebates or give-ups or participation in any
reciprocal business arrangements which would have the effect of circumventing
any of the provisions of the Partnership Agreement.

Item 13. Controls and Procedures

Mr. Beach, acting in his capacity as the principal executive officer of GP3 Asset
Acquisition, is ultimately responsible for the disclosure controls
and procedures of the Partnership. Disclosure controls and procedures
are established and maintained by the Partnership to ensure the
information required to be disclosed by the Partnership in the
reports that it files or submits pursuant to the Securities Exchange
Act of 1934, as amended (the Act), is recorded, processed,
summarized and reported within the time periods specified in the
Commissions rules and forms. Mr. Beach has evaluated the
effectiveness of the Partnerships disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this report, and has determined that the Partnerships
disclosure controls and procedures effectively communicate the
information required to be disclosed by the Partnership in the report
it files or submits under the Act in a manner that allows timely
decisions regarding such disclosure.

There have been no significant changes in the Partnerships internal controls or in
other factors that could significantly affect these controls
subsequent to the evaluation date, including, but not limited to any
corrective actions with regard to significant deficiencies and
material weaknesses.

8



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Item 14. Exhibits and Reports on Form 8-K

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

|       |  |                                                                                                                                                                                                                                 
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Exhibit                                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                 
|4      |  | Amended Agreement of Limited Partnership of Registrant.
(Incorporated by reference to the corresponding exhibit in the
Registrants Form 10-KSB for the fiscal year ended December 31,
1998)                                    
|       |  |                                                                                                                                                                                                                                 
|10.1   |  | Promissory Note dated November 28, 1998 between Registrant and
National Realty Funding L.C. (Incorporated by reference to the
corresponding exhibit in the Registrants Form 10-KSB for the
fiscal 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     |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley act of 2002                                                                                                          

(b)  Reports on Form 8-K:

There were no reports filed on Form 8-K for the year ended December 31,
2002.

9



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SIGNATURES

In accordance with Section 13 or 15 (d) of the Securities Exchange Act of
1934, as amended, the registrant has 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
President
|
| |  | Date:                                      |  | March 28, 2003                                

In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

By: /s/ Patrick L. Beach
      Patrick L. Beach
      President

Date: March 28, 2003

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Certifications

I, Patrick L. Beach, certify that:

1.     I have reviewed this annual report on Form 10-KSB of Captec Franchise
Capital Partners L.P. III;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: March 28, 2003

By: /s/ Patrick L. Beach
      Patrick L. Beach
      President, GP3 Asset Acquisition, LLC

The foregoing certification is as required by Section 302(a) of the
Sarbanes-Oxley Act of 2002 and amended Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934, which state that the wording of such
certification may not be changed in any respect, even if such change would
appear inconsequential in nature. GP3 Asset Acquisition, LLC is a single
member limited liability company, the sole member of which is a limited
liability company of which Patrick L. Beach is the sole and managing member.
As a result, neither the Partnership or GP3 Asset Acquisition, LLC has a board
of directors or audit committee and Patrick L. Beach is only certifying officer
and is ultimately responsible for establishing and maintaining the registrants
disclosure controls.

11



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Captec Franchise Capital Partners L.P. III
Index to Financial Statements

|                                           |         | 
|------------------------------------------ | ------- | 
|                                           | Page(s) | 
|                                           |         | 
|Report of Independent Accountants          | F  1   | 
|                                          
|Financial Statements                       |         | 
|Balance Sheets                             | F  2   | 
|Statements of Operations                   | F  3   | 
|Statements of Changes in Partners Capital | F  4   | 
|Statements of Cash Flows                   | F  5   | 
|Notes to Financial Statements              | F  6   | 

F-I



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Report of Independent Accountants

To the partners of Captec Franchise Capital
Partners L.P. III

In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Captec
Franchise Capital Partners L.P. III at December 31, 2002 and 2001, and the
results of its operations, its cash flows and its changes in partners capital
for each of the two years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Partnerships
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Chicago, Illinois
February 28, 2003

F-1



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Captec Franchise Capital Partners
L.P. IIIBalance Sheets
December 31, 2002 and 2001

|                                   |                                       |                                         |                                   |            |            |      |            |            |            |  |  | 
|---------------------------------- | ------------------------------------- | --------------------------------------- | --------------------------------- | ---------- | ---------- | ---- | ---------- | ---------- | ---------- |  |  | 
|                                   |                                       |                                         |                                   |            |            | 2002 |            |            | 2001       | 
|                                   |                                       |                                         |                                   |            |            |      |            |            |            | 
|                                   |                                       |                                         |                                   | Assets     |            |      |            |            |            |  |  | 
|Cash and cash equivalents          |                                       | $                                       | 286,511                           |            |            | $    | 781,658    |           
|Restricted cash                    |                                       |                                         | 499,863                           |            |            |      | 387,302    |           
|Investment in leases:              |                                       |                                         |                                   |            |            |      |            |           
|                                   | Operating leases, net                 |                                         |                                   | 17,285,384 |            |      |            | 17,565,762 |           
|                                   | Financing leases, net                 |                                         |                                   | 807,542    |            |      |            | 1,111,307  |           
|                                   | Impaired financing leases, net        |                                         |                                   | 12,693     |            |      |            | 48,693     |           
|Accounts receivable                |                                       |                                         | 47,762                            |            |            |      | 60,401     |           
|Unbilled rent, net                 |                                       |                                         | 1,299,690                         |            |            |      | 1,190,584  |           
|Due from related parties           |                                       |                                         | 5,733                             |            |            |      | 5,524      |           
|Deferred financing costs, net      |                                       |                                         | 286,745                           |            |            |      | 334,536    |           
|                                   |                                       |                                         |                                   |            |            |     
|                                   |                                       | Total assets                            |                                   | $          | 20,531,923 |      |            | $          | 21,485,767 | 
|                                   |                                       |                                         |                                   |            |            |     
|                                   |                                       |                                         | Liabilities and Partners Capital |            |            |      |            |            |            |  | 
|Liabilities:                       |                                       |                                         |                                   |            |            |      |            |           
|                                   | Notes payable                         |                                         | $                                 | 7,864,328  |            |      | $          | 8,042,570  |           
|                                   | Accounts payable and accrued expenses |                                         |                                   | 110,819    |            |      |            | 161,935    |           
|                                   | Due to related parties                |                                         |                                   |           |            |      |            | 15,025     |           
|                                   | Security deposits held on leases      |                                         |                                   | 31,960     |            |      |            | 45,607     |           
|                                   |                                       |                                         |                                   |            |            |     
|                                   |                                       | Total liabilities                       |                                   |            | 8,007,107  |      |            |            | 8,265,137  | 
|                                   |                                       |                                         |                                   |            |            |     
|Partners capital:                 |                                       |                                         |                                   |            |            |      |            |           
|Limited partners capital accounts |                                       |                                         | 12,519,242                        |            |            |      | 13,188,344 |           
|General partners capital account  |                                       |                                         | 5,574                             |            |            |      | 32,286     |           
|                                   |                                       |                                         |                                   |            |            |     
|                                   |                                       | Total partners capital                 |                                   |            | 12,524,816 |      |            |            | 13,220,630 | 
|                                   |                                       |                                         |                                   |            |            |     
|                                   |                                       | Total liabilities and partners capital |                                   | $          | 20,531,923 |      |            | $          | 21,485,767 | 
|                                   |                                       |                                         |                                   |            |            |     

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

F-2



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Captec Franchise Capital Partners L.P. III
Statements of Operations
For the Years Ended December 31, 2002 and 2001

|                                                                 |                                         |                                    |           |           |           |   |         |           |           |  
|---------------------------------------------------------------- | --------------------------------------- | ---------------------------------- | --------- | --------- | --------- | - | ------- | --------- | --------- | -
|                                                                 |                                         |                                    |           | 2002      |           |   | 2001    |          
|                                                                 |                                         |                                    |           |           |           |   |         |          
|Operating revenue:                                               |                                         |                                    |           |           |           |   |         |          
|                                                                 | Rental income                           |                                    | $         | 2,205,918 |           |   | $       | 2,180,366 |          
|                                                                 | Finance income                          |                                    |           | 72,240    |           |   |         | 123,891   |          
|                                                                 |                                         |                                    |           |           |           |  
|                                                                 |                                         | Total operating revenue            |           |           | 2,278,158 |   |         |           | 2,304,257 |  
|                                                                 |                                         |                                    |           |           |           |  
|Operating costs and expenses:                                    |                                         |                                    |           |           |           |   |         |          
|                                                                 | Interest expense                        |                                    |           | 715,506   |           |   |         | 736,649   |          
|                                                                 | Depreciation                            |                                    |           | 280,378   |           |   |         | 293,733   |          
|                                                                 | General and administrative              |                                    |           | 154,740   |           |   |         | 105,715   |          
|                                                                 | Provision for impaired financing leases |                                    |           | 36,000    |           |   |         | 255,080   |          
|                                                                 | Provision for unbilled rent             |                                    |           |          |           |   |         | 92,908    |          
|                                                                 |                                         |                                    |           |           |           |  
|                                                                 |                                         | Total operating costs and expenses |           |           | 1,186,624 |   |         |           | 1,484,085 |  
|                                                                 |                                         |                                    |           |           |           |  
|                                                                 |                                         | Income from operations             |           |           | 1,091,534 |   |         |           | 820,172   |  
|                                                                 |                                         |                                    |           |           |           |  
|Other income (expense):                                          |                                         |                                    |           |           |           |   |         |          
|                                                                 | Gain (loss) on sale of equipment        |                                    |           | 29,227    |           |   |         | (118,465  | )        
|                                                                 | Loss on sale of real estate             |                                    |           |          |           |   |         | (169,013  | )        
|                                                                 | Interest income                         |                                    |           | 3,125     |           |   |         | 2,838     |          
|                                                                 | Other                                   |                                    |           | 8,031     |           |   |         | 6,212     |          
|                                                                 |                                         |                                    |           |           |           |  
|                                                                 |                                         | Total other income (expense)       |           |           | 40,383    |   |         |           | (278,428  | )
|                                                                 |                                         |                                    |           |           |           |  
|Net income                                                       |                                         |                                    | 1,131,917 |           |           |   | 541,744 |          
|Net income allocable to general partner                          |                                         |                                    | 11,319    |           |           |   | 5,417   |          
|                                                                 |                                         |                                    |           |           |           |  
|Net income allocable to limited partners                         |                                         | $                                  | 1,120,598 |           |           | $ | 536,327 |          
|                                                                 |                                         |                                    |           |           |           |  
|Net income per limited partnership unit                          |                                         | $                                  | 56.70     |           |           | $ | 27.04   |          
|                                                                 |                                         |                                    |           |           |           |  
|Weighted average number of limited partnership
units outstanding |                                         |                                    | 19,765    |           |           |   | 19,836  |          
|                                                                 |                                         |                                    |           |           |           |  

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

F-3



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Captec Franchise Capital Partners L.P. III
Statements of Changes in Partners Capital
For the Years Ended December 31, 2002 and 2001

|                                                      |  |           |        |   |           |   |            |         |           |   |         |   |  |   |            |  
|----------------------------------------------------- |  | --------- | ------ | - | --------- | - | ---------- | ------- | --------- | - | ------- | - |  | - | ---------- | -
|                                                      |  | Limited   |        |   | Limited   |   |            | General |           |   | Total   |  
|                                                      |  | Partners' |        |   | Partners' |   | Partner's  |         | Partners' |  
|                                                      |  | Units     |        |   | Accounts  |   |            | Account |           |   | Capital |  
|                                                      |  |           |        |   |           |   |            |         |           |   |         |  
|Balance, January 1, 2001                              |  |           | 19,842 |   |           | $ | 14,407,068 |         |           | $ | 26,869  |   |  | $ | 14,433,937 |  
|Repurchase of limited partnership units               |  |           | (66    | ) |           |   | (42,839    | )       |           |   |        |   |  |   | (42,839    | )
|Distributions  ($86.32 per limited partnership unit) |  |           |       |   |           |   | (1,712,212 | )       |           |   |        |   |  |   | (1,712,212 | )
|Net income                                            |  |           |       |   |           |   | 536,327    |         |           |   | 5,417   |   |  |   | 541,744    |  
|                                                      |  |           |        |   |           |   |            |         |           |   |         |  
|Balance, December 31, 2001                            |  |           | 19,776 |   |           | $ | 13,188,344 |         |           | $ | 32,286  |   |  | $ | 13,220,630 |  
|Repurchase of limited partnership units               |  |           | (123   | ) |           |   | (74,789    | )       |           |   |        |   |  |   | (74,789    | )
|Distributions  ($86.77 per limited partnership unit) |  |           |       |   |           |   | (1,714,911 | )       |           |   | (38,031 | ) |  |   | (1,752,942 | )
|Net income                                            |  |           |       |   |           |   | 1,120,598  |         |           |   | 11,319  |   |  |   | 1,131,917  |  
|                                                      |  |           |        |   |           |   |            |         |           |   |         |  
|Balance, December 31, 2002                            |  |           | 19,653 |   |           | $ | 12,519,242 |         |           | $ | 5,574   |   |  | $ | 12,524,816 |  
|                                                      |  |           |        |   |           |   |            |         |           |   |         |  

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

F-4



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##### Table of Contents






Captec Franchise Capital Partners L.P. III
Statements of Cash Flows
For the Years Ended December 31, 2002 and 2001

|                                                     |                                                                         |                                                              |                        |            |          |         |            |            |          |         | 
|---------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------------------------ | ---------------------- | ---------- | -------- | ------- | ---------- | ---------- | -------- | ------- | 
|                                                     |                                                                         |                                                              |                        |            | 2002     |         |            | 2001       |         
|                                                     |                                                                         |                                                              |                        |            |          |         |            |            |         
|Cash flows from operating activities:                |                                                                         |                                                              |                        |            |          |         |            |           
|                                                     | Net Income                                                              |                                                              | $                      | 1,131,917  |          |         | $          | 541,744    |         
|                                                     | Adjustments to net income:                                              |                                                              |                        |            |          |         |            |            |         
|                                                     |                                                                         | Depreciation                                                 |                        |            | 280,378  |         |            |            | 293,733  |        
|                                                     |                                                                         | Amortization of debt issuance costs                          |                        |            | 47,791   |         |            |            | 47,791   |        
|                                                     |                                                                         | (Gain) loss on sale of equipment                             |                        |            | (29,227  | )       |            |            | 118,465  |        
|                                                     |                                                                         | Provision for impaired financing leases                      |                        |            | 36,000   |         |            |            | 255,080  |        
|                                                     |                                                                         | Loss on sale of real estate                                  |                        |            |         |         |            |            | 169,013  |        
|                                                     |                                                                         | Increase in unbilled rent                                    |                        |            | (109,106 | )       |            |            | (116,150 | )      
|                                                     |                                                                         | Decrease (increase) in accounts receivable                   |                        |            | 12,639   |         |            |            | (203     | )      
|                                                     |                                                                         | Decrease in security deposits                                |                        |            | (13,647  | )       |            |            | (9,167   | )      
|                                                     |                                                                         | (Decrease) increase in accounts payable and accrued expenses |                        |            | (51,116  | )       |            |            | 78,790   |        
|                                                     |                                                                         | Increase in restricted cash                                  |                        |            | (112,561 | )       |            |            | (117,865 | )      
|                                                     |                                                                         | Decrease in due from related parties                         |                        |            | (209     | )       |            |            | (5,524   | )      
|                                                     |                                                                         | (Decrease) increase in due to related parties                |                        |            | (15,025  | )       |            |            | 11,620   |        
|                                                     |                                                                         |                                                              |                        |            |          |        
|Net cash provided by operating activities            |                                                                         |                                                              | 1,177,834              |            |          |         | 1,267,327  |           
|                                                     |                                                                         |                                                              |                        |            |          |        
|Cash flows from investing activities:                |                                                                         |                                                              |                        |            |          |         |            |           
|                                                     | Net proceeds from disposition of properties subject to operating leases |                                                              |                        |           |          |         |            | 781,434    |         
|                                                     | Net proceeds from sale of equipment                                     |                                                              |                        | 71,896     |          |         |            | 267,745    |         
|                                                     | Net principal payments on financing leases                              |                                                              |                        | 261,096    |          |         |            | 275,640    |         
|                                                     |                                                                         |                                                              |                        |            |          |        
|Net cash provided by investing activities            |                                                                         |                                                              | 332,992                |            |          |         | 1,324,819  |           
|                                                     |                                                                         |                                                              |                        |            |          |        
|Cash flows from financing activities:                |                                                                         |                                                              |                        |            |          |         |            |           
|                                                     | Repayments of notes payable                                             |                                                              |                        | (178,242   | )        |         |            | (151,430   | )       
|                                                     | Repurchase of limited partnership units                                 |                                                              |                        | (74,789    | )        |         |            | (42,839    | )       
|                                                     | Distributions to limited partners                                       |                                                              |                        | (1,714,911 | )        |         |            | (1,712,212 | )       
|                                                     | Distributions to general partner                                        |                                                              |                        | (38,031    | )        |         |            |           |         
|                                                     |                                                                         |                                                              |                        |            |          |        
|Net cash used in financing activities                |                                                                         |                                                              | (2,005,973             | )          |          |         | (1,906,481 | )         
|                                                     |                                                                         |                                                              |                        |            |          |        
|Net (decrease) increase in cash and cash equivalents |                                                                         |                                                              | (495,147               | )          |          |         | 685,665    |           
|Cash
and cash equivalents, beginning of year         |                                                                         |                                                              | 781,658                |            |          |         | 95,993     |           
|                                                     |                                                                         |                                                              |                        |            |          |        
|Cash
and cash equivalents, end of year               |                                                                         | $                                                            | 286,511                |            |          | $       | 781,658    |           
|                                                     |                                                                         |                                                              |                        |            |          |        
|Supplemental disclosure of cash flow information:    |                                                                         |                                                              |                        |            |          |         |            |           
|                                                     |                                                                         |                                                              | Cash paid for interest |            | $        | 668,962 |            |            | $        | 689,917 | 
|                                                     |                                                                         |                                                              |                        |            |          |        

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

F-5



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##### 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, Captec Net Lease Realty, Inc.,
an affiliate, acquired the General Partnership interests of the Partnership.
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 37 Units for $31,450, or an average of $850 per Unit.
In 1999, the Partnership repurchased a total of 79 Units for $59,625, or an
average of $755 per Unit. During 2000, the Partnership repurchased a total of
42 Units for $28,432, or an average of $677 per Unit and in 2001 the
Partnership repurchased a total of 66 Units for $42,839, or an average of
$649 per Unit. During 2002, the Partnership repurchased a total of 123 Units
for $74,789, or an average of $608 per Unit. At December 31, 2002, the
Partnership had 19,653 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. Following is a
summary of the Partnerships significant accounting policies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | The Partnership considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Restricted cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | The Partnership is required to maintain a cash balance in an escrow account
until specific post closing requirements have been satisfied related to a
note payable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | Rental income from operating leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | The Partnerships operating leases have scheduled rent increases, which occur
at various dates throughout the lease terms. Increases to rental income on
leases that provide for rental increases based on changes in the Consumer
Price Index commence being recognized when the increase is known. 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. In addition to scheduled
rent increases, certain of the Partnerships leases also have percentage and
overage rent clauses, which the Partnership recognizes after the tenants
reported sales have exceeded the applicable sales breakpoint.                                                                                                                                                                                                                                                                                                                                                                                                                    

F-6



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##### Table of Contents





| |  | Land and building subject to 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). The Partnership
periodically reviews its real estate portfolio for impairment whenever events
or changes in circumstances indicate that the carrying amount of the property
may not be recoverable. If an impairment loss is indicated using undiscounted
cash flows, the loss is measured as the amount by which the carrying amount
of the asset exceeds the estimated fair or present value of the asset on a
discounted cash flow basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets (FAS 144). FAS 144 requires
that long-lived assets to be disposed of other than by sale be considered
held and used until they are disposed of. The new standard also requires
that long-lived assets to be disposed of by sale be accounted for under the
requirements of FAS No. 121 which requires that such assets be measured at
the lower of carrying amounts or fair value less cost to sell and the
cessation of depreciation. FAS 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001. The implementation
of this statement has not had a material effect on the Partnerships
financial statements.                                                                                                                                                                                                                                                                                      
|
| |  | Net investment in financing leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Net investment in financing leases primarily represents equipment used in
restaurant operations, which are leased on a triple-net basis. 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. Direct origination costs are deferred and amortized over the life
of the lease as an adjustment to yield. Income recognition is suspended on
financing leases that become delinquent for 90 or more days. The Partnership
periodically reviews its financing lease portfolio for impairment whenever
events or changes in circumstances indicate that the carrying value of a
lease may not be recoverable. If impairment is indicated, a loss reserve is
calculated based on the estimated amounts recoverable. At December 31, 2002,
the Partnership has provided an allowance of $168,636 for uncollectible
amounts associated with its financing leases.
|
| |  | Note payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Notes payable have fair values
equal to $8,629,163 based on debt with similar terms reflecting
current interest rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Distributions per limited partnership Unit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Distributions per limited
partnership Unit is calculated using the actual distributions
disbursed during the period to the weighted average number of limited
partnership Units during the period. Actual individual limited
partner distributions realized may vary from this calculation as a
result of a variety of factors including: (i) actual
distributions are computed based on quarterly operating results and
outstanding limited partnership units, which are disbursed in the
subsequent quarter; (ii) certain limited partners have
elected to receive monthly distributions versus quarterly
distributions which creates timing differences between comparative
calculations, and (iii) the calculation ignores the timing of repurchases.                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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|   |  | 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 99% to the Limited Partners and
1% to the General Partner, except that the General Partners share is
subordinated to a 10% preferred return to the limited partners. Net sale or
refinancing proceeds of the Partnership are allocated 90% to the limited
partners and 10% to the General Partner, except that the General Partners
share is subordinated to an 11% preferred return plus return of the
original contributions to the limited partners. Distributions of cash flow
from operations are paid quarterly in arrears.                                                                                                                                                   
|  
|3. |  | Related Party Transactions and Agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | Pursuant to the Partnership Agreement, the General Partner receives
acquisition fees of 4%, plus an additional .00624% for each 1% of
indebtedness incurred in acquiring properties and equipment, of the aggregate
purchase prices of properties and equipment (not to exceed a total 5%
acquisition fee). The Partnership did not incur any acquisition fees during
2002 and 2001. Acquisition fees incurred in earlier years are capitalized as
part of the Partnerships investment in land and buildings subject to
operating leases and net investment in financing leases.                                                                                                                                                 
|  
|   |  | The Partnership has entered into an asset management agreement with the
General Partner and its affiliates, whereby the General Partner and the
General Partners affiliates provide various property and equipment
management services for the Partnership. A subordinated asset management fee
is charged, in an amount equal to 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 non-compounded return of 10% per annum on their adjusted
invested capital. Management fees of $24,807 and $22,934 were expensed as
incurred during 2002 and 2001, respectively.
|  
|   |  | The Partnership Agreement provides for the General Partner to receive real
estate liquidation fees limited to the lesser of 3% of the gross sales price
or 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 11% per
annum on their adjusted invested capital plus distributions of sale or
refinancing proceeds equal to 100% of their original contributions. The
Partnership did not incur any real estate liquidation fees during 2002 and
2001.                                                                                                         
|  
|   |  | The Partnership Agreement provides for the General Partner to receive
equipment liquidation fees in the amount of 3% of the contract sales price.
The Partnership did not incur any equipment liquidation fees during 2002 and
2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | An affiliate of the
Partnership, a Small Business Investment Corporation
(SBIC), has invested in certain entities that have leases
with the Partnership. As a result of the investments made through the
SBIC, Mr. Beach or his associates in the SBCI, may have board
representation in these companies. The Partnership and its General
Partner believe that the leases are at market rates for such
properties and equipment.                                                                                                                                                                                                                                                                                                
|  
|4. |  | Land and Building Subject to Operating Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | The net investment in operating leases as of December 31, 2002 and 2001 is
comprised of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                              |  |      |            |   |      |   |            |  
|----------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                              |  | 2002 |            |   | 2001 |  
|                              |  |      |            |   |      |  
|Land                          |  | $    | 7,695,896  |   |      | $ | 7,695,896  |  
|Building and improvements     |  |      | 11,214,344 |   |      |   | 11,214,344 |  
|                              |  |      |            |   |      |  
|                              |  |      | 18,910,240 |   |      |   | 18,910,240 |  
|Less accumulated depreciation |  |      | (1,624,856 | ) |      |   | (1,344,478 | )
|                              |  |      |            |   |      |  
|Total                         |  | $    | 17,285,384 |   |      | $ | 17,565,762 |  
|                              |  |      |            |   |      |  

F-8



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##### Table of Contents





| |  | The following is a schedule of future minimum lease payments to be received
on the operating leases as of December 31, 2002.
| |  | ----------------------------------------------------------------------------------------------------------------------------

|           |  |   |            | 
|---------- |  | - | ---------- | 
|2003       |  | $ | 2,089,565  | 
|2004       |  |   | 2,138,859  | 
|2005       |  |   | 2,176,005  | 
|2006       |  |   | 2,214,859  | 
|2007       |  |   | 2,254,212  | 
|Thereafter |  |   | 17,717,565 | 
|           |  |   |           
|Total      |  | $ | 28,591,065 | 
|           |  |   |           



|5. |  | Net Investment in Financing Leases                                                                    
|-- |  | ------------------------------------------------------------------------------------------------------
|  
|   |  | The net investment in financing leases as of December 31, 2002 and 2001 is
comprised of the following:

|                                      |  |      |          |   |      |   |           |  
|------------------------------------- |  | ---- | -------- | - | ---- | - | --------- | -
|                                      |  | 2002 |          |   | 2001 |  
|                                      |  |      |          |   |      |  
|Minimum lease payments to be received |  | $    | 897,429  |   |      | $ | 1,230,765 |  
|Estimated residual value              |  |      | 48,736   |   |      |   | 89,678    |  
|                                      |  |      |          |   |      |  
|Gross investment in financing leases  |  |      | 946,165  |   |      |   | 1,320,443 |  
|Less unearned income                  |  |      | (121,994 | ) |      |   | (173,859  | )
|Less direct origination costs         |  |      | (16,629  | ) |      |   | (35,277   | )
|                                      |  |      |          |   |      |  
|Net investment in financing leases    |  | $    | 807,542  |   |      | $ | 1,111,307 |  
|                                      |  |      |          |   |      |  



| |  | The following is a schedule of future minimum lease payments to be received
on the financing leases as of December 31, 2002:
| |  | ----------------------------------------------------------------------------------------------------------------------------

|           |  |   |         | 
|---------- |  | - | ------- | 
|2003       |  | $ | 301,068 | 
|2004       |  |   | 224,749 | 
|2005       |  |   | 224,749 | 
|2006       |  |   | 87,923  | 
|2007       |  |   | 7,947   | 
|Thereafter |  |   | 50,993  | 
|           |  |   |        
|Total      |  | $ | 897,429 | 
|           |  |   |        



|   |  | During 2002, the Partnership recognized a net gain of $29,227 primarily due
to a gain on the disposition of an equipment lease. During 2001, the
Partnership recognized a loss of $118,465 on the sale of equipment leases,
comprised of net proceeds of $267,745 against a net investment of $386,210.                                                                                                                                                                                                                  
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|6. |  | Impaired Financing Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | At December 31, 2002, the Partnerships investment in impaired financing
leases was comprised of a lease with a recorded investment of $12,693, net of
a related allowance of $168,636. This was an equipment lease to a lessee that
has gone out of business. The Partnership recovered the equipment from the
lessees premises and expects to sell the equipment. The net investment in
the impaired lease represents the estimated net proceeds that the Partnership
expects to receive from a sale of the equipment.
|  
|7. |  | 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 an interest 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 an interest rate of 8.5% per annum. At
December 31, 2002, annual maturities on the notes in aggregate are as
follows:                                                                                                                                                                                                     
|  
|   |  | F-9Table of Contents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|           |  |   |           | 
|---------- |  | - | --------- | 
|2003       |  | $ | 193,806   | 
|2004       |  |   | 210,729   | 
|2005       |  |   | 229,130   | 
|2006       |  |   | 249,137   | 
|2007       |  |   | 270,891   | 
|Thereafter |  |   | 6,710,635 | 
|           |  |   |          
|Total      |  | $ | 7,864,328 | 
|           |  |   |          



|   |  | Debt issuance costs of $477,909 in aggregate were incurred in connection with
the issuance of the notes, and are being amortized to interest expense using
the straight-line method over the ten-year term of the notes.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|8. |  | Subsequent Event                                                                                                                                                                                                        
|  
|   |  | Based upon the results of operations for the three-month period ended
December 31, 2002, the Partnership declared distributions of $340,000 to its
limited partners on January 15, 2003.                                

F-10



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##### Table of Contents






EXHIBIT INDEX

|               |  |                                                                                                                                                                                                                                 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                     
|               |  |                                                                                                                                                                                                                                 
|4              |  | Amended Agreement of Limited Partnership of Registrant.
(Incorporated by reference to the corresponding exhibit in the
Registrants Form 10-KSB for the fiscal year ended December 31,
1998)                                    
|               |  |                                                                                                                                                                                                                                 
|10.1           |  | Promissory Note dated November 28, 1998 between Registrant and
National Realty Funding L.C. (Incorporated by reference to the
corresponding exhibit in the Registrants Form 10-KSB for the
fiscal 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             |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley act of 2002