##### Table of Contents



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

FORM 10-KSB

(Mark One)

|                                                                                                    
|----------------------------------------------------------------------------------------------------
|X IN BALLOT BOX   ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|                                                                                                    
|For the fiscal year ended December 31, 2001                                                         
|                                                                                                    
|OR                                                                                                  
|                                                                                                    
|X IN BALLOT BOX   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

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

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 38-3160141                          
|                                                               |  |                                     
|(State or other jurisdiction
of incorporation or organization) |  | (I.R.S. Employer
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 ($1,000)
|                                                               |  | (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 IN BALLOT BOX Yes   X IN BALLOT BOX  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 IN BALLOT BOX

At December 31, 2001 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, 2001, there were 19,776 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

A portion of the Prospectus of the Registrant dated August 12, 1994, as
supplemented and filed pursuant to Rule 424(b) under the Securities Act of
1933, as amended, S.E.C. File No. 33-77510C, and is incorporated by reference
in Part III of this Annual Report on Form 10-KSB.





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TABLE OF CONTENTS



|                                                                                          |  |  |  |  |  |  |  | 
|----------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                                                                   
|PART II                                                                                  
|PART III                                                                                 
|REPORT OF INDEPENDENT ACCOUNTANTS                                                        
|BALANCE SHEETS DECEMBER 31, 2001 AND 2000                                                
|STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000                  
|STATEMENTS OF CHANGES IN PARTNERS CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
|STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000                  




PART I

Item 1. Description of Business

Captec Franchise Capital Partners L.P. III (the Partnership) is a
Delaware limited partnership formed on February 18, 1994 for the purpose of
acquiring income-producing commercial real properties and equipment which will
be leased primarily to operators of national chain and nationally franchised
fast-food, family style and dinner house restaurants as well as other
franchised or chain businesses pursuant to leases requiring the lessee to pay
all taxes, assessments, utilities, insurance, maintenance, and repair costs
associated with such properties. The general partners upon formation of the
Partnership were Captec Franchise Capital Corporation III (Captec) and
Patrick L. Beach, an individual. In August 1998, the general partnership
interest in the Partnership was acquired by Captec Net Lease Realty, Inc.
(Captec Net Lease), an affiliate of Captec. Captec Net Lease, Captec, and Mr.
Beach are collectively referred to as the General Partners. In December 2001,
Captec Net Lease 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,
a wholly-owned subsidiary of CRC Asset Acquisition LLC which is 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 must 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 whereby Commercial Net Lease assigned to GP3 Asset
Acquisition all economic interests as general partner, GP3 Asset Acquisition
has assumed all obligations to be performed relative to such economic interests
and Commercial Net Lease has contracted with GP3 Asset Acquisition to perform
all management services previously performed by the General Partners under the
terms of the Partnership Agreement.

The Partnership commenced a public offering (the Offering) of up to
20,000 units of limited partnership interest (the Units) 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. Capitalized terms not defined herein shall have
the meaning ascribed to them in the Partnerships Prospectus dated 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 from 1,392 investors. Since 1997, a total of 224 Units have been
repurchased by the Partnership pursuant to the terms of the Repurchase Plan set
forth in the Partnerships Prospectus. At December 31, 2001, the Partnership
had 19,776 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
Partnership properties; (iv) generation of increased income and protection
against inflation through contractual escalation of base rents or participation
in gross revenues of lessees of Partnership properties; and (v) deferred
taxation of Partnership cash distributions of the Partnership for limited
partners of the Partnership (the Limited Partners).

The Partnership expects to have not less than 75%, but not more than 90%
of total investments in Properties and up to 25%, but not less than 10% in
Equipment. The Properties generally will be 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 will be
leased only pursuant to leases under which the present value of non-cancelable
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
(Full Payout Leases).

The Partnership has no employees. The General Partners and their
affiliates, however, are permitted to perform services for the Partnership
pursuant to the partnership agreement.

Item 2. Description of Properties

As of December 31, 2001, the Partnership had a portfolio of 14 properties
located in 10 states, with a cost basis of $19.0 million, 8 performing
equipment leases with an original investment of $2.3 million and two
repossessed equipment packages related to defaulted equipment contracts. The
Properties are leased to 11 operators of restaurant concepts such as Red Robin
and Dennys and one retail operator, Hollywood Video. As of December 31, 2001,
leases to Red Robin International, Inc., Foodmaker, Inc. and Gourmet

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Systems, Inc. represented 14.2%, 9.82%, and 9.07% of the annualized rent
from the total portfolio respectively. Any performance failure under these
leases could materially affect the Partnerships income and financial position.

In December 2000, Platinum Properties, LLC abandoned the Partnerships
Boston Market property in Raleigh, North Carolina. Annualized rent prior to
abandonment was approximately $124,000. The Property was subsequently sold in
December of 2001 and $370,000 of the net proceeds of approximately $780,000
were distributed and the remainder retained for working capital.

In October 1998, Boston Chicken Inc. and the majority of its subsidiaries
filed for Chapter 11 bankruptcy protection. As a consequence, the lease for
one of the Partnerships Boston Market properties was rejected and that
property was vacant as of December 31, 1998, and the lease for another Boston
Market property was assumed by Boston Chicken, Inc. in Chapter 11 with modified
terms. The vacant Boston Market property was sold in April 1999, and the
proceeds were reinvested in properties and equipment. In 2000, the assumed
Boston Market property was subsequently sold by Boston Chicken, Inc. in Chapter
11 to Golden Restaurant Operations, a subsidiary of McDonalds Corporation.
Annualized rent from this remaining Boston Market property was $110,000 at
December 31, 2001.

As of December 31, 2001, all of the properties owned by the Partnership
are occupied and the related leases are performing. However, during 2001 the
Partnership experienced defaults on four equipment lease or equipment loan
contracts, as further described below.

In November 2001, an equipment lease to a Taco Bell franchisee was written
down by approximately $100,000 from its balance of $159,000 to a new balance of
$59,000 to reflect a restructuring of the lease agreement. This lease became
delinquent as a result of a significant deterioration in the credit condition
of the obligor. The restructuring is designed to adjust rental payments to a
level that can be supported by the obligors forecasted operating cash flows.
In connection with the lease restructuring, the monthly rental payment
decreased from $3,110 to $662, and the remaining term was extended from 54
months to 149 months. To mitigate the loss to the Partnership from this
restructure, the lessee also provided the Partnership with a performance based
junior note in the amount of $65,000, which is due and payable as certain
performance goals are achieved. The write down does not take into
consideration any value for the junior note.

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, has
experienced sales declines that have resulted in reduced operating cash flows.
It is anticipated that the lessee will be able to reverse these negative trends
and overcome their cash flow problems. As a result, the Partnership is working
with the obligor to restructure the terms of the equipment lease to provide the
lessee with temporary reductions in lease payments followed by increased
payments designed to provide for full payment of the lease rents at its
currently scheduled maturity date. No loss is anticipated on this equipment
lease and no reserve has been recorded against this asset.

The Partnership had two equipment leases with obligors who have gone out
of business: a former Boston Market licensee and a former Dennys franchisee.
The Partnership recovered the equipment from the lessees premises and expects
to sell the equipment packages. The Partnership has agreed to sell the
equipment formerly leased to the Dennys franchisee to the franchisor for
$36,000, subject to completion of definitive documentation. The Partnership
has also filed a claim for recoveries of its losses in the bankruptcy
proceedings of the Dennys franchisee, but does not anticipate any significant
recoveries to be realized as a result of this claim. During 2001, the
Partnership recognized a loss provision for impaired financing leases totaling
approximately $255,000 for these two defaulted leases. At December 31, 2001,
the Partnership had a remaining net investment in these two equipment contracts
of approximately $458,000, and had recorded offsetting allowances of
approximately $409,000 (including allowances recorded in prior periods) to
reflect the losses 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, 2001.

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|                                   |         |                 |         |  |          |         |  |            |          |  |                  |           |           |          |                  |            |      |         |        |          |           |  |             |         |         |         |         |        |  |  |       |  |  |  |  |  | 
|---------------------------------- | ------- | --------------- | ------- |  | -------- | ------- |  | ---------- | -------- |  | ---------------- | --------- | --------- | -------- | ---------------- | ---------- | ---- | ------- | ------ | -------- | --------- |  | ----------- | ------- | ------- | ------- | ------- | ------ |  |  | ----- |  |  |  |  |  | 
|                                   |         |                 |         |  |          |         |  |            |          |  |                  |           |           |          | Total Asset Cost |            |      | Asset   |        |          |           |  |             |         | Date of |         |         | Annual |  |  |       |  | 
|                                   |         |                 | Concept |  |          | Date of |  |            | Date of  |  |                  | Including |           |          | State            |            |      | Monthly |        |          | Next Rent |  |             | Rate of |         |         |         |        | 
|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         |      |         | 17,951 |          |           |  | 8/1/02      |         |         |         | 3.00    | %      |  |  | 5,580 | 
|DenAmerica Corp.                   |         | 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         |      |         | 28,121 |          |           |  | 4/1/02      |         |         |         | 2.50    | %      |  |  | 7,485 | 
|Golden Restaurant Operations, Inc. |         | Boston Market   |         |  | 7/1/96   |         |  |            | 7/1/11   |  |                  |           | 1,200,150 |          |                  | NJ         |      |         | 9,197  |          |           |  | 1/1/02      |         |         |         | 4.6     | %      |  |  | 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 |          |           |  | 9/1/02      |         |         |         | (2)   0 | %      |  |  | 7,500 | 
|Corral South Store #3, Inc.        |         | Golden Corral   |         |  | 6/1/97   |         |  |            | 6/1/17   |  |                  |           | 1,680,000 |          |                  | FL         |      |         | 14,534 |          |           |  | 6/1/02      |         |         |         | 2.39    | %      |  |  | 8,825 | 
|DenAmerica Corp.                   |         | 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         |      |         | 6,833  |          |           |  | 1/1/02      |         |         |         | 0.66    | %      |  |  | 2,356 | 
|Romacorp, Inc.                     |         | Tony Roma's     |         |  | 1/1/99   |         |  |            | 1/1/14   |  |                  |           | 1,942,500 |          |                  | FL         |      |         | 15,417 |          |           |  | 1/1/02      |         |         |         | 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         |      |         | 9,949  |          |           |  | 4/1/02      |         |         |         | 2.00    | %      |  |  | 2,687 | 
|                                   |         |                 |         |  |          |         |  |            |          |  |                  |           |           |          |                  |            |      |         |        |          |           |  |             |         |         |         |         |        |  |  |       |  |  | 
|                                   |         |                 |         |  |          |         |  |            |          |  |                  |           |           |          | 18,910,240       |            |      |         |        |          |           |  | 168,495     |         |         |         |         |        |  |  |       |  |  |  |  | 
|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    |          |           |  |             |         |         |         |         |        |  |  |       | 
|Phoenix Restaurant Group, Inc.     |         | Denny's         |         |  | 11/15/95 |         |  |            | 11/15/00 |  |                  |           | 286,593   |          |                  | FL         |      |         |        |          |           |  |             |         |         |         |         |        |  |  |       | 
|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  |          |           |  |             |         |         |         |         |        |  |  |       | 
|                                   |         |                 |         |  |          |         |  |            |          |  |                  |           |           |          |                  |            |      |         |        |          |           |  |             |         |         |         |         |        |  |  |       |  |  | 
|                                   |         |                 |         |  |          |         |  |            |          |  |                  |           |           |          | 2,260,515        |            |      |         |        |          |           |  | 29,403      |         |         |         |         |        |  |  |       |  |  |  |  | 
|                                   |         |                 |         |  |          |         |  |            |          |  |                  |           |           |          |                  |            |      |         |        |          |           |  |             |         |         |         |         |        |  |  |       |  |  | 
|REPOSSESSED EQUIPMENT              |         |                 |         |  |          |         |  |            |          |  |                  |           |           |          |                  |            |      |         |        |          |           |  |             |         |         |         |         |        |  |  |       |  |  |  |  | 
|Olajuwon Holdings                  |         | Denny's         |         |  | 4/1/99   |         |  |            | 4/1/07   |  |                  |           | 306,737   |          |                  | AL         |      |         |       |          |           |  |             |         |         |         |         |        |  |  |       | 
|Roma Texarkoma Joint Venture       |         | Johnny Carino's |         |  | 4/1/99   |         |  |            | 4/1/06   |  |                  |           | 261,646   |          |                  | IN         |      |         |       |          |           |  |             |         |         |         |         |        |  |  |       | 
|                                   |         |                 |         |  |          |         |  |            |          |  |                  |           |           |          |                  |            |      |         |        |          |           |  |             |         |         |         |         |        |  |  |       |  |  |  | 
|                                   |         |                 |         |  |          |         |  |            |          |  |                  |           |           |          | 568,383          |            |      |         |        |          |           |  |             |         |         |         |         |        |  |  |       |  |  |  |  |  | 
|                                   |         |                 |         |  |          |         |  |            |          |  |                  |           |           |          |                  |            |      |         |        |          |           |  |             |         |         |         |         |        |  |  |       |  |  |  |  |  | 
|                                   | Total : |                 |         |  |          |         |  |            |          |  |                  |           |           |          | $                | 21,739,139 |      |         |        |          |           |  |             |         |         |         |         |        |  |  |       |  |  |  |  |  | 
|                                   |         |                 |         |  |          |         |  |            |          |  |                  |           |           |          |                  |            |      |         |        |          |           |  |             |         |         |         |         |        |  |  |       |  |  |  |  |  | 



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|(1) |  | Rent Increase equals the greater 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.

Leases

General Real Estate Lease Provisions: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. 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 13.8 years as of December 31,
2001. 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 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.

General Equipment Lease Provisions: All of the equipment leases are on the
Partnerships standard form of lease whereby 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. 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 48 months as of December 31, 2001. All of the leases provide for fixed
monthly rents during the entire term of the lease. Approximately 58% of the
equipment leases provide the tenant 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
Partners or an affiliate of the potential value of the site, the financial
condition and business history of the proposed lessee, the demographics of the
area in which the property is located, the proposed purchase price and lease
terms, geographic and market diversification, and potential operating results.
Similar analyses are utilized in selecting equipment. The Partnership
anticipates that only fee interests in real property will be acquired, although
other interests (including acquisitions of buildings, with the underlying land
being subject to a long-term ground lease) may be acquired if it is deemed to
be advantageous to the Partnership.

In making investments, the General Partners consider relevant factors,
including the condition and proposed use of the property and/or equipment,
income-producing capacity, the financial condition of the lessee, and with
respect to Properties, the prospects for

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long-term appreciation. In no event will property or equipment be acquired
unless a satisfactory lease commitment has been obtained from a suitable lessee
as further described below.

In selecting specific properties, the General Partners generally require
the following:

(i)  Base annual rent will provide a specified minimum return on the
contract purchase price of the property; the majority of the leases will
provide for fixed increases on specific dates or indexation of rents to indices
such as the Consumer Price Index. Leases may also provide for percentage rents
calculated to provide rents equal to a percentage of the lessees gross sales
if greater than the base rent; and

(ii)  The initial lease will have a term of between ten and twenty years.

In selecting specific equipment, the General Partners typically require
the following:

(i)  Full Payout 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)  The leases are expected to have terms of five to seven years with
residual values of equipment at the end of such terms expected to be minimal
(approximately 10% of original cost).

The determination of whether particular properties or equipment should be
sold or otherwise disposed of will be 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.

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

As described herein under the heading Item 1. Business, 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, a
wholly-owned subsidiary of CRC Asset Acquisition LLC which is 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 this transaction, a majority in interest of the
Limited Partners and the Partnerships lender must consent to the transfer of
the general partner interest to GP3 Asset Acquisition. A consent
solicitation regarding this consent was filed with the Securities and Exchange
Commission and mailed to all Limited Partners on or about November 30, 2001.
The consent solicitation requested that the Limited Partners provide written
consent to:



| |  |  | Transfer the general partners interest to GP3 Asset Acquisition;                          
| | - |  | -------------------------------------------------------------------------------------------
|
| |  |  | Admit GP3 Asset Acquisition as the general partner of the Partnership; and                 
|
| |  |  | Continue the business of the Partnership with GP3 Asset Acquisition as the general partner.

Effective January 15, 2002, the requisite Limited Partner consents to the
transfer of the general partnership interests to GP3 Asset Acquisition were
obtained and the consent solicitation of the Limited Partners was closed.
Lender consent is still pending.




PART II

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

The Units are not readily transferable. There is no public market for the
Units and it is not currently expected that any will develop. There are
restrictions upon the transferability of Units, including the requirement that
the General Partners consent to any

5



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##### Table of Contents



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.

The Revenue Act of 1987 contains provisions which 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 Partners 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, the words, intends, anticipates,
expects, and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from those projected.
Such risks and uncertainties include the following: (i) a tenant may default in
making rent payments, (ii) a fire or other casualty may interrupt the cash flow
stream from a property, (iii) the properties may not be able to be leased at
the assumed rental rates, (iv) unexpected expenses may be incurred in the
ownership of the properties, and (v) properties may not be able to be sold at
the presently anticipated prices and times.

As a result of these and other factors, the Partnership may experience
material fluctuations in future operating results on a quarterly or annual
basis, which could materially and adversely affect its business, financial
condition and operating results. 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  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 except as may be required by law.

Results of Operations

For the year ended December 31, 2001, total operating revenue decreased 7%
to approximately $2.3 million as compared to approximately $2.5 million for the
year ended December 31, 2000. Rental income from operating leases for 2001
decreased 5% to approximately $2.2 million as compared to $2.3 million for 2000
due to the impairment of the Raleigh, North Carolina Boston Market property.
Earned income from financing leases for 2001 decreased 30% to approximately
$124,000 as compared to $176,000 for 2000 as a result of the disposition of two
equipment leases, one in January 2001 and the other one in April 2001, as well
as amortization of principal balances.

Operating expenses increased 35% to approximately $1.5 million for 2001 as
compared to approximately $1.1 million for 2000. The increase is principally
due to a reserve for unbilled rent of approximately $93,000 and reserves for
impaired financing leases of approximately $255,000 both of which were charges
incurred in the first quarter of 2001. General and administrative expenses
increased by approximately $37,000, primarily due to the increase in
professional fee expense.

During 2001 the Partnership experienced defaults on one property lease and
four equipment leases that resulted in certain charges to reserves for
anticipated losses and/or losses from the sale of equipment and real estate no
longer subject to leases.

In December 2000, Platinum Properties, LLC abandoned the Partnerships
Boston Market property in Raleigh, North Carolina. Annualized rent prior to
abandonment was approximately $124,000. The Property was subsequently sold in
December of 2001 and $370,000 of the net proceeds of approximately $780,000
were distributed and the remainder retained for working capital. In connection
with these activities, in 2001 the Partnership recognized a charge of
approximately $93,000 to the provision for unbilled rent related to this lease
and a loss on the sale of the real estate of approximately $169,000.

In November 2001, an equipment lease to a Taco Bell franchisee was
modified as a result of negotiations arising out of the delinquent status of
the contract. This lease became delinquent as a result of a significant
deterioration in the credit condition of the obligor. The restructuring is
designed to adjust rental payments to a level that can be supported by the
obligors forecasted operating cash flows. In connection with the lease
restructuring, the monthly rental payment decreased from $3,110 to $662, and
the remaining term was extended from 54 months to 149 months. To mitigate the
loss to the Partnership from this restructure, the lessee also

6



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##### Table of Contents



provided the Partnership with a performance based junior note in the
amount of $65,000, which is due and payable as certain performance goals are
achieved. As a result of the restructuring the Partnership recognized a loss
of approximately $100,000, charged to loss on the sale of equipment. This
charge does not take into consideration any value for the junior note.

The Partnership had two equipment leases with obligors who have gone out
of business: a former Boston Market licensee and a former Dennys franchisee.
The Partnership recovered the equipment from the lessees premises and expects
to sell the equipment packages. The Partnership has agreed to sell the
equipment formerly leased to the Dennys franchisee to the franchisor for
$36,000, subject to completion of definitive documentation. The Partnership
has also filed a claim for recoveries of its losses in the bankruptcy
proceedings of the Dennys franchisee, but does not anticipate any significant
recoveries to be realized as a result of this claim. During 2001, the
partnership recognized a provision for impaired financing leases totaling
approximately $255,000 for these two defaulted leases. At December 31, 2001,
the Partnership had a remaining net investment in these two equipment contracts
of approximately $458,000, and had recorded offsetting allowances of
approximately $409,000 (including allowances recorded in prior periods) to
reflect the losses expected to be realized from the sale of the equipment.

In 2001, the Partnership incurred a net loss on the sale of equipment of
approximately $118,000. This was comprised of an aggregate loss of
approximately $18,000 on the disposition of two equipment leases, for which the
Partnership received net proceeds of $268,000, and the charge on the
restructured Taco Bell franchisee equipment lease of approximately $100,000, as
described above.

As a result of the foregoing, the Partnerships net income for 2001
decreased 61% to approximately $542,000 from approximately $1.4 million in
2000. 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,
2001, the Partnership made distributions to Limited Partners totaling
approximately $1.7 million, as compared with approximately $2.2 million for the
preceding year.

Critical Accounting Policies

The financial statements are prepared in accordance with GAAP, which requires
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 registered
under the Securities Act of 1933, as amended, by means of a Registration
Statement filed on Form SB-2 which was declared effective by the Securities and
Exchange Commission on August 12, 1994. The Partnership accepted subscriptions
for the Minimum Number of Units on January 24, 1995, and immediately commenced
operations. The Offering reached final funding on August 12, 1996, with
subscriptions for the entire 20,000 Units and funds totaling $20,000,000. Net
proceeds after offering expenses were $17,400,000.

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 have a 10-year term, are collateralized by certain
properties subject to operating leases, and bear interest at rates ranging from
8.37 to 8.5% per annum. Debt issuance costs of approximately $478,000 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, 2001, the Partnership had a portfolio of 14 properties
located in 10 states, with a cost basis of $19.0 million, 8 performing
equipment leases with an original investment of $2.3 million and two
repossessed equipment packages related to defaulted equipment contracts.

7



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As of December 31, 2001, the Partnership had invested $19.0 million in 14
net leased real estate properties and $2.3 million in 8 performing equipment
leases. The remaining net investment in the Partnerships leased equipment is
$1.1 million, after cumulative principal collections of $1.2 million.
Inclusive of the above amount, the Partnership has received a total of
approximately $2.7 million of aggregate principal collections on its financing
leases during the life of those investments. The Partnership also has a net
investment of approximately $458,000 in two repossessed equipment packages,
against which it has recorded allowances for losses of approximately $409,000.
As of December 31, 2001, 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. Since 1997, a total of 224 units have been repurchased by the
Partnership. During 1997 the Partnership repurchased a total of 37 Units for
$31,450, or approximately $850 per Unit on average. In 1999 the Partnership
repurchased a total of 79 Units for $59,625, or approximately $755 per Unit on
average. During 2000 the Partnership repurchased a total of 42 Units for
$28,432, or approximately $677 per Unit on average. In 2001 the Partnership
repurchased a total of 66 Units for $42,839, or approximately $649 per Unit on
average. The Partnership expects to fund future Unit repurchases out of
working capital reserves and Net Sale or Refinancing Proceeds, but may also
fund such repurchases out of Cash Flow. The Partnership is not obligated to
accept Unit repurchase requests if the General Partners determine 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 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 Partners
expect 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 or officers.

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 13 Certain Relationship and Related Transactions.

Item 11. Security Ownership of Certain Beneficial Owners and Management

To the best knowledge of the Partnership, as of December 31, 2001, no
person beneficially owned more than 5% of the outstanding Units.

Item 12. Certain Relationships and Related Transactions



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pursuant to the Partnership Agreement, 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) are incurred to the
General Partner. The Partnership did not incur any acquisition fees during
2001 and 2000. The acquisition fees were capitalized as part of the
Partnerships investment in land and buildings subject to operating leases
and net investment in financing leases.

8



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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 $22,934 and $26,971 were incurred during
2001 and 2000, 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s Prospectus provided for the reinvestment of net sale proceeds
during the four-year period beginning on the date the Partnership terminated
the offering, August 12, 1996. The Partnership did not incur any real estate
liquidation fees during 2000 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 2000 and
2001 .

In December 2001, Captec Net Lease 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, a wholly-owned subsidiary of CRC
Asset Acquisition LLC which is 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 must 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 whereby
Commercial Net Lease assigned to GP3 Asset Acquisition all economic interests
as general partner, GP3 Asset Acquisition has assumed all obligations to be
performed relative to such economic interests and Commercial Net Lease has
contracted with GP3 Asset Acquisition to perform all management services
previously performed by the General Partners under the terms of the Partnership
Agreement.

The agreements and arrangements, including those relating to compensation,
between the Partnership and the General Partners or any of their affiliates
have not been and will not be the result of arms-length negotiations although
the General Partners believe 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 Partners or their
affiliates, the Partnership may borrow money from the General Partners or their
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 Partners and their 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. Exhibits and Reports on Form 8-k

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

|       |  |                                                                                                                                                                                                                                           
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Exhibit                                                                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                           
|4      |  | Agreement of Limited Partnership of Registrant. (Incorporated by
reference from Exhibit A of the final Prospectus dated August 12,
1994, as supplemented and filed with the Securities and Exchange
Commission, S.E.C. File No. 33-77510C)
|      
|4.1    |  | 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)          

9



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|       |  |                                                                                                                                                                                                                                                                                               
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Exhibit                                                                                                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                               
|10.2   |  | Promissory Note dated March 31, 1999 between Registrant and
National Realty Funding L.C. (Incorporated by reference to the
corresponding exhibit in the Registrants Form 10-QSB for the
quarter ended March 31, 1999)                                                                        
|      
|99.1   |  | Pages 12-16 of the final Prospectus dated August 12, 1994, as
supplemented. (Incorporated by reference from the final Prospectus
filed with the Securities and Exchange Commission pursuant to Rule
424(b) promulgated under the Securities Act of 1933, as amended.
S.E.C. File No. 33-77510C

(b) Reports on Form 8-K:

There were no reports filed on Form 8-K for the fourth quarter ended December 31, 2001.

10



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##### Table of Contents



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
         Sole Member                          
|                                                                                         
|Date:      March 29, 2002                                                                

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. BeachPatrick L. Beach
Sole Member
of GP3 Asset Acquisition, LLC.
|     
|Date: |  | March 29, 2002                                                                 

11



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##### Table of Contents



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 | 





---



##### Table of Contents






Report of Independent Accountants

To the Sole Member of
GP3 Asset Acquisition, LLC
Manager of Captec Franchise Capital Partners L.P. III

In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in partners capital and of cash flows present fairly, in
all material respects, the financial position of Captec Franchise Capital
Partners L.P. III at December 31, 2001 and 2000, and the results of its
operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company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

Detroit, Michigan
March 22, 2002

F-1



---



##### Table of Contents






Captec Franchise Capital Partners L.P. III
Balance Sheets

December 31, 2001 and 2000

|                                   |                                       |                                         |                                   |            |            |      |            |            |            |  |  | 
|---------------------------------- | ------------------------------------- | --------------------------------------- | --------------------------------- | ---------- | ---------- | ---- | ---------- | ---------- | ---------- |  |  | 
|                                   |                                       |                                         |                                   |            |            | 2001 |            |            | 2000       | 
|                                   |                                       |                                         |                                   |            |            |      |            |            |            | 
|                                   |                                       |                                         |                                   | Assets     |            |      |            |            |            |  |  | 
|Cash and cash equivalents          |                                       | $                                       | 781,658                           |            |            | $    | 95,992     |           
|Restricted cash                    |                                       |                                         | 387,302                           |            |            |      | 269,437    |           
|Investment in leases:              |                                       |                                         |                                   |            |            |      |            |           
|                                   | Operating leases, net                 |                                         |                                   | 17,565,762 |            |      |            | 18,809,942 |           
|                                   | Financing leases, net                 |                                         |                                   | 1,111,307  |            |      |            | 2,049,441  |           
|                                   | Impaired financing leases, net        |                                         |                                   | 48,693     |            |      |            | 27,492     |           
|Accounts receivable                |                                       |                                         | 60,401                            |            |            |      | 60,198     |           
|Unbilled rent, net                 |                                       |                                         | 1,190,584                         |            |            |      | 1,074,434  |           
|Due from related parties           |                                       |                                         | 5,524                             |            |            |      |           |           
|Deferred financing costs, net      |                                       |                                         | 334,536                           |            |            |      | 382,327    |           
|                                   |                                       |                                         |                                   |            |            |     
|                                   |                                       | Total assets                            |                                   | $          | 21,485,767 |      |            | $          | 22,769,263 | 
|                                   |                                       |                                         |                                   |            |            |     
|                                   |                                       |                                         | Liabilities and Partners Capital |            |            |      |            |            |            |  | 
|Liabilities:                       |                                       |                                         |                                   |            |            |      |            |           
|                                   | Notes payable                         |                                         | $                                 | 8,042,570  |            |      | $          | 8,194,000  |           
|                                   | Accounts payable and accrued expenses |                                         |                                   | 161,935    |            |      |            | 83,147     |           
|                                   | Due to related parties                |                                         |                                   | 15,025     |            |      |            | 3,405      |           
|                                   | Security deposits held on leases      |                                         |                                   | 45,607     |            |      |            | 54,774     |           
|                                   |                                       |                                         |                                   |            |            |     
|                                   |                                       | Total liabilities                       |                                   |            | 8,265,137  |      |            |            | 8,335,326  | 
|                                   |                                       |                                         |                                   |            |            |     
|Partners capital:                 |                                       |                                         |                                   |            |            |      |            |           
|Limited partners capital accounts |                                       |                                         | 13,188,344                        |            |            |      | 14,407,068 |           
|General partners capital accounts |                                       |                                         | 32,286                            |            |            |      | 26,869     |           
|                                   |                                       |                                         |                                   |            |            |     
|                                   |                                       | Total partners capital                 |                                   |            | 13,220,630 |      |            |            | 14,433,937 | 
|                                   |                                       |                                         |                                   |            |            |     
|                                   |                                       | Total liabilities and partners capital |                                   | $          | 21,485,767 |      |            | $          | 22,769,263 | 
|                                   |                                       |                                         |                                   |            |            |     

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

F-2



---



##### Table of Contents






Captec Franchise Capital Partners L.P. III
Statements of OperationsFor the Years Ended December 31, 2001 and 2000

|                                               |                                         |                                    |         |           |           |   |           |           |           | 
|---------------------------------------------- | --------------------------------------- | ---------------------------------- | ------- | --------- | --------- | - | --------- | --------- | --------- | 
|                                               |                                         |                                    |         | 2001      |           |   | 2000      |          
|                                               |                                         |                                    |         |           |           |   |           |          
|Operating revenue:                             |                                         |                                    |         |           |           |   |           |          
|                                               | Rental income                           |                                    | $       | 2,180,366 |           |   | $         | 2,302,149 |          
|                                               | Finance income                          |                                    |         | 123,891   |           |   |           | 176,329   |          
|                                               |                                         |                                    |         |           |           |  
|                                               |                                         | Total operating revenue            |         |           | 2,304,257 |   |           |           | 2,478,478 | 
|Operating costs and expenses:                  |                                         |                                    |         |           |           |   |           |          
|                                               | Interest expense                        |                                    |         | 736,649   |           |   |           | 737,683   |          
|                                               | Depreciation                            |                                    |         | 293,733   |           |   |           | 294,947   |          
|                                               | General and administrative              |                                    |         | 105,715   |           |   |           | 69,210    |          
|                                               | Provision for impaired financing leases |                                    |         | 255,080   |           |   |           |          |          
|                                               | Provision for unbilled rent             |                                    |         | 92,908    |           |   |           |          |          
|                                               |                                         |                                    |         |           |           |  
|                                               |                                         | Total operating costs and expenses |         |           | 1,484,085 |   |           |           | 1,101,840 | 
|                                               |                                         |                                    |         |           |           |  
|                                               |                                         | Income from operations             |         |           | 820,172   |   |           |           | 1,376,638 | 
|Other income (expense):                        |                                         |                                    |         |           |           |   |           |          
|                                               | Gain (loss) on sale of equipment        |                                    |         | (118,465  | )         |   |           | 15,000    |          
|                                               | Loss on sale of real estate             |                                    |         | (169,013  | )         |   |           |          |          
|                                               | Interest income                         |                                    |         | 2,838     |           |   |           |          |          
|                                               | Other                                   |                                    |         | 6,212     |           |   |           | 6,655     |          
|                                               |                                         |                                    |         |           |           |  
|                                               |                                         | Total other income (expense)       |         |           | (278,428  | ) |           |           | 21,655    | 
|                                               |                                         |                                    |         |           |           |  
|Net income                                     |                                         |                                    | 541,744 |           |           |   | 1,398,293 |          
|Net income allocable to general partner        |                                         |                                    | 5,417   |           |           |   | 13,983    |          
|                                               |                                         |                                    |         |           |           |  
|Net income allocable to limited partners       |                                         | $                                  | 536,327 |           |           | $ | 1,384,310 |          
|                                               |                                         |                                    |         |           |           |  
|Net income per limited partnership unit        |                                         | $                                  | 27.04   |           |           | $ | 69.64     |          
|                                               |                                         |                                    |         |           |           |  
|Weighted average number of limited partnership |                                         |                                    |         |           |           |   |           |          
|                                               | units outstanding                       |                                    |         | 19,836    |           |   |           | 19,879    |          
|                                               |                                         |                                    |         |           |           |  

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

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##### Table of Contents






Captec Franchise Capital Partners L.P. III

Statements of Changes in Partners Capital

For the Years Ended December 31, 2001 and 2000

|                                        |  |           |        |   |           |   |            |           |  |   |           |   |  |   |            |  
|--------------------------------------- |  | --------- | ------ | - | --------- | - | ---------- | --------- |  | - | --------- | - |  | - | ---------- | -
|                                        |  | Limited   |        |   | Limited   |   |            | General   |  |   | Total     |  
|                                        |  | Partners' |        |   | Partners' |   |            | Partner's |  |   | Partners' |  
|                                        |  | Units     |        |   | Accounts  |   |            | Accounts  |  |   | Capital   |  
|                                        |  |           |        |   |           |   |            |           |  |   |           |  
|Balance, January 1, 2000                |  |           | 19,884 |   |           | $ | 15,240,812 |           |  | $ | 18,212    |   |  | $ | 15,259,024 |  
|Repurchase of limited partnership units |  |           | (42    | ) |           |   | (28,432    | )         |  |   |           |   |  |   | (28,432    | )
|Distributions  ($110.35 per unit)      |  |           |        |   |           |   | (2,189,622 | )         |  |   | (5,326    | ) |  |   | (2,194,948 | )
|Net income                              |  |           |       |   |           |   | 1,384,310  |           |  |   | 13,983    |   |  |   | 1,398,293  |  
|                                        |  |           |        |   |           |   |            |           |  |   |           |  
|Balance, December 31, 2000              |  |           | 19,842 |   |           | $ | 14,407,068 |           |  | $ | 26,869    |   |  | $ | 14,433,937 |  
|                                        |  |           |        |   |           |   |            |           |  |   |           |  
|Repurchase of limited partnership units |  |           | (66    | ) |           |   | (42,839    | )         |  |   |           |   |  |   | (42,839    | )
|Distributions  ($86.58 per 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 |  
|                                        |  |           |        |   |           |   |            |           |  |   |           |  

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

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##### Table of Contents






Captec Franchise Capital Partners L.P. III

Statements of Cash Flows
For the Years Ended December 31, 2001 and 2000

|                                                  |                                                                         |                                                              |                        |            |          |         |            |            |          |         | 
|------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------------------------ | ---------------------- | ---------- | -------- | ------- | ---------- | ---------- | -------- | ------- | 
|                                                  |                                                                         |                                                              |                        |            | 2001     |         |            | 2000       |         
|                                                  |                                                                         |                                                              |                        |            |          |         |            |            |         
|Cash flows from operating activities:             |                                                                         |                                                              |                        |            |          |         |            |           
|                                                  | Net Income                                                              |                                                              | $                      | 541,744    |          |         | $          | 1,398,293  |         
|                                                  | Adjustments to net income:                                              |                                                              |                        |            |          |         |            |            |         
|                                                  |                                                                         | Depreciation                                                 |                        |            | 293,733  |         |            |            | 294,947  |        
|                                                  |                                                                         | Amortization of debt issuance costs                          |                        |            | 47,791   |         |            |            | 47,791   |        
|                                                  |                                                                         | (Gain)loss on sale of equipment                              |                        |            | 118,465  |         |            |            | (15,000  | )      
|                                                  |                                                                         | Provision for impaired financing leases                      |                        |            | 255,080  |         |            |            |          |        
|                                                  |                                                                         | Loss on sale of real estate                                  |                        |            | 169,013  |         |            |            |         |        
|                                                  |                                                                         | Increase in unbilled rent, net                               |                        |            | (116,150 | )       |            |            | (257,486 | )      
|                                                  |                                                                         | (Increase) decrease in accounts receivable                   |                        |            | (203     | )       |            |            | (3,793   | )      
|                                                  |                                                                         | Decrease in security deposits                                |                        |            | (9,167   | )       |            |            |         |        
|                                                  |                                                                         | Increase (decrease) in accounts payable and accrued expenses |                        |            | 78,790   |         |            |            | 9,351    |        
|                                                  |                                                                         | Increase in restricted cash                                  |                        |            | (117,865 | )       |            |            | (2,985   | )      
|                                                  |                                                                         | (Increase)decrease in due from related parties               |                        |            | (5,524   | )       |            |            | 17,184   |        
|                                                  |                                                                         | (Decrease) increase in due to related parties                |                        |            | 11,620   |         |            |            | (36,809  | )      
|                                                  |                                                                         |                                                              |                        |            |          |         |           
|Net cash provided by operating activities         |                                                                         |                                                              | 1,267,327              |            |          |         | 1,451,493  |           
|                                                  |                                                                         |                                                              |                        |            |          |         |           
|Cash flows from investing activities:             |                                                                         |                                                              |                        |            |          |         |            |           
|                                                  | Net proceeds from disposition of properties subject to operating leases |                                                              |                        | 781,434    |          |         |            |           |         
|                                                  | Net proceeds from sale of equipment                                     |                                                              |                        | 267,745    |          |         |            | 75,000     |         
|                                                  | Principal payments on financing leases                                  |                                                              |                        | 275,640    |          |         |            | 464,976    |         
|                                                  |                                                                         |                                                              |                        |            |          |         |           
|Net cash provided by investing activities         |                                                                         |                                                              | 1,324,819              |            |          |         | 539,976    |           
|                                                  |                                                                         |                                                              |                        |            |          |         |           
|Cash flows from financing activities:             |                                                                         |                                                              |                        |            |          |         |            |           
|                                                  | Repayments of notes payable                                             |                                                              |                        | (151,430   | )        |         |            |           |         
|                                                  | Repurchase of limited partnership units                                 |                                                              |                        | (42,839    | )        |         |            | (28,432    | )       
|                                                  | Distributions to limited partners                                       |                                                              |                        | (1,712,212 | )        |         |            | (2,189,622 | )       
|                                                  | Distributions to general partner                                        |                                                              |                        |           |          |         |            | (5,326     | )       
|                                                  |                                                                         |                                                              |                        |            |          |         |           
|Net cash used in financing activities             |                                                                         |                                                              | (1,906,481             | )          |          |         | (2,223,380 | )         
|                                                  |                                                                         |                                                              |                        |            |          |         |           
|Net decrease in cash and cash equivalents         |                                                                         |                                                              | 685,665                |            |          |         | (231,911   | )         
|Cash and cash equivalents, beginning of period    |                                                                         |                                                              | 95,993                 |            |          |         | 327,903    |           
|                                                  |                                                                         |                                                              |                        |            |          |         |           
|Cash and cash equivalents, end of period          |                                                                         | $                                                            | 781,658                |            |          | $       | 95,992     |           
|                                                  |                                                                         |                                                              |                        |            |          |         |           
|Supplemental disclosure of cash flow information: |                                                                         |                                                              |                        |            |          |         |            |           
|                                                  |                                                                         |                                                              | Cash paid for interest |            | $        | 689,917 |            |            | $        | 689,892 | 
|                                                  |                                                                         |                                                              |                        |            |          |         |           

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

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##### Table of Contents



Captec Franchise Capital Partners L.P. III
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) and Patrick L. Beach, the Chairman of
the Board of Directors, President and Chief Executive Officer of the
Corporation and Captec. In August 1998, the General Partnership interest of
the Partnership was acquired by Captec Net Lease Realty, Inc., an affiliate
of Captec. 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, an affiliate of
Captec. In order to complete this transaction, the Limited Partners and the
Partnerships lender must consent to the transfer of the general partner
interest to GP3 Asset Acquisition. The Limited Partners consented to the
transfer of the general partner interest and the lender consent is pending.
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
required consents are obtained, GP3 Asset Acquisition has assumed all of the
General Partners obligations and liabilities prescribed under the terms of
the Partnership Agreement.
|  
|   |  | The Partnership commenced a public offering of 20,000 limited partnership
interests (Units), priced at $1,000 per Unit, on August 12, 1994. The
Partnership commenced operations on January 24, 1995. In August 1996 the
Partnership had accepted subscriptions for all 20,000 Units. During 1997 the
Partnership repurchased a total of 37 Units for $31,450, or approximately
$850 per Unit on average. In 1999 the Partnership repurchased a total of 79
Units for $59,625, or approximately $755 per Unit on average. During 2000
the Partnership repurchased a total of 42 Units for $28,432, or approximately
$677 per Unit on average. In 2001 the Partnership repurchased a total of 66
Units for $42,839, or approximately $649 per Unit on average. The repurchase
of the units was completed pursuant to the terms of the Repurchase Plan set
forth in the Partnerships Prospectus. At December 31, 2001, the Partnership
had 19,776 Units issued and outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | Allocation of profits, losses and cash distributions from operations and cash
distributions from sale or refinancing are made pursuant to the terms of the
Partnership Agreement. Profits and losses from operations are allocated among
the limited partners based upon the number of Units owned. 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. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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|   |  | impairment whenever events or changes in circumstances indicate that the
carrying amount of the property may not be recoverable. If an impairment loss
were 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 to cease
depreciation. FAS 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001. The Partnership does not
expect the implementation of this statement to have a material effect on its
financial statements.                                                                                  
|  
|   |  | Net investment in financing leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | Net investment in financing leases primarily represents equipment used in
restaurant operations and are leased under 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. Financing leases
delinquent for 90 or more days are determined to be impaired, and income
accrual is suspended at that time. A loss reserve is calculated based on the
estimated amounts recoverable. At December 31, 2001 the Partnership has
provided for an allowance of $408,917 for uncollectible amounts associated
with its financing leases.
|  
|   |  | Note payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The fair value of fixed rate debt approximates the book value, and is
estimated based on current rates offered for notes payable of the equivalent
remaining maturity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | Certain prior-period financial statement amounts have been reclassified to
conform to the 2001 presentations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|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 will be allocated 90% to the limited
partners and 10% to the General Partner, except that the General Partners
share will be 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.                                                                                                                                                                                                                                                                                                                                                              

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|3. |  | Related Party Transactions and Agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Pursuant to the Partnership Agreement, 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) are incurred to the
General Partner. The Partnership did not incur any acquisition fees during
2001 and 2000. The acquisition fees 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 $22,934 and $26,971 were incurred during
2001 and 2000, 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s Prospectus provided for the reinvestment of net sale proceeds
during the four-year period beginning on the date the Partnership terminated
the offering, August 12, 1996. The Partnership did not incur any real estate
liquidation fees during 2000 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 2000 and
2001 .                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|4. |  | Land and Building Subject to Operating Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | The net investment in operating leases as of December 31, 2001 and 2000 is
comprised of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                                |  |      |            |   |      |   |            |  
|------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                |  | 2001 |            |   | 2000 |  
|                                |  |      |            |   |      |  
|Land                            |  | $    | 7,695,896  |   |      | $ | 8,163,346  |  
|Building and improvements       |  |      | 11,214,344 |   |      |   | 11,796,894 |  
|                                |  |      |            |   |      |  
|                                |  |      | 18,910,240 |   |      |   | 19,960,240 |  
|Less  accumulated depreciation |  |      | (1,344,478 | ) |      |   | (1,150,298 | )
|                                |  |      |            |   |      |  
|Total                           |  | $    | 17,565,762 |   |      | $ | 18,809,942 |  
|                                |  |      |            |   |      |  



| |  | The following is a schedule of future minimum lease payments to be received
on the operating leases as of December 31, 2001.
| |  | ----------------------------------------------------------------------------------------------------------------------------

|           |       |   |            |            | 
|---------- | ----- | - | ---------- | ---------- | 
|2002       |       | $ | 2,059,596  |           
|2003       |       |   | 2,089,565  |           
|2004       |       |   | 2,138,859  |           
|2005       |       |   | 2,176,005  |           
|2006       |       |   | 2,214,859  |           
|Thereafter |       |   | 19,971,777 |           
|           |       |   |           
|           | Total |   | $          | 30,650,661 | 
|           |       |   |           



|5. |  | Net Investment in Financing Leases                                                                    
|-- |  | ------------------------------------------------------------------------------------------------------
|  
|   |  | The net investment in financing leases as of December 31, 2001 and 2000 is
comprised of the following:

|                                      |  |      |           |   |      |   |           |  
|------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                      |  | 2001 |           |   | 2000 |  
|                                      |  |      |           |   |      |  
|Minimum lease payments to be received |  | $    | 1,230,765 |   |      | $ | 2,413,936 |  
|Estimated residual value              |  |      | 89,678    |   |      |   | 117,101   |  
|                                      |  |      |           |   |      |  
|Gross investment in financing leases  |  |      | 1,320,443 |   |      |   | 2,531,037 |  
|Less unearned income                  |  |      | (173,859  | ) |      |   | (405,450  | )
|Less direct origination costs         |  |      | (35,277   | ) |      |   | (76,146   | )
|                                      |  |      |           |   |      |  
|Net investment in financing leases    |  | $    | 1,111,307 |   |      | $ | 2,049,441 |  
|                                      |  |      |           |   |      |  

F-8



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##### Table of Contents





| |  | The following is a schedule of future minimum lease payments to be received
on the financing leases as of December 31, 2001:
| |  | ----------------------------------------------------------------------------------------------------------------------------

|           |       |   |         |           | 
|---------- | ----- | - | ------- | --------- | 
|2002       |       | $ | 348,570 |          
|2003       |       |   | 285,837 |          
|2004       |       |   | 224,748 |          
|2005       |       |   | 224,748 |          
|2006       |       |   | 87,922  |          
|Thereafter |       |   | 58,940  |          
|           |       |   |        
|           | Total |   | $       | 1,230,766 | 
|           |       |   |        



|   |  | During 2001, the Partnership recognized a loss of $118,465 on the sale of
equipment leases. The Partnership received net proceeds of $267,745. The net
investment in the equipment leases was $386,210. During 2000, the Partnership
recognized a gain of $15,000 on the sale of equipment leases. The Partnership
received net proceeds of $75,000. The net investment in the equipment leases
was $60,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|6. |  | Impaired Financing Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | At December 31, 2001, the Partnerships investment in impaired financing
leases was comprised of two leases. The recorded investment in the leases is
$457,610 net of a related allowance of $408,917. These were equipment leases
to two obligors who have gone out of business: a former Boston Market
licensee and a former Dennys franchisee. The Partnership recovered the
equipment from the lessees premises and expects to sell the equipment
packages. The Partnership has agreed to sell the equipment formerly leased
to the Dennys franchisee to the franchisor for $36,000, subject to
completion of definitive documentation. The Partnership has also filed a
claim for recoveries of its losses in the bankruptcy proceedings of the
Dennys franchisee, but does not anticipate any significant recoveries to be
realized as a result of this claim. The net investment in the impaired leases
represents the estimated net proceeds that the Partnership expects to
receive.
|  
|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, 2001, annual maturities on the notes in aggregate are as
follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|           |       |   |           |           | 
|---------- | ----- | - | --------- | --------- | 
|2002       |       | $ | 178,243   |          
|2003       |       |   | 193,806   |          
|2004       |       |   | 210,729   |          
|2005       |       |   | 229,130   |          
|2006       |       |   | 249,137   |          
|Thereafter |       |   | 6,981,525 |          
|           |       |   |          
|           | Total |   | $         | 8,042,570 | 
|           |       |   |          



|   |  | 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, 2001, the Partnership declared distributions of $696,280 to its
limited partners on January 15, 2002.                                

F-9