<PAGE>   1
                   U.S. SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

(Mark One)                        FORM 10-KSB

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

                 For the fiscal year ended December 31, 1997

                                     OR

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

           For the Transition period from                to
                                         --------------    ----------------

                      Commission file number 33-77510C

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



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


<TABLE>
<S>                                                                                                 <C>
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)
</TABLE>

<TABLE>
<S>                                                                     <C>
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 ($1,0000)
                                                                        (Title of Class)
</TABLE>

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. [ X ] Yes [ ] 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]

At December 31, 1997 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, 1997, 19,963 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.

<PAGE>   2


                              TABLE OF CONTENTS


<TABLE>

                                                                                                                          Page
                                                          PART I
<S>           <C>                                                                                                            <C>
Item 1.       Description of Business ......................................................................................     1
Item 2.       Description of Properties  ...................................................................................     3
Item 3.       Legal Proceedings ............................................................................................    19
Item 4.       Submission of Matters to a Vote of Security Holders   ........................................................    19

                                                      PART II

Item 5.       Market for Registrant's Limited Partnership Interests
              and Related Security Holder Matters...........................................................................    20
Item 6.       Management's Discussion and Analysis or Plan of Operation.....................................................    20
Item 7.       Financial Statements  ........................................................................................    22
Item 8.       Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure...........................................................................    22

                                                     PART III

Item 9.       Directors, Executive Officers, Promoters and Control Persons;
              Compliance with Section 16(a) of the Exchange Act    .........................................................    23
Item 10.      Executive Compensation........................................................................................    24
Item 11.      Security Ownership of Certain Beneficial Owners and Management ...............................................    24
Item 12.      Certain Relationships and Related Transactions ...............................................................    24
Item 13.      Exhibits and Reports on Form 8-K..............................................................................    26

SIGNATURES        ..........................................................................................................    27

INDEX TO EXHIBITS .......................................................................................................... E - i

INDEX TO FINANCIAL STATEMENTS .............................................................................................. F - i
</TABLE>

                                      i

<PAGE>   3


                                    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 ("Properties") and
equipment ("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 (a "Triple Net
Lease"). The general partners of the Partnership are Captec Franchise Capital
Corporation III (the "Managing General Partner") and Patrick L. Beach, an
individual (collectively, the "General Partners"). The Managing General Partner
is a Michigan corporation which is a wholly-owned subsidiary of Captec Financial
Group, Inc. (the "Captec Group").

         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.

         Pending sale of the Minimum Number of Units, subscribers' funds were
forwarded to Michigan National Bank, Farmington Hills, Michigan, as escrow agent
(the "Escrow Agent"), and were held by the Escrow Agent in one or more
interest-bearing accounts. On January 24, 1995, the Partnership broke impound,
at which time funds totaling $1,155,255 were released from escrow and the
Partnership immediately commenced operations. The Offering reached final funding
in August, 1996, with subscriptions for the entire 20,000 Units and funds from
1,392 limited partners totaling $20,000,000. During December, 1997, the
Partnership repurchased a total of 37 Units for $31,450, or 85% of the
investor's capital account, pursuant to the terms of the Repurchase Plan set
forth in the Partnership's Prospectus. At December 31, 1997, the Partnership had
19,963 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 intends to acquire income-producing commercial real
estate ("Property") and equipment ("Equipment") which will be leased on a
"triple net" basis primarily to operators of nationally franchised fast-food,
family style and dinner house restaurants as well as other franchised
service-type businesses. The Partnership will use not less than 75% but not more
than 90% of Net Offering Proceeds to acquire Properties (primarily for lease to
restaurant franchisees) and up to 25% but not less than 10% to acquire Equipment
(for lease to restaurant and service-type franchisees). 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 and/or percentage rents. The Equipment will be leased only
pursuant to leases under which the present value

                                      1

<PAGE>   4


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 competes with many other entities engaged in the
purchase of triple-net leased real estate and the purchase of equipment, some of
which have greater assets than the Partnership. In addition, the number of
competing entities and the amount of funds available for investment in these
types of properties or equipment suitable for investment by the Partnership may
increase, resulting in increased competition for such investments and possible
increases in the prices paid or less favorable lease terms on the Property or
Equipment.

         In addition, the Partnership may compete with other entities engaged in
the disposition of Property and Equipment. The ability to locate purchasers at
the time of disposition of the Property and Equipment will depend primarily on
the success of the operating Properties, the location of the Properties and the
physical condition of the Property and Equipment. The General Partners and their
Affiliates are not aware of any current favorable or unfavorable competitive
business conditions.

         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.


                                      2


<PAGE>   5




ITEM 2.   DESCRIPTION OF PROPERTIES.

The following is a summary description of the Property and Equipment leases as
of December 31, 1997.

<TABLE>
<CAPTION>
                      LEASE INFORMATION                                           ASSET INFORMATION       RENTAL INFORMATION

REAL ESTATE

                                                                                    Total
                                                                                  Asset Cost                   Date of
                                                                                  Including   Asset              Next      Annual
                                 Concept                   Date of    Date of    Acquisition  State    Monthly   Rent      Rate of
     Lessee Name                  Name          Industry   Commence  Expiration      Fees    Location   Rent   Increase  Increase(7)
     -----------                  ----          --------   --------  ----------      ----    --------   ----   --------  -----------
<S>                             <C>             <C>         <C>      <C>         <C>          <C>    <C>       <C>         <C>
Platinum Properties, LLC        Boston Market   Restaurant    2/1/95   10/1/09   $ 1,040,000    NC   $  9,631      2/1/98   2.50%
America's Favorite Chicken Co.  Church's        Restaurant   11/1/95   11/1/15       655,200    TX      5,775     11/1/00   1.92%
Gourmet Systems, Inc.           Applebee's      Restaurant    8/1/95    8/1/15     1,708,060    IL     15,949      8/1/98   3.00%
DenAmerica Corp.                Denny's         Restaurant   10/1/96    9/1/15     1,023,090    VA      8,854      9/1/00   3.00%
Red Robin International, Inc.   Red Robin       Restaurant    4/1/96    4/1/16     2,819,849    TX     25,476      4/1/98   2.50%
BC Northwest, Inc.              Boston Market   Restaurant   10/1/96    1/1/11     1,092,000    WA      9,188     10/1/01   1.92%
New Jersey Rose, LLC            Boston Market   Restaurant    7/1/96    7/1/11     1,188,720    NJ     10,001      7/1/01   1.92%
Foodmaker, Inc.                 Jack in Box     Restaurant   10/1/96   10/1/14       977,600    TX      8,225  (2)10/1/01   1.92%
Hollywood Entertainment Corp.   Hollywood Video Retail        9/1/96    5/1/11     1,092,000    OK      9,844  (3) 9/1/01   0.00%
Corral South Store #3, Inc.(1)  Golden Corral   Restaurant    6/1/97    6/1/17     1,092,000    FL      9,538      6/1/02   2.39%
DenAmerica Corp.                Black Eyed Pea  Restaurant   10/1/96   10/1/16     1,546,239    TX     13,164  (4)10/1/02   0.00%

                                                                                 $14,234,757         $125,645               1.96%

<CAPTION>

EQUIPMENT
                                                                                    Total
                                                                                  Asset Cost
                                                                                  Including
                                 Concept                   Date of    Date of    Acquisition  Asset    Monthly
     Lessee Name                  Name          Industry   Commence  Expiration      Fees    Location   Rent
     -----------                  ----          --------   --------  ----------      ----    --------   ----
<S>                             <C>             <C>         <C>      <C>         <C>          <C>    <C>
The Snyder Group Company        Red Robin       Restaurant   5/15/95    5/15/00  $   780,000    CO   $ 16,988
BC Superior, LLC                Boston Market   Restaurant   8/15/95    8/15/02      259,155    TN      4,393
Drive Thru Realty LP            Checkers        Restaurant   10/1/95    10/1/00      208,000    MD      4,555
DenAmerica Corp.                Denny's         Restaurant  11/15/95   11/15/00      283,864    FL      5,404
Checkers Corp.                  Checkers        Restaurant   3/15/96    3/15/03      234,000    FL      4,050
The Green Team Restaurants      Denny's         Restaurant    5/1/96     5/1/01      356,495    OR      7,541
Cypress Partners 1995, Ltd.(5)  Denny's         Restaurant   3/15/96    3/15/01      367,793    FL      7,724
J.M.C. Limited Partnership      Applebee's      Restaurant   9/15/96    9/15/03      399,569    UT      6,624
Captec-Roasters, LLC(6)         KRR             Restaurant    5/1/97     3/1/03      241,765    AZ      6,869
                                                                                 $ 3,130,640         $ 64,147
TOTAL:                                                                           $17,365,397         $189,792


</TABLE>

(1) The property is owned jointly between CFCP LPIII and LPIV.  LPIII owns
    65.625% of the total assets.
(2) Rent Increase equals the greater of CPI or 10.0%.
(3) Rent Increase equals the lesser of CPI or 12.0%.
(4) Rent Increase equals the lesser of CPI or 10.0%.
(5) Equipment sold on February 13, 1998.
(6) Defaulted as of 12/31/97
(7) Rate of increase was calculated on a compounded annual basis.


REAL ESTATE


         Boston Chicken Restaurant, Raleigh, North Carolina (Land and Building):
On January 31, 1995, the Partnership completed the acquisition of the land and a
3,007 square foot building

                                      3

<PAGE>   6


comprising a Boston Market restaurant located at 4150 Fayetteville Road in
Raleigh, North Carolina (the "North Carolina Property"). The North Carolina
Property was constructed for its present use in 1994 and was fully operational
at the time of the purchase. The Partnership purchased a fee simple interest in
the North Carolina Property for a purchase price of $1,000,000.

        The North Carolina Property was purchased from, and leased back to,
Platinum Properties, L.L.C., a North Carolina limited liability company
("Platinum"). Platinum, pursuant to consent from the Partnership, has sublet the
North Carolina Property to Platinum Rotisserie Corp., an affiliate of the
Platinum. Platinum Rotisserie Corp. operates the Boston Market restaurant
pursuant to a franchise agreement with Boston Chicken, Inc. Platinum's
obligations under the Platinum Lease (as that term is defined below) are
guaranteed for the benefit of the Partnership by Platinum Rotisserie Corp. and
Platinum Service Corp. (collectively the "Guarantors"). Platinum Service Corp.,
an affiliate of the Platinum, provides management services to Platinum
Rotisserie Corp.

        Platinum and the Partnership have entered into the Partnership's
standard form of lease (the "Platinum Lease") which lease term expires on
September 30, 2009, followed by two (2) renewal options of five (5) years each.
The annual rent was increased on February 1, 1997, pursuant to the terms of the
Platinum Lease to $115,572, or $9,631 per month. The annual rent will be
increased by two and one-half percent (2.5%) on each anniversary date of the
Platinum Lease.

         Platinum has an option to purchase the North Carolina Property
commencing on the first day following the fifth (5th) anniversary date of the
Platinum Lease and expiring thirty (30) days thereafter or on the first day
following the seventh (7th) anniversary date of the Platinum Lease and expiring
thirty (30) days thereafter. The option price Platinum shall pay for the North
Carolina Property shall be calculated using a ten and three-quarters percent
(10.75%) capitalization rate applied to the annualized rental revenue for the
North Carolina Property during the sixth year of the Platinum (if the option is
exercised in the sixty-first month) or during the eighth year of the Platinum
Lease (if the option is exercised in the eighty-fifth month).

         The current annual rent per square foot for the North Carolina Property
is $38.43. The depreciable basis of the North Carolina Property for federal tax
purposes is $555,000 and is being depreciated using the straight line method
over 40 years; a rate of $14,231 per year.

         Applebee's Neighborhood Grill & Bar, Mt. Vernon, Illinois (Land and
Building): On September 13, 1995, the Partnership executed an agreement pursuant
to which it acquired, effective as of August 1, 1995, the land and 5,580 square
foot building comprising an Applebee's Neighborhood Grill & Bar located at 105
Potomac Boulevard, Mt. Vernon, Illinois (the "Illinois Property"). The
Partnership purchased a fee simple interest in the Illinois Property for a
purchase price of $1,640,000, which is equal to the acquisition price paid by
the affiliated party. The Partnership acquired the Illinois Property from an
affiliated party which purchased the Illinois Property on July 24, 1995 from,
and leased back to, Apple Partners Limited Partnership, an Ohio limited
partnership ("Apple Partners"). The affiliated party received no fees or mark-up
in connection with this transaction.

         The lease dated July 24, 1995 and entered into by Apple Partners and
the affiliated party is the Partnership's standard form of lease and was
assigned to the Partnership by the affiliated party on September 13, 1995 (the
"Applebee's Lease"). According to the terms of the lease assignment, the
Partnership received lease payments retroactive to August 1, 1995.

         On April 14, 1997, Apple Partners, Gourmet Systems, Inc., a Missouri
corporation, located at 4551 West 107th Street, Suite 100, Overland Park, Kansas
("Gourmet Systems") and the Partnership

                                      4

<PAGE>   7

entered into an Assignment and Assumption Agreement whereby Apple Partners
assigned to Gourmet Systems all of its rights, title and interest under the
Applebee's Lease. Under the Assignment and Assumption Agreement, the Partnership
and Gourmet Systems released Apple Partners from all obligations under the
Applebee's Lease. In addition, the following guarantors under the Applebee's
Lease have been released from any and all liabilities and obligations in
connection with the Applebee's Lease: Apple Partners, dirigiste I.M. Co., an
Ohio corporation, Thomas K. DeNomme, an individual, Michelle J. DeNomme, an
individual, Richard H. Adler, and individual, and Mary A. Adler, and individual.
Gourmet Systems operates 38 Applebee's Grill & Bar in the Kansas City and
Missouri markets under a franchise agreement . The Applebee's Lease term expires
on August 23, 2014, with two (2) renewal options of five years each.

         The minimum annual rent in the first year of the Applebee's Lease was
$180,400 per year or $15,033. The minimum annual rent will be increased by a
minimum of 3% on August 1 of each year. However, in the event that Gourmet
Systems gross annual sales attributable to the Illinois Property for the
preceding calendar year, shall exceed $3,000,000, then the minimum annual rent
for the Applebee's Lease year shall instead increase by the greater of: (a) six
percent (6%) of such excess; or (b) three percent (3%) of the minimum annual
rent for the preceding Applebee's Lease year. The minimum annual rent was
increased pursuant to the terms of the Applebee's Lease on August 1, 1997 to
$191,388 or $15,949 per month.

         Gourmet Systems has an option to purchase the Illinois Property
commencing on the first day of the sixtieth (60) month of the Applebee's Lease
and expiring ninety (90) days thereafter. The option purchase price Gourmet
Systems must pay for the Illinois Property will be the greater of $1,640,000
(the price at which the Illinois Property was purchased by the Partnership) or
the MAI appraised value at the time the option is exercised.

         The current annual rent per square foot for the Illinois Property is
$34.30. The depreciable basis of the Illinois Property for federal tax purposes
is $1,282,460 and is being depreciated using the straight line method over 40
years; a rate of $32,884 per year.

         Church's Chicken Restaurant, San Antonio, Texas (Land and Building): On
October 23, 1995 the Partnership acquired the land and 1,850 square foot
building comprising a Church's Chicken Restaurant located at 1003 S.E. Military
Drive, San Antonio, Texas (the "San Antonio Property"). The San Antonio Property
was constructed for its present use in August of 1995 and was fully operational
at the time of the purchase. The San Antonio Property was purchased from, and
leased back to America's Favorite Chicken Company, a Minnesota corporation
("AFC"). AFC operates and franchises quick-service restaurants under the primary
trade names of Popeye's Famous Fried Chicken & Biscuits and Church's Chicken.
The Partnership purchased a fee simple interest in the San Antonio Property for
a purchase price of $630,000.

         AFC and the Partnership have entered into the Partnership's standard
form of lease (the "AFC Lease"). The AFC Lease term expires on October 31, 2015
with four (4) renewal options of five (5) years each. The rent in the first
through the fourth years of the AFC Lease is $69,300 per year, or $5,775 per
month. The minimum annual rent will be increased on November 1, 1999 and every
five (5) years thereafter. The minimum annual rent will be increased by ten
percent (10%) on each adjustment date.

         AFC has an option to purchase the San Antonio Property commencing on
the first day of the eighty-fifth (85th) month of the AFC Lease and expiring
ninety (90) days thereafter. The option price AFC shall pay for the San Antonio
Property shall be the greater of: (a) $756,000 or (b) one hundred

                                      5

<PAGE>   8


twenty percent (120%) of the then current fair market value of the San Antonio
Property. AFC has a right of first refusal to purchase the San Antonio Property
if at any time during the AFC Lease Term, the Partnership receives a bona fide
offer ("Offer") to purchase the San Antonio Property which the Partnership
desires to accept. AFC shall have a one-time right to purchase the San Antonio
Property at the same price and on the same terms as the Offer. In the event AFC
accepts the Offer, AFC shall close on the purchase of the San Antonio Property
within forty-five (45) days after the date of AFC's written notice of its
election to exercise its right of first refusal.

         The current annual rent per square foot for the San Antonio Property is
$37.46. The depreciable basis of the San Antonio Property for federal tax
purposes is $504,000 and it is being depreciated using the straight line method
over 40 years; a rate of $12,923 per year.

         Red Robin Grill & Spirits, Grapevine, Texas (Land and Building): On
March 29, 1995 the Partnership acquired the land and 7,485 square foot building
comprising a Red Robin Grill & Spirits restaurant located at 1701 William D.
Tate Avenue, Grapevine, Texas (the "Grapevine Property"). The Grapevine Property
was constructed for its present use in August of 1995 and was fully operational
at the time of the purchase. The Grapevine Property was purchased from, and
leased back to Red Robin International, Inc. a Nevada corporation ("Red Robin").
Red Robin operates and franchises casual dining restaurants under the primary
trade name of Red Robin Restaurants. The Partnership purchased a fee simple
interest in the Grapevine Property for a purchase price of $2,711,393.

         Red Robin and the Partnership have entered into the Partnership's
standard form of lease (the "Red Robin Lease"). The Red Robin Lease term expires
on March 31, 2016 with two renewal options of five years each. The rent in the
first year of the Red Robin Lease was $298,253 per year, or $24,854 per month.
The minimum annual rent shall be increased on April 1 of each year by 2.5%. The
annual rent was increased pursuant to the terms of the Red Robin Lease on April
1, 1997, to $305,712 or $25,476 per month.

         Red Robin has an option to purchase the Grapevine Property during two
"window periods;" the first window period commencing on April 1, 2000 and
expiring on June 29, 2000, and the second window period commencing on April 1,
2003 and expiring on June 29, 2003. The option price Red Robin shall pay for the
Grapevine Property is $3,211,861 if the option is exercised during the first
window period, or $3,458,823 if the option is exercised during the second window
period

         The current annual rent per square foot for the Grapevine Property is
$40.84. The depreciable basis of the Grapevine Property for federal tax purposes
is $1,611,393 and it is being depreciated using the straight line method over 40
years; a rate of $41,318 per year. Red Robin has deposited with the Partnership
the amount of $24,854 as security for their faithful performance of the
obligations under the Red Robin Lease.

         The Red Robin Lease contains a substitution option that in the event
that Red Robin determines that the Grapevine Property is inadequate or
unprofitable or the Grapevine Property is rendered unsuitable by condemnation or
casualty, Red Robin may substitute another property having a Red Robin Grill &
Spirits restaurant located thereon, of equal or greater current value. The
substitute property shall be subject to the approval of the Partnership.

         Boston Market, Ewing Twp., New Jersey (Land and Building): On June 6,
1996, the Partnership acquired the land and 3,333 square foot building
comprising a Boston Market restaurant located at 1729 North Olden Ave., Ewing
Twp., New Jersey (the "New Jersey Property"). The New Jersey Property was
constructed for its present use in May of 1996 and was fully operational at the

                                      6

<PAGE>   9


time of the purchase. The New Jersey Property was purchased from BC Real Estate
Investments, Inc., and leased to New Jersey Rose, L.L.C., a New Jersey limited
liability company ("New Jersey Rose"). New Jersey Rose operates casual dining
restaurants under the primary trade name of Boston Market. The Partnership
purchased a fee simple interest in the New Jersey Property for a purchase price
of $1,143,000.

         New Jersey Rose and the Partnership have entered into a lease (the "New
Jersey Rose Lease") which commenced on July 1, 1996. The New Jersey Rose Lease
term expires on July 1, 2011 with five renewal options of five years each. The
rent in the first through fifth years of the New Jersey Rose Lease is $120,015
per year, or $10,001 per month. The annual rent shall be increased beginning on
the sixth lease year to $132,017; beginning on the eleventh lease year to
$142,275 and at the end of every five years thereafter by ten percent of the
annual rent payable during the lease year immediately preceding. Beginning in
the sixth year, and in addition to the annual rent provided above, New Jersey
Rose shall pay percentage rent on an annual basis equal to the difference
between five percent of "gross sales" (as defined in the lease) for such lease
year minus the annual rent payable for such lease year. Boston Chicken, Inc. has
unconditionally guaranteed all financial obligations of New Jersey Rose under
the New Jersey Rose Lease. Boston Chicken, Inc. is the franchisor of Boston
Market.

         New Jersey Rose has an option to purchase and first right of refusal to
purchase the New Jersey Property. New Jersey Rose shall have the right to
purchase the New Jersey Property on the same terms and conditions as set forth
in the offer or New Jersey Rose may elect an alternate purchase price as
follows: (a) during the first and second lease year the purchase price shall be
an amount equal to the total rent payable for the lease year subsequent to the
lease year in which the option is exercised divided by 9.462%; (b) during the
third lease year in an amount equal to the annual rent for lease year 3 divided
by 9.978%; (c) during the fourth lease year in an amount equal to the annual
rent for lease year four divided by 9.785% and (d) during lease year five in an
amount equal to the annual rent for lease year five divided by 9.580%.

         New Jersey Rose shall have the option to purchase the New Jersey
Property any time after the fifth year for the following option price: (a) if
New Jersey Rose exercises its option to purchase during the sixth through eighth
lease year, the option price shall be equal to the total rent payable for the
lease year subsequent to the lease year in which the option is exercised,
divided by ten percent; or (b) if New Jersey Rose exercises its option to
purchase after the eighth lease year, the option purchase price shall be the
greater of the fair market value of the New Jersey Property or an amount equal
to the total rent payable for the lease year subsequent to the lease year in
which the option is exercised, divided by ten percent.

         The current annual rent per square foot for the New Jersey Property is
$36.00. The depreciable basis of the New Jersey Property for federal tax
purposes is $763,000 and it is being depreciated using the straight line method
over 40 years, a rate of $19,564 per year.

         The New Jersey Rose Lease contains a substitution option that in the
event that New Jersey Rose determines that the New Jersey Property is inadequate
or unprofitable or is rendered unsuitable by condemnation or casualty, New
Jersey Rose may substitute another property having a Boston Market restaurant
located thereon, of equal or greater current value. The substitute property
shall be subject to the approval of the Partnership.

         Hollywood Video, Enid, Oklahoma (Land and Building): On August 4, 1996,
the Partnership acquired the land and a 7,500 square foot building comprising a
Hollywood Video located at 3400 West

                                      7

<PAGE>   10

Owen K. Garriott Road, Enid, Oklahoma (the "Enid Property"). The Enid Property
was constructed for its present use in June 1996 and was fully operational at
the time of the purchase. The Partnership purchased a fee simple interest in the
Enid Property from Terry S. Ward & Associates for $1,050,000 and assumed a lease
between Caltex Entertainment, Ltd., a Texas limited partnership, and Hollywood
Entertainment Corp., an Oregon corporation ( "Hollywood"). Hollywood is a retail
chain that operates video rental stores under the trade name of Hollywood Video.
The headquarters of Hollywood are located at 10300 S. W. Allen Blvd., Beaverton,
Oregon 97005.

         The Partnership assumed the lease dated January 15, 1997 between Caltex
Entertainment, Ltd. and Hollywood Entertainment Corporation, on July 31, 1996
(the "Hollywood Lease"). The Hollywood Lease term expires on May 10, 2011 with
two renewal options of five years each. The rent in the first five years of the
Hollywood Lease will be $118,125 per year, or $9,844 per month. The rent shall
be increased on May 10, 2001 and on the first day of each renewal term by the
percentage increase in the Consumer Price Index over the five year period
preceding the increase date, but in no event more than twelve percent (12%). In
the event the Consumer Price Index has decreased, the rent shall remain
unchanged.

                  The current annual rent per square foot of the Enid Property
is $15.75. The depreciable basis of the Enid Property is $842,700 and it is
being depreciated using the straight-line method over 40 years at a rate of
$21,608 per year.

         Denny's Restaurant, Virginia Beach, Virginia (Land and Building): On
August 5, 1996, the Partnership acquired the land and 3,012 square foot building
comprising a Kettle restaurant located at 5720 Northamton Road, Virginia Beach,
Virginia (the "Virginia Beach Property"). The Partnership purchased a fee simple
interest in the Virginia Beach Property from Captec Net Lease Realty, Inc., an
affiliate of the General Partner for $789,543. On August 5, 1996, the
Partnership took assignment of the lease entered into between the Partnership
and Captec Net Lease Realty, Inc. and DenAmerica Corp., a Delaware corporation
("DenAmerica") dated August 25, 1996 (the "DenAmerica Lease"). DenAmerica
franchises and operates casual dining restaurants under the primary trade name
of Denny's. The DenAmerica Lease term expires on August 31, 2015, with two
renewal options of five years each. The DenAmerica Lease provides for a one-time
increase in the purchase price by up to $250,000 to cover costs actually
incurred and paid by DenAmerica to third parties for additional improvements to
the Virginia Beach Property. On April 2, 1997, the Partnership provided funding
in the amount of $194,197, the actual cost of the re-imaging of the Kettle
Restaurant to a Denny's.

         The Partnership entered into the First Amendment to the DenAmerica
Lease dated April 2, 1997, which provides that DenAmerica will pay annual rent
in the amount of $106,244, payable in equal monthly installments of $8,854. The
annual rent shall increase by 10% on September 1, 2000 and every five years
thereafter. In all other respects the DenAmerica Lease shall remain unchanged
and in full force and effect. DenAmerica has an option to purchase the Virginia
Beach Property commencing on September 1, 2000 and expiring 90 days thereafter
for the greater of (a) the then fair market value of the Virginia Beach Property
as determined pursuant to in the DenAmerica Lease or (b) $1,192,534. DenAmerica
has deposited with the Partnership $7,106 as security for DenAmerica's faithful
performance of DenAmerica's obligations under the DenAmerica Lease.

         The current annual rent per square foot on the Virginia Beach Property
is $35.27. The depreciable basis of the Virginia Beach Property is $510,740 and
is being depreciated using the straight-line method over 40 years at a rate of
$13,096 per year.

                                      8

<PAGE>   11

         Golden Corral Restaurant, Lakeland, Florida (Land and Improvements): On
August 6, 1996, the Partnership acquired the land with all improvements,
including a building to be located thereon, located at 4532 South Florida
Avenue, Lakeland, Florida (the "Lakeland Property"). The Partnership purchased
the Lakeland Property from and leased it back to Corral South Store 3, Inc., a
Florida corporation ("Corral South 3"). Corral South 3 operates casual dining
restaurants under the primary trade name of Golden Corral Restaurants. The
Partnership purchased a fee simple interest in the Lakeland Property for the
total purchase price of $1,600,000. Corral South 3 completed construction of the
8,825 square foot building on February 3, 1997 and paid interim rent of $78,952
to the Partnership.

         The base term of the Corral South 3 Lease commenced on June 1, 1997 and
shall expire 15 years thereafter with two renewal options of five years each.
The annual rent on the Lakeland Property is $174,400, or $14,533 per month. The
annual rent shall increase by 8% on June 1, 2002, and every five years
thereafter by 8%. The annual rent per square foot on the Lakeland Property is
$19.76.

         Corral South 3's obligations under the Corral South 3 Lease are
guaranteed for the benefit of the Partnership by David C. Brown, an individual.
David C. Brown is the sole stockholder of the Corral South 3. Corral South 3 has
an option to purchase the Lakeland Property commencing on the sixty-first month
of the base term of the Corral South 3 Lease. The option price shall equal the
scheduled minimum annual rent during the sixth year of the base term divided by
0.10.

         Corral South 3 paid to the Partnership a construction funding fee equal
to one half percent (.5%) of the purchase price or $8,000. The depreciable basis
of the Lakeland Property is $1,135,000 and it will be depreciated using the
straight-line method over 40 years at a rate of approximately $29,102 per year.

         On July 25, 1997, the Partnership sold an undivided 34.375% interest in
the Golden Corral Property, as a tenant in common to Captec Franchise Capital
Partners L.P. IV, a Delaware limited partnership and an affiliate of the
Managing General Partner for $550,000. The Partnership's pro-rata share of the
rent is $114,450 or $9,538 per month.

         Boston Market, S. Kent, Washington (Land and Building): On September
26, 1996, the Partnership acquired the land and 3,320 square foot building
comprising a Boston Market restaurant located at 25947 Pacific Highway South,
Kent, Washington (the "Washington Property"). The Washington Property was
constructed for its present use in 1996 and was fully operational at the time of
the purchase. The Washington Property was purchased from and leased back to BC
Northwest, L.P., a Delaware limited partnership ("BC Northwest"). BC Northwest
is a Franchise Area Developer which operates casual dining restaurants under the
primary trade name of Boston Market. The Partnership purchased a fee simple
interest in the Washington Property for a purchase price of $1,050,000.

         BC Northwest and the Partnership have entered into a lease commencing
on October 1, 1996, (the "BC Northwest Lease").  The BC Northwest Lease term
expires on September 26, 2011 with five renewal options of five years each.  The
rent in the first through the fifth years of the BC Northwest Lease is $110,250
per year, or $9,188 per month.  The annual rent shall be increased beginning on
the sixth lease year to $121,275; beginning on the eleventh lease year to
$133,455 and at the end of every five years thereafter by ten percent of the
annual rent payable during the lease year immediately preceding. Beginning in
the sixth year, and in addition to the annual rent provided above, BC Northwest
shall pay percentage rent on an annual basis equal to the difference between
five percent of "gross sales" (as defined in the lease) for such lease


                                      9
<PAGE>   12

year minus the annual rent payable for such lease year.  BC Northwest's
financial obligations under the lease are unconditionally guaranteed by Boston
Chicken, Inc., a Delaware corporation and franchisor of Boston Market.

         BC Northwest has an option to purchase and first right of refusal to
purchase the Washington Property. BC Northwest shall have the right to purchase
the Washington Property on the same terms and conditions as set forth in the
offer or BC Northwest may elect an alternate purchase price as follows: (a)
during the first and second lease year the purchase price shall be an amount
equal to the total rent payable for the lease year subsequent to the lease year
in which the option is exercised divided by 9.462%; (b) during the third lease
year in an amount equal to the annual rent for lease year 3 divided by 9.978%;
(c) during the fourth lease year in an amount equal to the annual rent for lease
year four divided by 9.785%, and (d) in lease year five in an amount equal to
the annual rent for lease year five divided by 9.580%.

         BC Northwest has the option to purchase the Washington Property any
time after the fifth year for the following option price: (a) if BC Northwest
exercises its option at purchase during the sixth through eighth lease year, the
option price shall be equal to the total rent payable for the lease year
subsequent to the lease year in which the option is exercised, divided by ten
percent; or (b) if BC Northwest exercises its option to purchase after the
eighth lease year, the option purchase price shall be the greater of the fair
market value of the Washington Property or an amount equal to the total rent
payable for the lease year subsequent to the lease year in which the option is
exercised, divided by ten percent.

         The current annual rent per square foot for the Washington Property is
$33.21.  The depreciable basis of the Washington Property for federal tax
purposes is $630,000 and it is being depreciated using the straight line
method over 40 years, a rate of $16,154 per year.

         The BC Northwest Lease contains a substitution option that in the
event that BC Northwest determines that the Washington Property is inadequate or
unprofitable or is rendered unsuitable by  condemnation or casualty, BC
Northwest may substitute another property having a Boston Market restaurant
located thereon, of equal or greater current value. The substitute property
shall be subject to the approval of the Partnership.

         Jack-In-The-Box, Hurst, Texas (Land and Building) On September 27, 1996
the Partnership acquired the land and a 2,860 square foot building comprising a
Jack-In-The-Box restaurant located at 320 Grapevine Highway, Hurst, Texas (the
"Jack-In-The-Box Property"). The Jack-In-The-Box Property was constructed for
its present use in May 1997 and was fully operational at the time of the
purchase. The Jack-In-The-Box Property was purchased from and leased back to
Foodmaker, Inc., a Delaware corporation ("Foodmaker"). Foodmaker operates and
franchises casual dining restaurants under the primary trade name of
Jack-In-The-Box. The Partnership purchased a fee simple interest in the
Jack-In-The-Box Property for the purchase price of $940,000.

         Foodmaker and the Partnership have entered into the Partnership's
standard form of lease (the "Foodmaker Lease") which commenced on October 1,
1996. The Foodmaker Lease term expires on September 30, 2014 with four renewal
options of five years each. The annual rent in the first five years of the
Foodmaker Lease is $98,700 per year, or $8,225 per month. The minimum annual
rent shall be increased on October 1, 2001 and every five years thereafter by
the greater of: (a) the percentage increase in the Consumer Price Index over the
five year period preceding the increase date; or (b) ten percent (10%).

                                      10

<PAGE>   13

         Foodmaker has a continuing right of first refusal to purchase the
Jack-In-The-Box Property in accordance with the same terms and conditions set
forth in a bona fide offer that the Partnership desires to accept. The current
annual rent per square foot on the Jack-In-The-Box Property is $34.51. The
depreciable basis of the Jack-In-The-Box Property is $585,000 and it is being
depreciated on a straight-line basis over a period of 40 years at a rate of
$15,000 per year.

         Black-Eyed Pea, Plano, Texas (Land and Building): On September 30, 1996
the Partnership acquired the land and a 5,445 square foot building comprising a
Black-Eyed-Pea restaurant located at 1905 Preston Boulevard, Plano, Texas (the
"Black-Eyed Pea Property"). The Black-Eyed Pea Property was constructed for its
present use in September 1996 and was fully operational at the time of the
purchase. The Plano Property was purchased from and leased back to DenAmerica
Corp., a Delaware corporation ("DenAmerica"). DenAmerica operates and franchises
casual dining restaurants under the primary trade names of Denny's and
Black-Eyed Pea. The Partnership purchased a fee simple interest in the Plano
Property for the purchase price of $1,486,768.

         DenAmerica and the Partnership have entered into the Partnership's
standard form of lease (the "Black-Eyed Pea Lease") which commenced on October
1, 1996. The Black-Eyed Pea Lease term expires on September 30, 2016 with two
renewal options of five years each.

         The annual rent for the first seven years of the Black-Eyed Pea Lease
is $157,969 or $13,164 per month. The minimum annual rent will be increased on
October 1, 2003 and every five years thereafter by the percentage increase in
the Consumer Price Index over the five year period preceding the increase date;
provided that the increase does not exceed ten percent (10%). The current annual
rent per square foot on the Plano Property is $29.01.

         The depreciable basis of the Plano Property is $661,768 and it is being
depreciated on a straight-line basis over a period of 40 years at a rate of
$16,968 per year.

         General Real Estate Lease Provisions: An affiliate of the Managing
General Partner analyzed demographic, geographic and market diversification data
for the areas in which each of the properties described in this Item 2,
(collectively referred to as the "Properties") are located and reviewed the
appraisals of the Properties and the analysis regarding comparable properties
contained therein. Based upon the foregoing, the General Partners are unaware of
any unfavorable competitive conditions regarding the Properties. All of the
purchase prices were negotiated by an affiliate of the Managing General Partner,
which considered factors such as the potential value of the site, the financial
condition and business and operating history of the tenants and demographic data
for the areas in which the Properties are located.

         The General Partners believe that the amount of insurance carried by
the Tenants is adequate. The Partnership purchased the Properties with cash from
offering proceeds. It is anticipated that the Properties will be leveraged as
provided for in the Prospectus, however, the Partnership presently does not have
a financing commitment. The Tenants paid all of the expenses incident to the
closing of these transactions including, without limitation, the Partnership's
attorney's fees, title insurance premiums, recording fees and expenses and
transfer.

         All of the Properties are subject to leases (collectively and
singularly referred to as "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.

                                      11

<PAGE>   14

EQUIPMENT

         Red Robin  Restaurant  Equipment,  Ft. Collins,  Colorado:  On May 10,
1995 the Partnership  purchased  restaurant equipment ("Ft.  Collins
Equipment") to be used in the operation of a new Red Robin  Restaurant  located
at 701 E. Harmony Rd., Fort Collins,  Colorado.  The Ft. Collins  Equipment was
purchased  from various  vendors for a total cost of $750,000 and leased to The
Snyder Group Company,  a Delaware  Corporation,  DBA Red Robin Restaurant
("Snyder  Group").  The Snyder Group owns and operates the Red Robin Restaurant
under a franchise agreement.

         The Snyder Group and Partnership entered into the Partnership's
standard form of lease ("Snyder Group Lease") which commenced on May 15, 1995.
The Snyder Group Lease term is 60 months and the annual rent is $203,856 payable
in monthly installments of $16,988 on the fifteenth day of each month. The
annual rent remains fixed for the entire Snyder Group Lease term. At closing,
the Snyder Group paid the first and last month's rent to the Partnership in the
amount of $33,975.

         The Snyder Group Lease is guaranteed by the following individuals:
Stephen S. Snyder and Louise Snyder; and Michael J. Snyder and Nadine Snyder.
The Snyder Group has an option to purchase all of the Ft. Collins Equipment on
the termination date or any extension thereof, upon at least ninety (90) days
prior irrevocable notice to the Partnership for a sum to be determined to be the
fair market value plus all unpaid rental and other amounts owing.
Notwithstanding the foregoing, the fair market value shall not exceed the sum of
$75,000.

         Boston Market Restaurant Equipment, Chattanooga, Tennessee: On July 28,
1995, the Partnership purchased restaurant equipment (the "Chattanooga
Equipment") to be used in the operation of a new Kenny Rogers Roasters
Restaurant located at 5390 Highway #153, Chattanooga, Tennessee. The Chattanooga
Equipment was purchased from various vendors for a total cost of $249,187, and
leased to Roasters Corp., a Florida Corporation, DBA Kenny Rogers Roasters.

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

         The Chattanooga Equipment Lease term is 84 months and the minimum
annual rent is $52,716 payable in monthly installments of $4,393 on the 15th day
of each month. The annual rent remains fixed for the entire Chattanooga
Equipment Lease term. At closing, the Lessee paid the first and last month's
rent to the Partnership in the amount of $8,786 as well as interim rent of
$1,757. At the end of the Chattanooga Equipment Lease term, upon at least 90
days prior irrevocable notice to the

                                      12

<PAGE>   15

Partnership, the Lessee may renew the Chattanooga Equipment Lease for a minimum
renewal term of twenty-four (24) months at a monthly renewal rent of $1,142,
exclusive of tax, or purchase the Chattanooga Equipment for $24,918.

         Checkers Drive-In Restaurant Equipment, Marlow Heights, Maryland: On
September 27, 1995, the Partnership purchased restaurant equipment and a modular
building (the "Checkers Equipment") to be used in the operation of a Checkers
Drive-In Restaurant located at 4335 St. Barnabas Rd., Marlow Heights, Maryland.
The Checkers Equipment was purchased from Champion Modular Restaurant Company,
Inc. for $200,000 and leased to Drive Thru Realty Limited Partnership, a
Maryland limited partnership DBA Checkers Drive-In Restaurant ("Drive Thru").
Drive Thru owns and operates the Checkers Drive-In Restaurant under a franchise
agreement.

         Drive Thru and the Partnership entered into the Partnership's standard
form of lease (the "Drive Thru Lease") commencing on October 1, 1995. The Drive
Thru Lease term is 60 months and the minimum annual rent is $54,660 payable in
monthly installments of $4,555 on the first day of each month. The annual rent
remains fixed for the entire Drive Thru Lease term. At closing, Drive Thru paid
the first and last month's rent to the Partnership in the amount of $9,110 and
interim rent of $607.

         The Drive Thru Lease is guaranteed by the following entity and its
members: Maryland Drive Thru L.L.C.; and Adam Schwartz, David Terzian, Robert P.
Begelman, and John Smith, jointly and severally. Drive Thru has an option to
purchase the Checkers Equipment on the termination date or any extension
thereof, upon at least ninety (90) days irrevocable notice to the Partnership,
for $20,000.

         Kenny Rogers Roasters Restaurant Equipment, Phoenix, Arizona: On
October 11, 1995, the Partnership executed an agreement pursuant to which it
acquired restaurant equipment ("KRR Arizona Equipment") for $224,115 to be used
in the operation of a new Kenny Rogers Roasters Restaurant located at 1949 E.
Camelback, Suite 160, Phoenix, Arizona. The KRR Arizona Equipment was acquired
from an affiliated party which purchased the KRR Arizona Equipment on May 30,
1995 from various vendors for a total cost of $235,258 and leased it to Kenny
Rogers Roasters of Arizona, Inc., an Arizona corporation, DBA Kenny Rogers
Roasters ("KRR of Arizona")

         On October 11, 1995 the Partnership took assignment from the same
affiliated party, effective as of October 1, 1995, of the Partnership's standard
form of lease ("KRR Lease") dated June 1, 1995. The remainder of the KRR Lease
term at the time of the assignment was 79 months and the annual rent is $51,098
payable in monthly installments of $4,258 on the first day of each month. The
annual rent remains fixed for the entire KRR Lease term.

         During 1996, KRR of Arizona defaulted on the KRR Lease due to
non-payment of rents from February 1, 1996 and forward. On May 1, 1997, the
Partnership executed a lease agreement with Captec-Roasters, L.L.C., a Michigan
limited liability company DBA Kenny Rogers Roasters ("Captec-Roasters"). Captec
Financial Group, Inc., an affiliate of the Managing General Partner of the
Partnership, is a member of Captec-Roasters. Roasters Corp., a Florida
corporation and the franchisor of Kenny Rogers Roasters Restaurants, is also a
member of Captec-Roasters and is responsible for the operation of the
restaurant.

         The Partnership and Captec-Roasters entered into a lease agreement
dated May 1, 1997 ("Captec-Roasters Lease") with a term of 70 months. The annual
rent for the first 12 months of the Captec-Roasters Lease is $6,869 and is
$4,849 for the 58 months thereafter. At the end of the Captec-Roasters Lease
term, upon at least 90 days prior irrevocable notice to the Partnership,
Captec-Roasters shall have the option to purchase the KRR Arizona Equipment for
$1.00.

                                      13

<PAGE>   16

         Captec-Roasters was more than 30 days delinquent on the November 1,
1997 payment. This payment was subsequently paid on December 29, 1997, however,
that was the last payment received and Captec-Roasters subsequently defaulted on
its obligations under the KRR Lease. The Partnership took control of the KRR
Arizona Equipment on February 13, 1998 and is currently in the process of
re-marketing the KRR Arizona Equipment. The Partnership has provided for a loss
of $169,775 based on an anticipated $50,000 recovery from the equipment.

         Arby's Restaurant Equipment, Greenville, North Carolina: On December
29, 1995, the Partnership executed an agreement pursuant to which it acquired
restaurant equipment (the "Arby's Equipment") to be used in the operation of an
Arby's Restaurant located at 912 Maye Blvd., Greenville, North Carolina. The
Arby's Equipment was acquired from an affiliated party, which purchased the
Arby's Equipment on November 1, 1995 from various vendors at a total cost of
$228,055 and leased the Arby's Equipment back to Charmes, Inc. a North Carolina
corporation, DBA Arby's Restaurant ("Charmes"). Charmes owns and operates the
Arby's Restaurant under a franchise agreement.

         On December 29, 1995, the Partnership took assignment from the same
affiliated party, effective as of November 1, 1995, of the Partnership's
standard form of lease ("Charmes Lease") dated November 1, 1995. The Charmes
Lease term is 60 months and the minimum annual rent is $61,301 payable in
monthly installments of $5,108 on the first day of each month. The annual rent
remained fixed for the entire Charmes Lease term. At closing, Charmes paid the
first and last month's rent to the Partnership in the amount of $10,217. On
August 5, 1997, Charmes purchased the Arby's equipment from the Partnership for
$199,000.

         Denny's Restaurant Equipment, Lakeland, Florida: On December 29, 1995,
the Partnership executed an agreement pursuant to which it acquired restaurant
equipment (the "Denny's Equipment") to be used in the operation of a Denny's
Restaurant located at 4325 S. Florida Ave., Lakeland, Florida. The Denny's
Equipment was acquired from an affiliated party which purchased the Denny's
Equipment on November 15, 1995 from various vendors at a total cost of $272,946
and leased the Denny's Equipment back to American Family Restaurants, Inc., a
Georgia corporation, DBA Denny's Restaurant. American Family Restaurants, Inc.
was subsequently merged with DenAmerica Corp., its parent company and franchisor
of Denny's Restaurants ("DenAmerica"). The Partnership acquired the Denny's
Equipment at the original cost to the affiliated party.

         On December 29, 1995, the Partnership took assignment from the same
affiliated party, effective as of November 15, 1995, of the Partnership's
standard form of lease dated November 15, 1995, which lease was subsequently
assigned to DenAmerica (the "DenAmerica Lease"). Under the terms of the Lease,
DenAmerica is responsible for all expenses related to the Denny's Equipment
including taxes, insurance, maintenance and repair costs. The Lease term is 60
months and the minimum annual rent is $64,847 payable in monthly installments of
$5,404 on the fifteenth day of each month. The annual rent remains fixed for the
entire Lease term. At closing, the Partnership received the first month's rent
to the Partnership in the amount of $5,404 and interim rent of $1,081. In
addition, the Partnership received a security deposit of $13,647. At the end of
the DenAmerica Lease term, upon at least 90 days prior irrevocable notice to the
Partnership, DenAmerica may purchase all of the Denny's Equipment for $27,295.

         Denny's POS Equipment,: On July 15, 1996, the Partnership purchased
point of sale equipment ("POS Equipment) pursuant to an assignment effective as
of May 1, 1996, from an affiliate of the General Partner to be used in the
operation of twelve (12) Denny's restaurants located at the following locations:


                                      14

<PAGE>   17

             425 N.E. Hassalo St., Portland, OR
             12201 N. Center St., Portland, OR
             7815 N.E 6th Ave., Vancouver, WA
             8787 S.W. Scholls Ferry Rd., Portland, OR
             12101 SE 82nd Ave., Portland, OR
             105 E. Burnside R., Gresham, OR
             10428 S. E. Stark, Portland, OR
             1020 W. 6th Ave., Dalles, OR
             10412 N. E. 4th Plain, Orchards, WA
             400 E. Plain Mill Blvd., Vancouver, WA
             15815 S. E. 82nd Dr., Clackamas, OR
             3680 Market St., Salem, OR

         The Partnership purchased the POS Equipment for $342,783 and leased it
to the Green Team Restaurants, LLC, a Delaware limited liability company, dba
Denny's ("Green Team"). Green Team owns and operates the twelve Denny's
restaurants under a franchise agreement.

         Green Team and the Partnership entered into the Partnership's standard
form of lease (the "Green Team Lease") commencing on May 1, 1996. The Green Team
Lease term is 60 months and the minimum annual rent is $90,495.24 payable in
monthly installments of $7,541.27 on the first day of each month. The annual
rent remains fixed for the entire Green Team Lease term.

         At the end of the Green Team Lease term, upon at least 90 days prior
irrevocable notice to the Partnership, Green Team may purchase all of the POS
Equipment for its fair market value, not to exceed the sum of $34,278. The Green
Team Lease is unconditionally guaranteed by the following individuals: Doug
Koch, Robbie Qualls and Justin M. Hathaway, jointly and severally.

         Checkers Equipment, Palm Harbor, Florida. On March 11, 1996 the
Partnership purchased restaurant equipment and a modular building ("Palm Harbor
Equipment") to be used in the operation of a Checkers Drive-In Restaurant
located at 33225 U. S. Highway 19, North, Palm Harbor, Florida. The Palm Harbor
Equipment was purchased from Checkers of Palm Harbor, a Franchise, Inc., for
$225,000 and leased back to Checkers of Palm Harbor, a Franchise, Inc., a
Florida Corporation, DBA Checkers Drive-In Restaurant ("Checkers of Palm
Harbor").

         Checkers of Palm Harbor and Partnership entered into the Partnership's
standard form of lease (the "Checkers Lease") commencing on March 15, 1996. The
Checkers Lease term is 84 months and the minimum annual rent is $48,600 payable
in monthly installments of $4,050 on the fifteenth day of each month. The annual
rent remains fixed for the entire Checkers Lease term. The first and last
month's rent totaling $8,100 was paid to the Partnership at the time of closing.
At the end of the Checkers Lease term, upon at least 90 days prior irrevocable
notice to the Partnership, Checkers Drive In may purchase all of the Palm Harbor
Equipment for $22,500. The Checkers Lease is guaranteed by the following
individuals: George W. Cook and Michael G. Perez (the "Guarantors").

         Pursuant to a Lease Transfer and Assumption Agreement dated August 15,
1996, Checkers of Palm Harbor assigned all its right, title and interest in and
to the Palm Harbor Equipment to Checkers Drive In Restaurant, a Delaware
corporation, and franchisor of Checkers Drive In Restaurants ("Checkers Drive
In"). All of the terms of the Checkers Lease remain unchanged. Checkers of Palm
Harbor, Inc. and the Guarantors acknowledged that their obligations to the
Partnership under the Checkers Lease shall continue in full force and effect. In
the event of any default or breach by

                                      15

<PAGE>   18

Checkers Drive In, the obligations of Checkers of Palm Harbor and the Guarantors
to the Partnership shall be as fully extensive as Checkers Drive In obligations
to the Partnership.

         Denny's Equipment, Cypress, Florida. On March 29, 1996 the Partnership
purchased restaurant equipment ("Cypress Equipment") to be used in the operation
of a Denny's Restaurant located at 2380 NW Highway 19, Crystal River, Florida.
The Cypress Equipment was purchased for $353,647 and leased to Cypress Partners
1995, Ltd., a Florida limited partnership, dba Denny's ("Cypress Partners").
Cypress Partners owns and operates the Denny's Restaurant under a franchise
agreement.

         Cypress Partners and the Partnership entered into the Partnership's
standard form of lease (the "Cypress Lease") commencing on March 15, 1996. The
Cypress Lease term is 60 months and the minimum annual rent is $92,684 payable
in monthly installments of $7,723.65 on the fifteenth day of each month. The
annual rent remains fixed for the entire Cypress Lease term. At the time of
closing, the first and last month's rent totaling $15,447 was paid to the
Partnership.

         At the end of the Cypress Lease term, upon at least 90 days prior
irrevocable notice to the Partnership, Cypress Partners may purchase the Cypress
Equipment for the lesser of its fair market value or $35,364.70. The Cypress
Lease is jointly and severally guaranteed by the following: Cypress Associates,
a Florida partnership; Cypress Ormond Beach, Inc., a Florida corporation;
Transam Financial Services, Inc., a Florida corporation; Gerald F. Hilbrich, an
individual; Thomas E. McIntyre, an individual; George Noga, an individual; and
Larry K. Walker, an individual. On February 13, 1998, Cypress Partners purchased
all of the Cypress Equipment for $289,875.

         Applebee's Neighborhood Grill & Bar Equipment, Orem, Utah. On September
11, 1996, the Partnership acquired restaurant equipment to be used in the
operation of an Applebee's Neighborhood Grill & Bar located at 290 West 1300
South, Orem, Utah (the "Applebee's Equipment"). The Applebee's Equipment was
purchased on September 11, 1996 from various vendors at a total cost of
$384,200.80 and leased to J.M.C. Limited Partnership, a Utah limited
partnership, DBA Applebee's Neighborhood Grill and Bar ("J.M.C."). J.M.C. owns
and operates the Applebee's Neighborhood Grill & Bar under a franchise
agreement.

         J.M.C. and Partnership entered into the Partnership's  standard form
of lease whereby which commenced on September 15,  1996 (the  "J.M.C.  Lease").
The J.M.C.  Lease term is 84 months and the minimum  annual  rent is $79,484
payable in monthly  installments  of  $6,623,63  on the  fifteenth  day of each
month.  The annual rent  remains  fixed for the entire J.M.C.  Lease term. At
closing,  J.M.C.  paid the first and last month's rent to the  Partnership  in
the amount of $13,247 and interim rent of $883.

         At the end of the J.M.C. Lease term, upon at least 90 days prior
irrevocable notice to the Partnership, J.M.C. may purchase all of the Applebee's
Equipment for the lesser of its fair market value or $38,420. The J.M.C. Lease
is guaranteed by the following: John B. Prince, an individual; and William Tell,
Inc., a Utah corporation, jointly and severally.

         Equipment Leases - General 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. Prior to entering into the leases, an affiliate of
the Managing General Partner considered factors such as the financial condition
and business and operating history of the lessees and demographic data for the
area in which the Equipment is located. All of the Equipment was purchased with
cash from offering proceeds. It is anticipated that the

                                      16
<PAGE>   19


Equipment will be leveraged as provided for in the Prospectus, however, the
Partnership presently does not have a financing commitment. The General Partners
believe that the amount of insurance carried by each lessee is adequate.


Summary of Investment Objectives and Policies:

         The Partnership will acquire income-producing Property and Equipment
which will be 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. The
Partnership will use not less than 75% but not more than 90% of Net Offering
Proceeds to acquire Properties (primarily for lease to restaurant franchisees)
and up to 25% but not less than 10% to acquire Equipment (for lease to
restaurant and service-type franchisees). 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 and/or percentage rents. The Equipment will be leased only
pursuant to Full Payout Leases.

         Properties will be 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 or to be located, the
proposed purchase price and lease terms, geographic and market diversification,
and potential operating results. Similar analyses will be utilized in selecting
Equipment. In certain cases, the Partnership may become a co-venturer or general
partner in a joint venture or general partnership which will own a Property or
Equipment. The Partnership may also acquire Property through the acquisition of
substantially all of the interests of an entity which in turn owns a Property.
The Partnership may participate in sale-leaseback transactions, but expects to
do so only with respect to Properties and then only when the Property has an
established track record. 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
each such case, the Partnership's cost to purchase an interest in such Property
and/or Equipment would decrease and the total number of Properties and/or
Equipment which the Partnership would be able to acquire will increase.

         In making investments, the General Partners will 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 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 will
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 will
require the following:

                                      17
<PAGE>   20

         (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 terms and conditions of any lease entered into by the Partnership
with regard to a tenant may vary substantially from those described herein.
However, all of the leases will be "triple net" leases, which means that the
lessee will be required to pay all real estate and other taxes and assessments,
utilities, insurance and cost of maintenance and repairs.

         In no event will the Partnership reinvest Net Sale or Refinancing
Proceeds received commencing four years after the date on which the Partnership
terminates its Offering. It is expected that leases of certain Properties may
give the lessee the right to purchase the Property five to ten years after the
date of the lease at the Property's fair market value as determined by an
independent appraisal at the time of sale. Additionally, certain leases may
grant the lessee an option to purchase a percentage interest in the Property at
a price based on the fair market value as determined by an independent appraisal
at the time the option is exercised. 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.

         The Partnership's general policy will be to sell Properties and/or
Equipment on an all cash basis. However, under certain circumstances a purchase
money obligation secured by a lien on the Property or Equipment may be taken as
part payment and there are no limitations or restrictions on the Partnership
taking such purchase money obligations. The terms of payment to the Partnership
will be affected by custom in the area in which the Property or Equipment is
located and the then prevailing economic conditions. To the extent the
Partnership receives notes and other property in lieu of cash, such proceeds
(other than any interest payable thereon) will be excluded from Net Sale or
Refinancing Proceeds until and to the extent the notes or other property are
actually paid, sold, refinanced or otherwise disposed of and, therefore, the
distribution of the proceeds of a sale to the Limited Partners may be delayed
until such time. In some cases, the Partnership may receive payments (cash and
other property) in the year of sale in an amount less than the selling price,
with subsequent payments being spread over a number of years. It is possible
that such purchase money obligations would be structured to provide for a
"balloon" payment of the entire balance of principal at maturity.

         The Partnership intends to acquire Properties and Equipment using
leverage, on a portfolio basis, of up to 30% of the sum of gross proceeds of the
Offering and the aggregate amount of Partnership indebtedness secured by
Partnership Assets (approximately 35% of the aggregate purchase prices of all
Properties and Equipment). Notwithstanding the foregoing, the Partnership may
incur indebtedness on single Properties or Equipment packages equal to up to 80%
of the purchase price thereof so long as aggregate portfolio indebtedness does
not exceed the above-referenced amount. Borrowings for acquisition or
improvement will cause tax-exempt investors to recognize unrelated business
taxable income, although they will be allowed to offset such income with
deductions related thereto.


                                      18

<PAGE>   21
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.

           No matters were submitted to a vote of security holders during the
Partnership's most recent fiscal year covered by this report. However, in a
recently filed proxy with the Securities and Exchange Commission, the
Partnership intends to solicit the approval of the Limited Partners for the sale
of the general partnership interest held by the General Partners to Captec Net
Lease Realty, Inc., an Affiliate of the General Partners. However, the transfer
of such general partnership interests is subject to the approval of the majority
of the Limited Partners and the Limited Partners will receive notice of and an
opportunity to approve any transfer of the general partnership interests.


                                      19
<PAGE>   22
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 transferee becoming a substituted Limited
Partner (which consent may be granted or withheld at the sole discretion of the
General Partners). 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."

         On December 1, 1997, the Partnership repurchased 25 Units for $21,250
or 85% of the investor's capital account as of December 1, 1997. The repurchase
of the Units was completed pursuant to the terms of the Repurchase Plan set
forth in the Partnership's Prospectus. An additional 12 Units were repurchased
on December 31, 1997, for $10,200 under the same terms and conditions set forth
above. At December 31, 1997, the Partnership had 19,963 Units issued and
outstanding and 1,390 limited partners.


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. These forward-looking statements speak only as
of the date hereof. The Partnership undertakes no obligation to publicly release
the results of any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.


                                      20

<PAGE>   23

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.

         During 1997, the Partnership had limited investing activity.
Approximately $724,000 was spent completing the Lakeland Property and
approximately $194,000 was spent in re-imaging the Virginia Beach Property.

         During 1997, the Partnership sold an undivided 34.375% interest in the
Corral South Property to an affiliate for $550,000 (the book value). Also, the
Partnership sold the Arby's Equipment to its lessee for $199,399. The
Partnership recorded a gain on the sale of the Arby's Equipment of approximately
$9,300. Proceeds from these sales were used to fund the investing activity noted
above.

         As of December 31, 1997, the Partnership had $14.2 million invested in
eleven net leased real estate properties and $2.5 million invested in nine
equipment packages. As of December 31, 1997, the Partnership's investments were
allocated 82.01% to Properties and 17.99% to Equipment. This allocation is
expected to be similar to the final asset mix allocation, which will be at least
75% and not more than 90% Properties and up to 25% but not less than 10%
Equipment. During 1998, the Partnership intends to obtain leverage of up to
approximately $8.5 million. Such leverage, when incurred, will provide
additional funds to acquire additional Properties and Equipment.

         During December, 1997, the Partnership repurchased a total of 37 Units
pursuant to the Repurchase Plan for a total of $31,450 (the purchase price was
equal to the Limited Partner's Adjusted Capital Contribution on December 1,
1997, multiplied by 85%). The Units were purchased from net cash flow of the
Partnership. At December 31, 1997, the Partnership had 19,963 Units issued and
outstanding.

         The Partnership expects that only limited amounts of liquid assets will
be required for existing Properties since the form of lease which it uses for
its Properties and Equipment requires lessees to pay all taxes and assessments,
maintenance and repairs and insurance premiums, including casualty insurance.
The General Partners expect that the cash flow to be generated by the
Partnership's Properties and Equipment will provide adequate liquidity and
capital resources to pay operating expenses and provide distributions to Limited
Partners.

         The General Partners are not aware of any known trends or
uncertainties, other than national economic conditions, which reasonably may be
expected to have a material impact, favorable or unfavorable, on liquidity and
capital resources of the Partnership other than those referred to herein and in
the Partnership's Prospectus.


                                      21
<PAGE>   24


Results of Operations

         For the year ended December 31, 1997, the Partnership earned revenues
totaling approximately $2,063,000 compared to $1,491,000 for the previous year.
Revenues for the year ended December 31, 1997 were comprised of approximately
$1,672,000 of rental income from operating leases, $328,000 of financing income
from financing leases and $63,000 of other income which includes approximately
$3,000 interest earned on the Partnership's bank accounts and approximately
$56,000 interest and fees earned on the construction loan. For the preceding
year, the Partnership's revenues were comprised of approximately $983,000 of
rental income from operating leases, $341,000 of financing income from financing
leases and $167,000 of other income. The increase in revenues over the prior
year (38.4%) was primarily due to the benefit of a full period of rental revenue
from Properties and Equipment acquired and leased in the preceding year.

         For the year ended December 31, 1997, the Partnership incurred expenses
totaling approximately $469,000, compared to $169,000 for the previous year.
Expenses for the year ended December 31, 1997 were comprised of approximately
$210,000 of depreciation on buildings leased under operating leases, $90,000 of
general and administrative expenses and $170,000 for reserves on impaired
financing leases. For the preceding year, the Partnership's expenses were
comprised of approximately $114,000 of depreciation on buildings leased under
operating leases and $55,000 of general and administrative expenses. The 76.9%
increase in depreciation and general and administrative expenses over the prior
year was principally due to the effect of a full period of depreciation of
Properties and Equipment acquired and leased in the preceding year.

         During 1997, the reserve for impaired financing leases related to one
lease to a single restaurant obligor. The recorded investment in the lease is
approximately $220,000 and management anticipates receiving $50,000 of proceeds
from the equipment at auction. Installment payments on this lease, which
represented 3.6% of total rental payments, are delinquent by more than 120 days
and income accrual has been suspended by the Partnership.

         As a result of the foregoing, the Partnership's net income for 1997
increased 20.6% to $1.6 million from $1.3 million in 1996. During the year ended
December 31, 1997, the Partnership made distributions to limited partners
totaling $2,144,908, as compared with $1,371,318 for the preceding year.

         The Partnership is not subject to income taxation as all of its income
and expenses flow through to the Partners. The Partnership's net assets and
liabilities as reported in its financial statements exceeds tax basis by
$835,000, as of December 31, 1997.

ITEM 7.  FINANCIAL STATEMENTS.

         See Index to Financial Statements on Page F-i of this Form 10-KSB for
Financial Statements and Financial Statement Schedules, where applicable.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         None.

                                      22
<PAGE>   25


                                   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. The General
Partners of the Partnership are Captec Franchise Capital Corporation III, a
Michigan corporation, as Managing General Partner, and Patrick L. Beach, an
individual. Captec Franchise Capital Corporation III is a wholly-owned
subsidiary of the Captec Group.

         The following is a list of the executive officers and directors of the
Managing General Partner as of December 31, 1997:


<TABLE>
<CAPTION>

       Name                         Age                       Position
       ----                         ---                       --------
<S>                               <C>                         <C>
Patrick L. Beach                    41                        Chairman of the Board of Directors,
                                                              President and Chief Executive Officer

W. Ross Martin                      37                        Director, Vice President, Treasurer and
                                                              Chief Financial Officer
</TABLE>

         Patrick L. Beach has served as Chairman of the Board of Directors,
President and Chief Executive Officer of the Managing General Partner since
1994. Mr. Beach is also the Chairman of the Board of Directors, President and
Chief Executive Officer of the Captec Group, Captec Franchise Capital
Corporation II ("Captec II") and Captec Franchise Capital Corporation IV
("Captec IV"). Captec II and Captec IV are Michigan corporations which serve as
the Managing General Partners of Captec Franchise Capital Partners L.P. II and
Captec Franchise Capital Partners L.P. IV, respectively, both of which are
public limited partnerships with investment objectives similar to the
Partnership. From 1977 until 1980 he was employed by the HydraMatic Division of
General Motors Corp., where he served in various manufacturing related
positions. From March 1980 until February 1981 he served as Production Manager
for Quick Industries, Inc. of Jackson, Michigan with responsibility for
purchasing and production management for five plastics manufacturing plants in
five states. In February 1981, Mr. Beach resigned from his previous position to
found the Captec Group. He is responsible for the day to day management of the
Captec Group and its Affiliates. From 1986 to 1990, Mr. Beach also served as
Chairman of Wendy's of San Diego, Inc., a 27-unit franchisee of Wendy's
International. In 1990, Mr. Beach sold his interest in Wendy's of San Diego,
Inc. and resigned as Chairman of the Board. Approximately twenty-two months
thereafter, Wendy's of San Diego, Inc. filed for protection under Chapter 11 of
the Bankruptcy Code. From 1989 to 1991 Mr. Beach served as Chairman and
President of Illiana Printing, Inc., the master franchisor for American Speedy
Printing Centers, Inc. in the states of Illinois and Indiana.

         W. Ross Martin has served as a Director, Vice President, Treasurer and
Chief Financial Officer of the Managing General Partner since 1994. Mr. Martin
also serves as Director, Vice President, Treasurer and Chief Financial Officer
of Captec II; Director, Senior Vice President, Treasurer and Chief Financial
Officer of Captec IV; and as Director, Senior Vice President and Chief Financial
Officer of the Captec Group. Mr. Martin is also a Certified Public Accountant.
From 1982 until 1985, he was employed by Deloitte Haskins & Sells, most recently
as senior consultant in that firm's Emerging Business Services practice. Mr.
Martin joined the Captec Group in 1985 as Controller, was promoted

                                      23

<PAGE>   26

to Vice President-Finance in 1986 and to Senior Vice President and Chief
Financial Officer in 1994. He is responsible for the treasury, corporate finance
and strategic planning duties of the Captec Group as well as overseeing the
Accounting and Credit Departments.

           There were no filings  required  under  Section 16(a) of the
Securities  and Exchange Act of 1934 and the rules thereunder.

ITEM 10. EXECUTIVE COMPENSATION.

         The Partnership has no officers or directors. Furthermore, the
Partnership is not required to pay the officers and directors of the General
Partners any current nor any proposed compensation in such capacities. However,
the Partnership is required to pay certain fees, make distributions and allocate
a share of the profits or losses of the Partnership to the General Partners as
described under the caption "Compensation Table" on pages 12 through 16 of the
Partnership's Prospectus, which description is incorporated herein by reference.

         See "Item 12.  Certain Relationships and Related Transactions."


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         To the best knowledge of the Partnership,  as of December 31, 1997,
no person  beneficially  owned more than 5% of the outstanding Units.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         During 1997, an Affiliate of the Managing General Partner received
Acquisition Fees from the Partnership of $23,104 for services rendered in
connection with the selection, evaluation and acquisition of the Properties and
Equipment, as provided for in the Partnership Agreement. In addition, the
Affiliate expects to receive an additional fee of $166,892 from the Partnership
after leveraging these acquired assets, as provided for in the Prospectus.

         It is anticipated that the Captec Group, the parent of the Managing
General Partner and of which Mr. Patrick Beach is a director, officer and
majority shareholder, may provide property and equipment management services for
the Partnership. In such case, the General Partners believe that the Captec
Group would render management services to the Partnership on a competitive basis
in a manner consistent with customary business practices. The General Partners
further believe that the Captec Group has sufficient personnel and other
required resources to discharge all responsibilities to the various properties
that the Captec Group manages and will manage in the future. The Captec Group
also receives commitment fees paid by the lessees. The commitment fees are paid
by third parties and are limited to 1% of the purchase price of the assets.
Commitment fees have been to an affiliate of the Managing General Partner by the
lessees of the Partnership in an amount equal to $166,689. In addition, the
Partnership was paid a construction fee of .5% of the purchase price of the
Lakeland Property or $8,000 in 1996.

         The General Partners believe that the Asset Management Agreement
entered into between the Partnership and the Captec Group is on terms no less
favorable to the Partnership than those customary for similar services by
independent firms in the relevant geographic area. The Asset Management
Agreement provides for termination by a majority vote of the Limited Partners,
without

                                      24
<PAGE>   27

penalty, upon 60 days prior written notice. The asset management fees
paid by the Partnership in 1997 were $41,400.

         In connection with the Offering and throughout all stages of the
Partnership's operations, the General Partners and their affiliates will receive
compensation as described more fully in the "Compensation Table" on pages 12
through 16 of the Partnership's Prospectus. All of the General Partners' fees
with the exception of Acquisition Fees will be subordinated to receipt by the
Limited Partners of preferential distributions. Acquisition Fees will be payable
whether or not funds are available for distribution to the Limited Partners. The
General Partners may, under certain circumstances, benefit from the continued
holding of Partnership Properties and/or Equipment, while investors may be
better served by a sale or other disposition of such Properties and/or
Equipment. Furthermore, the receipt of certain fees and reimbursements is
dependent upon the ability of the General Partners to timely invest net offering
proceeds. Therefore, the interest of the General Partners in receiving such fees
may conflict with the interest of the Limited Partners. The General Partners and
their affiliates believe that their actions and decisions will be made in a
manner consistent with their fiduciary duty to the Partnership.

         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, although there
are no present arrangements with respect thereto. 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.

         The General Partners may cause the Partnership to acquire an interest
in property and/or equipment through a joint venture or general partnership with
an entity affiliated with the General Partners. In such instance, the General
Partners or their affiliates will have a fiduciary duty to both the Partnership
and the other entity which participates in the joint venture. This may result in
an impasse in decision-making since generally no one of the affiliated joint
venturers would have full control over the joint venture. In addition, there is
a potential risk that while one joint venturer may have the right to purchase
the other joint venturer's interest in the event of a proposed sale, it may not
have the resources to do so. In order to minimize the likelihood of a conflict
between those fiduciary duties, the Partnership Agreement provides guidelines
for investments in such joint ventures in various respects.


                                      25

<PAGE>   28


ITEM 13. EXHIBITS AND REPORTS ON FORM.

         (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).

   27           Financial Data Schedule

   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, 1997.


                                      26

<PAGE>   29


                                  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:      Captec Franchise Capital Corporation III,
                                       Managing General Partner

                              By:       /s/ W. Ross Martin
                                        ------------------------------
                                        W. Ross Martin
                                        Vice President and
                                        Chief Financial Officer

                              Date:     March 31, 1998

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



By:      /s/ Patrick L. Beach
         -------------------------------------
         Patrick L. Beach
         Chairman of the Board of Directors,
         President and Chief Executive Officer

Date:    March 31, 1998



By:      /s/ W. Ross Martin
         -------------------------------------
         W. Ross Martin,
         Director, Vice President,
         Treasurer and Chief Financial Officer

Date:    March 31, 1998



                                      27

<PAGE>   30


                                   INDEX TO

                                   EXHIBITS



<TABLE>
<CAPTION>
<S>                                                                                                           <C>
                                                                                                              Page
     Exhibit 27
         Financial Data Schedule

     Exhibit 99.1
         Pages 12-16 of the final Prospectus dated August 12, 1994.............................................E-1


</TABLE>


                                     E-i