SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

           ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the Fiscal Year Ended December 31, 1997
                         Commission file number 0-10134

                            SUPER 8 MOTELS III, LTD.
             (Exact name of registrant as specified in its charter)

                    California                      94-2664921
            (State or other jurisdiction of    (I.R.S. Employer Iden-
             incorporation or organization)       tification No.)

          2030 J Street, Sacramento, California           95814
         (Address of principal executive offices)       (Zip Code)
       Registrant's telephone number, including area code: (916) 442-9183

          Securities registered pursuant to Section 12 (b) of the Act: None
          Securities registered pursuant to Section 12 (g) of the Act:

                      UNITS OF LIMITED PARTNERSHIP INTEREST
                                (Title of Class)

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not 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-K or any amendment to this
Form 10-K.(X)

State the aggregate market value of the voting stock held by  non-affiliates  of
the registrant.

Inapplicable.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None









                                       1
<PAGE>

                                     PART I

Item 1.  BUSINESS

General Development of Business

Super 8 Motels III, Ltd. (the  "Partnership") is a limited partnership which was
organized under the Uniform  Limited  Partnership Act of the State of California
on June 2, 1980.

The General Partner of the Partnership is Grotewohl Management Services, Inc., a
California corporation which is 50% owned by Philip B. Grotewohl.

Through two public  offerings  of units of limited  partnership  interest in the
Partnership (the "Units"), the Partnership sold 5,941 Units at a price of $1,000
per Unit.

The net proceeds of the offerings have been expended for the  acquisition in fee
and  development  of  properties  located  in  San  Bernardino,  California  and
Bakersfield,  California. Motel operations commenced on March 6, 1982 at the San
Bernardino property, and on September 20, 1982 at the Bakersfield property.

Narrative Description of Business

(a)  Franchise Agreements

The Partnership operates each of its motel properties as a franchisee of Super 8
Motels,   Inc.   through   sub-franchises   obtained  from  Super  8  Management
Corporation.  In March 1988, Brown & Grotewohl, a California general partnership
which  is  an  affiliate  of  the  General  Partner  (the   "Manager"),   became
sub-franchisor  in the stead of Super 8 Management  Corporation.  As of November
10, 1997, Super 8 Motels,  Inc. had franchised a total of 1,619 motels having an
aggregate  of  98,000  guestrooms  in  operation.  Super  8  Motels,  Inc.  is a
wholly-owned subsidiary of Hospitality Franchise Systems, Inc.

The objective of the Super 8 Motel chain is to maintain a  competitive  position
in  the  motel  industry  by  offering  to  the  public  comfortable,  no-frills
accommodations  at a budget price.  Each Super 8 Motel  provides its guests with
attractively  decorated rooms, free color television,  direct dial telephone and
other  basic  amenities,  but  eliminates  or  modifies  other  items to provide
substantial cost reduction without  seriously  affecting comfort or convenience.
Some of these savings are  accomplished by reductions in room size,  elimination
of expensive lobbies, and by substantial economies in building construction.

By the  terms  of each  franchise  agreement  with  Super 8  Motels,  Inc.,  the
Partnership  pays monthly  franchise fees equal to 4% of its gross room revenues
(half of which is paid to the  sub-franchisor)  and contributes an additional 1%
of its gross room  revenues to a fund  administered  by Super 8 Motels,  Inc. to
finance the national reservation and promotions program.








                                       2
<PAGE>


(b)  Operation of the Motels

The  Manager  manages and  operates  the  Partnership's  motels.  The  Manager's
responsibilities  include,  but are not limited to, supervision and direction of
the Partnership's  employees having direct  responsibility  for the operation of
each  motel,  establishment  of room  rates  and  direction  of the  promotional
activities of the Partnership's  employees. In addition, the Manager directs the
purchase of  replacement  equipment and supplies,  maintenance  activity and the
engagement or selection of all vendors,  suppliers and independent  contractors.
The  Partnership's  financial  activities are performed by the individual  motel
staffs and a centralized accounting staff, all of which work under the direction
of the  Manager.  Together,  these  staffs  perform  all  bookkeeping  duties in
connection with each motel,  including all collections and all  disbursements to
be paid out of funds generated by motel operations or otherwise  supplied by the
Partnership.

As of December 31, 1997, the Partnership employed a total of 39 persons,  either
full or part-time at its two motel  properties,  including  ten desk clerks,  24
housekeeping and laundry  personnel,  three maintenance  personnel and two motel
managers.

In addition,  and as of the same date,  the  Partnership  employed 11 persons in
administrative positions at its central office in Sacramento, California, all of
whom worked for the Partnership on a part-time basis. They included  accounting,
investor service,  sales and marketing personnel,  motel supervisory  personnel,
secretarial personnel, and purchasing personnel.  Employed by the Partnership on
a part-time basis are David and Mark Grotewohl,  relatives of Philip  Grotewohl,
chairman  of  the  General  Partner.  David  Grotewohl,   an  attorney,  is  the
Partnership's general counsel and is the Director of Operations.  Mark Grotewohl
is the Director of Marketing and Sales.

(c)  Property Acquisition and Development

The net  proceeds of the offering of the Units,  and  financing in the amount of
$870,000  (which has since been  repaid),  was expended in  connection  with the
acquisition  and  development  of two  properties  located in San Bernardino and
Bakersfield, California, respectively.

It is the present intention of the General Partner that the proceeds of any sale
or refinancing be distributed to the Limited Partners rather than reinvested.

(d)  Competition

As discussed in greater detail below, in each area in which its motel properties
are located the  Partnership  faces intense  competition  from motels of varying
quality and size,  including  other budget  motels which are part of  nationwide
chains and which have access to nationwide reservation systems.

Super 8 Motels offer accommodations at the upper end, in terms of facilities and
prices, of the budget segment of the lodging industry. Generally, Super 8 Motels
offer larger rooms and higher  quality  furnishings  at higher rates than motels
franchised under the trade-names  Motel 6, Western 6, Econolodge,  Red Roof Inns
and E-Z 8.



                                       3
<PAGE>

Item 2.  Properties

(a) San Bernardino, California

The San Bernardino motel, which consists of 81 guest rooms on approximately 1.87
acres of land,  commenced  operations  on March 6,  1982.  The  average  monthly
occupancy  rates and  average  monthly  room rates  during the three most recent
years are as follows:

                                        Annual Averages
                               1997          1996         1995
                             ------------------------------------
    Average Occupancy Rate     53.8%         49.9%         55.3%
    Average Room Rate         $43.57        $40.23        $40.29


The  Partnership's  San  Bernardino  motel  provides  accommodations  to no  one
customer,   the  loss  of  which  could  materially   affect  the  Partnership's
operations.

The following lodging facilities provide direct and indirect  competition to the
Partnership's San Bernardino motel:
                                                 APPROXIMATE
                                 NUMBER           DISTANCE
               FACILITY         OF ROOMS         FROM MOTEL
            ---------------     --------        -------------
            Comfort Inn            50             Adjacent
            Hilton Inn            200           Across street
            La Quinta Motel       154             200 yards
            TraveLodge             90             200 yards
            EZ-8 Motel            117            0.13 miles

(b) Bakersfield, California

The Bakersfield  motel,  which consists of 90 guestrooms on  approximately  2.32
acres of land,  commenced  operations on September 20, 1982. The average monthly
occupancy rate and average monthly room rate for the three most recent years are
as follows:
                                           Annual Averages
                                  1997          1996         1995
                                ------------------------------------
       Average Occupancy Rate     84.6%         87.2%         85.6%
       Average Room Rate         $32.35        $30.28        $30.87














                                       4
<PAGE>

From October 1, 1982 to January 31, 1993,  an agreement  was in effect  granting
the Partnership the first  opportunity to provide rooms to employees of Santa Fe
Railroad at a room rate of $20.00.  Though expired  according to its terms,  the
contract  continues to be observed by both parties,  except that the agreed rate
is now $23.00 per room night. Revenue attributable to this agreement constituted
approximately 32%, 31%, and 32% of the motel's total guest revenues during 1997,
1996 and 1995, respectively.

On December 31, 1992, the Partnership  entered into a written agreement with the
National Railroad  Passenger  Corporation  (Amtrak) for the provision of lodging
services  to  its  employees  at  a  room  rate  of  $25.75,  which  included  a
transportation  credit of $1.75 per room night  payable to the  Partnership  for
providing  transportation from the train terminal.  Due to competitive bids, the
rate was  lowered  to $24.00 per room night  effective  October 1, 1994.  Amtrak
provided  approximately  24%,  22% and 26% of the motel's  guest room revenue in
1997, 1996 and 1995, respectively.

Except as set forth above, the Bakersfield  motel provides  accommodations to no
one  customer,  the loss of which  could  materially  affect  the  Partnership's
operations.

The following lodging facilities  provide direct or indirect  competition to the
Partnership's Bakersfield motel:

                                                           APPROXIMATE
                                              NUMBER         DISTANCE
                   FACILITY                  OF ROOMS       FROM MOTEL
       ----------------------------------    --------      -----------
       California Inn                            74           Adjacent
       Motel 6                                  160         0.50 miles
       EZ-8 Motel                               100         0.50 miles
       TraveLodge Plaza                          61         0.75 miles
       Comfort Inn South                         80         0.75 miles
       Four Points Inn                          199         1.00 mile
       Best Western Kern River Motor Inn        200         1.00 mile
       La Quinta Inn                            150         1.00 mile
       Days Inn                                 120         1.00 mile
       Roderunner                                49         1.50 miles
       Economy Motels of America                140         1.50 miles
       Rio Mirada                               209         2.00 miles
       Comfort Inn                               60         2.00 miles
       Econo Lodge                              100         2.00 miles
       Holiday Inn Express                      100         6.00 miles














                                       5
<PAGE>


Item 3.  LEGAL PROCEEDINGS

On October 27, 1997 a complaint was filed in the United States  District  Court,
Eastern District of California by the registrant,  the Managing General Partner,
and  four  other  limited  partnerships  (together  with  the  registrant,   the
"Partnerships")  as to which the  Managing  General  Partner  serves as  general
partner (i.e.,  Super 8 Motels,  Ltd.,  Super 8 Motels II, Ltd., Super 8 Economy
Lodging IV, Ltd., and Famous Host Lodging V, L.P.), as plaintiffs. The complaint
named as defendants  Everest/Madison  Investors, LLC, Everest Lodging Investors,
LLC, Everest Properties, LLC, Everest Partners, LLC, Everest Properties II, LLC,
Everest  Properties,  Inc., W. Robert  Kohorst,  David I. Lesser,  The Blackacre
Capital Group,  L.P.,  Blackacre Capital  Management  Corp.,  Jeffrey B. Citron,
Ronald J. Kravit, and Stephen P. Enquist (the "Everest Defendants"). The factual
basis  underlying the plaintiffs'  causes of actions  pertained to tender offers
directed by certain of the defendants to limited  partners of the  Partnerships,
and to  indications  of interest made by certain of the defendants in purchasing
the property of the Partnerships.  The complaint requested the following relief:
(i) a declaration that each of the defendants had violated Sections 13(d), 14(d)
and 14(e) of the Securities  Exchange Act of 1934 (the "Exchange  Act"), and the
rules and  regulations  promulgated by the  Securities  and Exchange  Commission
thereunder;  (ii) a  declaration  that  certain of the  defendants  had violated
Section  15(a) of the  Exchange  Act and the rules and  regulations  thereunder;
(iii) an order permanently  enjoining the defendants from (a) soliciting tenders
of or accepting for purchase securities of the Partnerships,  (b) exercising any
voting rights  attendant to the  securities  already  acquired,  (c)  soliciting
proxies,  and (d)  violating  Sections 13 or 14 of the Exchange Act or the rules
and regulations promulgated  thereunder;  (iv) an order enjoining certain of the
defendants  from  violating  Section 15(a) of the Exchange Act and the rules and
regulations  promulgated  thereunder;  (v) an  order  directing  certain  of the
defendants to offer to each person who sold  securities to such  defendants  the
right to rescind such sale; and (vi) a declaration  that the  Partnerships  need
not provide to the defendants a list of limited  partners in the Partnerships or
any  other  information  respecting  the  Partnerships  which  is  not  publicly
available.

On October 28, 1997 a complaint was filed in the Superior  Court of the State of
California,   Sacramento   County  by  Everest   Lodging   Investors,   LLC  and
Everest/Madison  Investors,  LLC, as plaintiffs,  against  Philip B.  Grotewohl,
Grotewohl Management Services,  Inc., Kenneth M. Sanders,  Robert J. Dana, Borel
Associates,  and BWC  Incorporated,  as  defendants,  and the  Partnerships,  as
nominal defendants.  The factual basis underlying the causes of action pertained
to the  receipt  by the  defendants  of  franchise  fees  and  reimbursement  of
expenses,  the  indications of interest made by the plaintiffs in purchasing the
properties of the nominal defendants,  and the alleged refusal of the defendants
to provide  information  required by the terms of the Partnerships'  partnership
agreements and California law. The complaint requested the following relief: (i)
a  declaration  that the action has a proper  derivative  action;  (ii) an order
requiring the defendants to discharge their fiduciary duties to the Partnerships
and to enjoin them from breaching their fiduciary duties;  (iii) disgorgement of
certain profits; (iv) appointment of a receiver; and (v) an award for damages in
an amount to be determined.





                                       6
<PAGE>

On February 20, 1998, the parties  entered into a settlement  agreement and both
of the above complaints were dismissed.  Pursuant to the terms of the settlement
agreement,  among other things,  the General  Partner has agreed to proceed with
the marketing for sale of the  properties  of the  Partnerships,  if by June 30,
1998, it receives an offer to purchase one or more  properties  for a cash price
equal to 75% or more of the appraised  value.  In addition,  the General Partner
has agreed to submit the offer for  approval to the limited  partners  and other
procedures as required by the  partnership  agreements and  applicable  law. The
General Partner has also agreed that upon the sale of one or more properties, to
distribute  promptly  the  proceeds of the sale after  payment of  payables  and
retention of reserves to pay anticipated expenses. The Everest Defendants agreed
not to  generally  solicit  the  acquisition  of  any  additional  units  of the
Partnerships  without first filing  necessary  documents with the SEC. Under the
terms of the settlement agreement, the Partnerships have agreed to reimburse the
Everest  Defendants  for certain  costs not to exceed  $60,000,  to be allocated
among the Partnerships.  Of this amount,  the Partnership will pay approximately
$12,000 during the year ending December 31, 1998.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Inapplicable.
















                                       7
<PAGE>


                                     PART II

Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
             STOCKHOLDER MATTERS

Market Information

The Units are not  freely  transferable  and no public  market for the Units has
developed or is expected to develop.

Holders

As of December 31, 1997 a total of 994 individuals (the "Limited Partners") held
Units in the Partnership.

Distributions

Cash  distributions  are made on a  quarterly  basis  from  Cash  Available  for
Distribution,  defined in the Partnership's Certificate and Agreement of Limited
Partnership  (the  "Partnership  Agreement")  as Cash Flow,  less  adequate cash
reserves for  obligations  of the  Partnership  for which there is no provision.
Cash Flow means cash funds provided from operations of the Partnership,  without
deduction  for  depreciation,  but after  deducting  cash  funds  used to pay or
provide for the payment of debt service,  capital  improvements and replacements
and the operating expenses of the Partnership's  property. Of the Cash Available
for  Distribution in any year, the General Partner will receive 10% thereof,  of
which 9% will  constitute  a fee for  managing  the  Partnership  and 1% will be
attributable to its interest in the profits of the Partnership. The balance will
be  distributed to the Limited  Partners.  Notwithstanding  the  preceding,  the
General   Partner  will  not  receive   distributions   of  Cash  Available  for
Distribution  in  any  year  in  which  the  Limited  Partners  do  not  receive
distributions  of Cash Available for Distribution in an amount at least equal to
10% per annum cumulative on their adjusted capital contributions.

In addition,  the Partnership will promptly  distribute net proceeds of the sale
and  refinancing of its motel  properties to the General Partner and the Limited
Partners,  to the extent such proceeds are not reinvested in the  acquisition of
additional  properties.  Of the  sale  or  refinancing  proceeds  available  for
distribution in any year, the General Partner will receive 15% thereof,  and the
balance  will  be  distributed  to the  Limited  Partners.  Notwithstanding  the
preceding,  the  General  Partner  will  not  receive  distributions  of Sale or
Refinancing  Proceeds  until each Limited  Partner has received from all sources
distributions  equal to 100% of his  capital  contributions  plus 10% per  annum
cumulative on his adjusted capital contribution.












                                       8
<PAGE>



The following  distributions of Cash Available for Distribution were made to the
Limited Partners during the years 1996 and 1997:

                                      Total         Amount
                    Date          Distribution     Per Unit
                  --------        ------------     --------
                   8/15/97           $74,263        $12.50
                  11/15/97           $74,262        $12.50

No  distributions  of Cash Available for  Distribution  were made to the General
Partners.

Item 6.  SELECTED FINANCIAL DATA

Following  are  selected  financial  data of the  Partnership  for its last five
fiscal years ended December 31, 1997, 1996, 1995, 1994 and 1993.







































                                       9
<PAGE>

                            SUPER 8 MOTELS III, LTD.

Item 6. Selected Financial Data



                                   Years Ended December 31:
              -----------------------------------------------------------------
                 1997       1996       1995       1994       1993       1992
              ---------- ---------- ---------- ---------- ---------- ----------
Guest Room
 Income       $1,592,209 $1,464,850 $1,526,742 $1,625,581 $1,734,535 $1,622,825
Net Income(Loss)$117,093     $1,116    $68,750    $33,851    $49,083   $(31,203)

Per Partnership Unit:
 Cash
  distributions $148,525     $  -       $  -       $  -       $  -       $25.00
 Net income(loss) $19.52       $.19     $11.46      $5.64      $8.18     $(5.20)


                                         December 31:
              -----------------------------------------------------------------
                 1997       1996       1995       1994       1993       1992
              ---------- ---------- ---------- ---------- ---------- ----------
Total Assets  $3,259,069 $3,237,869 $3,411,456 $3,632,719 $3,793,456 $3,852,557
Long-Term Debt  $   -      $   -       $75,493   $390,484   $595,214   $724,636































                                       10
<PAGE>

Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS

Liquidity

The General Partner believes that the  Partnership's  liquidity,  defined as its
ability  to  generate  cash  to  satisfy  its  cash  needs,  is  adequate.   The
Partnership's  primary source of liquidity is its cash flow from operations.  As
of December 31, 1997 the  Partnership had current assets of $471,628 and current
liabilities  of  $116,417,  providing an  operating  reserve of  $355,211.  This
reserve is greater than the $297,050  reserve target required by the Partnership
Agreement.

The  liquidity  of the  Partnership  is  enhanced  by the fact that both the San
Bernardino  and  Bakersfield  motels are  presently  unencumbered.  Although the
General Partner knows of no trend likely to create a material  deficiency in the
Partnership's   liquidity,  if  the  need  arises,   leveraging  the  properties
constitutes a potential source of liquidity.

The properties may be sold pursuant to Item 3 above.

Capital Resources

The Partnership has no material commitments for capital  expenditures.  However,
the General Partner anticipates that, if the Partnership retains its properties,
during 1998 the  Partnership  will spend an as yet  undetermined  amount for the
refurbishment  of  its  motels  and  their  furnishings.   In  particular,   the
Bakersfield motel needs painting and roof repairs.

During the fiscal year covered by this report, the Partnership  expended $66,721
for renovations and replacements of which $36,441 was  capitalized.  This amount
included $18,629 for guestroom carpets, $8,021 for two ice machines,  $4,255 for
tub refurbishing,  $5,099 for replacement bedspreads, $6,323 for replacement air
conditioners and $4,524 for replacement televisions.

During the fiscal year ended December 31, 1996, the Partnership expended $70,718
of which $24,711 was  capitalized.  This amount included $21,900 for parking lot
resurfacing at the Bakersfield motel,  $15,348 for computer systems,  $7,345 for
guest room carpets,  $6,218 for re-keying,  $5,365 for tub refurbishing,  $5,006
for replacement bedspreads and $3,702 for replacement televisions.

The General Partner knows of no material trends likely to affect or to require a
change  in the mix of its  capital  resources  except as  discussed  in Part III
below.













                                       11
<PAGE>


Results of Operations

Combined Financial Results

The following tables summarize the operating  results of the Partnership for the
fiscal years ended  December 31, 1997,  1996 and 1995 on a combined  basis.  The
results of the individual properties follow in separate subsections.  The income
and expense  numbers in the  following  table are shown on an accrual  basis and
other payments on a cash basis.

                                         Average         Average
                                        Occupancy         Room
             Fiscal Year Ended:            Rate           Rate
             ------------------         ---------        -------
             December 31, 1995            71.3%          $34.33

             December 31, 1996            69.5%          $33.66

             December 31, 1997            70.0%          $36.43

                                               Total
                                            Expenditures       Partnership
                             Total              and             Cash Flow
Fiscal Year Ended:          Revenues        Debt Service           (1)
------------------          ----------      ------------       ------------
December 31, 1995           $1,571,111        $1,671,151         $(100,040)

December 31, 1996           $1,510,262        $1,515,375           $(5,113)

December 31, 1997           $1,641,860        $1,408,696          $233,164

(1) While Partnership Cash Flow as it is used here is not an amount found in the
financial statements,  this amount is the best indicator of the annual change in
the amount,  if any,  available for distribution to the Limited  Partners.  This
calculation is reconciled to the financial statement in the following table.

Reconciliation  of  Partnership  Cash Flow  (included in the chart above) to Net
Income as shown on the Statements of Operations (in the financial statements) is
as follows:

                                                1997        1996       1995
                                             ----------  ---------  ----------
Partnership Cash Flow                          $233,164    $(5,113)  $(100,040)
Principal Payments on Financial Obligations           0    153,456     285,133
Additions to Fixed Assets                        36,441     24,711      45,880
Depreciation and Amortization                  (151,769)  (162,569)   (164,599)
Other Items                                        (743)    (9,369)      2,376
                                             ----------  ---------  ----------
Net Income                                     $117,093     $1,116     $68,750
                                             ==========  =========  ==========






                                       12
<PAGE>

Following is a reconciliation  of the Partnership Cash Flow (shown above) to the
aggregate total of Cash Flow from Property  Operations for the Partnership's two
motels  which  are  segregated  in the  tables  below  under the  captions  "San
Bernardino Motel" and "Bakersfield Motel".
                                                1997        1996        1995
                                             ----------  ----------  ----------
San Bernardino Motel                            $82,590     $20,090     $41,110
Bakersfield Motel                               134,412     (34,512)   (159,959)
                                             ----------  ----------  ----------
Aggregate Cash Flow from Property Operations   $217,002    ($14,422)   (118,849)
Interest on Cash Reserves                        13,116       8,288      10,071
Other Partnership Income (net of Other
  Expenses) not allocated to the properties       3,046       1,019       8,738
                                             ----------  ----------  ----------
Partnership Cash Flow                          $233,164     $(5,113)  $(100,040)
                                             ==========  ==========  ==========

The  Partnership  achieved a $131,598 or 8.7% increase in total revenues  during
the fiscal year covered by this report as compared to the previous  fiscal year.
The  increase  in revenue is due to the net effect of  slightly  increased  room
rates  at  both  motels  and  significantly   reduced  occupancy  rates  at  the
Bakersfield motel. The San Bernardino market has improved in 1997 as compared to
the previous fiscal year.

The Partnership  experienced a $60,849 or 3.9% decrease in total revenues during
the fiscal year ended December 31, 1996 as compared to the previous fiscal year.
The decrease in revenue is due to slightly reduced room rates at both motels and
to significantly reduced occupancy at the San Bernardino motel. These conditions
are related to the high level of  competition in the  Bakersfield  market and to
poor economic conditions in the San Bernardino market.

The Partnership  achieved a $106,679 or 7.0% decrease in the total  expenditures
and debt  service  during the fiscal year  covered by this report as compared to
the previous  fiscal year.  This increase is due primarily to the liquidation of
the Bakersfield motel's loan during 1996.

The Partnership  achieved a $155,776 or 9.3% reduction in the total expenditures
and debt service  during the fiscal year ended  December 31, 1996 as compared to
the previous fiscal year.  This reduction is due primarily to the  comparatively
smaller  payments  necessary to liquidate  the  Bakersfield  motel's loan and to
lower payments for renovations and replacements.
















                                       13
<PAGE>



San Bernardino Motel
                                           Average         Average
                                          Occupancy          Room
            Fiscal Year Ended:               Rate            Rate
            ------------------            ---------        -------
            December 31, 1995               55.3%           $40.29

            December 31, 1996               49.9%           $40.23

            December 31, 1997               53.8%           $43.57

                                              Total         Cash Flow
                                          Expenditures         from
                               Total           and           Property
     Fiscal Year Ended:      Revenues     Debt Service      Operations
     ------------------    ----------     ------------      ----------
     December 31, 1995       $678,561       $637,451         $41,110

     December 31, 1996       $615,471       $595,381         $20,090

     December 31, 1997       $717,895       $635,305         $82,590

The  Partnership's San Bernardino motel achieved a $102,424 or 16.6% increase in
total revenues  during the fiscal year covered by this report as compared to the
previous fiscal year. The increased  revenue was primarily in guestroom  revenue
and was realized by increased business in the corporate market segment.

The Partnership's San Bernardino motel experienced a $63,090 or 9.3% decrease in
total revenues during the fiscal year ended December 31, 1996 as compared to the
previous  fiscal  year.  Guestroom  revenue  from  the  leisure  market  segment
decreased approximately $68,000 while the revenue from the other market segments
remained substantially unchanged.

The San  Bernardino  motel  experienced  a  $39,924  or 6.7%  increase  in total
expenditures  during the fiscal  year  covered by this report as compared to the
previous fiscal year. These expenditure  increases included $14,184 in increased
resident  manager  costs  reflecting  a management  change,  $9,987 in increased
franchise and  management  fees costs  associated  with the increased  guestroom
revenue and $6,808 in increased renovation expenses.

The San  Bernardino  motel  achieved  a  $42,070  or  6.6%  reduction  in  total
expenditures  during the fiscal year ended  December 31, 1996 as compared to the
previous fiscal year. These expenditure  reductions  included $13,573 in reduced
property taxes from a property tax appeal,  $14,602 in reduced  resident manager
costs,  $6,054 in lower  housekeeping  wages and  $9,861 in  reduced  renovation
expenses.  These  reductions  were  partially  offset  by  $7,250  in  increased
appraisal costs and by $7,609 of increased workers' compensation insurance.








                                       14
<PAGE>

Bakersfield Motel
                                        Average          Average
                                       Occupancy          Room
           Fiscal Year Ended:            Rate             Rate
           ------------------          ---------        --------
           December 31, 1995             85.6%           $30.87

           December 31, 1996             87.2%           $30.28

           December 31, 1997             84.6%           $32.35

                                                 Total          Cash Flow
                                             Expenditures         from
                                Total             and            Property
      Fiscal Year Ended:       Revenues       Debt Service      Operations
      -----------------     ----------       ------------      -----------
      December 31, 1995       $882,261         $1,042,220       $(159,959)

      December 31, 1996       $885,403          $919,915         $(34,512)

      December 31, 1997       $910,849          $776,437         $134,412

The  Bakersfield  motel  achieved a $25,446 or 2.9%  increase in total  revenues
during the fiscal year covered by this report as compared to the previous fiscal
year.  Guestroom  revenue increased $30,045 due to increased average daily rates
from $30.28 in 1996 to $32.35 in 1997.  This  increased  revenue  was  partially
offset by a  decrease  in  occupancy  from  87.2% in 1996 to 84.6% in 1997.  The
railroad  contracts  were  essentially  unchanged,  while  rate  increases  were
achieved in other market segments with a slight decline in rooms sold.

The Bakersfield motel achieved a $3,142 (0.4%) increase in total revenues during
the fiscal year ended December 31, 1996 as compared to the previous fiscal year.
Guestroom revenue was  substantially  unchanged as the increase in occupancy was
mostly  offset by the decrease in average  room rate.  Decreased  corporate  and
leisure  market segment  business was offset by increased  contract rooms to the
Santa Fe Railroad and to Amtrak.

The Partnership's  Bakersfield motel experienced a $143,478 or 15.6% decrease in
total expenses and debt service during the fiscal year covered by this report as
compared  to the  previous  fiscal  year.  The  loan  that  was  secured  by the
Bakersfield property was liquidated in 1996.

The  Partnership's  Bakersfield motel experienced a $122,305 (11.7%) decrease in
total  expenses and debt service  during the fiscal year ended December 31, 1996
as compared to the  previous  fiscal year.  The  $152,300  reduction in mortgage
payments was partially offset by increased  expenditures of $7,250 for appraisal
fees,  of $5,460 for workers'  compensation  insurance  and $5,329 for increased
supplies.









                                       15
<PAGE>


Future Trends

The General Partner believes that  competitive  conditions in the San Bernardino
and Bakersfield  markets are such as to prevent the Partnership  from reflecting
inflation in increased room rates at its motels. Accordingly, an increase in the
inflation rate could have a deleterious effect on Partnership operations.

The properties may be sold pursuant to Item 3 above.

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Inapplicable.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Financial  Statements and Notes to Financial  Statements  attached hereto at
pages F-1 through F-12.







































                                       16
<PAGE>












                           ANNUAL REPORT ON FORM 10-K

                                     ITEM 8

                              FINANCIAL STATEMENTS

                            SUPER 8 MOTELS III, LTD.

                             SACRAMENTO, CALIFORNIA

                                DECEMBER 31, 1997


































                                      F-1

<PAGE>


Item 8: Financial Statements




                            SUPER 8 MOTELS III, LTD.

                          INDEX OF FINANCIAL STATEMENTS


                                                                       Pages
                                                                       -----

    Report of Independent Certified Public Accountants                 F-3

    Balance Sheets, December 31, 1997 and 1996                         F-4

    Statements of Operations for the years ended December 31, 1997,
      1996 and 1995                                                    F-5

    Statements of Partners' Equity for the years ended December 31,
      1997, 1996 and 1995                                              F-6

    Statements of Cash Flows for the years ended December 31, 1997,
      1996 and 1995                                                    F-7 to
                                                                       F-8

    Notes to Financial Statements                                      F-9 to
                                                                       F-12














Note:  All  schedules  have been omitted since the required  information  is not
present or not  present  in amounts  sufficient  to  require  submission  of the
schedules  or because the  information  required  is  included in the  financial
statements or notes thereto.









                                      F-2
<PAGE>






            REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS




To the Partners
Super 8 Motels III, Ltd.

We have audited the  accompanying  balance sheets of Super 8 Motels III, Ltd., a
California  limited  partnership,  as of  December  31,  1997 and 1996,  and the
related  statements of operations,  partners' equity, and cash flows for each of
the  three  years  in the  period  ended  December  31,  1997.  These  financial
statements  are  the  responsibility  of  the  Partnership's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Super 8 Motels III, Ltd. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.


VOCKER KRISTOFFERSON AND CO.


February 26, 1998
San Mateo, California















                                      F-3
<PAGE>

                            SUPER 8 MOTELS III, LTD.
                       (A California Limited Partnership)
                                 BALANCE SHEETS
                           December 31, 1997 and 1996


                                     ASSETS
                                                         1997           1996
                                                      ----------     ----------
Current Assets:
    Cash and temporary investments (Notes 1, 3 and 6) $  362,215     $  254,782
    Accounts receivable                                  100,184         68,114
    Prepaid expenses                                       9,229         11,341
                                                      ----------     ----------
      Total Current Assets                               471,628        334,237
                                                      ----------     ----------

Property and Equipment (Note 2):
    Land                                               1,670,129      1,670,129
    Capital improvements                                  26,175         26,175
    Buildings                                          3,276,870      3,276,870
    Furniture and equipment                              782,439        756,837
                                                      ----------     ----------
                                                       5,755,613      5,730,011
    Accumulated depreciation and amortization         (2,968,172)    (2,826,379)
                                                      ----------     ----------
     Property and Equipment, Net                       2,787,441      2,903,632
                                                      ----------     ----------

       Total Assets                                   $3,259,069     $3,237,869
                                                      ==========     ==========


                        LIABILITIES AND PARTNERS' EQUITY

Current Liabilities:
    Accounts payable and accrued liabilities          $  105,668      $  62,020
    Due to related parties                                10,749          1,765
                                                      ----------     ----------
     Total Current Liabilities                           116,417         63,785
                                                      ----------     ----------

      Total Liabilities                                  116,417         63,785
                                                      ----------     ----------

Partners' Equity:
    General Partner                                       20,376         19,205
    Limited Partners                                   3,122,276      3,154,879
                                                      ----------     ----------
     Total Partners' Equity                            3,142,652      3,174,084
                                                      ----------     ----------

      Total Liabilities and Partners' Equity          $3,259,069     $3,237,869
                                                      ==========     ==========

                See accompanying notes to financial statements.

                                      F-4
<PAGE>

                            SUPER 8 MOTELS III, LTD.
                       (A California Limited Partnership)
                            STATEMENTS OF OPERATIONS


                                                 Years Ended December 31:
                                           ------------------------------------
                                              1997         1996         1995
                                           ----------   ----------   ----------
Income:
  Guest room                               $1,592,209   $1,464,850   $1,526,742
  Telephone and vending                        33,356       34,128       32,654
  Interest                                     13,116        8,288       10,071
  Other                                         3,178        2,996        1,644
                                           ----------   ----------   ----------
   Total Income                             1,641,859    1,510,262    1,571,111
                                           ----------   ----------   ----------

Expenses:
  Motel operations (Notes 4 and 5)          1,164,112    1,189,294    1,174,475
  General and administrative (Note 4)         127,448       74,474       57,956
  Depreciation and amortization (Note 2)      151,769      162,569      164,599
  Interest                                       -           7,765       27,290
  Property management fees (Note 4)            81,437       75,044       78,041
                                           ----------   ----------   ----------
   Total Expenses                           1,524,766    1,509,146    1,502,361
                                           ----------   ----------   ----------

    Net Income                             $  117,093   $    1,116   $   68,750
                                           ==========   ==========   ==========

Net Income Allocable to General Partner        $1,171          $11         $688
                                             ========     ========     ========

Net Income Allocable to Limited Partners     $115,922       $1,105      $68,062
                                             ========     ========     ========

Net Income Per Partnership Unit (Note 1)       $19.52         $.19       $11.46
                                             ========     ========     ========

Distributions to Limited Partners Per
  Partnership Unit (Note 1)                    $25.00      $   -        $   -
                                             ========     ========     ========












                See accompanying notes to financial statements.

                                      F-5
<PAGE>

                          SUPER 8 MOTELS III, LTD.
                       (A California Limited Partnership)
                         STATEMENTS OF PARTNERS' EQUITY



                                                 Years Ended December 31:
                                           ------------------------------------
                                              1997         1996         1995
                                           ----------   ----------   ----------
General Partner:
  Balance, beginning of year               $   19,205   $   19,194   $   18,506
  Net income                                    1,171           11          688
                                           ----------   ----------   ----------
   Balance, End of Year                        20,376       19,205       19,194
                                           ----------   ----------   ----------

Limited Partners:
  Balance, beginning of year                3,154,879    3,153,774    3,085,712
  Net Income                                  115,922        1,105       68,062
  Cash Distributions                         (148,525)        -            -
                                           ----------   ----------   ----------
   Balance, End of Year                     3,122,276    3,154,879    3,153,774
                                           ----------   ----------   ----------

   Total Partners' Equity                  $3,142,652   $3,174,084   $3,172,968
                                           ==========   ==========   ==========




























                See accompanying notes to financial statements.

                                      F-6
<PAGE>


                            SUPER 8 MOTELS III, LTD.
                       (A California Limited Partnership)
                            STATEMENTS OF CASH FLOWS





                                                 Years Ended December 31:
                                           ------------------------------------
                                              1997         1996         1995
                                           ----------   ----------   ----------

Cash Flows From Operating Activities:
  Received from motel operations           $1,596,674   $1,505,571   $1,575,015
  Expended for motel operations and
    general and administrative expenses    (1,317,510)  (1,359,033)  (1,313,408)
  Interest received                            13,115        9,401        9,154
  Interest paid                                  -          (9,044)     (29,666)
                                           ----------   ----------   ----------
   Net Cash Provided by
    Operating Activities                      292,279      146,895      241,095
                                           ----------   ----------   ----------

Cash Flows From Investing Activities:
  Proceeds from sale of equipment                 120          500        5,366
  Purchases of property and equipment         (36,441)     (24,711)     (45,880)
                                           ----------   ----------   ----------
   Net Cash Used by Investing Activities      (36,321)     (24,211)     (40,514)
                                           ----------   ----------   ----------

Cash Flows From Financing Activities:
  Distributions paid to limited partners     (148,525)        -            -
  Payments on notes payable                      -        (153,456)    (285,134)
                                           ----------   ----------   ----------
   Net Cash Used by Financing Activities     (148,525)    (153,456)    (285,134)
                                           ----------   ----------   ----------

   Net Increase (Decrease) in Cash and
     Temporary Investments                    107,433      (30,772)     (84,553)

Cash and Temporary Investments:
  Beginning of year                           254,782      285,554      370,107
                                           ----------   ----------   ----------

   End of Year                             $  362,215   $  254,782   $  285,554
                                           ==========   ==========   ==========






                See accompanying notes to financial statements.

                                      F-7

<PAGE>

                            SUPER 8 MOTELS III, LTD.
                       (A California Limited Partnership)
                      STATEMENTS OF CASH FLOWS (Continued)




                                                 Years Ended December 31:
                                           ------------------------------------
                                              1997         1996         1995
                                           ----------   ----------   ----------
Reconciliation of Net Income to Net Cash
 Provided by Operating Activities:
  Net income                                 $117,093   $   1,116      $ 68,750

  Adjustments to reconcile net income to net
   cash provided by operating activities:

    Depreciation and amortization             151,769     162,569       164,599

    (Gain) loss on disposition of
     property and equipment                       743        (500)          433
    Decrease in accounts receivable           (32,070)      4,710        13,058
    (Increase) decrease in prepaid expenses     2,112         247          (866)
    Increase (decrease) in accounts payable
     and accrued liabilities                   43,648     (23,012)        3,033
    Increase (decrease) in due to
     related parties                            8,984       1,765        (7,912)
                                           ----------   ----------   ----------
     Total Adjustments                        175,186      145,779      172,345
                                           ----------   ----------   ----------

       Net Cash Provided by
        Operating Activities                 $292,279     $146,895     $241,095
                                           ==========   ==========   ==========




















                See accompanying notes to financial statements.

                                      F-8
<PAGE>
                            SUPER 8 MOTELS III, LTD.
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 1 - THE PARTNERSHIP

Super 8 Motels III, Ltd. is a limited partnership organized under California law
on June 2, 1980 to acquire and operate motel  properties in San  Bernardino  and
Bakersfield,  California. The term of the Partnership expires December 31, 2030,
and may be dissolved  earlier under certain  circumstances.  The San  Bernardino
motel  was  opened in  March,  1982,  and the  Bakersfield  motel was  opened in
September,  1982. The Partnership grants credit to customers,  substantially all
of which are local businesses in San Bernardino or Bakersfield.

The general partner is Grotewohl  Management  Services,  Inc., the fifty percent
stockholder and officer of which is Philip B. Grotewohl.

The net income or net loss of the  Partnership  is  allocated  1% to the General
Partner  and 99% to the  Limited  Partners.  Net  income and  distributions  per
Partnership unit are based on 5,941 units outstanding. All Partnership units are
owned by the Limited Partners.

The Partnership agreement requires that the Partnership maintain working capital
reserves for normal repairs, replacements,  working capital and contingencies in
an amount of at least 5% of adjusted capital contributions ($297,050 at December
31,  1997).  As of December  31,  1997 the  Partnership  had working  capital of
$355,211.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Items of Partnership  income are passed  through to the individual  partners for
income tax purposes, along with any income tax credits. Therefore, no federal or
California  income  taxes are provided for in the  financial  statements  of the
Partnership.  At December 31, 1997,  assets and  liabilities on a tax basis were
approximately  $1,000,000  lower  than  on  a  book  basis  due  to  accelerated
depreciation methods used for tax purposes.

Property and equipment are recorded at cost.  Depreciation  and amortization are
computed using the following estimated useful lives and methods:

        Description                Methods              Useful Lives
 -----------------------  --------------------------    ------------
 Capital improvements     150-200% declining balance    10-20 years

 Buildings                Straight-line and             10-25 years
                             150% declining balance

 Furniture and equipment  200% declining balance         4-7 years

Costs incurred in connection with maintenance and repair are charged to expense.
Major renewals and betterments  that materially  prolong the lives of assets are
capitalized.

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect certain  reported amounts and  disclosures.  Accordingly,  actual results
could differ from those estimates.

                                      F-9
<PAGE>
                            SUPER 8 MOTELS III, LTD.
                       (A California Limited Partnership)
                    NOTES TO FINANCIAL STATEMENTS (Continued)

NOTE 3 - CASH AND TEMPORARY INVESTMENTS

Cash and temporary  investments as of December 31, 1997 and 1996 consists of the
following:
                                         --1997--  --1996--
  Cash in bank                           $ 44,675  $ 43,305
  Money market accounts                   317,540   211,477
                                         --------  --------
   Total Cash and Temporary Investments  $362,215  $254,782
                                         ========  ========
Temporary investments are recorded at cost, which approximates market value. The
Partnership  considers  temporary  investments and all highly liquid  marketable
securities  with  original  maturities  of  three  months  or  less  to be  cash
equivalents for purposes of the statement of cash flows.

NOTE 4 - RELATED PARTY TRANSACTIONS

Franchise Fees
Super 8 Motels,  Inc.,  now a wholly-owned  subsidiary of Hospitality  Franchise
Systems,  Inc., is franchisor of all Super 8 Motels. The Partnership pays to the
franchisor monthly fees equal to 4% of the gross room revenues of each motel and
contributes an additional 1% of its gross room revenues to an  advertising  fund
administered by the franchisor.  In return, the franchisor provides the right to
use the name "Super 8," a national institutional advertising program, an advance
room reservation system, and inspection services. These costs ($79,610,  $73,242
and $76,337 for the years ended December 31, 1997, 1996 and 1995,  respectively)
are  included in motel  operations  expense in the  accompanying  statements  of
operations.  The  Partnership  operates its motel  properties as a franchisee of
Super 8 Motels, Inc., through a sub-franchise  agreement with Brown & Grotewohl,
a California general partnership,  of which Grotewohl Management Services,  Inc.
(see  Note  1) is a 50%  owner.  Under  the  sub-franchise  agreement,  Brown  &
Grotewohl  earned 40% of the above  franchise  fees,  which amounted to $31,844,
$29,297  and  $30,535  for the years ended  December  31,  1997,  1996 and 1995,
respectively.

Property Management Fees
The General  Partner,  or its  affiliates,  handles the  management of the motel
properties  of the  Partnership.  The fee for this  service  is 5% of the  gross
revenues from Partnership  operations,  as defined in the Partnership agreement,
and  amounted to $81,437,  $75,044 and $78,041 for the years ended  December 31,
1997, 1996 and 1995, respectively.

Subordinated Partnership Management Fees
During the Partnership's operational stage, the General Partner is to receive 9%
of cash available for distributions for Partnership  management services,  along
with an additional  1% of cash  available  for  distributions  on account of its
interest in the profit and losses subordinated in each case, however, to receipt
by the Limited  Partners of a 10% per annum  cumulative  pre-tax return on their
adjusted capital  contributions.  At December 31, 1997, the Limited Partners had
not  received  the  10%  cumulative  return,  and  accordingly,  no  Partnership
management  fees are presently  payable and therefore are not reflected in these
financial statements.  Management believes it is not likely that these fees will
become payable in the future.  This fee is payable only from cash funds provided
from  operations  of the  Partnership,  and may not be paid from the proceeds of
sale or a refinancing.  As of December 31, 1997, the cumulative  amount of these
fees was $438,290.                   F-10
<PAGE>
                            SUPER 8 MOTELS III, LTD.
                       (A California Limited Partnership)
                    NOTES TO FINANCIAL STATEMENTS (Continued)

NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)

Subordinated Incentive Distributions
Under the terms of the Partnership agreement,  the General Partner is to receive
15% of distributions of net proceeds from the sale or refinancing of Partnership
properties  remaining after  distribution to the Limited Partners of any portion
thereof required to cause distributions to the Limited Partners from all sources
to be equal to their  capital  contributions  plus a  cumulative  10% per  annum
pre-tax return on their adjusted  capital  contributions.  Through  December 31,
1997, there had been no such sales or refinancings.

Administrative  Expenses Shared by the Partnership and Its Affiliates  There are
certain  administrative  expenses  allocated  between the  Partnership and other
partnerships managed by the General Partner and its affiliates.  These expenses,
which are allocated based on usage are telephone,  data processing,  rent of the
administrative office, and administrative  salaries. The administrative expenses
allocated to the Partnership were approximately $230,000,  $225,000 and $223,000
during the years ended December 31, 1997, 1996 and 1995,  respectively,  and are
included  in general  and  administrative  and motel  operating  expenses in the
accompanying  statements of operations.  Included in administrative salaries are
allocated  amounts paid to two employees who are related to Philip B. Grotewohl,
the fifty  percent  stockholder  of Grotewohl  Management  Services,  Inc.,  the
General Partner.

NOTE 5 - MOTEL OPERATING EXPENSES

The following table summarizes the major components of motel operating costs for
the following years:

                                              1997         1996         1995
                                           ----------   ----------   ----------
Salaries and related costs                 $  454,635   $  447,181   $  441,334
Franchise and advertising fees                 79,610       73,242       76,337
Utilities                                     111,274      111,366      121,969
Allocated costs, mainly
  indirect salaries                           186,004      184,064      181,607
Renovations and replacements                   30,280       46,007       35,740
Other operating expenses                      302,309      327,434      317,488
                                           ----------   ----------   ----------
  Total motel operating expenses           $1,164,112   $1,189,294   $1,174,475
                                           ==========   ==========   ==========
NOTE 6 - CONCENTRATION OF CREDIT RISK

The Partnership  maintains its cash accounts in four commercial banks located in
California.  Accounts  at  each  bank  are  guaranteed  by the  Federal  Deposit
Insurance  Corporation  (FDIC) up to $100,000  per bank.  A summary of the total
insured and uninsured  cash balances (not reduced by  outstanding  checks) as of
December 31, 1997 follows:





                                      F-11
<PAGE>
                            SUPER 8 MOTELS III, LTD.
                       (A California Limited Partnership)
                    NOTES TO FINANCIAL STATEMENTS (Continued)

NOTE 6 - CONCENTRATION OF CREDIT RISK (Continued)

    Total cash in all California banks         $406,606
    Portion insured by the FDIC                (359,665)
                                               --------
       Uninsured cash balances                 $ 46,941
                                               ========

NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and temporary  investments  approximates  fair value
because of the short-term maturity of those investments.

NOTE 8 - LEGAL PROCEEDINGS AND SUBSEQUENT EVENT

On October 27, 1997, a complaint was filed in the United States  District  Court
by the Managing General Partner naming as defendants  Everest/Madison Investors,
LLC,  Everest  Lodging  Investors,  LLC,  Everest  Properties  II, LLC,  Everest
Properties,  Inc., W. Robert  Kohorst,  David I. Lesser,  The Blackacre  Capital
Group, L.P.,  Blackacre Capital Management Corp.,  Jeffrey B. Citron,  Ronald J.
Kravit,  and Stephen P.  Enquist.  The  complaint  alleged  that the  defendants
violated  certain  provisions of the Securities  Exchange Act of 1934 and sought
injunctive and declarative relief.

On October 28, 1997, a complaint was filed in the Superior Court of the State of
California,   Sacramento   County  by  Everest   Lodging   Investors,   LLC  and
Everest/Madison Investors, LLC as plaintiffs against the General Partners of the
Partnership and four other  partnerships  which have common general  partners as
nominal defendants.  The complaint pertained to the receipt by the defendants of
franchise fees and  reimbursement of expenses,  the indications of interest made
by the plaintiffs in purchasing the  properties of the nominal  defendants,  and
the alleged  refusal of the  defendants to provide  information  required by the
terms of the Partnership's partnership agreement and California law.

On February 20, 1998, the parties  entered into a settlement  agreement and both
of the above complaints were dismissed.  Pursuant to the terms of the settlement
agreement, the General Partner has agreed to proceed with the marketing for sale
of the properties of the Partnerships,  among other things, if by June 30, 1998,
it receives an offer to purchase one or more  properties  for a cash price equal
to 75% or more of the  appraised  value.  In addition,  the General  Partner has
agreed to submit the offer for  approval to the limited  partners as required by
the  partnership  agreements  and applicable  law. The General  Partner has also
agreed that upon the sale of one or more properties,  to distribute promptly the
proceeds of the sale after  payment of payables and retention of reserves to pay
anticipated expenses. The Everest Defendants agreed not to generally solicit the
acquisition of any  additional  units of the  Partnerships  without first filing
necessary  documents with the SEC. Under the terms of the settlement  agreement,
the  Partnerships  have agreed to reimburse the Everest  Defendants  for certain
costs not to exceed  $60,000,  to be allocated among the  Partnerships.  Of this
amount,  the Partnership  will pay  approximately  $12,000 during the year ended
December 31, 1998.



                                      F-12
<PAGE>


Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
             ACCOUNTING AND FINANCIAL DISCLOSURE

Inapplicable.


                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The original general partners of the Partnership were Dennis A. Brown and Philip
B.  Grotewohl,  as the  managing  general  partners,  and  Borel  Associates  (a
partnership  of which Robert J. Dana was a partner),  as the  associate  general
partner.  Upon Mr. Brown's death on February 25, 1988,  Mr.  Grotewohl and Borel
Associates elected to continue the Partnership. During March 1988, Mr. Grotewohl
appointed Grotewohl Management  Services,  Inc., a California  corporation,  his
successor as General Partner.  Upon the liquidation of Borel Associates in April
1990,  Grotewohl  Management  Services,  Inc.,  as the  sole  remaining  General
Partner, elected to continue the Partnership.

The  General  Partner  was  organized  in 1981 to serve as a general  partner of
limited  partnerships  to be formed  for the  purpose  of  investing  in Super 8
Motels.  Mr.  Grotewohl  is a 50%  shareholder,  the sole  director and the sole
officer of the General Partner.

Mr.  Grotewohl,  age 79, is an  attorney-at-law  and was  engaged in the private
practice of law in San Mateo County,  California,  between 1967 and 1978.  Since
1978, Mr.  Grotewohl's  principal  occupation has been as a promoter and general
partner of Super 8 Motels limited partnerships.

See Item 3, "Legal Proceedings."

Item 11.  EXECUTIVE COMPENSATION

Although Mr. Brown ceased to be a general  partner of the  Partnership  upon his
death,  a trust of Mr.  Brown  shares in certain of the  compensation  otherwise
payable to the General  Partner and its  affiliates.  Similarly,  although Borel
Associates  ceased to have any interest in the Partnership upon its dissolution,
Mr. Dana continues to share in such compensation.

The  following  is a  description  of the fees paid or  payable  to the  General
Partner, the Brown trust and Mr. Dana.

Property Management Fees

The Manager is managing and will manage all motel properties of the Partnership.
The fee for this service is 5% of the gross proceeds from the operations of each
motel.  This  compensation  is in  addition  to the  cost  of  compensating  the
Partnership's  employees  and the cost of goods and  services  acquired  for the
Partnership from independent contractors.

The  Partnership  accrued  and paid such fees to the  Manager  in the  amount of
$81,437 during the year ended December 31, 1997.



                                       17
<PAGE>


Franchise Fees and Advertising Fees

The  Partnership  operates its motels as a franchisee  of Super 8 Motels,  Inc.,
pursuant to sub-franchises from the Manager. In connection with the operation of
each of its motels,  the Partnership,  as franchisee,  pays 4% of its gross room
revenues  to the  franchisor.  One-half  of the  franchise  fee is  paid  to the
Manager.  In addition to the franchise fee, the Partnership pays 1% of its gross
room revenues to the  franchisor as an  advertising  fee. No part of this fee is
paid to the Manager.

The total of franchise  fees accrued  during the year ended December 31, 1997 to
Super 8 Motels, Inc. was $63,688,  of which $31,844 accrued to the Manager.  The
total advertising fees paid to Super 8 Motels,  Inc. was $15,922.  All the above
amounts have been paid.

General Partner's Interest in Cash Available for Distribution

At quarterly intervals, the total amount of the Partnership's Cash Available for
Distribution is determined at the discretion of the General Partner. (See Item 5
above.)   Distributions   therefrom  are  made  as  follows:  (1)  90%  of  such
distributions  are paid to the Limited  Partners;  (2) 9% thereof is paid to the
General  Partner as Partnership  management  fees; and (3) 1% thereof is paid to
the General  Partner in accordance with its interest in the income and losses of
the Partnership.

Notwithstanding  the  foregoing,  however,  distributions  of Cash Available for
Distribution  which would  otherwise be paid to the General Partner are deferred
and paid only after  payment to the Limited  Partners of  distributions  of Cash
Available  for  Distribution  in an amount  equal to a 10% per annum  cumulative
return on their adjusted capital contributions.

No such cash  distributions  were paid by the Partnership to the General Partner
during the fiscal year ended  December  31,  1997.  A total of $438,290 has been
accrued to the General Partner since commencement of the Partnership, but is not
set forth as a liability in the  Partnership's  financial  statements due to the
uncertainty  of  payment.  In order for this  amount to be payable  the  Limited
Partners must receive  $5,636,161 in prior years'  preference  distributions and
$594,100 in each future year before any payments can be made to management.

General Partner's  Interest in Net Proceeds of Sales,  Financing and Refinancing
of Partnership Properties

The proceeds from the sale or refinancing of properties not reinvested are to be
distributed  first to the Limited  Partners until they have received  cumulative
payments from all  distribution  sources equal to 100% of their original capital
contributions  and a cumulative 10% per annum return on their  adjusted  capital
contributions.  When the foregoing requirement has been satisfied, any remaining
funds from the sale or refinancing of properties is to be distributed 15% to the
General Partner and 85% to the Limited Partners.

No such  distributions  were paid or  accrued  for the  account  of the  General
Partner during the fiscal year covered by this report.




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Allocation of General Partners' Interest

Compensation  to the  General  Partners  and  their  affiliates  in the  form of
franchise fees and property  management  fees is allocated 1/3 each to the Brown
trust, the General Partner and Robert J. Dana.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT

Security Ownership of Certain Beneficial Owners

                                                    AMOUNT AND
    TITLE                                           NATURE OF
     OF                                             BENEFICIAL     PERCENT
    CLASS         NAME OF BENEFICIAL OWNER          OWNERSHIP      OF CLASS
    -----------------------------------------------------------------------
    Units       Everest Lodging Investors, LLC        216  Units    3.64%
    Units       Everest Madison Investors, LLC        280  Units    4.71%
    Units       KM Investments                         50  Units     .84%
                                                    ------
                                 Total                496  Units    9.19%
                                                    ======

Security Ownership of Management

The General Partner is not the beneficial owner of any Units.

Changes in Control

With the consent of all other General Partners and Limited Partners holding more
than 50% of the Units, a General Partner may designate a successor or additional
general partner,  in each case with such participation in such General Partner's
interest as such General Partner and successor or additional general partner may
agree upon, provided that the interests of the Limited Partners are not affected
thereby.

A General  Partner may withdraw from the  Partnership  at any time upon 60 days'
prior written notice to the Limited Partners and any other General Partners,  or
may transfer his interest to an entity  controlled  by him;  provided,  however,
that in either such event, if it is determined that the Partnership  business is
to be continued rather than dissolved and liquidated upon the happening thereof,
the  withdrawal  or  transfer  will  be  effective  only  after  receipt  by the
Partnership  of an opinion of counsel  to the  effect  that such  withdrawal  or
transfer  will not cause the  Partnership  to be  classified  as an  association
taxable as a  corporation  rather than as a partnership  for federal  income tax
purposes.











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The Limited  Partners shall take no part in the management of the  Partnership's
business;  however, a majority in interest of the Limited Partners,  without the
concurrence  of  the  General  Partner,  shall  have  the  right  to  amend  the
Partnership Agreement, dissolve the Partnership, remove a General Partner or any
successor general partner,  elect a new general partner or general partners upon
the removal, retirement,  death, insanity, insolvency or bankruptcy of a General
Partner,  and  approve or  disapprove  the sale,  exchange or pledge in a single
transaction  of all or  substantially  all of  the  properties  acquired  by the
Partnership.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


Administrative Expenses Shared by the Partnership and its Affiliates

There are certain administrative  expenses allocated between the Partnership and
other  partnerships  managed by the General  Partner and its  affiliates.  These
expenses,  which are allocated based on usage,  are telephone,  data processing,
rent of administrative  offices and administrative  salaries. The administrative
expenses  allocated to the Partnership were  approximately  $230,000 in 1997 are
included in general and administrative expenses and motel operations expenses in
the Partnership's financial statements.  Included in administrative salaries are
allocated  amounts paid to two employees who are related to Philip B. Grotewohl,
the 50% shareholder of the General Partner.
































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                                     PART IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents filed as part of this report
     1. Financial Statements Included in Part II of this Report

         Report of Independent Certified Public Accountants

          Balance Sheets, December 31, 1997 and 1996
          Statements  of Operations  for the Years Ended  December 31, 1997,
          1996 and 1995  Statements of Partners'  Equity for the Years Ended
          December 31, 1997,  1996 and 1995  Statements of Cash Flow for the
          Years Ended  December 31,  1997,  1996 and 1995 Notes to Financial
          Statements

     2. Financial Statement Schedules Included in this Report

         None

     3. Exhibits

         3.1 and 4.1 The Partnership  Agreement filed as Exhibits 3.1 and 4.1
         to the annual report on Form 10-K for the fiscal year ended December
         31, 1994 is incorporated herein by reference.

         3.2 & 4.2  The  Amendment  to  Partnership  Agreement,  included  as
         Exhibit  3.2 & 4.2 to the annual  report on Form 10-K for the fiscal
         year ended December 31, 1989 is incorporated herein by reference.

         Exhibits  10.1 through  10.4,  filed as Exhibits  10.1 through 10.4,
         respectively,  to the annual report on Form 10-K for the fiscal year
         ended December 31, 1989 are hereby incorporated herein by reference.

           10.1 Santa Fe Railway Agreement with the Partnership's Bakersfield
             Motel.
           10.2 Amtrak Contract with the Partnership's Bakersfield Motel.
           10.3 Franchise Agreement for the Bakersfield Property.
           10.4 Franchise Agreement for the San Bernardino Property.
         10.5 Amtrak  Contract  Amendment filed as Exhibit 10.5 to the annual
         report on Form 10-K for the fiscal year ended  December  31, 1994 is
         incorporated  herein by reference.  10.5 Amtrak  Contract  Amendment
         filed as  Exhibit  10.5 to the  annual  report  on Form 10-K for the
         fiscal  year  ended  December  31,  1994 is  incorporated  herein by
         reference.

    (b)  Reports on Form 8-K

A current  report on form 8-K dated  November  13, 1997 was filed  reporting  an
"Other Event" under Item 5. No financial statements were included therein.






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                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

(Registrant)      SUPER 8 MOTELS III, LTD.

By (Signature and Title)       /s/ Philp B. Grotewohl
                               ------------------------
                               Philip B. Grotewohl,
                               Chairman of Grotewohl Management Services, Inc.,
                               General Partner

Date March 27, 1998


Pursuant to the requirements of 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 (Signature and Title)       /s/ Philp B. Grotewohl
                               ------------------------
                               Philip B. Grotewohl,
                               Chief financial officer, chief accounting
                               officer and sole director of Grotewohl
                               Management Services, Inc.,
                               General Partner

Date March 27, 1998



























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