SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

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


                  For the quarterly period ended June 30, 1998


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

                         Commission file number 33-67848


                      ESSEX HOSPITALITY ASSOCIATES III L.P.

               (Exact name of registrant as specified in charter)

                                    DELAWARE
         (State or other jurisdiction of incorporation or organization)

                                   16-1422266
                      (I.R.S. Employer Identification No.)

                               100 CORPORATE WOODS
                            ROCHESTER, NEW YORK 14623
                     (Address of principal executive office)

       Registrant's telephone number, including area code: (716) 272-2300

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.

               Yes          X                       No
                           ---                            ---

As of August 12, 1998 4,000 Limited Partnership Units were outstanding.


<PAGE>




                                     PART 1
                                     ------

                              FINANCIAL INFORMATION
                              ---------------------

 Item 1.   Financial Statements
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                      Essex Hospitality Associates III L.P.
                                 Balance Sheets
                             June 30, 1998 and 1997


                            ASSETS                          1998           1997
                            -------                         -----          ----
Investments in real estate, at cost
<S>                                                    <C>            <C>      
       Land and land improvements                         1,984,385      1,984,385
       Buildings                                          7,239,290      7,250,564
       Furniture, fixtures and equipment                  2,009,843      1,966,558
                                                        -----------    -----------
                                                         11,233,518     11,201,507
       Less:accumulated depreciation                     (1,292,280)      (878,051)
                                                        -----------    -----------
          Net investments in real estate                  9,941,238     10,323,456

Cash and cash equivalents                                   251,343        116,774

Deferred costs:
       Debt issuance costs                                  344,980      1,060,289
       Franchise fees                                        85,500         85,500
       Other deferred costs                                  70,846         70,846
                                                        -----------    -----------
          Total deferred costs                              501,326      1,216,635
       Less: accumulated amortization                       (84,143)      (749,613)
                                                        -----------    -----------
                                                            417,183        467,022

Other assets                                                174,463        164,312
                                                        -----------    -----------

Total assets                                             10,784,227     11,071,564
                                                        ===========    ===========


                    LIABILITIES AND PARTNERS' CAPITAL
                    ---------------------------------
                                                        
Accounts payable and accrued expenses                       183,868        215,947
Accounts payable - construction                                --           17,500
Due to affiliate                                            228,056        104,111
First mortgage payable                                    7,655,519           --
Subordinated notes                                        2,736,000           --
Mortgage notes payable                                         --       10,000,000
                                                        -----------    -----------
                 Total liabilities                       10,803,443     10,337,558
                                                        -----------    -----------

Commitments (note 5)

Partners' capital                                           (12,926)       742,315
       Less notes receivable from partners                   (6,290)        (8,310)
                                                        -----------    -----------
          Total partners' capital                           (19,216)       734,005
                                                        -----------    -----------

Total liabilities and partners' capital                  10,784,227     11,071,564
                                                        ===========    ===========


</TABLE>

            See accompanying notes to unaudited financial statements.


<PAGE>





                      Essex Hospitality Associates III L.P.
                              Statements of Income
                  For the Quarters Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>


                                                    1998         1997
                                                    -----        ----
Income
<S>                                           <C>           <C>      
        Rooms                                      986,991     1,068,151
        Other income                                40,216        55,105
                                                ----------    ----------
           Total income                          1,027,207     1,123,256

Expenses
        Rooms                                      227,025       259,639
        Administrative and general                  99,174       101,285
        Property taxes                              57,667        70,870
        Repairs and maintenance                     50,048        54,388
        Advertising and promotion                   51,023        50,957
        Management fees                             44,365        50,731
        Utilities                                   44,947        48,185
        Commissions expenses                        36,176        38,068
        Franchises fees                             33,278        32,504
        Partnership management fees                 12,324        13,461
        Insurance                                    3,872         4,222
        Depreciation & amortization                104,231       103,411
        Miscellaneous                               20,371        12,757
                                                ----------    ----------
           Total expenses                          784,500       840,478
                                                ----------    ----------

              Operating income                     242,707       282,778

Interest
        Income                                         726           514
        Expense                                   (175,518)     (250,000)
        Amortization                              (195,391)      (59,487)
                                                ----------    ----------
                                                  (370,183)     (308,973)
                                                ----------    ----------

NET INCOME (LOSS)                                 (127,476)      (26,195)
                                                ==========    ==========

Net income (loss) - general partners                (1,275)         (262)
Net income (loss) - limited partners              (126,202)      (25,933)
                                                ----------    ----------
                                                  (127,476)      (26,195)
                                                ==========    ==========

Net income (loss) per unit - limited partners          (32)           (6)
                                                ==========    ==========



</TABLE>


 See accompanying notes to unaudited financial statements.




<PAGE>





                      Essex Hospitality Associates III L.P.
                            Statements of Cash Flows
                  For the Quarters Ended June 30, 1998 and 1997

<TABLE>
<CAPTION>

                                                                               1998          1997
                                                                               ----          ----
Cash flows from operating activities
<S>                                                                        <C>           <C>      
       Cash received from customers                                          1,018,287     1,098,488
       Cash paid to suppliers                                                 (638,568)     (716,201)
       Interest received                                                           726           514
       Interest paid                                                          (165,803)     (250,000)
                                                                            ----------    ----------
          Net cash provided by operating activities                            214,642       132,801
                                                                            ----------    ----------

Cash flows from investing activities
       Payments for fixed asset additions                                      (18,663)      (23,251)
                                                                            ----------    ----------
          Net cash used in investing activities                                (18,663)      (23,251)
                                                                            ----------    ----------

Cash flows from financing activities
       Partner capital contributions                                              --           1,010
       Payments for debt acquisition costs                                    (319,980)         --
       Repayment of mortgage notes, net of exchanges                        (8,707,000)         --
       Proceeds from subordinated notes, net of exchanges                    1,545,000          --
       Proceeds from first mortgage financing, net of repayments             7,553,519          --
       Proceeds from bridge loan, net of repayments                             69,440          --
       Repayments of advances from affiliate                                   (96,100)       59,155
       Partner distributions                                                      --        (101,010)
                                                                            ----------    ----------
          Net cash used in financing activities                                 44,879       (40,845)
                                                                            ----------    ----------

Net increase (decrease) in cash and cash equivalents                           240,858        68,705

Cash and cash equivalents - beginning of period                                 10,486        48,069
                                                                            ----------    ----------

Cash and cash equivalents - end of period                                      251,344       116,774
                                                                            ==========    ==========


RECONCILIATION OF NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss                                                                      (127,476)      (26,195)

Adjustments to reconcile net income (loss) to net cash used in operating
  activities:
       Depreciation and amortization                                           299,622       162,898
       Changes in:
          Accounts payable                                                      38,351        (1,396)
          Other assets                                                           4,145        (2,506)
                                                                            ----------    ----------
                                                                               214,642       132,801
                                                                            ==========    ==========
</TABLE>

 See accompanying notes to unaudited financial statements.


<PAGE>










                      ESSEX HOSPITALITY ASSOCIATES III L.P.
                        (A Delaware Limited Partnership)

                          Notes to Financial Statements
                             June 30, 1998 and 1997

(1)     ORGANIZATION

        Essex Hospitality Associates III L.P. (the Partnership) is a Delaware
        limited partnership formed in August 1993 for the purpose of purchasing,
        leasing or subleasing undeveloped land and constructing, owning and
        operating up to four new Hampton Inn, Homewood Suites or Microtel hotels
        under franchises or licenses to be obtained from these national lodging
        chains. The Partnership financed its activities through a public
        offering of notes and limited partnership units. Microtel hotels were
        constructed in Birmingham, Alabama and Chattanooga, Tennessee and began
        operations in September 1994 and September 1995, respectively. In April
        1995, construction of a Hampton Inn hotel in Rochester, New York was
        completed and the hotel began operations. The Partnership does not
        anticipate raising additional capital and, therefore, no additional
        hotels are expected to be developed.

        The Partnership's general partners are Essex Partners Inc. (Essex
        Partners), a subsidiary of Essex Investment Group, Inc. (Essex), and
        John E. Mooney, President of Essex Partners and Essex. Management of the
        Partnership and the hotels is the sole responsibility of Essex Partners.

        The following is a general description of the allocation of income and
        loss. For a more comprehensive description see the Partnership
        Agreement.

            Income from operations will be allocated 99% to the limited partners
            and 1% to the general partners until the amount allocated to the
            limited partners equals the cumulative annual return of 8% of their
            contribution. Any remaining income from operations is allocated 80%
            to the limited partners and 20% to the general partners. Income on
            the sale of any or all of the hotels is allocated 99% to the limited
            partners until each limited partner has been allocated income in an
            amount equal to his or her pro rata share of the nondeductible
            syndication expenses and sale commissions and 1% to the general
            partners. Thereafter, income on the sale of any or all the hotels is
            allocated in the same manner as income from operations.

            Losses from operations will be allocated 80% to the limited partners
            and 20% to the general partners in the amounts sufficient to offset
            all income, if any, which was allocated 80% to the limited partners.
            Thereafter, operating losses are allocated 99% to the limited
            partners and 1% to the general partners. Loss on the sale of any or
            all of the hotels will be first allocated in the same manner as
            losses from operations, except that the allocation of such loss
            would be made prior to allocations of income from operations. All
            other losses are allocated 99% to the limited partners and 1% to the
            general partners.


<PAGE>




ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997
PAGE 2

(1)     ORGANIZATION (CONTINUED)

        In 1997 and 1996, losses from operations were allocated 99% to the
        limited partners and 1% to the general partners.

        Under the Partnership agreement, cash distributions will initially be
        made 99% to the limited partners and 1% to the general partners. After
        the limited partners have received a minimum cumulative annual return of
        8% of their contribution, additional distributions may then be made 80%
        to the limited partners and 20% to the general partners. The limited
        partners have not received the minimum cumulative return of 8% due as of
        June 30, 1998.

        Under the Partnership's initial offering from 1993 to 1995, limited
        partnership capital of $3,986,320 was raised, less syndication fees
        including selling commissions and legal, accounting, printing and other
        filing costs of $491,473. Cumulative distributions to limited partners
        through June 30, 1998 were $1,076,718.

        Essex Partners and its affiliates received substantial fees in
        connection with the offering of notes and limited partnership units and
        the acquisition and development of hotels. Management and other fees
        related to the operation of the hotels and the Partnership are due
        annually to Essex Partners (see note 6).


(2)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        BASIS OF ACCOUNTING

        The financial statements of the Partnership were prepared on the accrual
        basis of accounting in conformity with generally accepted accounting
        principles.

        INVESTMENT IN REAL ESTATE

        Investments in real estate are stated at cost. Depreciation is
        calculated using the straight-line method over the estimated useful
        lives of the assets. The cost of property and equipment retired or
        otherwise disposed of and the related accumulated depreciation are
        removed from the accounts.

        DEFERRED COSTS

        Costs of issuing mortgage notes payable are amortized on a straight-line
        basis over the term of the notes.


<PAGE>



ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997
PAGE 3

(2)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        Franchise fees paid for the right to own and operate the hotels are
        amortized on a straight-line basis over the term of the franchise
        agreement, beginning when the hotel is placed in service.

        SYNDICATION COSTS

        The Partnership incurred legal fees and other costs related to the
        syndication which were treated as a reduction to Partners' capital.
        These costs will be included in the Partners' basis upon termination of
        the Partnership

        ADVERTISING COSTS

        Advertising costs of the Partnership are expensed as incurred.
        Advertising expense for the quarters ended June 30, 1998 and 1997 was
        $51,023 and $50,957, respectively.

        INCOME TAXES

        No provision for income taxes has been provided since any liability is
        the individual responsibility of the Partners.

        USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

        The preparation of the financial statements in conformity with generally
        accepted accounting principles requires the managing general partner to
        make estimates and assumptions that affect the reported amounts of
        assets and liabilities at the date of the financial statements and the
        reported amounts of income and expenses during the reporting period.
        Actual results could differ from those estimates.

        RECLASSIFICATION

        Certain amounts in the prior year's financial statements were
        reclassified to conform with the current year's presentation.


(3)     SALE OF LAND

        In 1996, the Partnership sold land adjacent to the hotel in Chattanooga
        with final settlement in January 1997 of $86,782. A loss of $67,218 was
        recognized on the transaction.






<PAGE>



ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997
PAGE 4


(4)     LONG TERM DEBT

        On May 11, 1998 the Partnership replaced its outstanding Mortgage Notes
        with a combination of first mortgage financing from a financial
        institution in the amount of $7,560,000, subordinated notes in the
        initial amount of $1,293,000 and a bridge loan from Essex Partners in
        the amount of $1,403,000. The first mortgage financing requires monthly
        payments of principal and interest based on a 25 year amortization and a
        fixed interest rate of 7.86%. The first mortgage financing matures on
        May 11, 2008. The first mortgage financing is secured by first mortgage
        liens on the Partnership's real and personal property and certain other
        assets. The Partnership is required to contribute 4% of gross revenues
        to a replacement reserve on a monthly basis.

        The Partnership completed its private offering of subordinated notes in
        July, 1998, raising $3,389,000 from private investors. As of June 30,
        1998, a total of $2,736,000 had been raised. The notes require monthly
        payments of interest only at the rate of 9.75%. The notes mature on
        April 30, 2004 unless extended for up to one year with the payment of a
        .5% extension fee. The notes are unsecured and are subordinated to the
        first mortgage financing. The proceeds from the offering were used to
        pay the costs of the offering, repay the bridge loan from Essex
        Partners, repay up to $150,000 in advances from Essex Partners and
        provide $350,000 in working capital and reserves for the Partnership.

        The bridge loan from Essex Partners was repaid with interest at the rate
        of prime plus .5% (the prime rate at June 30, 1998 was 8.5%). As of June
        30, 1998, the amount of the bridge loan outstanding was $69,440. This
        amount was repaid in July, 1998.

        The future annual principal payments of the debt obligations outstanding
        as of June 30, 1998 are estimated as follows:


                           1998          51,315
                                               
                           1999          96,942
                                               
                           2000         104,956
                                               
                           2001         113,633
                                               
                           2002         123,026
                           ----         -------
                                               
                                        489,869
                                        
                        

                        

                        
<PAGE>

                        


ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997
PAGE 5

(5)     FRANCHISE, ROYALTY AND MARKETING FEES

        The Partnership entered into franchise agreements with Microtel
        Franchise and Development Corporation (MFDC) for the Birmingham, Alabama
        and Chattanooga, Tennessee sites. Total initial franchise fees paid were
        $50,500. In addition to the initial fee, the Partnership is required to
        pay a monthly royalty fee of 2.5% of gross room revenues. The monthly
        royalty fee increases to 3% of gross room revenues in the event between
        50 and 100 Microtel Inn hotels are opened for business by franchisees
        and up to 3.5% in the event 100 or more Microtel Inn hotels are opened.
        The monthly royalty fee increased to 3% in 1997 and to 3.5% in 1998. In
        1996, the Franchisor established a system of advertising, thus requiring
        the Partnership to contribute an additional 1% of gross room revenues to
        pay for the cost of such a system.

        The franchise agreement also requires the Partnership to maintain
        certain insurance coverage, to meet certain standards with respect to
        furniture, fixtures, maintenance and repair, and to refurbish and
        upgrade the hotel not more than once every 5 years to conform to the
        Microtel Inn hotel's then-current public image. The term of the
        agreement is 10 years, with an option to renew for an additional 10
        years, subject to compliance with certain conditions. Microtel royalty
        fees totaled $12,613 in the second quarter of 1998 and $12,147 in the
        second quarter of 1997 and advertising fees were $4,205 in the second
        quarter of 1998 and $4,859 in the second quarter of 1997.

        The Partnership has also entered into a license agreement with Promus
        Corporation (Promus) to operate a Hampton Inn hotel for the Rochester,
        New York site. An initial franchise fee of $35,000 was paid. In addition
        to the initial fee, the Partnership is required to pay Promus a monthly
        royalty fee of 4% of gross room revenues, a monthly
        marketing/reservation fee of 4% of gross room revenue and a monthly
        amount equal to any sales tax or similar tax imposed on Hampton Inn on
        payments received under the license agreement. The Partnership incurred
        royalty fees of $20,666 in the second quarter of 1998 and $20,357 in the
        second quarter of 1997. Marketing/reservations fees included in
        advertising and promotion expenses totaled $20,666 in the second quarter
        of 1998 and $20,357 in the second quarter of 1997.

        Promus requires the Partnership to establish a capital reserve escrow
        account based on a percentage of gross revenues generated by the Hampton
        Inn hotel which will be used for product quality requirements of the
        hotel. Cumulative funding of the reserve for the first five years of
        operation increases from 1% to 5% of gross room revenues and stabilizes
        at 5% for the term of the agreement. The Partnership is also required to
        escrow an amount equal to 4% of gross revenues monthly under the new
        first mortgage. The total of the capital reserve cash account and the
        amount held in escrow for capital replacements at June 30, 1998 and 1997
        was $60,243 and $55,675, respectively.

        The franchise agreements impose certain restrictions on the transfer of
        limited partnership units. MFDC and Promus restrict the sale, pledge or
        transfer of units in excess of 10% and 25%, respectively, without their
        consent.


<PAGE>



ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997
PAGE 6



(6)     RELATED PARTY TRANSACTIONS

        A summary of the fees earned by Essex Partners in the second quarter of
        1998 and 1997 under the terms of the Partnership and management
        agreements is as follows:


<PAGE>


<TABLE>
<CAPTION>



TYPE OF FEE             AMOUNT OF FEE                                     1998              1997
-----------             -------------                                     ----              ----

<S>                     <C>                                            <C>                <C>    
Property Management     4.5% of gross operating revenues from          $ 44,365           $50,731
Fee                     the hotels

Partnership             1.25% of gross operating revenues                12,324            13,461
Management Fee          from the hotels

Accounting Fee          $2,025 per month                                  6,075             6,075

Refinancing Fee         up to 1% of the gross proceeds                   30,200               -0-

                                                                        $92,964           $70,267
                                                                        =======           =======

</TABLE>


       The accounting fees for the quarters ended June 30, 1998 and 1997 have
       been included in the administrative expenses.

       In addition, Essex Partners will receive a sales fee of up to 3% of the
       gross price if any hotel is sold.



<PAGE>



ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
-------    ---------------------------------------------------------

The Partnership was formed on August 2, 1993. In 1995, it completed its public
offering of first mortgage notes and limited partnership units, raising
$13,986,320. The first Partnership property, a 102-room Microtel hotel in
Birmingham, Alabama, opened in September, 1994. The two remaining Partnership
properties opened in 1995, a 118-room Hampton Inn in Rochester, New York in
April and a 100-room Microtel in Chattanooga in September.

The major revenue source for the Partnership's properties is room revenues,
which generated 96% of the operating revenues for the Partnership in the second
quarter, 1998. Room revenues generated are dependent on a property's average
occupancy and average daily rate. Room revenues for the second quarter 1998 were
8% lower than the second quarter, 1997 due to reductions in room revenues at
each of the Partnership's hotels. Room revenues decreased $81,000 in the second
quarter 1998 compared to the second quarter 1997. Other revenues, which are
composed primarily of telephone and movie rental income, decreased $15,000.
Occupancies at the hotels were less in the second quarter 1998 than in the
second quarter 1997, which affects both the room revenues and reduces the users
of other services, which reduces other income. Telephone revenues have also been
reduced due to the increasing use of calling cards by customers. Fewer customers
are billing long distance calls to their rooms since calling cards are more
economical.

The Birmingham Microtel Inn achieved an average occupancy of 66% for the quarter
with an average daily rate of $36.40, as compared with an average occupancy of
72% in the second quarter, 1997, and an average daily rate of $35.46. The
decrease in occupancy produced a $11,000 decrease in room revenues. The
reduction in room revenues appears to be due to two factors, new competition
entering the Birmingham market and management problems at the hotel.
 Although there are no new hotels in the immediate vicinity of the Birmingham
hotel, there are new hotels in other areas of Birmingham, which is reducing the
supply of customers for the Partnership's hotel. There have also been several
management changes at the hotel in the last year. In March, 1998 the manager who
left the property in the spring of 1997 was rehired. Under his leadership the
property had achieved its best performance since opening in 1994. By June, 1998,
the monthly revenues had increased to just more than those achieved in June,
1997. The improvement in revenues continued in July, with July,1998 revenues
exceeding July, 1997 by $6,000. With the return of the hotel manager in 1998,
the Managing General Partner expects that costs will be better controlled.
Although the second quarter 1998 revenues are $11,000 less than 1997, the
operating income is only $2,000 less than the operating income for the second
quarter, 1997. The Managing General Partner expects the property's performance
to continue to improve. The Birmingham Microtel generated approximately 23% of
the Partnership's room revenues for the quarter, just more than 22% in the
second quarter, 1997.

The Hampton Inn achieved an average occupancy of 78% for the quarter, with an
average daily rate of $65.62, compared with an average occupancy of 78% for the
second quarter 1997 and an average daily rate of $68.31. The reduction in
average daily rate caused room revenues to decrease by $23,600. The major issue
facing the Hampton Inn for 1998 is increasing supply in its market. A Courtyard
by Marriott opened in the spring,1998 within a mile of the Hampton Inn.


<PAGE>



Another hotel, a Residence Inn will be opening in the fall of 1998 next to the
Courtyard. The Courtyard is directly competitive with the Hampton Inn. Although
the Hampton Inn has not lost a significant number of customers to the Courtyard,
the additional rooms in the market have had a downward pressure on room rates,
especially on the week-ends. The manager at the Hampton Inn was replaced in
March, 1998 with a manager with more marketing experience. Marketing efforts for
the hotel have been increased to try to offset the effect of the Courtyard. The
franchisor for Hampton Inns has also instituted new policies to more effectively
compete with the Courtyard brand, such as requiring irons, ironing boards and
coffee makers in all hotel rooms. The Partnership's hotel is also making capital
improvements to be more attractive to customers, such as upgrading its phone
system. In addition, the Hampton Inn is planning to add additional signage to
better direct customers to the hotel. The Hampton Inn generated around 56% of
the Partnership's room revenues for the quarter, which is the same as the second
quarter, 1997.

The average occupancy for the Chattanooga Microtel Inn for the quarter was 60%
with an average daily rate of $38.69, compared to the second quarter 1997 when
occupancy was 78% with an average daily rate of $36.30. With the sharp decrease
in occupancy in the second quarter 1998 compared to the second quarter 1997,
room revenues decreased by 46,000. The supply of hotel rooms in the Chattanooga
area has increased, which is contributing to the reduction in occupancy at the
Microtel Inn. In response to the increased supply, the Chattanooga Microtel Inn
added additional signage to increase awareness of and to direct customers to the
hotel, and leased a van. There are several local companies that have expressed
an interest in using the Microtel Inn if a means of transportation is provided.
Extensive marketing efforts have been instituted with the addition of a fulltime
sales director to the hotel in June, 1998. Previously, sales efforts for the
hotel had been handled by the hotel manager, who was also responsible for hotel
operations. The sales director position was filled by the previous manager who
had extensive experience in marketing and was very familiar with the Chattanooga
market. A new manager was hired who has more experience in operations and has
instituted stronger cost controls. The Chattanooga Microtel Inn generated around
21% of the Partnership's room revenues for the quarter, compared to 24% for the
second quarter, 1997.

Operating expenses (before depreciation) decreased $57,000 to $680,000 in the
second quarter 1998 compared to the same period in 1997 primarily due the
decrease in occupancy. With fewer people occupying the hotel, the expenses
needed to operate the property are reduced. The largest operating expense is
rooms expenses which totalled $227,025, $33,000 less than the rooms expenses of
$260,000 incurred in the second quarter, 1997. The next largest operating
expense is administrative and general expenses at $99,000 for 1998, $2,000 less
than the $101,000 incurred in the same period in 1997. Depreciation and
amortization for the second quarter 1998 was $104,000, increasing operating
expenses to $784,000 in 1998. Depreciation and amortization for the second
quarter 1997 was slightly less at $103,000, and operating expenses for the
second quarter 1997 totalled $840,000. Operating income before depreciation for
the second quarter decreased $39,000 over the second quarter 1997, to $347,000
due to the reduction in revenues. Total interest costs increased $61,000 due to
additional debt amortization expense of $130,000 with the early repayment of the
Partnership's mortgage notes Interest expense was reduced to $176,000, with the
replacement of the Partnership's 10% outstanding debt with first mortgage
financing at 7.86%, subordinated notes at 9.75% and a bridge loan from Essex
Partners at 9%. Interest expense for the second quarter, 1997 was $250,000. The
Partnership's net loss for the


<PAGE>



quarter was $127,500, $101,500 more than the net loss of $26,000 in the second
quarter, 1997. The Partnership generated cash of $215,000 from operations,
$82,000 more than generated in the second quarter 1997 due to the reduction in
interest expense. Investing activities required cash of $19,000 in the second
quarter 1998, for asset replacements. In the second quarter 1997, investing
activities required cash of $23,000. Financing activities provided $45,000 in
cash from the debt refinancing in the second quarter, 1998. In the second
quarter, 1997 financing activities used $41,000 in cash. Cash was generated in
the second quarter 1998 due to the fact that no partner distributions were paid.
The Partnership's cash and cash equivalents increased $241,000 in the second
quarter, 1998, compared to an increase of $69,000 in 1997.

Total assets decreased $287,000 since the end of the the second quarter, 1997
due primarily to the $414,000 increase in depreciation . Although amortization
expense of over $300,000 has been recognized since June 30, 1997, intangible
assets only decreased $50,000 due to the write-off of the debt acquisition costs
incurred for the mortgage notes which were repaid in 1998. Cash increased by
$135,000. Total liabilities increased $466,000 since the total long term debt
increased $391,000 with the refinancing activities in the second quarter, and
the increase of $124,000 in due to affiliate. Accounts payable and accrued
expenses decreased $50,000. Partners' equity decreased $755,000 from two
factors, the payment of $200,000 in distributions to limited partners and the
net losses of $555,000 generated between July 1, 1997 and June 30, 1998.

CAPITAL RESOURCES AND LIQUIDITY
The Partnership replaced its $10,000,000 of mortgage notes which were maturing
in December, 1998 in the second and third quarters of 1998 with first mortgage
financing in the principal amount of $7,560,000 and subordinated notes with a
principal balance of $3,389,000. The first mortgage financing is secured by
first mortgage liens on the Partnership's real and personal property. The first
mortgage financing will accrue interest at the rate of 7.86% per annum.
Principal and interest payments are due monthly based on a 25-year amortization.
The first mortgage financing has a ten year term. The Partnership is also
required to contribute 4% of gross revenues to a replacement reserve on a
monthly basis. Mortgage notes in the principal amount of $8,707,000 were repaid
with the proceeds from the institutional first mortgage financing. The
$1,293,000 balance of the mortgage notes due were exchanged for subordinated
notes in the Partnership's offering of subordinated notes. The offering provided
the option for mortgage note holders to exchange their mortgage notes for
subordinated notes. The subordinated notes are due in April, 2004, but can be
extended for up to one year with the payment of a .5% extension fee. The
subordinated notes require monthly payments of interest only at the rate of
9.75%. The subordinated notes are general unsecured obligations of the
Partnership. The Partnership may prepay the subordinated notes at any time
without premium or penalty, provided that any such prepayment shall be made to
all holders of the subordinated notes on a pro-rata basis. Proceeds from the
offering were sufficient to repay advances owed to Essex Partners and provide
for a $350,000 working capital reserve. With the refinancing completed in 1998,
the Partnership does not need liquidity to repay debt for several years.

The working capital raised in its subordinated notes offering, combined with
cash generated from operations should provide sufficient liquidity to fund all
operating costs and debt service payments.



<PAGE>



The Microtel franchise agreements require the Partnership to refurbish and
upgrade its Microtel Inn hotels not more than once every five years. The upgrade
would include replacing soft goods such as bedspreads and drapes, new carpeting,
equipment such the front desk system, telephone system and the key system. The
Partnership is replacing soft goods as needed and expects it will satisfy the
Microtel franchisor's requirements without any major additional expenditures.
The front desk system, telephone system and key system at the Partnership's
properties were new at the time the properties were constructed and are expected
to meet Franchisor specifications for the next several years. Equipment such as
televisions and heating and cooling units are expected to have a life of between
five and ten years and can replaced as required. Not all units will need to be
replaced in the same year, so that management expects that the expenditures can
be spread over several years.

The Hampton Inn license agreement requires the Partnership to establish a
capital reserve escrow account based on a percentage of gross room revenues
generated by the Hampton Inn hotel. The reserve will be used for product quality
requirements of the hotel. Cumulative funding of the reserve for the first five
years increases from 1% to 5% of gross revenues and stabilizes at 5% for the
term of the agreement. The Partnership expects to fund the reserve from cash
from operations and from the working capital reserve raised in the refinancing.
The Partnership is also contributing 4% of gross revenues monthly to a
replacement reserve escrow account under the first mortgage financing. At June
30, 1998, the total of the replacement reserve escrow account and the capital
reserve account was $60,243. The deposit required for 1998 will be made from
proceeds of the subordinated note offering.




<PAGE>


                                     PART II

                                OTHER INFORMATION


ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------           ---------------------------------------------------

                  None


ITEM 5.           OTHER INFORMATION
-------           -----------------

                  None


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

         a.       EXHIBITS
                  --------

                  None

         b.       REPORTS ON FORM 8-K
                  -------------------

                  None



                                   SIGNATURES
                                   ----------

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


                                    ESSEX HOSPITALITY ASSOCIATES III L.P.
                                    -------------------------------------
                                             Registrant



Dated:   August 12, 1998            /S/ LORRIE L. LOFASO
                                    --------------------
                                    Essex Hospitality Associates III L.P.
                                    Essex Partners Inc.
                                    Lorrie L. LoFaso
                                    Vice President and Chief Accounting Officer