<PAGE>

                                   FORM 10-Q

                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

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

For the quarterly period ended             September 30, 1999
                                -------------------------------------

                                       OR

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

For the transition period from             to
                              -------------  ------------


                             Commission file number
                                     0-16850
                                 --------------


                           CNL Income Fund III, Ltd.
        ----------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


                Florida                         59-2809460
----------------------------------------   --------------------
    (State or other jurisdiction of          (I.R.S. Employer
     incorporation or organization)         Identification No.)



        450 South Orange Avenue
           Orlando, Florida                        32801
----------------------------------------   --------------------
(Address of principal executive offices)         (Zip Code)



Registrant's telephone number
(including area code)                         (407) 540-2000
                                           --------------------


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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
                                      -----   -----
<PAGE>

                                    CONTENTS

                                                                          Page
                                                                          ----
Part I.

     Item 1. Financial Statements:

                   Condensed Balance Sheets                                 1

                   Condensed Statements of Income                           2

                   Condensed Statements of Partners' Capital                3

                   Condensed  Statements of Cash Flows                      4

                   Notes to Condensed Financial Statements                  5-8

     Item 2. Management's Discussion and Analysis of Financial
                   Condition and Results of Operations                      9-17

     Item 3. Quantitative and Qualitative Disclosures About
                   Market Risk                                              17

Part II.

     Other Information                                                     18-20
<PAGE>

                            CNL INCOME FUND III, LTD.
                        (A Florida Limited Partnership)
                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                September 30,       December 31,
                                                    1999                1998
                                                -------------       ------------
                 ASSETS
                 ------
<S>                                             <C>                 <C>
Land and buildings on operating leases,
 less accumulated depreciation of
 $2,701,262 and $2,738,895 in 1999 and
 1998, respectively                              $10,408,783         $11,418,836
Net investment in direct financing
 leases, less allowance for impairment
 in carrying value of $25,821 in 1998              1,124,990             887,071
Investment in joint ventures                       2,146,113           2,157,147
Cash and cash equivalents                          1,556,810           2,047,140
Restricted cash                                    1,109,663                  --
Receivables, less allowance for doubtful
 accounts of $7,478 and $153,598 in 1999
 and 1998, respectively                               17,049              89,519
Prepaid expenses                                       6,963               6,751
Accrued rental income, less allowance
 for doubtful accounts of $41,380 in 1998             96,623              65,914
Other assets                                          29,354              29,354
                                               -------------        ------------

                                                 $16,496,348         $16,701,732
                                               =============        ============


    LIABILITIES AND PARTNERS' CAPITAL
    ---------------------------------

Accounts payable                                 $    97,767         $     2,072
Escrowed real estate taxes payable                     5,352              15,217
Distributions payable                                500,000             500,000
Due to related parties                                75,342             152,887
Rents paid in advance                                 10,488              25,579
                                               -------------        ------------
     Total liabilities                               688,949             695,755

Commitments and Contingencies (Note 6)

Minority interests                                   133,607             135,705

Partners' capital                                 15,673,792          15,870,272
                                               -------------        ------------

                                                 $16,496,348         $16,701,732
                                               =============        ============

</TABLE>

           See accompanying notes to condensed financial statements.

                                       1
<PAGE>

                           CNL INCOME FUND III, LTD.
                        (A Florida Limited Partnership)
                        CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                              Quarter Ended                Nine Months Ended
                                                                              September 30,                  September 30,
                                                                          1999           1998             1999            1998
                                                                    -------------   --------------   -------------   -------------
<S>                                                                 <C>             <C>              <C>             <C>
Revenues:
     Rental income from operating leases                                 $360,398         $351,021      $1,070,165      $1,175,634
     Adjustments to accrued rental income                                      --          (29,474)             --         (80,800)
     Earned income from direct financing leases                            31,957           33,613         186,352         101,222
     Interest and other income                                             28,324           22,875          82,656         103,546
                                                                    -------------   --------------   -------------   -------------
                                                                          420,679          378,035       1,339,173       1,299,602
                                                                    -------------   --------------   -------------   -------------

Expenses:
     General operating and administrative                                  26,970           32,218          91,002         102,940
     Professional services                                                  3,865            6,650          18,027          31,706
     Real estate taxes                                                         --            1,886              --           9,421
     State and other taxes                                                     --              530          13,541          12,250
     Depreciation and amortization                                         63,701           72,026         198,541         236,345
     Transaction costs                                                     37,879               --         119,992              --
                                                                    -------------   --------------   -------------   -------------
                                                                          132,415          113,310         441,103         392,662
                                                                    -------------   --------------   -------------   -------------

Income Before Minority Interest in Income of
     Consolidated Joint Venture, Equity in Earnings
     (Losses) of Unconsolidated Joint Ventures,
     Gain on Sale of Land and Buildings and
     Provision for Loss on Land and Buildings                             288,264          264,725         898,070         906,940

Minority Interest in Income of Consolidated
     Joint Venture                                                         (4,357)          (4,352)        (12,934)        (12,933)

Equity in Earnings (Losses) of Unconsolidated
     Joint Ventures                                                        41,415          (75,617)        124,872         (34,343)

Gain on Sale of Land and Buildings                                             --               --         293,512         596,586

Provision for Loss on Land and Buildings                                       --          (99,865)             --         (99,865)
                                                                    -------------   --------------   -------------   -------------

Net Income                                                               $325,322         $ 84,891      $1,303,520      $1,356,385
                                                                    =============   ==============   =============   =============

Allocation of Net Income:
     General partners                                                    $  3,253         $    (11)     $   12,462      $   11,479
     Limited partners                                                     322,069           84,902       1,291,058       1,344,906
                                                                    -------------   --------------   -------------   -------------

                                                                         $325,322         $ 84,891      $1,303,520      $1,356,385
                                                                    =============   ==============   =============   =============

Net Income Per Limited Partner Unit                                      $   6.44         $   1.70      $    25.82      $    26.90
                                                                    =============   ==============   =============   =============

Weighted Average Number of Limited Partner
     Units Outstanding                                                     50,000           50,000          50,000          50,000
                                                                    =============   ==============   =============   =============
</TABLE>

           See accompanying notes to condensed financial statements.

                                       2
<PAGE>

                           CNL INCOME FUND III, LTD.
                        (A Florida Limited Partnership)
                   CONDENSED STATEMENTS OF PARTNERS' CAPITAL



                                             Nine Months Ended   Year Ended
                                               September 30,    December 31,
                                                    1999            1998
                                             -----------------  ------------
General partners:
  Beginning balance                               $   354,638   $    339,611
  Net income                                           12,462         15,027
                                                 ------------   ------------
                                                      367,100        354,638
                                                 ------------   ------------

Limited partners:
  Beginning balance                                15,515,634     17,271,525
  Net income                                        1,291,058      1,721,856
  Distributions ($30.00 and $69.55 per
    limited partner unit, respectively)            (1,500,000)    (3,477,747)
                                                 ------------   ------------
                                                   15,306,692     15,515,634
                                                 ------------   ------------

Total partners' capital                           $15,673,792   $ 15,870,272
                                                 ============   ============


           See accompanying notes to condensed financial statements.



                                       3
<PAGE>

                           CNL INCOME FUND III, LTD.
                        (A Florida Limited Partnership)
                       CONDENSED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                                         Nine Months Ended
                                                                                                           September 30,
                                                                                                        1999            1998
                                                                                                    ------------    ------------
<S>                                                                                                 <C>             <C>
Increase (Decrease) in Cash and Cash Equivalents

     Net Cash Provided by Operating Activities                                                       $ 1,263,641     $ 1,376,910
                                                                                                    ------------    ------------

     Cash Flows from Investing Activities:
          Proceeds from sale of land and buildings                                                     1,792,169       3,214,616
          Addition to land and buildings on
           operating leases                                                                             (326,996)       (150,000)
          Investment in direct financing lease                                                          (612,920)             --
          Investment in joint ventures                                                                        --      (1,045,511)
          Collections on mortgage note receivable                                                             --         678,730
          Decrease (increase) in restricted cash                                                      (1,091,192)        245,377
                                                                                                    ------------    ------------
                    Net cash provided by (used in) investing
                         activities                                                                     (238,939)      2,943,212
                                                                                                    ------------    ------------

     Cash Flows from Financing Activities:
          Distributions to limited partners                                                           (1,500,000)     (3,071,747)
          Distributions to holders of minority interest                                                  (15,032)        (15,148)
                                                                                                    ------------    ------------
                    Net cash used in financing activities                                             (1,515,032)     (3,086,895)
                                                                                                    ------------    ------------

Net Increase (Decrease) in Cash and Cash
     Equivalents                                                                                        (490,330)      1,233,227

Cash and Cash Equivalents at Beginning of Period                                                       2,047,140         493,118
                                                                                                    ------------    ------------

Cash and Cash Equivalents at End of Period                                                           $ 1,556,810     $ 1,726,345
                                                                                                    ============    ============

Supplemental Schedule of Non-Cash Investing
     and Financing Activities:

          Deferred real estate disposition fees incurred
            and unpaid at end of period                                                              $        --     $    53,400
                                                                                                    ------------    ------------

          Distributions declared and unpaid at end of
            period                                                                                   $   500,000     $   500,000
                                                                                                    ============    ============
</TABLE>

           See accompanying notes to condensed financial statements.

                                       4
<PAGE>

                            CNL INCOME FUND III, LTD.
                        (A Florida Limited Partnership)
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
           Quarters and Nine Months Ended September 30, 1999 and 1998



1.   Basis of Presentation:
     ---------------------

     The accompanying unaudited condensed financial statements have been
     prepared in accordance with the instructions to Form 10-Q and do not
     include all of the information and note disclosures required by generally
     accepted accounting principles. The financial statements reflect all
     adjustments, consisting of normal recurring adjustments, which are, in the
     opinion of management, necessary to a fair statement of the results for the
     interim periods presented. Operating results for the quarter and nine
     months ended September 30, 1999 may not be indicative of the results that
     may be expected for the year ending December 31, 1999. Amounts as of
     December 31, 1998, included in the financial statements, have been derived
     from audited financial statements as of that date.

     These unaudited financial statements should be read in conjunction with the
     financial statements and notes thereto included in Form 10-K of CNL Income
     Fund III, Ltd. (the "Partnership") for the year ended December 31, 1998.

     The Partnership accounts for its 69.07% interest in Tuscawilla Joint
     Venture using the consolidation method. Minority interests represents the
     minority joint venture partners' proportionate share of the equity in the
     Partnership's consolidated joint venture. All significant intercompany
     accounts and transactions have been eliminated.

2.   Land and Buildings on Operating Leases:
     --------------------------------------

     In January 1999, the Partnership reinvested the majority of the net sales
     proceeds from the 1998 sale of a Po Folks property in Hagerstown, Maryland,
     along with amounts collected in 1998 under a promissory note accepted in
     connection with the 1997 sale of a Property in Roswell, Georgia, in a
     Burger King property in Montgomery, Alabama. The Property had an
     approximate cost of $939,900. In accordance with Statement of Financial
     Accounting Standards No. 13, "Accounting for Leases," the land portion of
     this property was classified as an operating lease while the building
     portion was classified as a direct financing lease.

     In April 1999, the Partnership sold its property in Flagstaff, Arizona, to
     the tenant, for $1,103,127 and received net sales proceeds of $1,091,192,
     resulting in a gain of $285,350 for financial reporting purposes. This
     property was originally acquired by the Partnership in October 1998 and had
     a cost of approximately $993,500, excluding acquisition fees and
     miscellaneous acquisition expenses; therefore, the Partnership sold the
     property for approximately $97,700 in excess of its original purchase price
     (See Note 4).

                                       5
<PAGE>

                            CNL INCOME FUND III, LTD.
                        (A Florida Limited Partnership)
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
           Quarters and Nine Months Ended September 30, 1999 and 1998



2.   Land and Buildings on Operating Leases - Continued:
     --------------------------------------------------

     In June 1999, the Partnership sold its Denny's property in Hagerstown,
     Maryland to the tenant, for $710,000 and received net sales proceeds of
     $700,977. Due to the fact that during 1998, the Partnership recorded an
     allowance for doubtful accounts of $25,821 in accrued rental income, income
     the Partnership had recognized since the inception of the lease relating to
     the straight-lining of future scheduled rent increases in accordance with
     generally accepted accounting principles, the Partnership recognized a gain
     of $8,162 for financial reporting purposes in June 1999 relating to this
     sale (See Note 3).

3.   Net Investment in Direct Financing Leases:
     -----------------------------------------

     In June 1999, the Partnership sold its Denny's property in Hagerstown,
     Maryland, for which the building portion had been classified as a direct
     financing lease. In connection therewith, the gross investment (minimum
     lease payments receivable and estimated residual value) and unearned income
     relating to this property were removed from the accounts and the gain from
     the sale relating to this property was reflected in income (See Note 2).

4.   Restricted Cash:
     ---------------

     As of September 30, 1999, net sales proceeds of $1,091,192 from the sale of
     the property in Flagstaff, Arizona, plus accrued interest of $18,471, were
     being held in interest-bearing escrow account pending the release of funds
     by the escrow agent to acquire an additional property on behalf of the
     Partnership (See Note 2).

5.   Related Party Transactions:
     --------------------------

     On September 1, 1999, CNL American Properties Fund, Inc. ("APF"), an
     affiliate of the general partners, acquired CNL Fund Advisors, Inc.
     ("CFA"), an affiliate who provides certain services relating to management
     of the Partnership and its properties pursuant to a property management
     agreement with the Partnership. As a result of this acquisition, CFA became
     a wholly owned subsidiary of APF; however, the terms of the property
     management agreement between the Partnership and CFA remain unchanged and
     in effect.

                                       6
<PAGE>

                            CNL INCOME FUND III, LTD.
                        (A Florida Limited Partnership)
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
           Quarters and Nine Months Ended September 30, 1999 and 1998



6.   Commitments and Contingencies:
     -----------------------------

     On March 11, 1999, the Partnership entered into an Agreement and Plan of
     Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which
     the Partnership would be merged with and into a subsidiary of APF (the
     "Merger". As consideration for the Merger, APF has agreed to issue
     1,041,451 shares of its common stock, par value $0.01 per share (the "APF
     Shares"). In order to assist the general partners in evaluating the
     proposed merger consideration, the general partners retained Valuation
     Associates, a nationally recognized real estate appraisal firm, to appraise
     the Partnership's restaurant property portfolio. Based on Valuation
     Associates' appraisal, the fair value of the Partnership's property
     portfolio and other assets was $20,535,734 as of December 31, 1998. The APF
     Shares are expected to be listed for trading on the New York Stock Exchange
     concurrently with the consummation of the Merger, and therefore, would be
     freely tradable at the option of the former limited partners. At a special
     meeting of the partners that is expected to be held in the first quarter of
     2000, limited partners holding in excess of 50% of the Partnership's
     outstanding limited partnership interests must approve the Merger prior to
     consummation of the transaction. If the limited partners at the special
     meeting approve the Merger, APF will own the properties and other assets of
     the Partnership. The general partners intend to recommend that the limited
     partners of the Partnership approve the Merger. In connection with their
     recommendation, the general partners will solicit the consent of the
     limited partners at the special meeting. If the limited partners reject the
     Merger, the Partnership will bear the portion of the transaction costs
     based upon the percentage of "For" votes and the general partners will bear
     the portion of such transaction costs based upon the percentage of
     "Against" votes and abstentions.

     On May 11, 1999, four limited partners in several of the CNL Income Funds
     served a lawsuit against the general partners and APF in connection with
     the proposed Merger. On July 8, 1999, the plaintiffs amended the complaint
     to add three additional limited partners as plaintiffs. Additionally, on
     June 22, 1999, a limited partner in certain of the CNL Income Funds served
     a lawsuit against the general partners, APF, CNL Fund Advisors, Inc. and
     certain of its affiliates, in connection with the proposed Merger. On
     September 23, 1999, the judge assigned to the two lawsuits entered an order
     consolidating the two cases. Pursuant to this order, the plaintiffs in
     these cases filed a consolidated and amended complaint on November 8, 1999.
     The various defendants, including the general partners, have 45 days to
     respond to that consolidated complaint. The general partners and APF
     believe that the lawsuits are without merit and intend to defend vigorously
     against the claims. See Part II - Item 1. Legal Proceedings.

                                       7
<PAGE>

                            CNL INCOME FUND III, LTD.
                        (A Florida Limited Partnership)
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
           Quarters and Nine Months Ended September 30, 1999 and 1998



7.   Subsequent Events:
     -----------------

     In October 1999, the Partnership used the net sales proceeds from the sale
     of the property in Hagerstown, Maryland to invest in a property in Baytown,
     Texas, with an affiliate of the general partners as tenants-in-common for a
     20 percent interest in the property. The Partnership will account for its
     investment in this property using the equity method since the Partnership
     will share control with affiliates.

     In addition, in October 1999, the Partnership reinvested the net sales
     proceeds it received from the sale of the property in Flagstaff, Arizona,
     in an IHOP property located in Auburn, Alabama, at an approximate cost of
     $1,440,200. In connection therewith, the Partnership entered into a long
     term, triple-net lease with terms substantially the same as its other
     leases.

                                       8
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS



     CNL Income Fund III, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on June 1, 1987 to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurant properties, as well as land upon which restaurants were to
be constructed, which are leased primarily to operators of selected national and
regional fast-food restaurant chains. The leases generally are triple-net
leases, with the lessees responsible for all repairs and maintenance, property
taxes, insurance and utilities. As of September 30, 1999, the Partnership owned
26 Properties, which included interests in three Properties owned by joint
ventures in which the Partnership is a co-venturer and three Properties owned
with affiliates of the general partners as tenants-in-common.

Capital Resources
-----------------

     During the nine months ended September 30, 1999 and 1998, the Partnership
generated cash from operations (which includes cash received from tenants,
distributions from joint ventures, and interest and other income received, less
cash paid for expenses) of $1,263,641 and $1,376,910, respectively. The decrease
in cash from operations for the nine months ended September 30, 1999 is
primarily a result of changes in the Partnership's working capital.

     Other sources and uses of capital included the following during the nine
months ended September 30, 1999.

     In January 1999, the Partnership reinvested the majority of the net sales
proceeds from the 1998 sale of a Po Folks Property in Hagerstown, Maryland,
along with a portion of the amounts collected in 1998 under the promissory note
accepted in connection with the 1997 sale of the Property in Roswell, Georgia,
in a Burger King Property in Montgomery, Alabama, at an approximate cost of
$939,900.

     In April 1999, the Partnership sold its Property in Flagstaff, Arizona, to
the tenant for $1,103,127 and received net sales proceeds of $1,091,192,
resulting in a gain of $285,350 for financial reporting purposes. This Property
was originally acquired by the Partnership in October 1988 and had a cost of
approximately $993,500, excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the Property for approximately $97,700
in excess of its original purchase price. As of September 30, 1999, the net
sales proceeds were being held in an interest bearing escrow account pending the
release of funds by the escrow agent to acquire an additional Property. In
October 1999, the Partnership reinvested the net sales proceeds it received from
the sale of this Property, in an IHOP Property located in Auburn, Alabama, at an
approximate cost of $1,440,200. The Partnership anticipates this transaction, or
a portion thereof, relating to the sale of the Property in Flagstaff, Arizona,
and the reinvestment of the net sales proceeds will be structured to qualify as
a like-kind exchange transaction for federal income tax purposes. However, the
Partnership will distribute amounts sufficient to enable the limited partners to
pay federal and state income taxes, if any, (at a level reasonably assumed by
the general partners) resulting from the sale.

                                       9
<PAGE>

     In June 1999, the Partnership sold its Denny's Property in Hagerstown,
Maryland, to the tenant for $710,000 and received net sales proceeds of
$700,977, resulting in a gain of $8,162 for financial reporting purposes. In
October 1999, the Partnership invested a portion of the net sales proceeds it
received from the sale, in a Property in Baytown, Texas, with an affiliate of
the General Partners as tenants-in-common for a 20 percent interest in the
Property. The Partnership will account for its investment in this Property using
the equity method since the Partnership will share control with an affiliate. In
addition, in October 1999, the Partnership reinvested the remaining net sales
proceeds it received from the sale of the Property in Hagerstown, Maryland, in
the IHOP Property in Auburn, Alabama, as described above. The Partnership
anticipates that it will distribute amounts sufficient to enable the limited
partners to pay federal and state income taxes, if any (at a level reasonably
assumed by the general partners), resulting from the sale.

     Currently, rental income from the Partnership's Properties and net sales
proceeds from the sale of a Property pending reinvestment in an additional
Property, are invested in money market accounts or other short-term, highly
liquid investments such as demand deposit accounts at commercial banks,
certificates of deposit, and money market accounts with less than a 30-day
maturity date, pending the Partnership's use of such funds to pay Partnership
expenses or to make distributions to the partners. At September 30, 1999, the
Partnership had $1,556,810 invested in such short-term investments, as compared
to $2,047,140 at December 31, 1998. The decrease in cash and cash equivalents
during the nine months ended September 30, 1999, is primarily attributable to
the reinvestment of net sales proceeds in a Property in Montgomery, Alabama, in
January 1999, as described above. The decrease in cash and cash equivalents is
partially offset by an increase due to the receipt of net sales proceeds from
the sale of the Denny's Property in Hagerstown, Maryland, as described above.
The Partnership expects to use the funds remaining at September 30, 1999 to pay
distributions and other liabilities and to invest in an additional Property.

Short-Term Liquidity
--------------------

     The Partnership's short-term liquidity requirements consist primarily of
the operating expenses of the Partnership.

     The Partnership's investment strategy of acquiring Properties for cash and
leasing them under triple-net leases to operators who generally meet specified
financial standards minimizes the Partnership's operating expenses. The general
partners believe that the leases will continue to generate cash flow in excess
of operating expenses.

     The general partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.

     The Partnership generally distributes cash from operations remaining after
the payment of operating expenses of the Partnership, to the extent that the
general partners determine that such funds are available for distribution. Based
on current and anticipated future cash from operations, and for the nine months
ended September 30, 1998, proceeds received from the sales of two Properties,
the Partnership declared distributions to limited partners of $1,500,000 and
$2,977,747 for the nine months ended September 30, 1999 and 1998, respectively
($500,000 for each of the quarters ended September 30, 1999 and 1998). This
represents distributions of $30.00 and $59.55 per unit for the nine months ended
September 30, 1999 and 1998,

                                       10
<PAGE>

respectively ($10.00 per unit for each of the quarters ended September 30, 1999
and 1998). Distributions for the nine months ended September 30, 1998 included
$1,477,747 as a result of the distribution of net sales proceeds from the sale
of the Properties in Fernandina Beach and Daytona Beach, Florida. No
distributions were made to the general partners for the quarters and nine months
ended September 30, 1999 and 1998. No amounts distributed to the limited
partners for the nine months ended September 30, 1999 and 1998 are required to
be or have been treated by the Partnership as a return of capital for purposes
of calculating the limited partners' return on their adjusted capital
contributions. The Partnership intends to continue to make distributions of cash
available for distribution to the limited partners on a quarterly basis.

     Total liabilities of the Partnership, including distributions payable,
decreased to $688,949 at September 30, 1999 from $695,755 at December 31, 1998
primarily as a result of a decrease in amounts due to related parties and rents
paid in advance at September 30, 1999, as compared to December 31, 1998. The
decrease is partially offset by an increase as a result of the Partnership
accruing transaction costs relating to the proposed merger with CNL American
Properties Fund, Inc. ("APF"), as described below. The general partners believe
that the Partnership has sufficient cash on hand to meet its current working
capital needs.

Long-Term Liquidity
-------------------

     The Partnership has no long-term debt or other long-term liquidity
requirements.

Results of Operations
---------------------

     During the nine months ended September 30, 1998, the Partnership and its
consolidated joint venture, Tuscawilla Joint Venture, owned and leased 26 wholly
owned Properties (which included four Properties which were sold in 1998) and
during the nine months ended September 30, 1999, the Partnership and its
consolidated joint venture owned and leased 23 wholly owned Properties (which
included two Properties which were sold in 1999), to operators of fast food and
familystyle restaurant chains. In connection therewith, during the nine months
ended September 30, 1999 and 1998, the Partnership earned $1,256,517 and
$1,196,056, respectively, in rental income from operating leases (net of
adjustments to accrued rental income) and earned income from direct financing
leases from these Properties, $392,355 and $355,160 of which was earned during
the quarters ended September 30, 1999 and 1998, respectively. The increase in
rental and earned income during the quarter and nine months ended September 30,
1999 as compared to the quarter and nine months ended September 30, 1998, is
partially due to the fact that during the quarter and nine months ended
September 30, 1998, (i) the tenant of the Property in Canton Township, Michigan,
vacated the Property and ceased operations and (ii) the Partnership terminated
the lease with the tenant of the Property in Hazard, Kentucky. As a result,
during the quarter and nine months ended September 30, 1998, the Partnership
wrote off approximately $29,500 and $80,800, respectively, in accrued rental
income (noncash accounting adjustments relating to the straightlining of future
scheduled rent increases over the lease terms in accordance with generally
accepted accounting principles) relating to these Properties. The Partnership is
currently seeking a replacement tenant or purchaser for the Property in Canton
Township, Michigan, and sold the Property in Hazard, Kentucky in December 1998.
No such amounts were written off during the quarter and nine months ended
September 30, 1999.

                                       11
<PAGE>

     The increase in rental and earned income during the quarter and nine months
ended September 30, 1999, was partially offset by a decrease of approximately
$37,700 and $110,300, respectively, as a result of the sale of several
Properties during 1998 and during the nine months ended September 30, 1999. This
decrease was partially offset by an increase in rental and earned income of
approximately $24,300 and $65,900, respectively, during the quarter and nine
months ended September 30, 1999, due to the fact that during January 1999, the
Partnership reinvested a portion of net sales proceeds in an additional
Property, as described above in "Capital Resources." However, rental and earned
income are expected to remain at reduced amounts as a result of distributing a
portion of the net sales proceeds to limited partners during 1998 from two of
the Properties sold during 1998.

     For the nine months ended September 30, 1999 and 1998, the Partnership
owned and leased three Properties indirectly through joint venture arrangements
and three Properties as tenants-in-common with affiliates of the general
partners. In connection therewith, during the nine months ended September 30,
1999 and 1998, the Partnership recorded income of $124,872 and a loss of
$34,343, respectively, income of $41,415 and a loss of $75,617 of which were
recorded during the quarters ended September 30, 1999 and 1998, respectively,
attributable to income and losses recorded by these joint ventures. The increase
during the quarter and nine months ended September 30, 1999 in net income earned
by joint ventures is primarily due to the fact that during July 1997, the
operator of the Property owned by Titusville Joint Venture vacated the Property
and ceased operations and during the quarter and nine months ended September 30,
1998, Titusville Joint Venture (in which the Partnership owns a 73.40% interest)
established an allowance for loss on the land and building for its Property, or
approximately $139,300. The allowance represented the difference between the
Property's net carrying value at September 30, 1998 and the estimated net
realizable value of the Property. No such allowance was recorded during the
quarter and nine months ended September 30, 1999. The joint venture is currently
seeking either a replacement tenant or purchaser for this Property. The increase
in net income earned by joint ventures during the quarter and nine months ended
September 30, 1999, is also due to the fact that in May 1998, the Partnership
reinvested net sales proceeds from sales of Properties during 1998, in RTO Joint
Venture, with an affiliate of the general partners.

     In addition, during the nine months ended September 30, 1999 and 1998, the
Partnership earned $82,656 and $103,546, respectively, in interest and other
income, $28,324 and $22,875 of which was earned during the quarters ended
September 30, 1999 and 1998, respectively. The decrease in interest and other
income during the nine months ended September 30, 1999, as compared to the nine
months ended September 30, 1998, is primarily attributable to a decrease in
interest income as a result of the fact that in July 1998, the Partnership
collected the full balance of a mortgage note receivable related to the Property
in Roswell, Georgia that the Partnership had accepted in conjunction with the
sale of a Property in a prior year.

     Operating expenses, including depreciation and amortization expense, were
$441,103 and $392,662 for the nine months ended September 30, 1999 and 1998,
respectively, of which $132,415 and $113,310 were incurred for the quarters
ended September 30, 1999 and 1998, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1999, as
compared to the quarter and nine months ended September 30, 1998, was primarily
due to the fact that the Partnership incurred $37,879 and $119,992 in
transaction costs during the quarter and nine months ended September 30, 1999,
respectively, relating to the

                                       12
<PAGE>

general partners retaining financial and legal advisors to assist them in
evaluating and negotiating the proposed merger with APF, as described below. If
the limited partners reject the merger, the Partnership will bear the portion of
the transaction costs based upon the percentage of "For" votes and the general
partners will bear the portion of such transaction costs based upon the
percentage of "Against" votes and abstentions.

     The increase in operating expenses for the nine months ended September 30,
1999, was partially offset by a decrease in operating expenses due to the fact
that, during 1998, the Partnership recognized real estate tax expense relating
to the Po Folks Property in Hagerstown, Maryland, based on the fact that payment
by the former tenant was doubtful. The Partnership sold this Property in June
1998. The increase in operating expenses also was offset by a decrease in
depreciation expense due to the sale of several Properties during the nine
months ended September 30, 1999 and 1998.

     As a result of the sales of two Properties during the nine months ended
September 30, 1999, as described above in "Capital Resources," the Partnership
recognized total gains of $293,512 for financial reporting purposes. In
addition, as a result of the sales of four Properties during the nine months
ended September 30, 1998, the Partnership recognized total gains of $596,586.

     During the quarter and nine months ended September 30, 1998, the
Partnership recorded an allowance for loss on land and building of $99,865 for
financial reporting purposes relating to the Property in Hazard, Kentucky. The
loss represented the difference between the Property's net carrying value and
the estimated net realizable value of the Property. The Partnership sold the
Property in December 1998. No additional allowance was recorded for the quarter
and nine months ended September 30, 1999.

Proposed Merger
---------------

     On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with APF, pursuant to which the Partnership would be merged with and into
a subsidiary of APF (the "Merger"). As consideration for the Merger, APF has
agreed to issue 1,041,451 shares of its common stock, par value $0.01 per share
(the "APF Shares"). In order to assist the general partners in evaluating the
proposed merger consideration, the general partners retained Valuation
Associates, a nationally recognized real estate appraisal firm, to appraise the
Partnership's restaurant property portfolio. Based on Valuation Associates'
appraisal, the fair value of the Partnership's property portfolio and other
assets was $20,535,734 as of December 31, 1998. The APF Shares are expected to
be listed for trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and therefore, would be freely tradable at the
option of the former limited partners. At a special meeting of the partners that
is expected to be held in the first quarter of 2000, limited partners holding in
excess of 50% of the Partnership's outstanding limited partnership interests
must approve the Merger prior to consummation of the transaction. If the limited
partners at the special meeting approve the Merger, APF will own the properties
and other assets of the Partnership. The general partners intend to recommend
that the limited partners of the Partnership approve the Merger. In connection
with their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs

                                       13
<PAGE>

based upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.

     On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22, 1999,
a limited partner in certain of the CNL Income Funds served a lawsuit against
the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates, in connection with the proposed Merger. On September 23, 1999, the
judge assigned to the two lawsuits entered an order consolidating the two cases.
Pursuant to this order, the plaintiffs in these cases filed a consolidated and
amended complaint on November 8, 1999. The various defendants, including the
general partners, have 45 days to respond to that consolidated complaint. The
general partners and APF believe that the lawsuits are without merit and intend
to defend vigorously against the claims. See Part II - Item 1. Legal
Proceedings.

Year 2000 Readiness Disclosure
------------------------------

Overview of Year 2000 Problem

     The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the year
2000 could result in a variety of problems from data miscalculations to the
failure of entire systems.

Information and Non-Information Technology Systems

     The Partnership does not have any information or non-information technology
systems. The general partners and their affiliates provide all services
requiring the use of information and non-information technology systems pursuant
to a management agreement with the Partnership. The information technology
system of the general partners' affiliates consists of a network of personal
computers and servers built using hardware and software from mainstream
suppliers. The non-information technology systems of the affiliates are
primarily facility related and include building security systems, elevators,
fire suppressions, HVAC, electrical systems and other utilities. The affiliates
have no internally generated programmed software coding to correct, because
substantially all of the software utilized by the affiliates is purchased or
licensed from external providers. The maintenance of non-information technology
systems at the Partnership's restaurant properties is the responsibility of the
tenants of such properties in accordance with the terms of the Partnership's
leases.

The Y2K Team

     In early 1998, the general partners and their affiliates formed a Year 2000
committee (the "Y2K Team") for the purpose of identifying, understanding and
addressing the various issues associated with the year 2000 problem. The Y2K
Team consists of the general partners and members from their affiliates,
including representatives from senior management, information systems,
telecommunications, legal, office management, accounting and property
management.

                                       14
<PAGE>

Assessing Year 2000 Readiness

     The Y2K Team's initial step in assessing year 2000 readiness consisted of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections, interviews
and tests to identify which of the systems used by the Partnership could have a
potential year 2000 problem.

     The information system of the general partners' affiliates is comprised of
hardware and software applications from mainstream suppliers. Accordingly, the
Y2K Team has contacted and is evaluating documentation from the respective
vendors and manufacturers to verify the year 2000 compliance of their products.
The Y2K Team has also requested and is evaluating documentation from the non-
information technology systems providers of the affiliates.

     In addition, the Y2K Team has requested and is evaluating documentation
from other companies with which the Partnership has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Partnership's transfer
agent and financial institutions. The Partnership depends on its transfer agent
to maintain and track investor information and its financial institutions for
availability of cash.

     As of September 30, 1999, the Y2K Team had received responses from
approximately 62 percent of the third parties. All of the responses were in
writing. Of the third parties responding, all indicated that they are currently
year 2000 compliant or will be year 2000 compliant prior to the year 2000.
Although the Y2K Team continues to receive positive responses from the companies
with which the Partnership has third party relationships regarding their year
2000 compliance, the general partners cannot be assured that the third parties
have adequately considered the impact of the year 2000.

     In addition, the Y2K Team has requested documentation from the
Partnership's tenants. As of September 30, 1999, the Y2K Team had received
responses from approximately 31 percent of the tenants. All of the responses
were in writing. Of the tenant's responding, all indicated that they are
currently year 2000 compliant or will be year 2000 compliant prior to the year
2000. The general partners cannot be assured that the tenants have adequately
considered the impact of the year 2000. The Partnership has also instituted a
policy of requiring any new tenants to indicate that their systems are year 2000
compliant or are expected to be year 2000 compliant prior to the year 2000.

Achieving Year 2000 Compliance

     The Y2K Team has identified and completed upgrades for its hardware
equipment that was not year 2000 compliant. In addition, the Y2K Team has
identified and completed upgrades of the software applications that were not
year 2000 compliant, although the general partners cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.

                                       15
<PAGE>

     The cost for these upgrades and other remedial measures is the
responsibility of the general partners and their affiliates. The general
partners do not expect that the Partnership will incur any costs in connection
with year 2000 remedial measures.

Assessing the Risks to the Partnership of Non-Compliance and Developing
Contingency Plans

Risk of Failure of Information and Non-Information Technology Systems Used by
the Partnership

     The general partners believe that the reasonably likely worst case scenario
with regard to the information and non-information technology systems used by
the Partnership is the failure of one or more of these systems as a result of
year 2000 problems. Because the Partnership's major source of income is rental
payments under long-term triple-net leases, any failure of information or non-
information technology systems used by the Partnership is not expected to have a
material impact on the results of operations of the Partnership. Even if such
systems failed, the payment of rent under the Partnership's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of the general partners and their affiliates before the year
2000.

     The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional risks
associated with the year 2000 compliance of the information or non- information
technology systems used by the Partnership, the Y2K Team will develop a
contingency plan if deemed necessary at that time.

Risk of Inability of Transfer Agent to Accurately Maintain Partnership Records

     The general partners believe that the reasonably likely worst case scenario
with regard to the Partnership's transfer agent is that the transfer agent will
fail to achieve year 2000 compliance of its systems and will not be able to
accurately maintain the records of the Partnership. This could result in the
inability of the Partnership to accurately identify its limited partners for
purposes of distributions, delivery of disclosure materials and transfer of
units. The Y2K Team has received certification from the Partnership's transfer
agent of its year 2000 compliance. Despite the positive response from the
transfer agent, the general partners cannot be assured that the transfer agent
has addressed all possible year 2000 issues.

     The Y2K Team has developed a contingency plan pursuant to which the general
partners and their affiliates would maintain the records of the Partnership
manually, in the event that the systems of the transfer agent are not year 2000
compliant. The general partners and their affiliates would have to allocate
resources to internally perform the functions of the transfer agent. The general
partners do not anticipate that the additional cost of these resources would
have a material impact on the results of operations of the Partnership.

Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance

     The general partners believe that the reasonably likely worst case scenario
with regard to the Partnership's financial institutions is that some or all of
its funds on deposit with such

                                       16
<PAGE>

financial institutions may be temporarily unavailable. The Y2K Team has received
responses from 93% of the Partnership's financial institutions indicating that
their systems are currently year 2000 compliant or are expected to be year 2000
compliant prior to the year 2000. Despite the positive responses from the
financial institutions, the general partners cannot be assured that the
financial institutions have addressed all possible year 2000 issues. The loss of
short-term liquidity could affect the Partnership's ability to pay its expenses
on a current basis. The general partners do not anticipate that a loss of
short-term liquidity would have a material impact on the results of operations
of the Partnership.

     Based upon the responses received from the Partnership's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.

Risks of Late Payment or Non-Payment of Rent by Tenants

     The general partners believe that the reasonably likely worst case scenario
with regard to the Partnership's tenants is that some of the tenants may make
rental payments late as the result of the failure of the tenants to achieve year
2000 compliance of their systems used in the payment of rent, the failure of the
tenant's financial institutions to achieve year 2000 compliance, or the
temporary disruption of the tenants' businesses. The Y2K Team is in the process
of requesting responses from the Partnership's tenants indicating the extent to
which their systems are currently year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000. The general partners cannot be assured
that the tenants have addressed all possible year 2000 issues. The late payment
of rent by one or more tenants would affect the results of operations of the
Partnership in the short-term.

     The general partners are also aware of predictions that the year 2000
problem, if uncorrected, may result in a global economic crisis. The general
partners are not able to determine if such predictions are true. A widespread
disruption of the economy could affect the ability of the Partnership's tenants
to pay rent and, accordingly, could have a material impact on the results of
operations of the Partnership.

     Because payment of rent is under the control of the Partnership's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, the general partners will
assess the remedies available to the Partnership under its lease agreements.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

     Not applicable.

                                       17
<PAGE>

                          PART II.  OTHER INFORMATION


Item 1.   Legal Proceedings.
          -----------------

          On May 11, 1999, four limited partners in several CNL Income Funds
          served a derivative and purported class action lawsuit filed April 22,
          1999 against the general partners and APF in the Circuit Court of the
          Ninth Judicial Circuit of Orange County, Florida, alleging that the
          general partners breached their fiduciary duties and violated
          provisions of certain of the CNL Income Fund partnership agreements in
          connection with the proposed Merger. The plaintiffs are seeking
          unspecified damages and equitable relief. On July 8, 1999, the
          plaintiffs filed an amended complaint which, in addition to naming
          three additional plaintiffs, includes allegations of aiding and
          abetting and conspiring to breach fiduciary duties, negligence and
          breach of duty of good faith against certain of the defendants and
          seeks additional equitable relief. As amended, the caption of the case
          is Jon Hale, Mary J. Hewitt, Charles A. Hewitt, Gretchen M. Hewitt
             ---------------------------------------------------------------
          Bernard J. Schulte, Edward M. and Margaret Berol Trust, and Vicky
          -----------------------------------------------------------------
          Berol v. James M. Seneff, Jr., Robert A. Bourne, CNL Realty
          -----------------------------------------------------------
          Corporation, and CNL American Properties Fund, Inc., Case No.
          ----------------------------------------------------
          CIO-99-0003561.

          On June 22, 1999, a limited partner of several CNL Income Funds served
          a purported class action lawsuit filed April 29, 1999 against the
          general partners and APF, Ira Gaines, individually and on behalf of a
                                    -------------------------------------------
          class of persons similarly situated, v. CNL American Properties Fund,
          ---------------------------------------------------------------------
          Inc., James M. Seneff, Jr., Robert A. Bourne, CNL Realty Corporation,
          ---------------------------------------------------------------------
          CNL Fund Advisors, Inc., CNL Financial Corporation a/k/a CNL Financial
          ----------------------------------------------------------------------
          Corp., CNL Financial Services, Inc. and CNL Group, Inc., Case NO.
          --------------------------------------------------------
          CIO-99-3796, in the Circuit Court of the Ninth Judicial Circuit of
          Orange County, Florida, alleging that the general partners breached
          their fiduciary duties and that APF aided and abetted their breach of
          fiduciary duties in connection with the proposed Merger. The plaintiff
          is seeking unspecified damages and equitable relief.

          On September 23, 1999, Judge Lawrence Kirkwood entered an order
          consolidating the two cases under the caption In re: CNL Income Funds
                                                        -----------------------
          Litigation, Case No. 99- 3561. Pursuant to this order, the plaintiffs
          -----------------------------
          in these cases filed a consolidated and amended complaint on November
          8, 1999, and the various defendants, including the general partners,
          have 45 days to respond to that consolidated complaint.

Item 2.   Changes in Securities. Inapplicable.
          ---------------------

Item 3.   Defaults upon Senior Securities.  Inapplicable.
          -------------------------------

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

Item 5.   Other Information. Inapplicable.
          -----------------

                                       18
<PAGE>

Item 6.   Exhibits and Reports on Form 8-K.
          --------------------------------

          (a)  Exhibits

          2.1  Agreement and Plan of Merger by and between the Registrant and
               CNL American Properties Fund, Inc. ("APF") dated March 11, 1999,
               as amended on June 4, 1999, as amended October 27, 1999 (Filed as
               Appendix B to the Prospectus Supplement for the Registrant,
               constituting a part of Amendment No. 3 to the Registration
               Statement of APF on Form S-4, File No. 333-74329.)

          3.1  Certificate of Limited Partnership of CNL Income Fund III, Ltd.
               (Included as Exhibit 3.1 to Amendment No. 1 to Registration
               Statement No. 33-15374 on Form S-11 and incorporated herein by
               reference.)

          3.2  Amended and Restated Agreement and Certificate of Limited
               Partnership of CNL Income Fund III, Ltd. (Included as Exhibit 3.2
               to Form 10-K filed with the Securities and Exchange Commission on
               April 5, 1993, and incorporated herein by reference.)

          4.1  Certificate of Limited Partnership of CNL Income Fund III, Ltd.
               (Included as Exhibit 3.1 to Amendment No. 1 to Registration
               Statement No. 33-15374 on Form S-11 and incorporated herein by
               reference.)

          4.2  Amended and Restated Agreement and Certificate of Limited
               Partnership of CNL Income Fund III, Ltd. (Included as Exhibit 3.2
               to Form 10-K filed with the Securities and Exchange Commission on
               April 5, 1993, and incorporated herein by reference.)

          10.1 Property Management Agreement (Included as Exhibit 10.1 to Form
               10-K filed with the Securities and Exchange Commission on April
               5, 1993, and incorporated herein by reference.)

          10.2 Assignment of Property Management Agreement from CNL Investment
               Company to CNL Income Fund Advisors, Inc. (Included as Exhibit
               10.2 to Form 10-K filed with the Securities and Exchange
               Commission on March 30, 1995, and incorporated herein by
               reference.)

          10.3 Assignment of Property Management Agreement from CNL Income Fund
               Advisors, Inc. to CNL Fund Advisors, Inc. (Included as Exhibit
               10.3 to Form 10-K filed with the Securities and Exchange
               Commission on April 1, 1996, and incorporated herein by
               reference.)

          27   Financial Data Schedule (Filed herewith.)

                                       19
<PAGE>

          (b)  Reports on Form 8-K

               No reports on Form 8-K were filed during the quarter ended
               September 30, 1999.

                                       20
<PAGE>

                                  SIGNATURES
                                  ----------


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

     DATED this 10th day of November, 1999.


                                         CNL INCOME FUND III, LTD.

                                         By:  CNL REALTY CORPORATION
                                              General Partner


                                              By:  /s/ James M. Seneff, Jr.
                                                  ------------------------------
                                                  JAMES M. SENEFF, JR.
                                                  Chief Executive Officer
                                                  (Principal Executive Officer)

                                              By:  /s/ Robert A. Bourne
                                                  ------------------------------
                                                  ROBERT A. BOURNE
                                                  President and Treasurer
                                                  (Principal Financial and
                                                  Accounting Officer)