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 March 31, 1998
                            ------------------------

                                       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                    (I.R.S. Employer
of incorporation or organiza-                   Identification No.)
tion)


400 E. South Street
Orlando, Florida                              32801
----------------------------           -----------------
(Address of principal                       (Zip Code)
executive offices)


Registrant's telephone number
(including area code)                      (407) 422-1574


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




Part I                                                   Page

  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                       9-13


Part II

  Other Information                                      14


<PAGE>



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


                                               March 31,         December 31,
            ASSETS                               1998                1997
            ------                            -----------        ------------

Land and buildings on operating
  leases, less accumulated
  depreciation of $2,876,442 and
  $3,341,624 and allowance for
  loss on land and building of
  $240,663 in 1998 and 1997                   $12,795,485       $14,635,583
Investment in direct financing
  leases                                          923,561           926,862
Investment in joint ventures                    1,590,531         1,179,762
Mortgage note receivable                          678,528           681,687
Cash and cash equivalents                       2,653,819           493,118
Restricted cash                                        -            251,879
Receivables, less allowance for
  doubtful accounts of $150,000
  and $154,469                                     70,917           102,420
Prepaid expenses                                    9,089            14,361
Lease costs, less accumulated
  amortization of $2,912 and
  $2,762                                            9,088             9,238
Accrued rental income, less
  allowance for doubtful accounts
  of $15,384 for 1998 and 1997                    169,943           154,738
Other assets                                       29,354            29,354
                                              -----------       -----------

                                              $18,930,315       $18,479,002
                                              ===========       ===========

LIABILITIES AND PARTNERS' CAPITAL

Accounts payable                              $     3,403       $     5,219
Escrowed real estate taxes payable                 10,975            11,897
Distributions payable                           1,977,747           594,000
Due to related parties                            159,834            97,388
Rents paid in advance and deposits                 28,822            20,745
                                              -----------       -----------
    Total liabilities                           2,180,781           729,249

Minority interest                                 137,912           138,617

Partners' capital                              16,611,622        17,611,136
                                              -----------       -----------

                                              $18,930,315       $18,479,002
                                              ===========       ===========







            See accompanying notes to condensed financial statements.

                                        1

<PAGE>



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


                                                      Quarter Ended
                                                        March 31,
                                                  1998              1997
                                                --------          ---------
Revenues:
  Rental income from operating leases           $421,125          $498,727
  Earned income from direct financing
    lease                                         33,866            34,318
  Contingent rental income                        12,833            51,791
  Interest and other income                       41,182            11,155
                                                --------          --------
                                                 509,006           595,991
                                                --------          --------
Expenses:
  General operating and administrative            31,780            36,115
  Professional services                            4,610             8,054
  Real estate taxes                                4,229             3,028
  State and other taxes                           11,516             9,280
  Depreciation and amortization                   80,417            97,706
                                                --------          --------
                                                 132,552           154,183
                                                --------          --------

Income Before Minority Interest in Income
  of Consolidated Joint Venture, Equity in
  Earnings (Loss) of Unconsolidated Joint
  Ventures, Gain on Sale of Land and
  Buildings and Provision for Loss on
  Land and Building                              376,454           441,808

Minority Interest in Income of Consolidated
  Joint Venture                                   (4,345)           (4,229)

Equity in Earnings (Loss) of Unconsolidated
  Joint Ventures                                  22,751            (1,514)

Gain on Sale of Land and Buildings               583,373           365,195

Provision for Loss on Land and Building               -            (32,819)
                                                --------          --------

Net Income                                      $978,233          $768,441
                                                ========          ========

Allocation of Net Income:
  General partners                              $  8,558          $  5,990
  Limited partners                               969,675           762,451
                                                --------          --------

                                                $978,233          $768,441
                                                ========          ========


Net Income Per Limited Partner Unit             $  19.39          $  15.25
                                                ========          ========

Weighted Average Number of Limited Partner
  Units Outstanding                               50,000            50,000
                                                ========          ========


            See accompanying notes to condensed financial statements.

                                        2

<PAGE>



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


                                        Quarter Ended              Year Ended
                                          March 31,               December 31,
                                            1998                      1997
                                        -------------             -----------

General partners:
  Beginning balance                      $   339,611             $   321,305
  Net income                                   8,558                  18,306
                                         -----------             -----------
                                             348,169                 339,611
                                         -----------             -----------

Limited partners:
  Beginning balance                       17,271,525              17,273,996
  Net income                                 969,675               2,373,529
  Distributions ($39.55 and
    $47.52 per limited partner
    unit, respectively)                   (1,977,747)             (2,376,000)
                                         -----------             -----------
                                          16,263,453              17,271,525
                                         -----------             -----------

Total partners' capital                  $16,611,622             $17,611,136
                                         ===========             ===========





            See accompanying notes to condensed financial statements.

                                        3

<PAGE>



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


                                                      Quarter Ended
                                                        March 31,
                                                  1998           1997
                                              -----------     ------------

Increase (Decrease) in Cash and Cash
  Equivalents:

    Net Cash Provided by Operating
      Activities                              $   501,741     $   467,241
                                              -----------     -----------

    Cash Flows from Investing
      Activities:
        Proceeds from sale of land and
          buildings                             2,424,977       1,786,939
        Investment in joint venture              (415,586)             -
        Collections on note receivable              3,242              -
        Decrease (increase) in
          restricted cash                         245,377      (1,305,671)
                                              -----------     -----------
            Net cash provided by
              investing activities              2,258,010         481,268
                                              -----------     -----------

    Cash Flows from Financing
      Activities:
        Distributions to limited
          partners                               (594,000)       (594,000)
        Distributions to holders of
          minority interest                        (5,050)         (5,050)
                                              -----------     -----------
            Net cash used in
              financing activities               (599,050)       (599,050)
                                              -----------     -----------

Net Increase in Cash and Cash
  Equivalents                                   2,160,701         349,459

Cash and Cash Equivalents at Beginning
  of Quarter                                      493,118          57,751
                                              -----------     -----------

Cash and Cash Equivalents at End of
  Quarter                                     $ 2,653,819     $   407,210
                                              ===========     ===========

Supplemental Schedule of Non-Cash
  Investing and Financing Activities:

    Deferred real estate disposition
      fees incurred and unpaid at end
      of quarter                              $    53,400     $    15,150
                                              ===========     ===========

    Distributions declared and unpaid
      at end of quarter                       $ 1,977,747     $   594,000
                                              ===========     ===========


            See accompanying notes to condensed financial statements.

                                        4

<PAGE>



                            CNL INCOME FUND III, LTD.
                         (A Florida Limited Partnership)
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                     Quarters Ended March 31, 1998 and 1997


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 ended March 31, 1998,  may not be indicative of the results
         that may be expected for the year ending December 31, 1998.  Amounts as
         of December 31, 1997, 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, 1997.

         The Partnership  accounts for its 69.07%  interest in Tuscawilla  Joint
         Venture using the consolidation  method.  Minority interest  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:

         During the  quarter  ended March 31,  1998,  the  Partnership  sold its
         properties in Daytona Beach, Fernandina Beach and Punta Gorda, Florida,
         to the tenants,  for a total of  approximately  $2,455,000 and received
         net sales proceeds of $2,424,977, resulting in a total gain of $583,373
         for financial  reporting  purposes.  These  properties were origi-nally
         acquired  by  the   Partnership   in  1988  and  had  costs   totalling
         approximately $2,148,500,  excluding acquisition fees and miscellaneous
         acquisition expenses;  therefore, the Partnership sold these properties
         for a total of  approximately  $276,500  in  excess  of their  original
         purchase  prices.  In  connection  with the sales of the  properties in
         Daytona Beach and Fernandina Beach,  Florida,  the Partnership incurred
         deferred,  subordinated,  real estate disposition fees of $53,400. (See
         Note 5).



                                        5

<PAGE>



                            CNL INCOME FUND III, LTD.
                         (A Florida Limited Partnership)
               NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
                     Quarters Ended March 31, 1998 and 1997


3.       Investment in Joint Ventures:

         In  January  1998,  the  Partnership  acquired a 25.84%  interest  in a
         property located in Overland Park,  Kansas, as  tenants-in-common  with
         affiliates of the general  partners.  The Partnership  accounts for its
         investment  in  this  property   using  the  equity  method  since  the
         Partnership shares control with affiliates, and amounts relating to its
         investment are included in investment in joint ventures.

         The following presents the combined,  condensed  financial  information
         for all of the Partnership's investments in joint ventures at:
                                                 March 31,   December 31,
                                                   1998          1997

                  Land and building on
                    operating leases, less
                    accumulated depreciation
                    and allowance for loss
                    on land and building        $3,147,512     $3,152,962
                  Net investment in direct
                    financing leases             2,609,507      1,003,680
                  Cash                               4,874         16,481
                  Receivables                          560             -
                  Accrued rental income             29,128         11,621
                  Other assets                       1,480          1,480
                  Liabilities                       13,423         18,722
                  Partners' capital              5,779,638      4,167,502
                  Revenues                         142,404         82,837
                  Net income (loss)                129,029       (157,912)

         The  Partnership  recognized  income  totalling  $22,751  and a loss of
         $1,514 for the  quarters  ended March 31, 1998 and 1997,  respectively,
         from these joint ventures.

4.       Allocations and Distributions:

         Generally, all net income and net losses of the Partnership,  excluding
         gains and losses from the sale of properties,  are allocated 99 percent
         to the  limited  partners  and one  percent  to the  general  partners.
         Distributions  of net  cash  flow are made 99  percent  to the  limited
         partners and one percent to the general  partners;  provided,  however,
         that the one percent of net cash flow to be  distributed to the general
         partners  is  subordinated  to receipt by the  limited  partners  of an
         aggregate, ten percent,  noncumulative,  noncompounded annual return on
         their adjusted capital contributions (the "10% Preferred Return").


                                        6

<PAGE>



                            CNL INCOME FUND III, LTD.
                         (A Florida Limited Partnership)
               NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
                     Quarters Ended March 31, 1998 and 1997


4.       Allocations and Distributions - Continued:

         Generally,  net  sales  proceeds  from the sale of  properties,  to the
         extent  distributed,  will be distributed first to the limited partners
         in an amount  sufficient  to  provide  them with their  cumulative  10%
         Preferred   Return,   plus  the  return  of  their   adjusted   capital
         contributions.  The general  partners will then receive,  to the extent
         previously subordinated and unpaid, a one percent interest in all prior
         distributions   of  net  cash  flow  and  a  return  of  their  capital
         contributions.  Any remaining  sales  proceeds will be  distributed  95
         percent  to the  limited  partners  and  five  percent  to the  general
         partners.  Any  gain  from  the  sale of a  property  is,  in  general,
         allocated in the same manner as net sales  proceeds are  distributable.
         Any loss from the sale of a property is, in general,  allocated  first,
         on a pro rata  basis,  to  partners  with  positive  balances  in their
         capital  accounts;  and thereafter,  95 percent to the limited partners
         and five percent to the general partners.

         During the  quarters  ended  March 31, 1998 and 1997,  the  Partnership
         declared  distributions  to the  limited  partners  of  $1,977,747  and
         $594,000,  respectively. This represents distributions for the quarters
         ended  March  31,  1998  and  1997  of  $39.55  and  $11.88  per  unit,
         respectively.  The  distribution  for the quarter ended March 31, 1998,
         includes  $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.  This amount was  applied  toward the limited
         partners' 10% Preferred Return. No distributions  have been made to the
         general partners to date.

5.       Related Party Transactions:

         Certain  affiliates  are  entitled to receive a deferred,  subordinated
         real  estate  disposition  fee,  payable  upon  the sale of one or more
         properties based on the lesser of one-half of a competitive real estate
         commission  or three  percent  of the  sales  price  if the  affiliates
         provide a substantial  amount of services in connection  with the sale.
         Payment of the real estate  disposition  fee is subordinated to receipt
         by the  limited  partners  of their  aggregate  ten  percent  preferred
         return,  plus their adjusted  capital  contributions.  For the quarters
         ended March 31, 1998 and 1997,  the  Partnership  incurred  $53,400 and
         $15,150,   respectively,   in  deferred,   subordinated,   real  estate
         disposition  fees as a  result  of the sale of  properties  in 1998 and
         1997.



                                        7

<PAGE>



                            CNL INCOME FUND III, LTD.
                         (A Florida Limited Partnership)
               NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
                     Quarters Ended March 31, 1998 and 1997


6.       Subsequent Event:

         In May 1998, the Partnership entered into a joint venture  arrangement,
         RTO Joint Venture,  with an affiliate of the Partnership  which has the
         same general partners,  to construct and hold one restaurant  property,
         at a total cost of $1,420,379. The Partnership has agreed to contribute
         approximately $665,900 to the joint venture for an estimated 47 percent
         interest in the profits and losses of the joint venture.

                                        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 March 31, 1998, the Partnership owned 28
Properties,  including  interests in two  Properties  owned by joint ventures in
which the Partnership is a co-venturer and two Properties  owned with affiliates
as tenants-in-common.

Liquidity and Capital Resources

         During the  quarters  ended  March 31, 1998 and 1997,  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 $501,741 and $467,241,  respectively. The increase in
cash from operations for the quarter ended March 31, 1998, is primarily a result
of changes in the Partnership's working capital.

         Other  sources and uses of capital  included the  following  during the
quarter ended March 31, 1998.

         In January 1998, the  Partnership  used the net sales proceeds from the
1997 sale of the Property in Mason City,  Iowa to acquire a Property  located in
Overland  Park,  Kansas,  as  tenants-in-common  with  affiliates of the general
partners.  In connection  therewith,  the Partnership and the affiliates entered
into an agreement  whereby each co-venturer will share in the profits and losses
of the Property in proportion to its applicable percentage interest. As of March
31, 1998, the Partnership owned an approximate 25.84% interest in this Property.

         During the  quarter  ended March 31,  1998,  the  Partnership  sold its
Properties in Daytona Beach,  Fernandina Beach and Punta Gorda,  Florida, to the
tenants for a total of approximately  $2,455,000 and received net sales proceeds
of $2,424,977,  resulting in gains of $583,373 for financial reporting purposes.
These  Properties  were  originally  acquired by the Partnership in 1988 and had
costs  totalling  approximately  $2,148,500,   excluding  acquisition  fees  and
miscellaneous  acquisition  expenses;  therefore,  the  Partnership  sold  these
Properties  for a total of  approximately  $276,500 in excess of their  original
purchase prices. In connection with the sales of the Properties in Daytona Beach
and Fernandina Beach, Florida, the


                                        9

<PAGE>



Liquidity and Capital Resources - Continued

Partnership  incurred  deferred,  subordinated,  real estate disposition fees of
$53,400. The Partnership  distributed  $1,477,747 of the net sales proceeds as a
special  distribution  of net sales proceeds from the sales of Properties to the
limited  partners and will use the remaining  net sales  proceeds to reinvest in
additional Properties.

         In May 1998, the Partnership entered into a joint venture  arrangement,
RTO Joint  Venture,  with an  affiliate  of the  Partnership  which has the same
general partners, to construct and hold one restaurant Property, at a total cost
of $1,420,379.  The Partnership has agreed to contribute  approximately $665,900
to the joint  venture for an  estimated  47 percent  interest in the profits and
losses of the joint venture.

         Currently,  rental income from the Partnership's Properties is invested
in money market accounts and other short-term, highly liquid investments pending
the  Partnership's  use of such  funds to pay  Partnership  expenses  or to make
distributions to the partners. At March 31, 1998, the Partnership had $2,653,819
invested in such short-term investments, as compared to $493,118 at December 31,
1997. The increase in cash and cash  equivalents at March 31, 1998, is primarily
attributable  to the receipt of net sales  proceeds  relating to the sale of the
Properties in Daytona Beach,  Fernandina  Beach,  and Punta Gorda,  Florida,  as
described  above.  The funds  remaining at March 31,  1998,  will be used to pay
distributions and other liabilities and to acquire additional Properties.

         Total liabilities of the Partnership,  including distributions payable,
increased to $2,180,781  at March 31, 1998,  from $729,249 at December 31, 1997,
primarily as a result of the  Partnership's  accruing a special  distribution of
net sales  proceeds  totalling  $1,477,747  from the sales of the  Properties in
Fernandina Beach and Daytona Beach, Florida,  payable to the limited partners at
March 31, 1998. The general partners believe that the Partnership has sufficient
cash on hand to meet its current working capital needs.

         Based on current and anticipated future cash from operations,  proceeds
received from the sales of several  Properties during 1998 and 1997, and for the
quarter  ended March 31, 1997,  the loan  received  from the  corporate  general
partner  in April  1997,  the  Partnership  declared  distributions  to  limited
partners of  $1,977,747  and $594,000 for the quarters  ended March 31, 1998 and
1997, respectively.  This represents distributions of $39.55 and $11.88 per unit
for the quarters ended March 31, 1998 and 1997, respectively.  Distributions for
the  quarter  ended  March  31,  1998,  include  $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. As a result of the sale of the Properties,

                                       10

<PAGE>



Liquidity and Capital Resources - Continued

the  Partnership's  total  revenue  was  reduced,  while  the  majority  of  the
Partnership's operating expenses remained fixed. Therefore, distributions of net
cash flow were adjusted for the quarter ended March 31, 1998 and are expected to
remain at this level.  This special  distribution  was effectively a return of a
portion of the limited partners'  investment,  although,  in accordance with the
Partnership agreement,  it was applied to the limited partners' unpaid preferred
return.  No  distributions  were made to the general  partners  for the quarters
ended March 31, 1998 and 1997. No amounts  distributed  to the limited  partners
for the quarters  ended March 31, 1998 and 1997, 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.

         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.

Results of Operations

         During the  quarter  ended  March 31,  1997,  the  Partnership  and its
consolidated joint venture, Tuscawilla Joint Venture, owned and leased 31 wholly
owned Properties  (including five Properties which were sold in 1997) and during
the quarter ended March 31, 1998, the  Partnership  and its  consolidated  joint
venture owned and leased 30 wholly owned Properties (including the Properties in
Daytona Beach,  Florida;  Fernandina  Beach,  Florida and Punta Gorda,  Florida,
which  were  sold  in  1998,   respectively)   to  operators  of  fast-food  and
family-style  restaurant  chains. In connection  therewith,  during the quarters
ended March 31, 1998 and 1997,  the  Partnership  and  Tuscawilla  Joint Venture
earned  $454,991 and $533,045,  respectively,  in rental  income from  operating
leases and earned income from the direct financing leases for these  Properties.
The  decrease in rental and earned  income  during the  quarter  ended March 31,
1998, as compared to the quarter ended March 31, 1997, is primarily attributable
to a decrease of approximately  $116,300 as a result of the sales during 1997 of
the Properties in Bradenton,  Florida; Kissimmee,  Florida; Roswell, Georgia and
Mason City,  Iowa and the sales during 1998 of the  Properties in Daytona Beach,
Florida;  Fernandina Beach,  Florida and Punta Gorda,  Florida.  The decrease in
rental income was partially offset by an increase of  approximately  $38,800 due
to the reinvestment of the majority of the net sales proceeds from the 1997 sale
of the Property in  Bradenton,  Florida,  in a Property in  Fayetteville,  North
Carolina

                                       11

<PAGE>



Results of Operations - Continued

in June 1997. The  Partnership  reinvested the net sales proceeds from the sales
of the Properties in Kissimmee,  Florida, Roswell, Georgia and Mason City, Iowa,
in Properties held as tenants-in-common  with affiliates of the general partners
resulting  in an increase in equity in  earnings of joint  venture as  described
below.

         Rental and earned income  during the quarters  ended March 31, 1998 and
1997,  continued  to  remain  at  reduced  amounts  due to  the  fact  that  the
Partnership is not receiving any rental income relating to the Po Folks Property
in  Hagerstown,  Maryland.  The  Partnership  is currently  seeking a buyer or a
replacement tenant for this Property.

         During the quarters ended March 31, 1998 and 1997, the Partnership also
earned  $12,833 and $51,791,  respectively,  in contingent  rental  income.  The
decrease in contingent rental income during the quarter ended March 31, 1998, as
compared to the quarter ended March 31, 1997, is primarily  attributable  to the
sale of two Properties,  one in Kissimmee,  Florida and one in Mason City, Iowa,
in April and October 1997, respectively, the leases of which require the payment
of contingent rent during the quarter ended March 31, 1997.

         In  addition,  during the quarters  ended March 31, 1998 and 1997,  the
Partnership  earned  $41,182 and  $11,155,  respectively,  in interest and other
income. The increase in interest and other income during the quarter ended March
31,  1998,  was  partially  attributable  to the  interest  earned  on the sales
proceeds  received from the sale of the  Properties in Daytona  Beach,  Florida;
Fernandina Beach,  Florida and Punta Gorda,  Florida,  which had not been either
reinvested  or used for other  Partnership  purposes  as of March 31,  1998.  In
addition, interest and other income increased during the quarter ended March 31,
1998,  as a result  of the  interest  earned  on the  mortgage  note  receivable
accepted in  connection  with the sale of the Property in Roswell,  Georgia,  in
June 1997.

         For the quarters ended March 31, 1998 and 1997, the  Partnership  owned
and leased one  Property  indirectly  through a joint  venture  arrangement.  In
addition,  during the quarter ended March 31, 1998,  the  Partnership  owned and
leased three  Properties  as  tenants-in-common  with  affiliates of the general
partners. In connection therewith,  during the quarters ended March 31, 1998 and
1997,  the  Partnership  earned income of $22,751 and recorded a loss of $1,514,
respectively,  attributable  to net income and losses  recorded  by these  joint
ventures. The increase in net income earned by joint ventures during the quarter
ended  March 31,  1998,  as compared to the  quarter  ended March 31,  1997,  is
partially  due to the  fact  that in July and  December  1997,  the  Partnership
reinvested a portion of the net sales  proceeds it received  from the 1997 sales
of several Properties in a Property in Englewood,


                                       12

<PAGE>



Results of Operations - Continued

Colorado, and a Property in Miami, Florida, respectively, with affiliates of the
general partners as tenants-in-common.  In addition,  the increase in net income
earned by joint  ventures  during the quarter ended March 31, 1998, is partially
attributable  to the fact that in January 1998, the  Partnership  reinvested the
net sales  proceeds it received from the 1997 sale of a Property,  in a Property
in  Overland  Park,   Kansas,   with  affiliates  of  the  general  partners  as
tenants-in-common.

         The increase in net income earned by these joint  ventures is partially
offset by the fact that, during July 1997, the operator of the Property owned by
Titusville  Joint  Venture  vacated  the  Property  and  ceased  operations.  In
conjunction therewith, the joint venture recorded real estate tax expense during
the quarter  ended March 31, 1998.  No such real estate tax expense was incurred
during the quarter ended March 31, 1997. The joint venture has ceased collection
efforts of these amounts and is currently seeking either a replacement tenant or
purchaser for this Property.

         Operating expenses,  including  depreciation and amortization  expense,
were  $132,552  and  $154,183  for the  quarters  ended March 31, 1998 and 1997,
respectively.  The decrease in operating expenses during the quarter ended March
31,  1998,  as compared  to the  quarter  ended  March 31,  1997,  is  primarily
attributable to a decrease in  depreciation  expense due to the sales of several
Properties during 1998 and 1997.

         As a result of the sales of three  Properties,  as  described  above in
"Liquidity and Capital  Resources,"  and one Property  during the quarters ended
March 31, 1998 and 1997,  respectively,  the Partnership recognized a total gain
of $583,373 and $365,195, respectively, for financial reporting purposes.

         In addition,  during the quarter ended March 31, 1997, the  Partnership
recorded an allowance  for loss on land and building of $32,819,  for  financial
reporting purposes,  relating to the Po Folks Property in Hagerstown,  Maryland.
The loss  represents  the difference  between the  Property's  carrying value at
March 31, 1997 and the estimated net  realizable  value,  based on the estimated
sales price of this Property.





                                       13

<PAGE>



                           PART II. OTHER INFORMATION


Item 1.           Legal Proceedings.  Inapplicable.

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.

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

                  (a)      Exhibits - None.

                  (b)      No reports on Form 8-K were filed  during the quarter
                           ended March 31, 1998.

                                       14

<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 13th day of May, 1998.


                            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)