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, 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 of other jurisdiction            (I.R.S. Employer
    of incorporation or organization)         Identification No.)


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


        Registrant's telephone number
        (including area code)                    (407) 650-1000


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                        4-5

       Notes to Condensed Financial Statements                   6-10

    Item 2.  Management's Discussion and Analysis
                  of Financial Condition and
                  Results of Operations                          11-17


Part II

    Other Information                                            18



<PAGE>


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

                                                                        September 30,             December 31,
                                                                             1998                     1997
                                                                        ----------------        -----------------
<S> <C>
                         ASSETS

Land and buildings on operating leases, less
    accumulated depreciation and allowance
    for loss on land and buildings                                          $11,923,109              $14,635,583
Investment in direct financing leases                                           916,580                  926,862
Investment in joint ventures                                                  2,093,452                1,179,762
Mortgage note receivable                                                             --                  681,687
Cash and cash equivalents                                                     1,726,345                  493,118
Restricted cash                                                                      --                  251,879
Receivables, less allowance for doubtful
    accounts of $152,230 and $154,469                                            40,088                  102,420
Prepaid expenses                                                                  8,310                   14,361
Lease costs, less accumulated
    amortization of $2,762 in 1997                                                    --                    9,238
Accrued rental income, less allowance for
    doubtful accounts of $14,735 and $15,384                                     85,729                  154,738
Other assets                                                                     29,354                   29,354
                                                                        ----------------         ----------------

                                                                            $16,822,967              $18,479,002
                                                                        ================         ================


                  LIABILITIES AND PARTNERS' CAPITAL

Accounts payable                                                            $     1,192              $     5,219
Accrued and escrowed real estate taxes payable                                   11,011                   11,897
Distributions payable                                                           500,000                  594,000
Due to related parties                                                          146,825                   97,388
Rents paid in advance and deposits                                               37,763                   20,745
                                                                        ----------------         ----------------
       Total liabilities                                                        696,791                  729,249

Minority interest                                                               136,402                  138,617

Partners' capital                                                            15,989,774               17,611,136
                                                                        ----------------         ----------------

                                                                            $16,822,967              $18,479,002
                                                                        ================         ================

</TABLE>



                 See accompanying notes to 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,
                                                       1998           1997            1998            1997
                                                     ----------     ---------      ------------    ------------
<S> <C>
Revenues:
    Rental income from operating leases               $351,021       $460,694       $1,175,634       $1,490,536
    Adjustments to accrued rental income               (29,474 )           --          (80,800 )             --
    Earned income from direct
       financing leases                                 33,613         34,101          101,222          102,631
    Interest and other income                           22,875         37,122          103,546           82,031
                                                     ----------     ----------     ------------    -------------
                                                       378,035        531,917        1,299,602        1,675,198
                                                     ----------     ----------     ------------    -------------

Expenses:
    General operating and administrative                32,218         31,361          102,940          104,699
    Professional services                                6,650          4,583           31,706           19,983
    Real estate taxes                                    1,886          4,229            9,421           11,789
    State and other taxes                                  530             --           12,250            9,924
    Depreciation and amortization                       72,026         90,917          236,345          278,778
                                                     ----------     ----------     ------------    -------------
                                                       113,310        131,090          392,662          425,173
                                                     ----------     ----------     ------------    -------------

Income Before Minority Interest in
    Income of Consolidated Joint Venture,
    Equity in Losses of Unconsolidated
    Joint Ventures, Gain on Sale of Land
    and Buildings and Provision for Loss
    on Land and Buildings                              264,725        400,827          906,940        1,250,025

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

Equity in Losses of Unconsolidated
    Joint Ventures                                     (75,617 )       (9,494 )        (34,343 )        (12,496 )

Gain on Sale of Land and Buildings                          --             --          596,586          969,052

Provision for Loss on Land and Buildings               (99,865 )           --          (99,865 )        (32,819 )
                                                     ----------     ----------     ------------    -------------

Net Income                                           $  84,891       $386,981       $1,356,385       $2,160,829
                                                     ==========     ==========     ============    =============

Allocation of Net Income:
    General partners                                 $     (11)      $  3,870       $   11,479       $   16,113
    Limited partners                                    84,902        383,111        1,344,906        2,144,716
                                                     ----------     ----------     ------------    -------------

                                                     $  84,891       $386,981       $1,356,385       $2,160,829
                                                     ==========     ==========     ============    =============

Net Income Per Limited Partner Unit                  $    1.70       $   7.66       $    26.90       $    42.89
                                                     ==========     ==========     ============    =============

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

                 See accompanying notes to financial statements.

                                       2
<PAGE>


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

<TABLE>
<CAPTION>

                                                                  Nine Months Ended              Year Ended
                                                                    September 30,                December 31,
                                                                         1998                       1997
                                                              ---------------------------     -----------------
<S> <C>
  General partners:
      Beginning balance                                              $     339,611             $     321,305
      Net income                                                            11,479                    18,306
                                                                   ----------------           ---------------
                                                                           351,090                   339,611
                                                                   ----------------           ---------------
  Limited partners:
      Beginning balance                                                 17,271,525                17,273,996
      Net income                                                         1,344,906                 2,373,529
      Distributions ($59.55 and
         $47.52 per limited partner
         unit, respectively)                                            (2,977,747 )              (2,376,000 )
                                                                   ----------------           ---------------
                                                                        15,638,684                17,271,525
                                                                   ----------------           ---------------

  Total partners' capital                                              $15,989,774               $17,611,136
                                                                   ================           ===============
</TABLE>


                 See accompanying notes to 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,
                                                                         1998                    1997
                                                                    ---------------         ---------------
<S> <C>
Increase (Decrease) in Cash and Cash
   Equivalents:

      Net Cash Provided by Operating
         Activities                                                   $  1,376,910            $  1,500,218
                                                                   ----------------        ----------------

      Cash Flows from Investing Activities:
         Proceeds from sale of land
             and buildings                                               3,214,616               2,811,159
         Additions to land and buildings
             on operating leases                                          (150,000 )            (1,272,960 )
         Investment in joint ventures                                   (1,045,511 )              (511,667 )
         Collections on mortgage note
             receivable                                                    678,730                   3,100
         Decrease (increase) in restricted cash                            245,377                (159,912 )
                                                                   ----------------        ----------------
                Net cash provided by
                   investing activities                                  2,943,212                 869,720
                                                                   ----------------        ----------------

      Cash Flows from Financing Activities:
         Proceeds from loans from corporate
             general partner                                                     --                  37,000
         Repayment of loans from corporate
             general partner                                                    --                 (37,000 )
         Distributions to limited partners                              (3,071,747 )            (1,782,000 )
         Distributions to holders of minority
             interest                                                      (15,148 )               (15,031 )
                                                                   ----------------        ----------------
                Net cash used in financing
                   activities                                           (3,086,895 )            (1,797,031 )
                                                                   ----------------        ----------------

Net Increase in Cash and Cash Equivalents                                1,233,227                 572,907

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

Cash and Cash Equivalents at End of
   Period                                                             $  1,726,345           $     630,658
                                                                   ================        ================
</TABLE>


                 See accompanying notes to financial statements.

                                       4
<PAGE>


                            CNL INCOME FUND III, LTD.
                         (A Florida Limited Partnership)
                 CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>


                                                                                Nine Months Ended
                                                                                  September 30,
                                                                           1998                  1997
                                                                      ---------------       ----------------
<S> <C>
Supplemental Schedule of Non-Cash
    Investing and Financing Activities:

       Mortgage note accepted in exchange
          for sale of land and building                                $          --          $     685,000
                                                                      ===============        ===============

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

       Distributions declared and unpaid at
          end of period                                                 $    500,000           $    594,000
                                                                      ===============        ===============

</TABLE>



                 See accompanying notes to financial statements.

                                       5
<PAGE>


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

         In May  1998,  the  Financial  Accounting  Standards  Board  reached  a
         consensus in EITF 98-9, entitled "Accounting for Contingent Rent in the
         Interim Financial  Periods."  Adoption of this consensus did not have a
         material effect on the Partnership's  financial  position or results of
         operations.

         Certain  items in the  prior  year's  financial  statements  have  been
         reclassified to conform to 1998 presentation.  These  reclassifications
         had no effect on partners' capital or net income.



                                       6
<PAGE>


                            CNL INCOME FUND III, LTD.
                         (A Florida Limited Partnership)
               NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
           Quarters and Nine Months Ended September 30, 1998 and 1997


2.       Land and Buildings on Operating Leases:

         Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>

                                                                       September 30,            December 31,
                                                                            1998                    1997
                                                                     -------------------      -----------------
<S> <C>
                  Land                                                   $  6,123,402            $ 7,325,960
                  Buildings                                                 8,720,879             10,891,910
                                                                       ---------------        ---------------
                                                                           14,844,281             18,217,870
                  Less accumulated depreciation                            (2,821,307 )           (3,341,624 )
                                                                       ---------------        ---------------
                                                                           12,022,974             14,876,246
                  Less allowance for loss on
                      land and building                                       (99,865 )             (240,663 )
                                                                       ---------------        ---------------

                                                                          $11,923,109            $14,635,583
                                                                       ===============        ===============
</TABLE>

         During the nine months ended September 30, 1998, the  Partnership  sold
         its  properties  in Daytona  Beach,  Fernandina  Beach and Punta Gorda,
         Florida,  and  Hagerstown,  Maryland,  for  a  total  of  approximately
         $3,280,000 and received net sales proceeds of $3,214,616,  resulting in
         a  total  gain  of  $596,586  for  financial  reporting  purposes.   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 6).

         In September 1998, the  Partnership  entered into a new lease agreement
         for the Golden Corral  property  located in  Stockbridge,  Georgia.  In
         connection  therewith,  the  Partnership  funded $150,000 in renovation
         costs.

         As of December 31, 1997, the  Partnership  had established an allowance
         for  loss on  land  and  building  of  $240,663  for  the  property  in
         Hagerstown,  Maryland. The allowance represented the difference between
         the net  carrying  value at December  31, 1997 and the  estimate of net
         realizable  value of the property.  The Partnership  sold this property
         during the nine months ended September 30, 1998, as described above.

         In addition,  during the nine months  ended  September  30,  1998,  the
         Partnership  established  an allowance for loss on land and building of
         $99,865,  for financial  reporting  purposes,  relating to the property
         located in Hazard,  Kentucky.  The allowance  represents the difference
         between the net carrying  value of the  property at September  30, 1998
         and the current estimate of net realizable value for the property.



                                       7
<PAGE>


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

         In May 1998, the Partnership entered into a joint venture  arrangement,
         RTO Joint  Venture,  with an  affiliate  of the  general  partners,  to
         construct and hold one restaurant  property.  As of September 30, 1998,
         the Partnership  had contributed  $629,925 to purchase land and pay for
         construction  relating to the joint venture. The Partnership has agreed
         to contribute approximately $36,100 in additional construction costs to
         the joint venture. When construction is completed, the Partnership will
         have an  approximate  47 percent  interest in the profits and losses of
         the joint venture.  The Partnership accounts for its investment in this
         joint  venture  under the equity  method since the  Partnership  shares
         control with an affiliate.

         The following presents the combined,  condensed  financial  information
         for  all  of  the  Partnership's  investments  in  joint  ventures  and
         properties held as tenants-in-common at:
<TABLE>
<CAPTION>

                                                                         September 30,         December 31,
                                                                             1998                  1997
                                                                       ------------------    ------------------
<S> <C>
                            Land and buildings on
                                operating leases, less
                                accumulated depreciation
                                and allowance for loss
                                on land and building                         $3,580,196            $3,152,962
                            Net investment in direct
                                financing leases                              3,406,017             1,003,680
                            Cash                                                 18,304                16,481
                            Accrued rental income                                48,509                11,621
                            Other assets                                          3,368                 1,480
                            Liabilities                                         123,346                18,722
                            Partners' capital                                 6,933,048             4,167,502
                            Revenues                                            423,873                82,837
                            Provision for loss on land
                                and building                                   (139,266 )            (147,039 )
                            Net income (loss)                                   222,725              (157,912 )

</TABLE>
                                       8
<PAGE>


                            CNL INCOME FUND III, LTD.
                         (A Florida Limited Partnership)
               NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
           Quarters and Nine Months Ended September 30, 1998 and 1997


3.       Investment in Joint Ventures - Continued:

         The Partnership recognized losses totalling $34,343 and $12,496 for the
         nine months ended September 30, 1998 and 1997, respectively, from these
         joint  ventures,  of which  losses  totaling  $75,617  and $9,494  were
         incurred  during  the  quarters  ended  September  30,  1998 and  1997,
         respectively.

4.        Mortgage Note Receivable:

         In  connection  with the sale of the property in Roswell,  Georgia,  in
         June 1997, the Partnership  accepted a promissory note in the principal
         sum of $685,000  collateralized  by a mortgage on the property.  During
         the nine months ended September 30, 1998, the Partnership collected the
         full amount of the outstanding mortgage note receivable balance.

         The mortgage note receivable consisted of the following at:
<TABLE>
<CAPTION>

                                                                     September 30,           December 31,
                                                                          1998                   1997
                                                                   -------------------     ------------------
<S> <C>
                     Principal balance                               $            --           $    678,730
                     Accrued interest receivable                                  --                  2,957
                                                                     ----------------       ----------------

                                                                     $            --           $    681,687
                                                                     ================       ================
</TABLE>

5.       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,  noncompounded annual return on their adjusted
         capital  contributions  (the "10% Preferred Return") on a noncumulative
         basis.

         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 the 10% Preferred  Return
         on a  cumulative  basis,  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.

                                       9
<PAGE>


                            CNL INCOME FUND III, LTD.
                         (A Florida Limited Partnership)
               NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
           Quarters and Nine Months Ended September 30, 1998 and 1997


5.       Allocations & Distributions - Continued:

         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  nine  months  ended  September  30,  1998  and  1997,  the
         Partnership   declared   distributions   to  the  limited  partners  of
         $2,977,747 and $1,782,000,  respectively ($500,000 and $594,000 for the
         quarters  ended  September  30,  1998  and  1997,  respectively).  This
         represents  distributions  of $59.55  and  $35.64 per unit for the nine
         months  ended  September  30, 1998 and 1997,  respectively  ($10.00 and
         $11.88 per unit for the  quarters  ended  September  30, 1998 and 1997,
         respectively).  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.  This amount was  applied  toward the limited
         partners'  cumulative 10% Preferred Return. No distributions  have been
         made to the general partners to date.

6.       Related Party Transactions:

         An  affiliate  of the  Partnership  is  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
         affiliate  provides 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  cumulative  10%
         Preferred Return,  plus their adjusted capital  contributions.  For the
         nine months ended September 30, 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.

                                       10
<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, 1998, the Partnership owned
28  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 as tenants-in-common.

Liquidity and Capital Resources

         During  the  nine  months  ended  September  30,  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  $1,376,910   and   $1,500,218,
respectively.  The  decrease in cash from  operations  for the nine months ended
September  30, 1998,  is primarily a result of changes in income and expenses as
described  in "Results  of  Operations"  below and changes in the  Partnership's
working capital.

         Other  sources and uses of capital  included the  following  during the
nine months ended September 30, 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
September 30, 1998, the Partnership owned a 25.84% interest in this Property.

         During the nine months ended September 30, 1998, the  Partnership  sold
its Properties in Daytona Beach,  Fernandina Beach and Punta Gorda, Florida, and
Hagerstown,  Maryland, for a total of approximately  $3,280,000 and received net
sales  proceeds  of  $3,214,616,  resulting  in a  total  gain of  $596,586  for
financial reporting purposes.  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.   The  Partnership
distributed  $1,477,747 of the net sales proceeds as a special  distribution  to
the  limited  partners,  used a portion of the net sales  proceeds to acquire an
interest  in RTO Joint  Venture,  as  described  below,  and  intends to use the
remaining  net sales  proceeds to reinvest in  additional  Properties or use for
other Partnership purposes. 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 these sales.


                                       11
<PAGE>


Liquidity and Capital Resources - Continued

         As described  above, in May 1998, the Partnership  entered into a joint
venture, RTO Joint Venture,  with an affiliate of the same general partners,  to
construct  and hold one  restaurant  Property.  As of September  30,  1998,  the
Partnership had contributed  $629,925 to purchase land and pay for  construction
relating  to the  joint  venture.  The  Partnership  has  agreed  to  contribute
approximately  $36,100 in additional  construction  costs to the joint  venture.
When  construction  is completed,  the  Partnership  will have an approximate 47
percent interest in the profits and losses of the joint venture.

         In September 1998, the  Partnership  entered into a new lease agreement
for the Golden Corral Property  located in Stockbridge,  Georgia.  In connection
therewith, the Partnership funded $150,000 in renovation costs.

         In  connection  with the sale of the Property in Roswell,  Georgia,  in
June 1997, the  Partnership  accepted a promissory  note in the principal sum of
$685,000  collateralized  by a mortgage on the Property.  During the nine months
ended  September  30, 1998,  the  Partnership  collected  the full amount of the
outstanding mortgage note receivable balance. The Partnership intends to use the
mortgage  note  proceeds  to  invest  in an  additional  Property  or for  other
Partnership purposes.

         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 September  30, 1998,  the  Partnership  had
$1,726,345 invested in such short-term  investments,  as compared to $493,118 at
December 31, 1997.  The increase in cash and cash  equivalents  at September 30,
1998, is primarily  attributable to the remaining net sales proceeds relating to
the sale of the Properties in Daytona Beach,  Punta Gorda and Fernandina  Beach,
Florida, and Hagerstown, Maryland, at September 30, 1998, and the receipt of the
balance of the mortgage note receivable as described  above. The funds remaining
at September 30, 1998, will be used to pay distributions and other  liabilities,
to make  additional  contributions  to RTO Joint  Venture to pay for  additional
construction  costs  relating to the Property  owned by the joint venture and to
acquire an additional Property.

         Total liabilities of the Partnership,  including distributions payable,
decreased to $696,791 at September 30, 1998, from $729,249 at December 31, 1997.
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  and
proceeds received from the sales of several Properties during 1998 and 1997, the
Partnership  declared  distributions  to  limited  partners  of  $2,977,747  and
$1,782,000 for the nine months ended  September 30, 1998 and 1997,  respectively
($500,000  and  $594,000  for the quarters  ended  September  30, 1998 and 1997,
respectively).  This represents  distributions of $59.55 and $35.64 per unit for
the nine months  ended  September  30, 1998 and 1997,  respectively  ($10.00 and
$11.88  per  unit  for  the  quarters   ended   September  30,  1998  and  1997,
respectively).  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. This
special  distribution  was  effectively  a return  of a portion  of the  limited
partners' investment, although, in accordance with the

                                       12
<PAGE>


Liquidity and Capital Resources - Continued

Partnership agreement, it was applied to the limited partners' unpaid cumulative
preferred return.  As a result of the sale of the Properties,  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 nine months ended September 30, 1998. No distributions  were made to the
general  partners for the quarter and nine months ended  September  30, 1998 and
1997. No amounts  distributed to the limited  partners for the nine months ended
September  30, 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 general  partners  have been  informed by CNL  American  Properties
Fund, Inc.  ("APF"),  an affiliate of the general  partners,  that it intends to
significantly  increase its asset base by proposing to acquire affiliates of the
general partners which have similar restaurant  property  portfolios,  including
the Partnership. APF is a real estate investment trust whose primary business is
the ownership of restaurant properties leased on a long-term, "triple-net" basis
to  operators  of national  and regional  restaurant  chains.  Accordingly,  the
general  partners  anticipate  that  APF  will  make an  offer  to  acquire  the
Partnership  in  exchange  for  securities  of APF.  The general  partners  have
recently retained  financial and legal advisors to assist them in evaluating and
negotiating  any offer that may be proposed by APF.  However,  at this time, APF
has made no such offer. In the event that an offer is made, the general partners
will  evaluate it and if the general  partners  believe  that the offer is worth
pursuing,  the general partners will promptly inform the limited  partners.  Any
agreement  to sell the  Partnership  would be  subject  to the  approval  of the
limited partners in accordance with the terms of the partnership agreement.

         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 nine months ended  September 30, 1997, the  Partnership  and
its consolidated  joint venture,  Tuscawilla Joint Venture,  owned and leased 32
wholly owned Properties  (including five Properties which were sold in 1997) and
during the nine  months  ended  September  30,  1998,  the  Partnership  and its
consolidated   joint  venture  owned  and  leased  27  wholly  owned  Properties
(including four  Properties  which were sold in 1998), to operators of fast-food
and family-style  restaurant  chains. In connection  therewith,  during the nine
months ended September 30, 1998 and 1997, the  Partnership and Tuscawilla  Joint
Venture earned  $1,196,056 and $1,593,167,  respectively,  in rental income from
operating  leases (net of adjustments to accrued rental  income),  earned income
from direct financing leases and contingent  rental income for these Properties,
$355,160 and $494,795 of which was earned  during the quarters  ended  September
30, 1998 and

                                       13
<PAGE>


Results of Operations - Continued

1997, respectively.  The decrease in rental, earned and contingent rental income
during the quarter and nine months ended  September 30, 1998, as compared to the
quarter and nine months ended September 30, 1997, is partially attributable to a
decrease of approximately $73,500 and $325,200, respectively, as a result of the
sales of  Properties  during 1997 and 1998.  The  decrease in rental  income was
partially  offset by an  increase of  approximately  $69,100 for the nine months
ended  September 30, 1998,  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  in  June  1997.  The  Partnership
reinvested  the net sales  proceeds  from the 1997  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,  earned and contingent  rental income also decreased during the
nine  months  ended  September  30,  1998 due to the fact that,  during the 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.  Due to the fact that the  Partnership  had recognized  accrued rental
income since the  inception of these leases  relating to the straight  lining of
future scheduled rent increases in accordance with generally accepted accounting
principles,  the  Partnership  wrote off  approximately  $80,800 of such accrued
rental  income  relating  to  these  Properties  during  the nine  months  ended
September  30,  1998  approximately  $29,500 of which was written off during the
quarter ended  September 30, 1998. The  Partnership is currently  seeking either
replacement tenants or purchasers for these Properties. Rental and earned income
are expected to remain at reduced  amounts  until the  Partnership  executes new
leases for these  Properties or until the  Properties  are sold and the proceeds
from such sales are reinvested in additional Properties.

         Rental and earned  income  during the nine months ended  September  30,
1998 and 1997,  remained at reduced amounts due to the fact that the Partnership
did  not  receive  any  rental  income  relating  to the Po  Folks  Property  in
Hagerstown, Maryland. In June 1998, the Partnership sold the Property to a third
party.  The  Partnership  intends  to  reinvest  the net  sales  proceeds  in an
additional Property.

         During the nine months ended September 30, 1997, the Partnership  owned
and leased one Property  indirectly through a joint venture  arrangement and one
Property as tenants-in-common with an affiliate of the general partners.  During
the nine months ended September 30, 1998, the Partnership owned and leased three
Properties as  tenants-in-common  with  affiliates  of the general  partners and
three Properties  indirectly through joint venture  arrangements.  In connection
therewith,  during  the nine  months  ended  September  30,  1998 and 1997,  the
Partnership recorded a loss of $34,343 and $12,496,  respectively,  attributable
to losses recorded by these joint ventures,  a loss of $75,617 and $9,494 during
the  quarters  ended  September  30,  1998 and 1997,  respectively.  The  losses
recorded  during the quarter and nine months ended  September  30, 1998 and 1997
are primarily  attributable to 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 established an allowance
for doubtful  accounts  during the quarter and nine months ended  September  30,
1997, for past due rental  amounts.  During the nine months ended  September 30,
1998, the joint venture wrote off all  uncollected  balances and  established an
allowance for loss

                                       14
<PAGE>


Results of Operations - Continued

on land and building for its Property in  Titusville,  Florida of  approximately
$139,300.  The allowance  represents the  difference  between the Property's net
carrying value at September 30, 1998,  and the current  estimated net realizable
value  of the  Property.  The  joint  venture  is  currently  seeking  either  a
replacement  tenant or  purchaser  for this  Property.  The losses  recorded  by
Titusville  Joint Venture during the quarter and nine months ended September 30,
1998 and 1997, were partially offset by the fact that the Partnership reinvested
a portion of the net sales  proceeds it received from the 1997 and 1998 sales of
several Properties,  in three Properties with affiliates of the general partners
as  tenants-in-common  and one Property through a joint venture arrangement with
an affiliate of the general partners.

         Operating expenses,  including  depreciation and amortization  expense,
were  $392,662 and $425,173  for the nine months  ended  September  30, 1998 and
1997,  respectively,  of which  $113,310  and  $131,090  were  incurred  for the
quarters  ended  September  30,  1998 and 1997,  respectively.  The  decrease in
operating  expenses during the quarter and nine months ended September 30, 1998,
as  compared  to the  quarter  and nine months  ended  September  30,  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  during  the nine  months
ended  September  30,  1998,  as  described  above  in  "Liquidity  and  Capital
Resources,"  and as a result of the  sales of four  Properties  during  the nine
months ended September 30, 1997, the Partnership  recognized  total gains during
the nine months ended  September  30, 1998 and 1997,  of $583,373 and  $969,052,
respectively, for financial reporting purposes.

         During the nine  months  ended  September  30,  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 represented the difference between the Property's net carrying value at
September  30, 1997 and the  estimated net  realizable  value of this  Property.
During June 1998,  the  Partnership  sold this Property and recognized a gain of
$13,213 for financial reporting purposes.

         In addition,  during the 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 represents the difference between the Property's net carrying value and the
current estimated net realizable value of the Property.

         In May  1998,  the  Financial  Accounting  Standards  Board  reached  a
consensus in EITF 98-9, entitled  "Accounting for Contingent Rent in the Interim
Financial Periods." Adoption of this consensus did not have a material effect on
the Partnership's financial position or results of operations.

         The Year 2000 problem is the result of information  technology  systems
and embedded  systems  (products which are made with  microprocessor  (computer)
chips such as HVAC systems,  physical  security  systems and elevators)  using a
two-digit  format,  as  opposed  to four  digits,  to  indicate  the year.  Such
information  technology and embedded systems may be unable to properly recognize
and process date-sensitive information beginning January 1, 2000.


                                       15
<PAGE>


Results of Operations - Continued

         The  Partnership  does  not have any  information  technology  systems.
Affiliates  of the general  partners  provide all services  requiring the use of
information  technology  systems  pursuant to a  management  agreement  with the
Partnership.  The maintenance of embedded systems,  if any, at the Partnership's
properties is the  responsibility of the tenants of the properties in accordance
with the terms of the Partnership's  leases. The general partners and affiliates
have  established  a  team  dedicated  to  reviewing  the  internal  information
technology systems used in the operation of the Partnership, and the information
technology  and  embedded  systems  and the Year  2000  compliance  plans of the
Partnership's  tenants,   significant  suppliers,   financial  institutions  and
transfer agent.

         The  information  technology  infrastructure  of the  affiliates of the
general  partners  consists of a network of personal  computers and servers that
were  obtained   from  major   suppliers.   The   affiliates   utilize   various
administrative  and financial  software  applications on that  infrastructure to
perform the business functions of the Partnership.  The inability of the general
partners  and  affiliates  to identify  and timely  correct  material  Year 2000
deficiencies  in  the  software  and/or   infrastructure   could  result  in  an
interruption in, or failure of, certain of the Partnership's business activities
or operations.  Accordingly,  the general partners and affiliates have requested
and are evaluating  documentation from the suppliers of the affiliates regarding
the Year  2000  compliance  of  their  products  that  are used in the  business
activities or operations of the  Partnership.  The costs expected to be incurred
by the general  partners and  affiliates to become Year 2000  compliant  will be
incurred by the general  partners and  affiliates;  therefore,  these costs will
have no impact on the Partnership's financial position or results of operations.

         The  Partnership  has  material  third  party  relationships  with  its
tenants,  financial  institutions and transfer agent. The Partnership depends on
its  tenants  for  rents  and  cash  flows,   its  financial   institutions  for
availability  of cash and its  transfer  agent to  maintain  and track  investor
information.  If any of these third parties are unable to meet their obligations
to the  Partnership  because of the Year 2000  deficiencies,  such a failure may
have a material impact on the  Partnership.  Accordingly,  the general  partners
have requested and are evaluating  documentation from the Partnership's tenants,
financial  institutions,   and  transfer  agent  relating  to  their  Year  2000
compliance  plans.  At this time,  the general  partners  have not yet  received
sufficient   certifications   to  be  assured   that  the   tenants,   financial
institutions,  and  transfer  agent  have fully  considered  and  mitigated  any
potential material impact of the Year 2000 deficiencies.  Therefore, the general
partners do not, at this time, know of the potential costs to the Partnership of
any  adverse  impact  or effect of any Year  2000  deficiencies  by these  third
parties.

         The general  partners  currently  expect that all year 2000  compliance
testing  and any  necessary  remedial  measures  on the  information  technology
systems used in the business  activities and operations of the Partnership  will
be completed prior to June 30, 1999.  Based on the progress the general partners
and affiliates  have made in identifying and addressing the  Partnership's  Year
2000 issues and the plan and timeline to complete the  compliance  program,  the
general  partners  do  not  foresee   significant   risks  associated  with  the
Partnership's  Year 2000 compliance at this time.  Because the general  partners
and affiliates  are still  evaluating the status of the systems used in business
activities  and  operations  of the  Partnership  and the  systems  of the third
parties with which

                                       16
<PAGE>


Results of Operations - Continued

the  Partnership  conducts  its  business,  the  general  partners  have not yet
developed a comprehensive  contingency plan and are unable to identify "the most
reasonably  likely worst case  scenario" at this time.  As the general  partners
identify  significant risks related to the Partnership's Year 2000 compliance or
if  the  Partnership's   Year  2000  compliance   program's   progress  deviates
substantially from the anticipated  timeline,  the general partners will develop
appropriate contingency.


                                       17
<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
                      September 30, 1998.

                                       18
<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, 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)