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 June 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 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                   4-5

    Notes to Condensed Financial Statements              6-9

  Item 2.  Management's Discussion and Analysis
             of Financial Condition and
             Results of Operations                       10-15


Part II

  Other Information                                      16


<PAGE>



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


                                            June 30,              December 31,
            ASSETS                            1998                    1997
                                           -----------            -----------

Land and buildings on operating
  leases, less accumulated
  depreciation of $2,749,281 and
  $3,341,624 and allowance for
  loss on land and building of
  $240,663 in 1997                         $11,945,000            $14,635,583
Investment in direct financing
  leases                                       920,135                926,862
Investment in joint ventures                 1,961,584              1,179,762
Mortgage note receivable                       674,944                681,687
Cash and cash equivalents                    1,512,898                493,118
Restricted cash                                     -                 251,879
Receivables, less allowance for
  doubtful accounts of $176,452
  and $154,469                                  74,139                102,420
Prepaid expenses                                 9,998                 14,361
Lease costs, less accumulated
  amortization of $2,762 in 1997                    -                   9,238
Accrued rental income, less
  allowance for doubtful accounts
  of $15,384 in 1997                           122,580                154,738
Other assets                                    29,354                 29,354
                                           -----------            -----------

                                           $17,250,632            $18,479,002
                                           ===========            ===========

LIABILITIES AND PARTNERS' CAPITAL

Accounts payable                           $     2,079            $     5,219
Accrued and escrowed real estate
  taxes payable                                 22,128                 11,897
Distributions payable                          500,000                594,000
Due to related parties                         157,451                 97,388
Rents paid in advance and deposits              26,992                 20,745
                                           -----------            -----------
    Total liabilities                          708,650                729,249

Minority interest                              137,099                138,617

Partners' capital                           16,404,883             17,611,136
                                           -----------            -----------

                                           $17,250,632            $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

<TABLE>
<CAPTION>

                                                           Quarter Ended                      Six Months Ended
                                                              June 30,                           June 30,
                                                      1998             1997              1998              1997
                                                   ----------       ----------        ----------        ----------
<S> <C>
Revenues:
  Rental income from
    operating leases                               $  318,276       $  454,599        $  739,401        $  953,326
  Earned income from direct
    financing leases                                   33,743           34,212            67,609            68,530
  Contingent rental income                             21,053           24,725            33,886            76,516
  Interest and other income                            39,489           33,754            80,671            44,909
                                                   ----------       ----------        ----------        ----------
                                                      412,561          547,290           921,567         1,143,281
                                                   ----------       ----------        ----------        ----------
Expenses:
  General operating and
    administrative                                     38,942           37,223            70,722            73,338
  Professional services                                20,446            7,346            25,056            15,400
  Real estate taxes                                     3,306            4,532             7,535             7,560
  State and other taxes                                   204              644            11,720             9,924
  Depreciation and
    amortization                                       83,902           90,155           164,319           187,861
                                                   ----------       ----------        ----------        ----------
                                                      146,800          139,900           279,352           294,083
                                                   ----------       ----------        ----------        ----------

Income Before Minority
  Interest in Income of Con-
  solidated 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                                   265,761          407,390           642,215           849,198

Minority Interest in Income
  of Consolidated Joint
  Venture                                              (4,236)          (4,352)           (8,581)           (8,581)

Equity in Earnings (Loss) of
  Unconsolidated Joint Ventures                        18,523           (1,488)           41,274            (3,002)

Gain on Sale of Land and
  Buildings                                            13,213          603,857           596,586           969,052

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

Net Income                                         $  293,261       $1,005,407        $1,271,494        $1,773,848
                                                   ==========       ==========        ==========        ==========

Allocation of Net Income:
  General partners                                 $    2,932       $    6,253        $   11,490        $   12,243
  Limited partners                                    290,329          999,154         1,260,004         1,761,605
                                                   ----------       ----------        ----------        ----------

                                                   $  293,261       $1,005,407        $1,271,494        $1,773,848
                                                   ==========       ==========        ==========        ==========

Net Income Per Limited
  Partner Unit                                     $     5.81       $    19.98        $    25.20        $    35.23
                                                   ==========       ==========        ==========        ==========

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

            See accompanying notes to condensed financial statements.

                                        2

<PAGE>



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


                                  Six Months Ended             Year Ended
                                      June 30,                December 31,
                                        1998                      1997
                                  ----------------            -------------

General partners:
  Beginning balance                $   339,611                $   321,305
  Net income                            11,490                     18,306
                                   -----------                -----------
                                       351,101                    339,611
                                   -----------                -----------

Limited partners:
  Beginning balance                 17,271,525                 17,273,996
  Net income                         1,260,004                  2,373,529
  Distributions ($49.55 and
    $47.52 per limited partner
    unit, respectively)             (2,477,747)                (2,376,000)
                                   -----------                -----------
                                    16,053,782                 17,271,525
                                   -----------                -----------

Total partners' capital            $16,404,883                $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


                                                     Six Months Ended
                                                         June 30,
                                               1998                   1997
                                           -----------             -----------
Increase (Decrease) in Cash and
  Cash Equivalents:

    Net Cash Provided by
      Operating Activities                 $   936,758             $   976,409
                                           -----------             -----------

    Cash Flows from Investing
      Activities:
        Proceeds from sale of land
          and buildings                      3,214,616               2,811,159
        Addition to land and
          buildings on operating
          lease                                     -               (1,272,960)
        Investment in joint ventures          (801,682)                     -
        Collections on note
          receivable                             6,557                      -
        Decrease (increase) in
          restricted cash                      245,377                (666,541)
                                           -----------             -----------
            Net cash provided by
              investing activities           2,664,868                 871,658
                                           -----------             -----------

    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                          (2,571,747)             (1,188,000)
        Distributions to holders of
          minority interest                    (10,099)                 (9,982)
                                           -----------             -----------
            Net cash used in
              financing activities          (2,581,846)             (1,197,982)
                                           -----------             -----------

Net Increase in Cash and Cash
  Equivalents                                1,019,780                 650,085

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

Cash and Cash Equivalents at End
  of Period                                $ 1,512,898             $   707,836
                                           ===========             ===========





            See accompanying notes to condensed financial statements.

                                        4

<PAGE>



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


                                                     Six Months Ended
                                                          June 30,
                                               1998                    1997
                                            -----------             -----------
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
                                            ===========             ===========





            See accompanying notes to condensed financial statements.

                                        5

<PAGE>



                            CNL INCOME FUND III, LTD.
                         (A Florida Limited Partnership)
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
              Quarters and Six Months Ended June 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 six months ended June 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.

2.       Land and Buildings on Operating Leases:

         During the six months ended June 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 5).

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.

                                        6

<PAGE>



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


3.       Investment in Joint Ventures - Continued:

         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.
         As of June 30, 1998, the  Partnership  and its  co-venture  partner had
         contributed $386,096 and $437,308,  respectively,  to purchase land and
         pay for  construction  relating  to the  property  owned  by the  joint
         venture.  The  Partnership  and its  co-venture  partner have agreed to
         contribute  approximately  $279,900  and  $317,100,   respectively,  in
         additional  construction costs to the joint venture.  When construction
         is completed, the Partnership expects to 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:

                                                June 30,    December 31,
                                                  1998          1997

                  Land and buildings on
                    operating leases, less
                    accumulated depreciation
                    and allowance for loss
                    on land and building       $3,944,654     $3,152,962
                  Net investment in direct
                    financing leases            2,606,750      1,003,680
                  Cash                             11,242         16,481
                  Accrued rental income            34,150         11,621
                  Other assets                      4,970          1,480
                  Liabilities                      33,482         18,722
                  Partners' capital             6,568,284      4,167,502
                  Revenues                        272,972         82,837
                  Net income (loss)               233,001       (157,912)

         The  Partnership  recognized  income  totalling  $41,274  and a loss of
         $3,002 for the six months  ended June 30, 1998 and 1997,  respectively,
         from these joint ventures,  and recognized income totalling $18,523 and
         a loss of $1,488  during the  quarters  ended  June 30,  1998 and 1997,
         respectively.


                                        7

<PAGE>



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


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").

         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 six months  ended June 30,  1998 and 1997,  the  Partnership
         declared  distributions  to the  limited  partners  of  $2,477,747  and
         $1,188,000,  respectively  ($500,000  and  $594,000  for  each  of  the
         quarters ended June 30, 1998 and 1997,  respectively).  This represents
         distributions  of $49.55 and  $23.76 per unit for the six months  ended
         June 30,  1998 and 1997,  respectively  ($10.00 and $11.88 per unit for
         each of the  quarters  ended  June 30,  1998 and  1997,  respectively).
         Distributions  for  the  six  months  ended  June  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'  10%
         Preferred  Return.  No  distributions  have  been  made to the  general
         partners to date.



                                        8

<PAGE>



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


5.       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  10%  Preferred
         Return, plus their adjusted capital  contributions.  For the six months
         ended June 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.



                                        9

<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 June 30, 1998, the Partnership  owned 27
Properties,  including  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 six months  ended June 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 $936,758 and $976,409,  respectively. The decrease in
cash from  operations  for the six months  ended June 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 six
months ended June 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 June
30, 1998, the Partnership owned an approximate 25.84% interest in this Property.

         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. As of June 30,
1998, the  Partnership and its co-venture  partner had contributed  $386,096 and
$437,308,  respectively,  to purchase land and pay for construction  relating to
the Property  owned by the joint  venture.  The  Partnership  and its co-venture
partner  have  agreed  to  contribute   approximately   $279,900  and  $317,100,
respectively,  in construction costs to the joint venture.  When construction is
completed, the Partnership expects to have an approximate 47 percent interest in
the profits and losses of the joint venture.



                                       10

<PAGE>



Liquidity and Capital Resources - Continued

         During the six months ended June 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  above,  and  intends to use the
remaining net sales proceeds to reinvest in additional Properties.

         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 June 30, 1998, the Partnership had $1,512,898
invested in such short-term investments, as compared to $493,118 at December 31,
1997.  The increase in cash and cash  equivalents at June 30, 1998, is primarily
attributable  to the receipt of net sales  proceeds  relating to the sale of the
Properties in Daytona Beach,  Punta Gorda and  Fernandina  Beach,  Florida,  and
Hagerstown,  Maryland, as described above. The funds remaining at June 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  additional
Properties.

         Total liabilities of the Partnership,  including distributions payable,
decreased  to $708,650 at June 30,  1998,  from  $729,249 at December  31, 1997,
primarily  as a result of a decrease  in  distributions  payable to the  limited
partners at June 30, 1998,  as compared to December  31,  1997.  The decrease in
liabilities is partially offset by an increase in amounts due to related parties
at June 30,  1998,  as compared  to  December  31,  1997,  from the  Partnership
accruing a deferred, subordinated real estate disposition fee as described below
in "Results of Operations."  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
six months ended June 30, 1997,  the loan received  from the  corporate  general
partner  in April  1997,  the  Partnership  declared  distributions  to  limited
partners of $2,477,747 and $1,188,000 for the six months ended June 30, 1998

                                       11

<PAGE>



Liquidity and Capital Resources - Continued

and 1997,  respectively  ($500,000  and $594,000 for each of the quarters  ended
June 30, 1998 and 1997,  respectively).  This represents distributions of $49.55
and  $23.76  per  unit  for the  six  months  ended  June  30,  1998  and  1997,
respectively ($10.00 and $11.88 per unit for each of the quarters ended June 30,
1998 and 1997,  respectively).  Distributions  for the six months ended June 30,
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.
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. 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 six months ended June 30,
1998. No distributions were made to the general partners for the quarter and six
months  ended June 30,  1998 and 1997.  No amounts  distributed  to the  limited
partners for the six months ended June 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 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 six months  ended June 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 six months ended June 30, 1998, the Partnership and its  consolidated  joint
venture owned and leased 31 wholly owned  Properties  (including four Properties
sold in 1998) to operators of fast-food and family-style  restaurant  chains. In
connection  therewith,  during the six months ended June 30, 1998 and 1997,  the
Partnership  and  Tuscawilla  Joint  Venture  earned  $807,010  and  $1,021,856,
respectively,  in rental income from operating leases and earned income from the
direct financing leases for these Properties, $352,019 and $488,811 of which was
earned  during the  quarters  ended June 30,  1998 and 1997,  respectively.  The
decrease in rental and earned  income  during the  quarter and six months  ended
June 30, 1998, as compared to the quarter and six months ended June

                                       12

<PAGE>



Results of Operations - Continued

30, 1997, is partially  attributable to a decrease of approximately  $90,500 and
$206,800,  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 $30,400 and $69,200,  respectively, for the quarter and six months
ended June 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 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  also  decreased  during the  quarter and six
months ended June 30, 1998 due to the fact that the  Partnership  terminated its
lease with the tenant of the Property in Canton Township,  Michigan.  Due to the
fact  that the  Partnership  had  recognized  accrued  rental  income  since the
inception of the lease relating to the straight lining of future  scheduled rent
increases in accordance  with  generally  accepted  accounting  principles,  the
Partnership  wrote off  approximately  $59,000  of such  accrued  rental  income
relating to this Property during the quarter and six months ended June 30, 1998.
In June 1998, the Partnership  entered into a new lease for this Property with a
new tenant to operate the Property as a Shell's Seafood  Restaurant.  The tenant
has agreed to fund all costs to renovate  this  Property and rent is expected to
commence no later than December 1998.

         Rental and earned  income during the six months ended June 30, 1998 and
1997,  continued  to  remain  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 six months  ended June 30,  1998 and 1997,  the  Partnership
also earned  $33,886 and $76,516,  respectively,  in contingent  rental  income,
$21,053 and $24,725 of which was earned during the quarters  ended June 30, 1998
and 1997, respectively.  The decrease in contingent rental income during the six
months ended June 30,  1998,  as compared to the six months ended June 30, 1997,
is primarily  attributable to the sale of three  Properties,  subsequent to June
30, 1997, the leases of which require the payment of contingent rent.

         In addition,  during the six months  ended June 30, 1998 and 1997,  the
Partnership  earned  $80,671 and  $44,909,  respectively,  in interest and other
income,  $39,489 and $33,754 of which was earned during the quarters  ended June
30, 1998 and 1997,  respectively.  The  increase in  interest  and other  income
during the



                                       13

<PAGE>



Results of Operations - Continued

six months  ended June 30,  1998,  was  primarily  attributable  to the interest
earned on the mortgage note  receivable  accepted in connection with the sale of
the Property in Roswell, Georgia, in 1997.

         During the six months ended June 30, 1997,  the  Partnership  owned and
leased one Property indirectly through a joint venture  arrangement.  During the
six  months  ended  June 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 six months ended June 30, 1998 and 1997, the  Partnership
earned  income  of  $41,274  and  recorded  a  loss  of  $3,002,   respectively,
attributable  to net income and losses  recorded  by these joint  ventures,  and
recognized  income  totalling  $18,523 and a loss of $1,488  during the quarters
ended June 30, 1998 and 1997, respectively. The increase in net income earned by
joint ventures during the six months ended June 30, 1998, as compared to the six
months ended June 30, 1997, is partially due to the fact that subsequent to June
30, 1997,  the  Partnership  reinvested  a portion of the net sales  proceeds it
received  from the 1997  sales of  several  Properties  in two  Properties  with
affiliates  of the  general  partners as  tenants-in-common.  In  addition,  the
increase in net income earned by joint ventures during the six months ended June
30, 1998, is partially attributable to the fact that during the six months ended
June 30, 1998,  the  Partnership  reinvested  net sales  proceeds  from sales of
Properties  in 1997 and 1998,  in a Property  in  Overland  Park,  Kansas,  with
affiliates  of the  general  partners  as  tenants-in-common  and  in RTO  Joint
Venture,  with an  affiliate  of the  Partnership  which  has the  same  general
partners, as described above in "Liquidity and Capital Resources."

         The increase in net income earned by joint ventures  during the quarter
and six months  ended June 30,  1998,  was  partially  offset by, and the losses
during  the  quarter  and  six  months  ended  June  30,  1997,   was  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 six months  ended June 30,  1997,  for past due
rental amounts. In addition,  the joint venture recorded real estate tax expense
during the six months ended June 30, 1998.  No such expense was incurred  during
the six months  ended June 30,  1997.  The joint  venture is  currently  seeking
either a replacement tenant or purchaser for this Property.

         Operating expenses,  including  depreciation and amortization  expense,
were  $279,352  and  $294,083  for the six months  ended June 30, 1998 and 1997,
respectively,  of which  $146,800  and $139,900  were  incurred for the quarters
ended June 30, 1998 and 1997,  respectively.  The decrease in operating expenses
during the six months ended June 30, 1998, as compared to the six months ended


                                       14

<PAGE>



Results of Operations - Continued

June 30, 1997, is partially attributable to, and the increase during the quarter
ended June 30, 1998 as compared to the quarter ended June 30, 1997, is partially
offset  by, 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 six  months
ended June 30, 1998, as described  above in "Liquidity  and Capital  Resources,"
and as a result of the sales of three  Properties  during the six  months  ended
June 30,  1997,  the  Partnership  recognized  total gains during the six months
ended June 30,  1998 and 1997,  of  $596,586  and  $969,052,  respectively,  for
financial  reporting  purposes,  $13,213 and  $603,857 of which were  recognized
during the quarters ended June 30, 1998 and 1997, respectively.

         In addition, during the six months ended June 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  carrying value at
June 30, 1997 and the estimated  net  realizable  value,  based on the estimated
sales price of this Property. This Property was sold in June 1998.





                                       15

<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 June 30, 1998.

                                       16

<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 28th day of July, 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)