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, 1997

                                       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 juris-             (I.R.S. Employer
   diction of incorporation           Identification No.)
      or organization)


400 E. South Street, #500
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                    6-10

  Item 2.  Management's Discussion and Analysis
             of Financial Condition and
             Results of Operations                             11-18


Part II

  Other Information                                            19


<PAGE>



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


                                      September 30,            December 31,
            ASSETS                        1997                     1996
                                      -------------            --------

Land and buildings on operating
  leases, less accumulated
  depreciation and allowance for
  loss on land and building            $ 14,883,938            $16,483,532
Investment in direct financing
  leases                                    930,045                938,918
Investment in joint venture               1,126,883                643,912
Mortgage note receivable                    684,540                     -
Cash and cash equivalents                   630,658                 57,751
Restricted cash                             165,119                     -
Receivables, less allowance for
  doubtful accounts of $17,816
  and $70,142                               209,295                321,831
Prepaid expenses                             20,686                  6,898
Lease costs, less accumulated
  amortization of $2,612 and
  $2,162                                      9,388                  9,838
Accrued rental income                       143,380                114,738
Other assets                                 29,355                 31,489
                                        -----------            -----------

                                        $18,833,287            $18,608,907
                                        ===========            ===========

LIABILITIES AND PARTNERS' CAPITAL

Accounts payable                        $     1,867            $    14,183
Accrued and escrowed real estate
  taxes payable                              14,008                 72,827
Distributions payable                       594,000                594,000
Due to related parties                       78,520                102,859
Rents paid in advance and deposits           31,448                 88,325
                                        -----------            -----------
    Total liabilities                       719,843                872,194

Commitment (Note 6)

Minority interest                           139,314                141,412

Partners' capital                        17,974,130             17,595,301
                                        -----------            -----------

                                        $18,833,287            $18,608,907
                                        ===========            ===========








            See accompanying notes to condensed financial statements.

                                        1

<PAGE>



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

<TABLE>
<CAPTION>

                                                               Quarter Ended                   Nine Months Ended
                                                               September 30,                   September 30,
                                                         1997          1996             1997             1996
                                                       --------      --------        ----------       -------
<S> <C>
Revenues:
  Rental income from operating
    leases                                             $450,596      $523,579        $1,403,922       $1,576,386
  Earned income from direct
    financing leases                                     34,101        17,837           102,631           53,659
  Contingent rental income                               10,098         8,235            86,614           64,431
  Interest and other income                              37,122         7,851            82,031           24,557
                                                       --------      --------        ----------       ----------
                                                        531,917       557,502         1,675,198        1,719,033
                                                       --------      --------        ----------       ----------
Expenses:
  General operating and
    administrative                                       31,361        34,485           104,699          112,065
  Professional services                                   4,583        10,229            19,983           34,008
  Bad debt expense                                           -          1,794                 -            1,794
  Real estate taxes                                       4,229         3,308            11,789           28,246
  State and other taxes                                      -             -              9,924           11,973
  Depreciation and amortization                          90,917       107,844           278,778          323,524
                                                       --------      --------        ----------       ----------
                                                        131,090       157,660           425,173          511,610
                                                       --------      --------        ----------       ----------

Income Before Minority Interest
  in Income of Consolidated
  Joint Venture, Equity in
  Earnings (Loss) of Unconsoli-
  dated Joint Venture, Gain on
  Sale of Land and Buildings
  and Provision for Loss on
  Land and Building                                     400,827       399,842         1,250,025        1,207,423

Minority Interest in Income of
  Consolidated Joint Venture                             (4,352)       (4,352)          (12,933)         (12,930)

Equity in Earnings (Loss) of
  Unconsolidated Joint Venture                           (9,494)        3,330           (12,496)           8,372

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

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

Net Income                                             $386,981      $398,820        $2,160,829       $1,202,865
                                                       ========      ========        ==========       ==========

Allocation of Net Income:
  General partners                                     $  3,870      $  3,988        $   16,113       $   12,029
  Limited partners                                      383,111       394,832         2,144,716        1,190,836
                                                       --------      --------        ----------       ----------

                                                       $386,981      $398,820        $2,160,829       $1,202,865
                                                       ========      ========        ==========       ==========

Net Income Per Limited
  Partner Unit                                         $   7.66      $   7.90        $    42.89       $    23.82
                                                       ========      ========        ==========       ==========

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
<TABLE>
<CAPTION>


                                                                       Nine Months Ended             Year Ended
                                                                          September 30,             December 31,
                                                                              1997                      1996
                                                                        ----------------            --------
<S> <C>
General partners:
  Beginning balance                                                      $   321,305                $   303,158
  Net income                                                                  16,113                     18,147
                                                                         -----------                -----------
                                                                             337,418                    321,305
                                                                         -----------                -----------

Limited partners:
  Beginning balance                                                       17,273,996                 17,853,486
  Net income                                                               2,144,716                  1,796,510
  Distributions ($35.64 and
    $47.52 per limited partner
    unit, respectively)                                                   (1,782,000)                (2,376,000    )
                                                                         -----------                -----------
                                                                          17,636,712                 17,273,996
                                                                         -----------                -----------

Total partners' capital                                                  $17,974,130                $17,595,301
                                                                         ===========                ===========



</TABLE>
            See accompanying notes to condensed financial statements.

                                        3

<PAGE>



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


                                                                                            Nine Months Ended
                                                                                              September 30,
                                                                                 1997                   1996
                                                                             -----------             ----------
<S> <C>
Increase (Decrease) in Cash and Cash
  Equivalents:

    Net Cash Provided by Operating
      Activities                                                             $ 1,500,218             $ 1,614,892
                                                                             -----------             -----------

    Cash Flows from Investing
      Activities:
        Proceeds from sale of land and
          buildings                                                            2,811,159                      -
        Addition to land and building
          on operating lease                                                  (1,272,960)                     -
        Investment in joint venture                                             (511,667)                     -
        Collections on mortgage note
          receivable                                                               3,100                      -
        Increase in restricted cash                                             (159,912)                     -
        Increase in other assets                                                      -                   (2,135)
        Deposit received on sale of
          land parcel                                                                 -                   51,400
                                                                             -----------             -----------
            Net cash provided by
              investing activities                                               869,720                  49,265
                                                                             -----------             -----------

    Cash Flows from Financing
      Activities:
        Proceeds from loans from
          corporate general partner                                               37,000                 372,400
        Repayment of loans from
          corporate general partner                                              (37,000)               (372,400)
        Distributions to limited
          partners                                                            (1,782,000)             (1,782,000)
        Distributions to holders of
          minority interest                                                      (15,031)                (15,033)
                                                                             -----------             -----------
            Net cash used in
              financing activities                                            (1,797,031)             (1,797,033)
                                                                             -----------             -----------

Net Increase (Decrease) in Cash and
  Cash Equivalents                                                               572,907                (132,876)

Cash and Cash Equivalents at Beginning
  of Period                                                                       57,751                 312,814
                                                                             -----------             -----------

Cash and Cash Equivalents at End of
  Period                                                                     $   630,658             $   179,938
                                                                             ===========             ===========



</TABLE>


            See accompanying notes to condensed 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,
                                                                                 1997                   1996
                                                                              ----------             ----------
<S> <C>
Supplemental Schedule of Non-Cash
  Investing and Financing Activities:

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

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



</TABLE>
            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 Nine Months Ended September 30, 1997
                                    and 1996


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,  1997,  may not be
         indicative  of the  results  that may be  expected  for the year ending
         December  31, 1997.  Amounts as of December  31, 1996,  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, 1996.

         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:

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

                                                                     September 30,             December 31,
                                                                          1997                    1996
                                                                    --------------            -------------
<S> <C>

                  Land                                                 $ 7,385,673             $ 7,835,279
                  Buildings                                             11,037,510              12,467,020
                                                                       -----------             -----------
                                                                        18,423,183              20,302,299
                  Less accumulated
                    depreciation                                        (3,298,582)             (3,610,923         )
                                                                       -----------             -----------
                                                                        15,124,601              16,691,376
                  Less allowance for loss
                    on land and building                                  (240,663)               (207,844         )
                                                                       -----------             -----------

                                                                       $14,883,938             $16,483,532
                                                                       ===========             ===========


</TABLE>



                                        6

<PAGE>



                            CNL INCOME FUND III, LTD.
                         (A Florida Limited Partnership)
                    NOTES TO CONDENSED FINANCIAL STATEMENTS -
               CONTINUED Quarters and Nine Months Ended September
                                30, 1997 and 1996


2.       Land and Buildings on Operating Leases - Continued:

         As of  December  31,  1996,  the  Partnership  continued  to  record an
         allowance  for loss on land and  building in the amount of $207,844 for
         financial  reporting  purposes for the Po Folks property in Hagerstown,
         Maryland.  In addition,  as of September 30, 1997, the  Partnership had
         increased  the allowance for loss on land and building by an additional
         $32,819 for such  property.  The allowance  represents  the  difference
         between  the  (i)  property's  carrying  value  and  (ii)  the  general
         partners' estimate of the net realizable value of the property based on
         the  general  partners'   anticipated  sales  price  relating  to  this
         property.

         In  January  1997,  the  Partnership  sold  its  property  in  Chicago,
         Illinois,  to an unrelated  third party,  for $505,000 and received net
         sales proceeds of $481,268, resulting in a gain of $3,827 for financial
         reporting purposes.

         In March 1997, the Partnership sold its property in Bradenton, Florida,
         to the tenant,  for  $1,332,154 and received net sales proceeds (net of
         $4,330 which represents real estate tax amounts due from the tenant) of
         $1,305,671,  resulting  in a gain of $361,368 for  financial  reporting
         purposes.  This property was originally  acquired by the Partnership in
         June  1988  and  had a  cost  of  approximately  $1,080,500,  excluding
         acquisition fees and miscellaneous acquisition expenses; therefore, the
         Partnership sold the property for  approximately  $225,200 in excess of
         its original  purchase price. In June 1997, the Partnership  reinvested
         approximately  $1,276,000  of the  net  sales  proceeds  received  in a
         Darryl's property in Fayetteville, North Carolina.

         In April 1997, the Partnership sold its property in Kissimmee, Florida,
         for $692,400 and received net sales proceeds of $671,209,  resulting in
         a gain of $271,929 for financial reporting purposes.  This property was
         originally  acquired by the Partnership in February 1988 and had a cost
         of approximately $474,800, excluding acquisition fees and miscellaneous
         acquisition expenses;  therefore, the Partnership sold the property for
         approximately  $196,400 in excess of its original  purchase  price.  In
         July 1997, the Partnership  reinvested  approximately $511,700 of these
         net sales proceeds in an IHOP property located in Englewood,  Colorado,
         as tenants-in-common, with an affiliate of the general partners.
         (see Note 3).

                                        7

<PAGE>



                            CNL INCOME FUND III, LTD.
                         (A Florida Limited Partnership)
                    NOTES TO CONDENSED FINANCIAL STATEMENTS -
               CONTINUED Quarters and Nine Months Ended September
                                30, 1997 and 1996


2.       Land and Buildings on Operating Leases - Continued:

         In addition, in April 1996, the Partnership received $51,400 as partial
         settlement in a right of way taking relating to a parcel of land of the
         property  in Plant  City,  Florida.  In  April  1997,  the  Partnership
         received the remaining  proceeds of $73,600  finalizing the sale of the
         land parcel. In connection therewith, the Partnership recognized a gain
         of $94,320 for financial reporting purposes.

         In  addition,  in June  1997,  the  Partnership  sold its  property  in
         Roswell, Georgia, to an unrelated third party for $985,000 and received
         net sales  proceeds of  $942,981,  resulting  in a gain of $237,608 for
         financial reporting purposes.  This property was originally acquired by
         the Partnership in June 1988 and had a cost of approximately  $775,200,
         excluding  acquisition  fees and  miscellaneous  acquisition  expenses;
         therefore, the Partnership sold the property for approximately $167,800
         in excess of its original purchase price. In connection therewith,  the
         Partnership  received $257,981 in cash and accepted the remaining sales
         proceeds in the form of a promissory note (Note 5).

3.       Investment in Joint Ventures:

         In July  1997,  the  Partnership  acquired  an  approximate  33 percent
         interest  in an  IHOP  property  located  in  Englewood,  Colorado,  as
         tenants-in-common  with  an  affiliate  of the  general  partners.  The
         Partnership  accounts for its  investment  in this  property  using the
         equity method since the  Partnership  shares control with an affiliate,
         and amounts  relating to its  investment  are included in investment in
         joint ventures.



                                        8

<PAGE>



                            CNL INCOME FUND III, LTD.
                         (A Florida Limited Partnership)
                                NOTES  TO  CONDENSED   FINANCIAL   STATEMENTS  -
                            CONTINUED  Quarters and Nine Months Ended  September
                            30, 1997 and 1996


3.       Investment in Joint Ventures - Continued:

         The following presents the combined,  condensed  financial  information
         for all of the Partnership's investments in joint ventures at:
<TABLE>
<CAPTION>

                                                                          September 30,            December 31,
                                                                              1997                     1996
                                                                         ---------------           -----------
<S> <C>
                  Land and building on
                    operating leases, less
                    accumulated depreciation                                 $1,355,887              $  822,072
                  Net investment in direct
                    financing lease                                           1,006,523                      -
                  Cash                                                           16,481                   9,677
                  Receivables                                                     3,595                  11,233
                  Accrued rental income                                          20,970                  17,700
                  Lease costs                                                    25,000                      -
                  Other assets                                                       -                   29,631
                  Liabilities                                                    23,708                   9,665
                  Partners' capital                                           2,404,748                 880,648
                  Revenues                                                       39,767                  51,778
                  Net income                                                      3,089                  15,995
</TABLE>

         The  Partnership   recognized  a  loss  totalling  $12,496  and  income
         totalling $8,372 for the nine months ended September 30, 1997 and 1996,
         respectively,  from these joint ventures,  a loss totalling  $9,494 and
         income totalling $3,330 of which was recorded during the quarters ended
         September 30, 1997 and 1996, respectively.

4.       Restricted Cash:

         As of September 30, 1997,  net sales proceeds of $159,912 from the sale
         of the property in Kissimmee, Florida, plus accrued interest of $5,207,
         were being  held in an  interest-bearing  escrow  account  pending  the
         release of funds by the escrow agent to acquire an additional  property
         on behalf of the Partnership.

5.       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.  The
         promissory  note bears interest at a rate of nine percent per annum and
         is being  collected  in 36 monthly  installments  of $6,163,  including
         interest, with a balloon payment of $642,798 due in July 2000.



                                        9

<PAGE>



                            CNL INCOME FUND III, LTD.
                         (A Florida Limited Partnership)
                                NOTES  TO  CONDENSED   FINANCIAL   STATEMENTS  -
                            CONTINUED  Quarters and Nine Months Ended  September
                            30, 1997 and 1996


5.       Mortgage Note Receivable - Continued:

         The mortgage  note  receivable  consisted of the following at September
         30:

                                           1997                    1996
                                       ------------             ----------

                  Principal balance    $    681,900             $        -
                  Accrued interest
                    receivable                2,640                      -
                                       ------------             ----------

                                       $    684,540             $        -
                                       ============             ==========

         The  general  partners  believe  that the  estimated  fair value of the
         mortgage  note  receivable  at  September  30,  1997  approximates  the
         outstanding  principal amount based on estimated current rates at which
         similar  loans would be made to borrowers  with similar  credit and for
         similar maturities.

6.       Commitment:

         In September  1997,  the  Partnership  entered into a purchase and sale
         agreement with the tenant to sell the Wendy's property located in Mason
         City,  Iowa. The general  partners  believe that the anticipated  sales
         price for this property  exceeds the carrying cost  associated with the
         property.  The sale of this  property  had not occurred as of September
         30, 1997.

7.       Subsequent Event:

         In October 1997, the  Partnership  entered into a promissory  note with
         the  corporate  general  partner for a loan in the amount of $80,000 in
         connection  with  the  operations  of  the  Partnership.  The  loan  is
         uncollateralized, non-interest bearing and due on demand.

                                       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, 1997, the Partnership owned
30 Properties,  including interests in two Properties owned by joint ventures in
which the  Partnership is a co-venturer and one Property owned with an affiliate
as tenants-in-common.

Liquidity and Capital Resources

         The  Partnership's  primary source of capital for the nine months ended
September  30, 1997 and 1996,  was cash from  operations  (which  includes  cash
received from tenants, distributions from joint ventures, and interest and other
income received,  less cash paid for expenses).  In addition,  another source of
capital for the nine months ended September 30, 1997, included proceeds from the
sales of Properties, as discussed below. Cash from operations was $1,500,218 and
$1,614,892 for the nine months ended September 30, 1997 and 1996,  respectively.
The decrease in cash from  operations  for the nine months ended  September  30,
1997, is primarily a result of changes in the Partnership's working capital.

         Other  sources and uses of capital  included the  following  during the
nine months ended September 30, 1997.

         In  January  1997,  the  Partnership  sold  its  Property  in  Chicago,
Illinois,  to an  unrelated  third  party,  for  $505,000 and received net sales
proceeds of  $481,268,  resulting  in a gain of $3,827 for  financial  reporting
purposes.  The  Partnership  used  $452,000  of the net  sales  proceeds  to pay
liabilities of the Partnership, including quarterly distributions to the limited
partners.  The balance of the funds were used to pay delinquent  prior year real
estate  taxes on this  Property  accrued by the  Partnership  as a result of the
former tenant declaring bankruptcy.

         In March 1997, the Partnership sold its Property in Bradenton, Florida,
to the tenant,  for  $1,332,154  and received net sales  proceeds (net of $4,330
which  represents  real  estate tax  amounts  due from  tenant)  of  $1,305,671,
resulting in a gain of $361,368 for financial reporting purposes.  This Property
was  originally  acquired  by the  Partnership  in June  1988  and had a cost of
approximately   $1,080,500,   excluding   acquisition  fees  and   miscellaneous
acquisition  expenses;   therefore,   the  Partnership  sold  the  Property  for
approximately  $225,200 in excess of its original  purchase price. In June 1997,
the Partnership  reinvested  approximately  $1,276,000 of the net sales proceeds
received in a Darryl's Property in Fayetteville, North Carolina. The Partnership

                                       11

<PAGE>



Liquidity and Capital Resources - Continued

intends to use the remaining net sales proceeds for other Partnership  purposes.
The  general  partners  believe  that the  transaction,  or a  portion  thereof,
relating to the sale of the Property in Bradenton, Florida, and the reinvestment
of the proceeds in a Darryl's  Property in  Fayetteville,  North Carolina,  will
qualify as a like-kind exchange transaction for federal income tax purposes.

         In April 1997, the Partnership sold its Property in Kissimmee, Florida,
to an  unrelated  third party,  for $692,400 and received net sales  proceeds of
$671,209, resulting in a gain of $271,929 for financial reporting purposes. This
Property was originally acquired by the Partnership in March 1988 and had a cost
of  approximately   $474,800,   excluding  acquisition  fees  and  miscellaneous
acquisition  expenses;   therefore,   the  Partnership  sold  the  Property  for
approximately  $196,400 in excess of its original  purchase price. In July 1997,
the Partnership reinvested approximately $511,700 of these net sales proceeds in
an IHOP Property located in Englewood,  Colorado,  as tenants-in-common  with an
affiliate of the general partners. In connection therewith,  the Partnership and
the affiliate  entered into an agreement  whereby each co-venturer will share in
the  profits  and losses of the  Property in  proportion  to each  co-venturer's
percentage  interest.  As of  September  30,  1997,  the  Partnership  owned  an
approximate  33 percent  interest in the Property.  As of September 30, 1997 the
remaining net sales proceeds of $159,912 plus accrued  interest of $5,207,  were
being held in an interest-bearing escrow account pending the release of funds by
the escrow agent to acquire an additional Property. The general partners believe
that the transaction, or a portion thereof, relating to the sale of the Property
in Kissimmee,  Florida, and the reinvestment of the proceeds in an IHOP Property
in Englewood,  Colorado,  will qualify as a like-kind  exchange  transaction for
federal income tax purposes.

         In addition, in April 1996, the Partnership received $51,400 as partial
settlement in a right of way taking relating to a parcel of land of the Property
in Plant City,  Florida.  In April 1997, the Partnership  received the remaining
proceeds  of  $73,600  finalizing  the sale of the land  parcel.  In  connection
therewith,  the Partnership recognized a gain of $94,320 for financial reporting
purposes.

         In  addition,  in June  1997,  the  Partnership  sold its  Property  in
Roswell,  Georgia,  to an  unrelated  third party for  $985,000 and received net
sales  proceeds  of  $942,981,  resulting  in a gain of $237,608  for  financial
reporting purposes.  This Property was originally acquired by the Partnership in
June 1988 and had a cost of approximately  $775,200,  excluding acquisition fees
and  miscellaneous  acquisition  expenses;  therefore,  the Partnership sold the
Property for approximately $167,800 in excess of its original purchase price. In
connection therewith, the Partnership received $257,981 in cash and accepted the
remaining  sales proceeds in the form of a promissory  note in the principal sum
of $685,000,

                                       12

<PAGE>



Liquidity and Capital Resources - Continued

collateralized by a mortgage on the Property. The promissory note bears interest
at a rate of nine  percent  per  annum  and is  being  collected  in 36  monthly
installments of $6,163,  including interest,  with a balloon payment of $642,798
due in July 2000. Net sales  proceeds of $257,981  received in cash and proceeds
received  from  the  collection  of  this  promissory  note  will be used to pay
liabilities of the Partnership, including quarterly distributions to the Limited
Partners,  reinvested in an additional  Property,  or used for other Partnership
purposes.

         In April 1997, the Partnership  entered into a promissory note with the
corporate general partner for a loan in the amount of $37,000 in connection with
the operations of the Partnership.  The note was uncollateralized,  non-interest
bearing and due on demand.  As of September 30, 1997, the Partnership had repaid
the loan in full to the corporate general partner. In addition, in October 1997,
the  Partnership  entered  into a  promissory  note with the  corporate  general
partner for a loan in the amount of $80,000 in connection with the operations of
the Partnership.  The loan is uncollateralized,  non-interest bearing and due on
demand.

         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, 1997,  the  Partnership  had
$630,658  invested  in such  short-term  investments,  as compared to $57,751 at
December 31, 1996. The increase in cash and cash equivalents for the nine months
ended September 30, 1997, is primarily  attributable to the receipt of a portion
of the net sales  proceeds  relating to the sale of the  Properties  in Roswell,
Georgia,  Bradenton,  Florida, and a land parcel sale in Plant City, Florida, as
described above. The funds remaining at September 30, 1997, will be used towards
the payment of distributions and other liabilities.

         Total liabilities of the Partnership,  including distributions payable,
decreased to $719,843 at September 30, 1997, from $872,194 at December 31, 1996,
partially as a result of a decrease in amounts due to related  parties and rents
paid in advance  during the nine months ended  September  30, 1997. In addition,
total liabilities decreased during the nine months ended September 30, 1997, due
to the fact that the Partnership paid amounts previously accrued for real estate
taxes relating to the Denny's and Po Folks  Properties in Hagerstown,  Maryland,
and the Wendy's  Property in Chicago,  Illinois.  Liabilities  at September  30,
1997, to the extent they exceed cash and cash equivalents at September 30, 1997,
will be paid from future cash from  operations  and net sales  proceeds from the
sales of  Properties,  as described  above,  the loan  received from the general
partner in October 1997,  and, in the event the general  partners  elect to make
additional  capital  contributions  or loans  to the  Partnership,  from  future
general partner capital contributions or loans.



                                       13

<PAGE>



Liquidity and Capital Resources - Continued

         In September  1997,  the  Partnership  entered into a purchase and sale
agreement  with the tenant to sell the Wendy's  Property  located in Mason City,
Iowa. The general  partners  believe that the  anticipated  sales price for this
Property  exceeds the carrying cost  associated  with the Property.  The sale of
this Property had not occurred as of September 30, 1997.

         Based on current and anticipated future cash from operations, the loans
received from the corporate  general partner in April and October 1997, and, for
the nine months ended  September 30, 1997,  proceeds  received from the sales of
the Properties in Chicago, Illinois, and Roswell, Georgia, and proceeds from the
right of way  taking  relating  to the  Property  in Plant  City,  Florida,  the
Partnership declared distributions to limited partners of $1,782,000 for each of
the nine months  ended  September  30, 1997 and 1996  ($594,000  for each of the
quarters ended September 30, 1997 and 1996).  This represents  distributions for
each  applicable  nine  months  of  $35.64  per unit  ($11.88  per unit for each
applicable quarter).  No distributions were made to the general partners for the
quarters  and nine  months  ended  September  30,  1997  and  1996.  No  amounts
distributed  or to be  distributed  to the limited  partners for the nine months
ended  September  30, 1997 and 1996,  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 nine months ended  September 30, 1996, the  Partnership  and
its consolidated  joint venture,  Tuscawilla Joint Venture,  owned and leased 31
wholly owned Properties and during the nine months ended September 30, 1997, the
Partnership and its consolidated  joint venture owned and leased 32 wholly owned
Properties (including four Properties in Chicago, Illinois,  Bradenton, Florida,
Kissimmee,  Florida, and Roswell,  Georgia,  which were sold in January,  March,
April and June 1997,  respectively)  to operators of fast-food and  family-style
restaurant  chains.  In  connection  therewith,  during  the nine  months  ended
September 30, 1997 and 1996, the Partnership and Tuscawilla Joint Venture earned
$1,506,553 and $1,630,045,  respectively, in rental income from operating leases
and earned income from the direct financing leases

                                       14

<PAGE>



Results of Operations - Continued

for these  Properties,  $484,697  and  $541,416  of which was earned  during the
quarters ended September 30, 1997 and 1996, respectively. The decrease in rental
and earned income  during the quarter and nine months ended  September 30, 1997,
as  compared  to the  quarter  and nine months  ended  September  30,  1996,  is
primarily  attributable  to a decrease of  approximately  $76,600 and  $144,500,
respectively,  as a result of the sales of the Properties in Chicago,  Illinois,
Bradenton, Florida, Kissimmee, Florida, and Roswell, Georgia, in January, March,
April and June 1997, respectively.

         In  addition,  the  decrease  in rental  and earned  income  during the
quarter and nine months ended September 30, 1997, as compared to the quarter and
nine  months  ended  September  30,  1996,  is  partially  attributable  to  the
Partnership  increasing  its  allowance for doubtful  accounts by  approximately
$11,500  for rental  amounts  relating  to the Red Oaks  Steakhouse  Property in
Canton  Township,   Michigan,  due  to  financial  difficulties  the  tenant  is
experiencing.  No such  allowance  was  established  during the quarter and nine
months ended September 30, 1996.

         The  decrease in rental and earned  income  during the quarter and nine
months ended September 30, 1997, was partially  offset by an increase during the
quarter and nine months ended September 30, 1997, of  approximately  $33,500 and
$40,800,  respectively,  as a result of the purchase of the Darryl's Property in
Fayetteville,  North  Carolina,  in June 1997,  from the  majority  of the sales
proceeds of the Property in Bradenton,  Florida.  The general  partners  believe
that the  decrease  in rental and  earned  income  will be further  offset by an
increase in rental and earned income  resulting from the reinvestment of the net
sales proceeds  received from the sales of the Properties in Kissimmee,  Florida
and Roswell,  Georgia, and the remaining net sales proceeds from the sale of the
Property in Bradenton, Florida.

         Rental and earned income during the quarters  ended  September 30, 1997
and  1996,  continued  to  remain at  reduced  amounts  due to the fact that the
Partnership is not receiving any rental income relating to the Po Folks Property
in  Hagerstown,  Maryland.  The  Partnership  is currently  seeking a buyer or a
replacement tenant for this Property.

         During  the  nine  months  ended  September  30,  1997  and  1996,  the
Partnership also earned $86,614 and $64,431,  respectively, in contingent rental
income,  $10,098  and  $8,235 of which was  earned  during  the  quarters  ended
September 30, 1997 and 1996,  respectively.  The increase in  contingent  rental
income   during  the  nine  months  ended   September  30,  1997,  is  primarily
attributable  to  increases  in  gross  sales  relating  to  certain  restaurant
Properties required to pay contingent rent.



                                       15

<PAGE>



Results of Operations - Continued

         In addition,  during the nine months ended September 30, 1997 and 1996,
the Partnership earned $82,031 and $24,557,  respectively, in interest and other
income,  $37,122  and  $7,851 of which was  earned  during  the  quarters  ended
September  30, 1997 and 1996,  respectively.  The increase in interest and other
income  during the  quarter  and nine  months  ended  September  30,  1997,  was
partially  attributable to an increase of approximately  $1,600 and $14,700, for
the quarter and nine months ended September 30, 1997, respectively,  relating to
interest  earned on the sales proceeds held in escrow relating to the Properties
in Bradenton and Kissimmee,  Florida.  The increase in interest and other income
during the nine months ended  September 30, 1997, was also  attributable  to the
Partnership  recognizing  $15,000  in  other  income  due to the  fact  that the
purchase and sale agreement between the Partnership and an unrelated third party
for the Po Folks Property located in Hagerstown, Maryland, was terminated. Based
on the agreement,  all deposits  received in  conjunction  with the purchase and
sale agreement were to be recognized as other income by the  Partnership at such
time as the agreement  was  terminated.  In addition,  interest and other income
increased  by  approximately  $16,600  and  $18,300  during the quarter and nine
months  ended  September  30,  1997,  respectively,  as a result of the interest
earned on the mortgage note  receivable  accepted in connection with the sale of
the Property in Roswell, Georgia, in June 1997.

         For the nine months ended  September 30, 1997 and 1996, the Partnership
also owned and leased one Property  indirectly  through  another  joint  venture
arrangement and during the nine months ended September 30, 1997, the Partnership
owned and leased one  Property as  tenants-in-common  with an  affiliate  of the
general  partners.  In  connection  therewith,  during  the  nine  months  ended
September 30, 1997 and 1996,  the  Partnership  recognized a loss of $12,496 and
income of $8,372,  respectively,  attributable to net income and losses recorded
by these joint ventures,  including a loss of $9,494 and income of $3,330 during
the quarters ended  September 30, 1997 and 1996,  respectively.  The decrease in
the net income earned by these joint ventures is primarily  attributable  to the
fact that,  during July 1997, the operator of Titusville  Joint Venture  vacated
the Property and ceased operations.  In conjunction therewith, the joint venture
established  an allowance  for doubtful  accounts of  approximately  $13,500 and
$25,900   during  the  quarter  and  nine  months  ended   September  30,  1997,
respectively.  No such  allowance  was  established  during the quarter and nine
months ended  September 30, 1996. In addition,  the joint venture  recorded real
estate tax expense of  approximately  $9,300  during the quarter and nine months
ended  September 30, 1997.  No such real estate taxes were  incurred  during the
quarter and nine months ended  September 30, 1996. The joint venture  intends to
pursue  collection of these  amounts from the former  tenant and will  recognize
such amounts as income if  collected.  The joint  venture is  currently  seeking
either  a  replacement   tenant  or  purchaser  for  this  Property.   The  loss
attributable to Titusville  Joint Venture was partially offset by an increase in
net income earned by joint ventures due to the fact

                                       16

<PAGE>



Results of Operations - Continued

that in July 1997,  the  Partnership  reinvested  the  majority of the net sales
proceeds it received from the sale of the Property in Kissimmee,  Florida, in an
IHOP  Property  located in Englewood,  Colorado,  as  tenants-in-common  with an
affiliate of the general partners.

         Operating expenses,  including  depreciation and amortization  expense,
were  $425,173 and $511,610  for the nine months  ended  September  30, 1997 and
1996,  respectively,  of which  $131,090  and  $157,660  were  incurred  for the
quarters  ended  September  30,  1997 and 1996,  respectively.  The  decrease in
operating  expenses during the quarter and nine months ended September 30, 1997,
as  compared  to the  quarter  and nine months  ended  September  30,  1996,  is
partially  attributable to a decrease in depreciation  expense of  approximately
$16,900  and  $44,700,  respectively,  due to the  sales  of the  Properties  in
Chicago, Illinois, Bradenton, Florida, Kissimmee, Florida, and Roswell, Georgia,
as discussed above in "Liquidity and Capital Resources."

         Operating  expenses also  decreased  during the quarter and nine months
ended  September  30,  1997,  due to the fact that  during the  quarter and nine
months ended September 30, 1996, the Partnership  recorded  approximately $4,600
and $15,200,  respectively,  for real estate taxes relating to the Partnership's
Property in Chicago,  Illinois,  due to continued financial  difficulties of the
tenant.  The Partnership  sold this Property in January 1997, as discussed above
in "Liquidity and Capital  Resources."  Operating expenses also decreased due to
the fact that during the nine months ended  September 30, 1996, the  Partnership
recorded  approximately  $4,800  in real  estate  tax  expense  for the  Denny's
Property in Hagerstown, Maryland, due to continued financial difficulties of the
former  tenant.  The  current  tenant  is  responsible  for real  estate  taxes;
therefore,  no such expense was recorded  during the nine months ended September
30, 1997.

         As a  result  of  the  former  tenant  of  the  Po  Folks  Property  in
Hagerstown,  Maryland, defaulting under the terms of its lease in February 1995,
the  Partnership  incurred real estate tax expense and insurance  expense during
the nine  months  ended  September  30,  1997,  relating to this  Property.  The
Partnership  expects to continue to incur these  expenses  until the Property is
sold or leased to a new tenant.

         As a  result  of the  sales of the  Properties  in  Chicago,  Illinois,
Bradenton,  Florida,  Kissimmee,  Florida,  Roswell,  Georgia, and the sale of a
parcel of land in Plant City,  Florida,  as discussed  above in  "Liquidity  and
Capital Resources," the Partnership  recognized a gain of $969,052 for financial
reporting  purposes  during  the  nine  months  ended  September  30,  1997.  No
Properties were sold during the nine months ended September 30, 1996.




                                       17

<PAGE>



Results of Operations - Continued

         In addition,  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  represents the difference  between the Property's  carrying
value and the estimated net realizable  value,  based on the  anticipated  sales
price of this Property.

                                       18

<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, 1997.

                                       19

<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          day of October, 1997.


                                  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)