SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

                [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934


                  For the quarterly period ended March 31, 1998


               [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                         Commission file number 33-67848


                      ESSEX HOSPITALITY ASSOCIATES III L.P.

               (Exact name of registrant as specified in charter)

                                    DELAWARE
         (State or other jurisdiction of incorporation or organization)

                                   16-1422266
                      (I.R.S. Employer Identification No.)

                               100 CORPORATE WOODS
                            ROCHESTER, NEW YORK 14623
                     (Address of principal executive office)

       Registrant's telephone number, including area code: (716) 272-2300

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
                         -------                              -------

As of May 11, 1998 of 4,000 Limited Partnership Units were outstanding.

<PAGE>

                      
                                     PART 1
                                     ------

                              FINANCIAL INFORMATION
                              ---------------------

 Item 1.   Financial Statements
--------------------------------------------------------------------------------

                      Essex Hospitality Associates III L.P.
                                 Balance Sheets
                             March 31, 1998 and 1997

                      Assets                                1998           1997 
                      ------                                ----           ---- 
Investments in real estate, at cost
             Land                                      1,546,151      1,546,151
             Land improvements                           438,234        438,234
             Buildings                                 7,239,290      7,247,114
             Furniture, fixtures and equipment         1,998,308      1,946,757
                                                      ----------     ----------
                                                      11,221,983     11,178,256
             Less:accumulated depreciation            (1,193,289)      (779,881)
                                                      ----------     ---------- 
                Net investments in real estate        10,028,694     10,398,375

Cash and cash equivalents                                 10,486         48,069

Deferred costs:
             Debt issuance costs                       1,085,289      1,060,289
             Franchise fees                               85,500         85,500
             Other deferred costs                         70,846         70,846
                                                      ----------     ----------
                Total deferred costs                   1,241,635      1,216,635
             Less: accumulated amortization             (943,799)      (684,884)
                                                      ----------     ---------- 
                                                         297,836        531,751

Other assets                                             171,476        161,804
                                                      ----------     ----------

Total assets                                          10,508,492     11,139,999
                                                     ===========    ===========

               Liabilities and Partners' Capital
               ---------------------------------
Accounts payable and accrued expenses                    155,232        217,299
Accounts payable - construction                             --           17,500
Due to affiliate                                         245,000         45,000
Mortgage notes payable (note 5 and 7)                 10,000,000     10,000,000
                             -     -                  ----------     ----------
                Total liabilities                     10,400,232     10,279,799
                                                      ----------     ----------

Commitments (note 5)

Partners' capital                                        114,550        869,520
             Less notes receivable from partners          (6,290)        (9,320)
                                                      ----------     ---------- 
                Total partners' capital                  108,260        860,200
                                                      ----------     ----------
Total liabilities and partners' capital               10,508,492     11,139,999
                                                     ===========    ===========

<PAGE>


                      Essex Hospitality Associates III L.P.
                            Statements of Operations
                 For the Quarters Ended March 31, 1998 and 1997

                                                           1998            1997 
                                                           ----            ---- 

INCOME
       Rooms                                            765,605         801,776
       Other income                                      41,214          43,704
                                                      ----------     ----------
          Total income                                  806,819         845,480

EXPENSES
       Rooms                                            215,664         223,562
       Commissions expenses                              32,288          30,127
       Advertising and promotion                         47,417          36,093
       Repairs and maintenance                           38,910          35,316
       Utilities                                         54,363          62,269
       Administrative and general                        82,030          77,494
       Property taxes                                    57,667          70,870
       Insurance                                          7,027           6,134
       Franchises fees                                   23,199          23,805
       Property management fees                          35,245          31,980
       Miscellaneous                                     20,453          18,446
       Depreciation and amortization                    104,231         103,411
                                                      ----------     ----------
          Total expenses                                718,494         719,507
                                                      ----------     ----------

             Operating income                            88,325         125,973

Interest:
       Income                                               746             235
       Expense                                         (250,000)       (250,000)
       Amortization                                     (59,487)        (59,487)
                                                      ----------     ---------- 
                                                       (308,741)       (309,252)
                                                      ----------     ---------- 

NET LOSS                                               (220,416)       (183,279)
                                                       ========        ========

Net loss allocated to:
       General partners                                  (2,204)         (1,833)
       Limited partners                                (218,212)       (181,446)
                                                      ----------     ---------- 
                                                       (220,416)       (183,279)
                                                      =========      ==========

Net loss per limited partner unit                           (55)            (46)
                                                      =========      ==========


<PAGE>


                      Essex Hospitality Associates III L.P.
                            Statements of Cash Flows
                 For the Quarters Ended March 31, 1998 and 1997


                                                               1998       1997 
                                                               ----       ---- 
Cash flows from operating activities
       Cash received from customers                         792,635     817,369
       Cash paid to suppliers                              (614,612)   (642,773)
       Interest received                                        746         235
       Interest paid                                       (250,000)   (250,000)
                                                           --------    -------- 
          Net cash from operating activities                (71,231)    (75,169)
                                                            -------     ------- 

Cash flows from investing activities
       Payments for fixed asset additions                    (1,383)     (5,436)
       Cash received from land sale                             --       83,788
                                                           --------    --------
          Net cash used in investing activities              (1,383)     78,352
                                                           --------    --------

Cash flows from financing activities
       Payments for debt acquisition costs                  (25,000)       --

       Advances from affiliates                              95,000        --
                                                           --------    --------
          Net cash from financing activities                 70,000        --
                                                           --------    --------

Net increase (decrease) in cash and cash equivalents         (2,614)      3,183

Cash and cash equivalents - beginning of period              13,100      44,886
                                                           --------    --------

Cash and cash equivalents - end of period                    10,486      48,069
                                                           ========    ========


Reconciliation of net income to net cash flows
----------------------------------------------
   from operating activities:
   --------------------------

Net income                                                 (220,416)   (183,279)

Adjustments to reconcile net income (loss) to net
  cash used in operating activities:
       Depreciation and amortization                        163,718     162,898
       Changes in:
          Accounts payable and accrued expenses              18,055       2,440
          Shortterm assets                                  (32,588)    (57,228)
                                                           --------    --------
                                                            (71,231)    (75,169)
                                                           ========    ========

<PAGE>



                      ESSEX HOSPITALITY ASSOCIATES III L.P.
                        (A Delaware Limited Partnership)

                          Notes to Financial Statements
                             March 31, 1998 and 1997

(1)     ORGANIZATION

        Essex Hospitality Associates III L.P. (the Partnership) is a Delaware
        limited partnership formed in August 1993 for the purpose of purchasing,
        leasing or subleasing undeveloped land and constructing, owning and
        operating up to four new Hampton Inn, Homewood Suites or Microtel hotels
        under franchises or licenses to be obtained from these national lodging
        chains. The Partnership financed its activities through a public
        offering of notes and limited partnership units. Microtel hotels were
        constructed in Birmingham, Alabama and Chattanooga, Tennessee and began
        operations in September 1994 and September 1995, respectively. In April
        1995, construction of a Hampton Inn hotel in Rochester, New York was
        completed and the hotel began operations. The Partnership does not
        anticipate raising additional capital and, therefore, no additional
        hotels are expected to be developed.

        The Partnership's general partners are Essex Partners Inc. (Essex
        Partners), a subsidiary of Essex Investment Group, Inc. (Essex), and
        John E. Mooney, President of Essex Partners and Essex. Management of the
        Partnership and the hotels is the sole responsibility of Essex Partners.

        The following is a general description of the allocation of income and
        loss. For a more comprehensive description see the Partnership
        Agreement.

            Income from operations will be allocated 99% to the limited partners
            and 1% to the general partners until the amount allocated to the
            limited partners equals the cumulative annual return of 8% of their
            contribution. Any remaining income from operations is allocated 80%
            to the limited partners and 20% to the general partners. Income on
            the sale of any or all of the hotels is allocated 99% to the limited
            partners until each limited partner has been allocated income in an
            amount equal to his or her pro rata share of the nondeductible
            syndication expenses and sale commissions and 1% to the general
            partners. Thereafter, income on the sale of any or all the hotels is
            allocated in the same manner as income from operations.

            Losses from operations will be allocated 80% to the limited partners
            and 20% to the general partners in the amounts sufficient to offset
            all income, if any, which was allocated 80% to the limited partners.
            Thereafter, operating losses are allocated 99% to the limited
            partners and 1% to the general partners. Loss on the sale of any or
            all of the hotels will be first allocated in the same manner as
            losses from operations, except that the allocation of such loss
            would be made prior to allocations of income from operations. All
            other losses are allocated 99% to the limited partners and 1% to the
            general partners.


<PAGE>




ESSEX HOSPITALITY ASSOCIATES III L.P.
( A DELAWARE LIMITED PARTNERSHIP) 
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1998 AND 1997
PAGE 2

(1)     ORGANIZATION (CONTINUED)

        In 1997 and 1996, losses from operations were allocated 99% to the
        limited partners and 1% to the general partners.

        Under the Partnership agreement, cash distributions will initially be
        made 99% to the limited partners and 1% to the general partners. After
        the limited partners have received a minimum cumulative annual return of
        8% of their contribution, additional distributions may then be made 80%
        to the limited partners and 20% to the general partners. The limited
        partners have not received the minimum cumulative return of 8% due as of
        March 31, 1998.

        Under the Partnership's initial offering from 1993 to 1995, limited
        partnership capital of $3,986,320 was raised, less syndication fees
        including selling commissions and legal, accounting, printing and other
        filing costs of $491,473. Cumulative distributions to limited partners
        through March 31, 1998 were $1,076,718.

        Essex Partners and its affiliates received substantial fees in
        connection with the offering of notes and limited partnership units and
        the acquisition and development of hotels. Management and other fees
        related to the operation of the hotels and the Partnership are due
        annually to Essex Partners (see note 6).


(2)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Basis of Accounting
        -------------------

        The financial statements of the Partnership were prepared on the accrual
        basis of accounting in conformity with generally accepted accounting
        principles.

        Investment in Real Estate
        -------------------------

        Investments in real estate are stated at cost. Depreciation is
        calculated using the straight-line method over the estimated useful
        lives of the assets. The cost of property and equipment retired or
        otherwise disposed of and the related accumulated depreciation are
        removed from the accounts.

        Deferred Costs
        --------------

        Costs of issuing mortgage notes payable are amortized on a straight-line
        basis over the term of the notes.


<PAGE>

ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1998 AND 1997
PAGE 3

(2)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        Franchise fees paid for the right to own and operate the hotels are
        amortized on a straight-line basis over the term of the franchise
        agreement, beginning when the hotel is placed in service.

        Syndication Costs
        -----------------

        The Partnership incurred legal fees and other costs related to the
        syndication which were treated as a reduction to Partners' capital.
        These costs will be included in the Partners' basis upon termination of
        the Partnership

        Advertising Costs
        -----------------

        Advertising costs of the Partnership are expensed as incurred.
        Advertising expense for the quarters ended March 31, 1998 and 1997 was
        $47,417 and $36,093, respectively.

        Income Taxes
        ------------

        No provision for income taxes has been provided since any liability is
        the individual responsibility of the Partners.

        Use of Estimates in the Preparation of Financial Statements
        -----------------------------------------------------------

        The preparation of the financial statements in conformity with generally
        accepted accounting principles requires the managing general partner to
        make estimates and assumptions that affect the reported amounts of
        assets and liabilities at the date of the financial statements and the
        reported amounts of income and expenses during the reporting period.
        Actual results could differ from those estimates.

        Reclassification
        ----------------

        Certain amounts in the prior year's financial statements were
        reclassified to conform with the current year's presentation.


(3)     SALE OF LAND

        In 1996, the Partnership sold land adjacent to the hotel in Chattanooga
        with final settlement in January 1997 of $86,782. A loss of $67,218 was
        recognized on the transaction.




<PAGE>





ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1998 AND 1997
PAGE 4


(4)     MORTGAGE NOTES PAYABLE

        Mortgage Notes payable bear interest at a rate of 10% per annum and
        mature December 31, 1998, unless extended by the Partnership to December
        31, 1999 upon payment of an extension fee equal to .5% of the principal
        amount outstanding, or December 31, 2000 upon payment of an extension
        fee equal to 1% of the principal amount outstanding. The notes are
        secured by a first mortgage on the hotels and underlying land.


(5)     FRANCHISE, ROYALTY AND MARKETING FEES

        The Partnership entered into franchise agreements with Microtel
        Franchise and Development Corporation (MFDC) for the Birmingham, Alabama
        and Chattanooga, Tennessee sites. Total initial franchise fees paid were
        $50,500. In addition to the initial fee, the Partnership is required to
        pay a monthly royalty fee of 2.5% of gross room revenues. The monthly
        royalty fee increases to 3% of gross room revenues in the event between
        50 and 100 Microtel Inn hotels are opened for business by franchisees
        and up to 3.5% in the event 100 or more Microtel Inn hotels are opened.
        The monthly royalty fee increased to 3% in 1997. In 1996, the Franchisor
        established a system of advertising, thus requiring the Partnership to
        contribute an additional 1% of gross room revenues to pay for the cost
        of such a system.

        The franchise agreement also requires the Partnership to maintain
        certain insurance coverage, to meet certain standards with respect to
        furniture, fixtures, maintenance and repair, and to refurbish and
        upgrade the hotel not more than once every 5 years to conform to the
        Microtel Inn hotel's then-current public image. The term of the
        agreement is 10 years, with an option to renew for an additional 10
        years, subject to compliance with certain conditions. Microtel royalty
        fees totaled $9,386 in the first quarter of 1998 and $8,922 in the first
        quarter of 1997 and advertising fees were $3,128 in the first quarter of
        1998 and $3,569 in the first quarter of 1997.

        The Partnership has also entered into a license agreement with Promus
        Corporation (Promus) to operate a Hampton Inn hotel for the Rochester,
        New York site. An initial franchise fee of $35,000 was paid. In addition
        to the initial fee, the Partnership is required to pay Promus a monthly
        royalty fee of 4% of gross room revenues, a monthly
        marketing/reservation fee of 4% of gross room revenue and a monthly
        amount equal to any sales tax or similar tax imposed on Hampton Inn on
        payments received under the license agreement. The Partnership incurred
        royalty fees of $13,813 in the first quarter of 1998 and $14,883 in the
        first quarter of 1997. Marketing/reservations fees included in
        advertising and promotion expenses totaled $13,813 in the first quarter
        of 1998 and $14,883 in the first quarter of 1997.

        Promus requires the Partnership to establish a capital reserve escrow
        account based on a percentage of gross revenues generated by the Hampton
        Inn hotel which will be used for


<PAGE>

ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1998 AND 1997
PAGE 5

        product quality requirements of the hotel. Cumulative funding of the
        reserve for the first five years of operation increases from 1% to 5% of
        gross revenues and stabilizes at 5% for the term of the agreement. The
        capital reserve cash escrow account at March 31, 1998 and 1997 was
        $52,932 and $17,230, respectively.

        The franchise agreement impose certain restrictions on the transfer of
        limited partnership units. MFDC and Promus restrict the sale, pledge or
        transfer of units in excess of 10% and 25%, respectively, without their
        consent.


(6)     RELATED PARTY TRANSACTIONS

        A summary of the fees earned by Essex Partners in the first quarter of
        1998 and 1997 under the terms of the Partnership and management
        agreements is as follows:



Type of Fee                Amount of Fee                          1998      1997
-----------                -------------                          ----      ----

Property Management        4.5% of gross operating revenues    $35,245   $33,759
Fee                        from the hotels

Partnership                1.25% of gross operating revenues     9,789    10,010
Management Fee             from the hotels

Accounting Fee             $2,025 per month                      6,075     6,075

                                                               $51,109   $49,844
                                                               =======   =======



       The accounting fees for the quarters ended March 31, 1998 and 1997 has
       been included in the administrative expenses.

       In addition, Essex Partners will received refinancing fees equal to 1% of
       the gross proceeds from any refinancing of the hotels and a sale fee of
       up to 3% of the gross price if the hotel is sold.



<PAGE>




ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1998 AND 1997
PAGE 6


 (7)   SUBSEQUENT EVENT

       On May 11, 1998, the Partnership obtained first mortgage financing from a
       bank for $7,560,000. The term of the loan is 10 years. Interest accrues
       at the rate of 7.86% per annum. Principal and interest payments are
       due monthly based on a 25-year amortization. The Partnership is also
       required to contribute 4% of gross revenues to a replacement reserve on a
       monthly basis. The loan is collateralized by the Partnership's real and
       personal property and certain other assets. Mortgage notes in the
       principal amount of $8,707,000 were repaid from the proceeds of the new
       first mortgage financing and a bridge loan of $1,461,000 from Essex
       Partners. The remaining $1,293,000 of mortgage notes were exchanged for
       subordinated notes. The Partnership is offering up to $3,500,000 of
       subordinated notes in a private offering. The offering provided mortgage
       note holders the option to exchange their mortgage notes for subordinated
       notes. The proceeds from the offering will be used to pay the costs of
       the offering, repay the bridge loan from Essex Partners, repay up to
       $150,000 in advances from affiliate and provide up to $460,000 in working
       capital and reserves for the Partnership.



<PAGE>




ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
-------  ---------------------------------------------------------

The Partnership was formed on August 2, 1993. In 1995, it completed its public
offering of first mortgage notes and limited partnership units, raising
$13,986,320. The first Partnership property, a 102-room Microtel hotel in
Birmingham, Alabama, opened in September, 1994. The two remaining Partnership
properties opened in 1995, a 118- room Hampton Inn in Rochester, New York in
April and a 100-room Microtel in Chattanooga in September.

The major revenue source for the Partnership's properties is room revenues,
which generated 95% of the operating revenues for the Partnership in the first
quarter, 1998. Room revenues generated are dependent on a property's average
occupancy and average daily rate. Room revenues for the first quarter 1998 were
5% lower than the first quarter, 1997. Room revenues at the Birmingham Microtel
Inn and Chattanooga Microtel Inn properties decreased compared to 1997.

The Birmingham Microtel Inn achieved an average occupancy of 62% for the quarter
with an average daily rate of $36.49, as compared with an average occupancy of
74% in the first quarter, 1997, and an average daily rate of $33.11. The
decrease in occupancy produced a $16,000 decrease in room revenues. A new
manager was hired in the spring of 1996, who made several improvements, which
started to have an impact on revenues by the end of the summer of 1996. The
property had a very strong winter and spring, with occupancy of 75% through June
1997, compared to 65% during the same period in 1996. Revenues for the first six
months of 1997 exceeded the first six months of 1996 by $61,000. Unfortunately,
that manager left the property in the spring of 1997. The manager returned to
the property in March 1998. During the manager's absence, the performance of the
hotel began to deteriote. The revenues for the last six months were the same as
the last six months of 1996. Although revenues were the same in the last six of
1997 as the same period in 1996, operating income declined in the last six
months of 1997 compared to the same period in 1996 due to ineffective cost
controls. With the return of the hotel manager in 1998, the Managing General
Partner expects that costs will be better controlled. The Managing General
Partner expects the property's performance to improve by the summer of 1998. The
Birmingham Microtel generated approximately 27% of the Partnership's room
revenues for the quarter, compared to 28% in the first quarter, 1997.

The Hampton Inn achieved an average occupancy of 63% for the quarter, with an
average daily rate of $61.20, compared with an average occupancy of 60% for the
first quarter 1997 and an average daily rate of $61.59. The increase in
occupancy and average daily rate caused room revenues to increase by $20,100.
The major issues facing the Hampton Inn for 1998 are increasing supply in its
market and travel reductions by its largest customer. In 1998, a Courtyard by
Marriott and Residence Inn will be opening within a mile of the Hampton Inn. The
Courtyard is expected to be directly competitive with the Hampton Inn. The
Hampton Inn expects it may lose some customers to the Courtyard, but is planning
to replace the lost revenue by more aggressively marketing the property and
raising rates from 2%-3%. Although the rates for the Courtyard and Residence Inn
have not yet been announced, the typical Courtyard and Residence Inn offer rooms
at rates higher than those charged at the Hampton Inn. Therefore, the Hampton
Inn believes a slight increase in rates will not be detrimental. In addition,
the Hampton Inn is planning to add additional signage to better direct customers
to the hotel. The Hampton Inn's





<PAGE>

largest customer is the Eastman Kodak Company. In the fourth quarter 1997,
Eastman Kodak announced a goal to reduce corporate travel by 20%. The Hampton
Inn felt some of the effects of this through reduced occupancy in December 1997
and January 1998 compared to the same period in the prior year. The Eastman
Kodak travel increased in February to close to the levels of prior years. With
the uncertainty of the Eastman Kodak travel, the staff at the Hampton Inn have
increased their marketing efforts and are also securing new business. The
Hampton Inn generated around 54% of the Partnership's room revenues for the
quarter, compared to 49% for the first quarter, 1997.

The average occupancy for the Chattanooga Microtel Inn for the quarter was 41%
with an average daily rate of $39.72, compared to the first quarter 1997 when
occupancy was 58% with an average daily rate of $36.18. The supply of
hotel rooms in the Chattanooga area has increased, which is contributing to the
reduction in occupancy at the Microtel Inn. In response to the increased supply,
the Chattanooga Microtel Inn is planning to obtain additional signage to
increase awareness of and to direct customers to the hotel, and will be leasing
a van. There are several local companies that have expressed an interest in
using the Microtel Inn if a means of transportation is provided. Extensive
marketing efforts will also be continued in 1998. The Chattanooga Microtel Inn
generated around 19% of the Partnership's room revenues for the quarter,
compared to 23% for the first quarter, 1997.

Operating income for the first quarter decreased $37,600 over the first quarter
1997, to $88,300 due to the reduction in revenues. Interest expense remained at
$250,000, since the partnership's mortgages require payments of interest only at
a fixed rate of 10%. The Partnership's net loss for the quarter was $220,400,
$37,100 less than the net loss of $183,300 in the first quarter, 1997. The
Partnership used cash of $71,000 in operations, compared to $75,000 in the first
quarter, 1997. Investing activities required cash of $1,000 in the first quarter
1998, for asset replacements. In 1996, investing activities provided cash of
$78,000 in the first quarter, primarily from the receipt of the proceeds from
the sale of land in Chattanooga. Financing activities provided $70,000 in cash
in the first quarter, 1998. Significant financing activities for the first
quarter 1998 included the payment of $25,000 for debt acquisition costs and the
receipt of advances of $95,000 from the Managing General Partner. There were no
financing activities in the first quarter 1997. The Partnership's cash and cash
equivalents decreased $3,000 in the first quarter, 1998, compared to an increase
of $48,000 in 1997.

Total assets decreased $632,000 in the first quarter, 1997 due primarily to the
$672,000 increase in depreciation and amortization. Total liabilities increased
$120,000 from an increase in due to affiliate. Accounts payable and accrued
expenses decreased $80,000. Partners' equity decreased $752,000 from two
factors, the payment of $300,000 in distributions to limited partners and the
net losses of $452,000 generated between April 1, 1997 and March 31, 1998.

CAPITAL RESOURCES AND LIQUIDITY
The Partnership expects to obtain sufficient liquidity from operations to fund
all operating costs. In addition to operations, the Partnership will require
liquidity to provide for repayment of outstanding debt. The Partnership's first
mortgage notes in the principal amount of $10,000,000 mature on December 31,
1998. The Managing General Partner is in the process of replacing the first
mortgage notes with a combination of institutional first mortgage financing and
subordinated




<PAGE>

notes. The institutional financing transaction closed on May 11, 1998, providing
first mortgage financing of $7,560,000. The first mortgage financing is secured
by first mortgage liens on the Partnership's hotel properties. The term of the
first mortgage loan is 10 years. The first mortgage loan will accrue interest at
the rate of 7.86% per annum. Principal and interest payments are due monthly
based on a 25-year amortization. The partnership is also required to contribute
4% of gross revenues to a replacement reserve on a monthly basis. Mortgage notes
in the principal amount of $8,707,000 were repaid with the proceeds from the
institutional first mortgage financing and a bridge loan from the Managing
General Partner in the amount of $1,461,000. The Partnership is in the process
of offering subordinated notes of up $3,500,000 to investors. The offering
provided the option for mortgage note holders to exchange their mortgage notes
for subordinated notes. Mortgage note holders holding $1,293,000 of mortgage
notes exchanged mortgage notes for subordinated notes. The proceeds from the
subordinated note offering will be used to pay the costs of the offering, repay
the bridge loan (with interest at a variable rate equal to Essex Partner's cost
of funds, which is presently the prime rate as quoted by Manufacturers and
Traders Trust Company plus 0.5%), repay $150,000 of advances from Essex Partners
and provide reserves and working capital of up to $460,000 to the Partnership.
The subordinated notes are general unsecured obligations of the Partnership. The
subordinated notes will accrue interest at the rate of 9.75% per annum. Payments
of accrued interest will be made monthly in arrears. The principal balance is
due and payable on April 30, 2004. Payment of principal may be extended for one
year upon payment of a 0.5% extension fee on or before April 30, 2004. The
Partnership may prepay the subordinated notes at any time without premium or
penalty, provided that any such prepayment shall be made to all holders of the
subordinated notes on a pro-rata basis.

The Microtel franchise agreements require the Partnership to refurbish and
upgrade its Microtel Inn hotels not more than once every five years. The upgrade
would include replacing soft goods such as bedspreads and drapes, new carpeting,
equipment such the front desk system, telephone system and the key system. The
Partnership is replacing soft goods as needed and expects it will satisfy the
Microtel franchisor's requirements without any major additional expenditures.
The front desk system, telephone system and key system at the Partnership's
properties were new at the time the properties were constructed and are expected
to meet Franchisor specifications for the next several years. Equipment such as
televisions and heating and cooling units are expected to have a life of between
five and ten years and can replaced as required. Not all units will need to be
replaced in the same year, so that management expects that the expenditures can
be spread over several years.

The Hampton Inn license agreement requires the Partnership to establish a
capital reserve escrow account based on a percentage of gross room revenues
generated by the Hampton Inn hotel. The reserve will be used for product quality
requirements of the hotel. Cumulative funding of the reserve for the first five
years increases from 1% to 5% of gross revenues and stabilizes at 5% for the
term of the agreement. The Partnership expects to fund the reserve from cash
from operations, and the reserve should be sufficient to fund major capital
improvements as required. At March 31, 1998, the capital reserve escrow account
was $53,200. The deposit required for 1998 will be made from proceeds of the
subordinated note offering.




<PAGE>


                                     PART II
                                     -------

                                OTHER INFORMATION
                                -----------------


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------   ---------------------------------------------------

          None


ITEM 5.  OTHER INFORMATION
-------  -----------------

         None


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
-------  --------------------------------

     a.  EXHIBITS
         --------

         None

     b.  REPORTS ON FORM 8-K
         -------------------

         There was one report 8-K filed in the first quarter, 1998. The report
         was dated February 13, 1998 and described a change in accountants for
         the Partnership. There were no financial statements included.



                                   SIGNATURES
                                   ----------

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


                                     ESSEX HOSPITALITY ASSOCIATES III L.P.
                                     -------------------------------------
                                                 Registrant



Dated:   May 14, 1998                /S/ LORRIE L. LOFASO
                                     --------------------
                                     Essex Hospitality Associates III L.P.
                                     Essex Partners Inc.
                                     Lorrie L. LoFaso
                                     Vice President and Chief Accounting Officer