<PAGE>   1
                       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 September 30, 1996


              [  ] 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 October 31, 1996 a total of 4,000 Limited Partnership Units were
outstanding.
<PAGE>   2
                                     PART 1

                             FINANCIAL INFORMATION

Item 1.   Financial Statements


                     Essex Hospitality Associates III L.P.
                                 Balance Sheets
                          September 30, 1996 and 1995

<TABLE>
<CAPTION>
                     Assets                                        1996                       1995
                     -----                                         ----                       ----
<S>                                                              <C>                        <C>
Investments in real estate, at cost
         Land                                                     1,700,151                  1,700,151
         Land improvements                                          438,234                    146,738
         Buildings                                                7,247,114                  7,903,673
         Furniture, fixtures and equipment                        1,921,087                  1,436,877
                                                                  ---------                  ---------
                                                                 11,306,586                 11,187,439
         Less:accumulated depreciation                             (517,432)                  (152,875)
                                                                   ---------                  ---------
            Net investments in real estate                       10,789,154                 11,034,564

Cash and cash equivalents                                           233,225                    492,658

Deferred costs:
         Debt issuance costs                                      1,060,289                  1,060,289
         Franchise fees                                              85,500                     85,500
         Other deferred costs                                        70,846                    178,740
                                                                     ------                    -------
            Total deferred costs                                  1,216,635                  1,324,529
         Less: accumulated amortization                            (555,431)                  (293,331)
                                                                   ---------                  ---------
                                                                    661,204                  1,031,198

Other assets                                                        142,275                    215,200
                                                                    -------                    -------

Total assets                                                     11,825,858                 12,773,620
                                                                 ----------                 ----------

            Liabilities and Partners' Capital
            ---------------------------------
Accounts payable and accrued expenses                               128,308                     71,205
Accounts payable - construction                                      17,500                     37,972
Mortgage notes payable                                           10,000,000                 10,000,000
                                                                 ----------                 ----------
            Total liabilities                                    10,145,808                 10,109,177
                                                                 ----------                 ----------
Commitments (note 5)

Partners' capital                                                 1,710,582                  2,861,554
         Less notes receivable from partners                        (30,532)                  (197,111)
                                                                    --------                  ---------
            Total partners' capital                               1,680,050                  2,664,443
                                                                  ---------                  ---------

Total liabilities and partners' capital                          11,825,858                 12,773,620
                                                                 ----------                 ----------
</TABLE>
<PAGE>   3
                     Essex Hospitality Associates III L.P.
                              Statements of Income
                      Quarters September 30, 1996 and 1995

<TABLE>
<CAPTION>
                                                    1996                         1995 
                                                    ----                         ----
<S>                                              <C>                            <C>
INCOME
------
    Rooms                                          971,680                      884,093
    Other income                                    51,285                       56,813
                                                    ------                      -------
       Total income                              1,022,965                      940,906

EXPENSES
--------
    Rooms                                          278,249                      228,536
    Commissions expenses                            32,355                       27,689
    Advertising and promotion                       16,569                       12,499
    Repairs and maintenance                         51,334                       26,417
    Utilities                                       48,493                       33,515
    Administrative and general                      99,963                       63,381
    Property taxes                                  19,128                       13,679
    Insurance                                        8,798                        1,232
    Franchises fees                                 33,917                       25,911
    Management fees                                 50,189                       39,428
    Marketing research fees                         27,170                       19,861
    Miscellaneous                                    3,203                        3,408
                                                     -----                        -----
       Total expenses                              669,368                      495,556
                                                   -------                      -------

          Operating income                         353,597                      445,350

    Interest expense                               250,000                      216,418
    Partnership management fees                     13,940                       10,212
    Depreciation & amortization                    146,031                      151,917
                                                   -------                      -------
       Total other expenses                        409,971                      378,547
                                                   -------                      -------

NET INCOME                                         (56,374)                      66,803
                                                   --------                      ------
</TABLE>
<PAGE>   4
                     Essex Hospitality Associates III L.P.
                            Statements of Cash Flows
               For the Quarters Ended September 30, 1996 and 1995


<TABLE>
<CAPTION>
                                                            1996                  1995
                                                            ----                  ----
<S>                                                       <C>                  <C>
Cash flows from operating activities
    Cash received from customers                          1,036,409               799,230
    Cash paid to suppliers                                 (685,302)             (524,162)
    Interest received                                           941                 9,420
    Interest paid                                          (250,000)             (216,418)
                                                           ---------             ---------
       Net cash from operating activities                   102,048                68,070
                                                            -------                ------

Cash flows from investing activities
    Payments for fixed asset additions                       (4,416)           (1,912,829)
                                                             -------           -----------
       Net cash used in investing activities                 (4,416)           (1,912,829)
                                                             -------           -----------
Cash flows from financing activities
    Proceeds from issuance of notes payable                      -                 45,000
    Debt issuance costs                                          -                 (4,005)
    Partner capital contributions                             1,010               383,600
    Syndication costs                                                             (46,049)
    Payments for distributions                             (101,010)              (57,421)
                                                           ---------              --------
       Net cash from financing activities                  (100,000)              321,125
                                                           ---------              -------

Net increase (decrease) in cash and cash equivalents         (2,368)           (1,523,634)

Cash and cash equivalents - beginning of period             235,593             2,016,292
                                                            -------             ---------
Cash and cash equivalents - end of period                   233,225               492,658
                                                            =======               =======

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

Net income                                                  (56,374)               66,803

Adjustments to reconcile net income (loss) to net
  cash used in operating activities:
    Depreciation and amortization                           146,031               151,917
    Changes in:
       Account payable                                         (252)               17,105
       Shortterm assets                                      12,643              (167,755)
                                                             ------              ---------
                                                            102,048                68,070
                                                            -------                ------
</TABLE>
<PAGE>   5
                     ESSEX HOSPITALITY ASSOCIATES III L.P.
                        (A Delaware Limited Partnership)

                         Notes to Financial Statements
                          September 30, 1996 and 1995


(1) ORGANIZATION

    Essex Hospitality Associates III L.P. (the Partnership) is a Delaware
    limited partnership formed on August 2, 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 construction and other start up
    activities through a public offering of notes and limited partnership
    units.  The first partnership property, a Microtel hotel in Birmingham,
    Alabama was completed and began operations in September 1994.  In April
    1995, a Hampton Inn hotel opened in Rochester, New York and a third
    property in Chattanooga, Tennessee opened in September, 1995.

    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 partner 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 $1,000
      per Unit owned by the limited partners 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 partner in the amounts sufficient to offset all income
      which was allocated 80% to the limited partners.  Thereafter, operating
      losses are allocated 99% to the limited partners and 1% to the general
      partner.  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>   6
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 AND 1995
PAGE 2

(1) ORGANIZATION (CONTINUED)

    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.

    Essex Partners and its affiliates received substantial fees in connection
    with the offering of notes and limited partnership units.  Additional fees
    were paid to them in connection with the acquisition, development and
    operation of the hotels and management of the Partnership (see note 5).

(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.

    Cash and Cash Equivalents

    Cash investments with original maturities of three months or less are
    considered to be cash equivalents.

    Deferred Costs

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

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

    Syndication Costs

    Selling commissions and legal, accounting, printing, and other filing costs
    totaling $492,184 related to the offering of the limited partnership units
    were charged against the proceeds of the public offering.
<PAGE>   7
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 AND 1995
PAGE 3

    Income Taxes

    The results of the Partnership's operations are reportable as income or
    loss in the individual federal and state income tax returns of the
    partners.

    Reclassification

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

(3) MORTGAGE NOTES PAYABLE

    Mortgage Notes payable bear interest at 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 issued as unsecured
    obligations of the Partnership until a hotel site is purchased, at which
    time the notes are secured by a first mortgage against the site and the
    hotel to be constructed thereon.

(4) FRANCHISE, ROYALTY AND MARKETING FEES

    In 1993 and 1995, the Partnership entered into franchise agreements with
    Microtel Franchise and Development Corporation (MFDC) for each of the two
    Microtel hotels.  The agreements require the Partnership to pay an initial
    franchise fee of the greater of $25,000 or $250 per room (which totaled
    $50,500) and a continuing 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 Microtels are opened for business and to
    3.5% in the event over 100 Microtels are opened.  In the event a system of
    advertising for Microtel franchisees, the Partnership is required to
    contribute an additional 1% of gross room revenues to pay for the cost of
    such a system.  In 1996, a system of advertising was established for the
    Microtel franchisees and payments of the 1% marketing fee started in March,
    1996.  The franchise agreements also require 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 Microtel not more than once every 5 years to conform to the Microtel
    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.

    The Partnership incurred a royalty fee expense of $11,245 and $6,050 during
    the third quarter, 1996 and 1995, respectively,  under the Microtel
    franchise agreements.  Marketing fee expense for the third quarter 1996 was
    $4,500.  There was no marketing fee expense for the third quarter 1995.
<PAGE>   8
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 AND 1995
PAGE 4

(4) FRANCHISE, ROYALTY AND MARKETING FEES (CONTINUED)

    The Partnership has entered into a license agreement with Promus
    Corporation (Promus) to operate a Hampton Inn hotel in Rochester, New York.
    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 contribution of 4%
    of gross room revenue and a monthly amount equal to any sales or similar
    tax imposed on the  payments received under the license agreement.

    The Partnership incurred royalty fee expense and marketing reservation
    expense each of $22,672 and $19,861 during the third quarter, 1996 and 1995
    respectively under the Hampton Inn license agreement.

    The Microtel franchise agreements and Hampton Inn license 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.

(5) RELATED PARTY TRANSACTIONS

    A summary of the compensation, fees and reimbursements to be received by
    Essex Partners or their affiliates under the terms of the Partnership
    agreement follows:

<TABLE>
<CAPTION>
                                                                 
                                               3rd Qtr.   3rd Qtr.
 Type of Fee       Amount of Fee                   1996       1995 
 -----------       -------------                   ----       ---- 
                                                                 
                                                 
                                                 
 <S>               <C>                           <C>       <C>
 Selling           Up to $80 per limited              0    $34,675
 Commission        partnership unit and 5.5%
                   per $1,000 note sold

 Organization and  Up to 3.4% of the gross            0     15,919
 Offering Fee      proceeds of the offering                 

 Development Fee   Up to $140,000 per hotel,          0          0
                   plus 5% of the total cost
                   of the hotel in excess of
                   $2 million

 Property          4.5% of gross operating       50,189     39,428
 Management Fee    revenues from the hotels

 Partnership       1.25% of gross operating      13,940     10,212
 Management Fee    revenues from the hotels

 Accounting Fee    $675 per month                 6,075      4,725

 Acquisition Fee   Up to $110,000 per hotel           0          0
                   suite
</TABLE>
<PAGE>   9
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 AND 1995
PAGE 5


<TABLE>
<CAPTION>
                                                                
                                                                
                                               3rd Qtr.       3rd Qtr.
 Type of Fee       Amount of Fee                   1996           1995
 -----------       -------------                   ----           ----

 <S>               <C>                          <C>           <C>
 Refinancing Fee   1% of the gross proceeds           0              0
                   of any refinancing of any
                   or all of the hotels

 Sales Fee         3% of the gross sale price         0              0
                   of any or all of hotels
                                                $70,204       $104,959
                                                =======       ========
                                                                      
                                                                     
</TABLE>
<PAGE>   10
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 Partnership's properties opened in September, 1994; April,
1995 and September, 1995.

The first property, a 102-room Microtel Inn hotel, is located in Homewood,
Alabama, outside Birmingham.  The property is in its second year of operations.
At the end of 1995, the Managing General Partner replaced the manager at the
property.  A new manager started in February, 1996.  The new manager is
addressing several problems, including improving the physical appearance of the
property, upgrading the clientele and initiating cost controls.  Revenues for
the third quarter 1996 decreased 12% ($30,000) over third quarter 1995 revenues
to $228,000 which the General Partner believes is due primarily to three
factors.  New hotel room supply has been added in the area of the Partnership's
property, without a significant increase in demand.  The second is the effort
made by the hotel to upgrade its client base.  More stringent standards are now
in place to reduce the number of undesirable clients.  The hotel also reduced
its room rates to attract more customers to the hotel.  Reducing rates reduces
revenues in the shortterm, but should increase occupancy and revenue in the
longterm.  Occupancy, after dropping sharply during the spring and early
summer, started to move back up in August and September.  Operating income for
the third quarter 1996 decreased $20,000 to $59,000 due to the reduced
revenues.  The decrease in operating income is less than the decrease in
revenues because cost controls initiated by the new manager are reducing
expenses compared to 1995.

The Partnership's second property is a 118-room Hampton Inn located in
Rochester, New York.  Revenues for the third quarter 1996 were $561,000, with
operating income of $262,000.  Revenues for the third quarter 1995 were
$616,000, with operating income of $347,000.  Only one month in the third
quarter 1996 had lower revenues and operating income compared to 1995, and that
was September.  September 1996 revenues were $87,000 less than 1995 and
operating income was $100,000 less than September, 1995.  The Ryder Cup golf
tournament was held in Rochester in September, 1995.  Rooms rates were more
than doubled during the Ryder Cup which contributed a significant amount of
revenue to the property, with little increase in expenses.

The Partnership's third property, a 100-room Microtel hotel in Chattanooga,
Tennessee, has been open since September, 1995.  The property has not performed
as well as expected during its first year of operations, which the Managing
General Partners believes is primarily due to the manager at the property.  The
manager was changed in early 1996, and again in October, 1996.  The current
manager, who has worked in the Chattanooga hotel industry for several years, is
expected to make significant improvements over the next several months.  The
two prior managers had less hotel experience and were not familiar with the
Chattanooga market.  Revenues for the third quarter 1996 were $233,000 and
operating income totaled $59,000.  The property opened at the end of the third
quarter in 1995, therefore, 1995 revenue and operating amounts are not
comparable.
<PAGE>   11
Partnership revenues for the third quarter, 1996 were $1,023,000, compared to
$941,000 in the third quarter 1995.  The revenues in 1995 were lower because
the Chattanooga hotel was only open for one month in the third quarter, 1995.
Operating expenses totaled $669,000 for operating income of $354,000.
Operating expenses for the third quarter 1995 were $496,000, and operating
income was $445,000.  The reduction in operating income for the Partnership in
1996 compared to 1995 is due to issues discussed above for the Birmingham and
Hampton Inn hotels.  Other expenses, including interest and depreciation were
$410,000 for a net loss of $56,000 for the third quarter 1996.  The net income
for the same period in 1995 was $67,000.  The reduction in net income for 1996
compared to 1995 was caused by the reduction in operating income, and the
increase in interest expense with the Chattanooga hotel being open for the
entire quarter in 1996.  Cash flow from operations was $89,000 compared to a
cash flow of $68,000 in the third quarter 1995.  The properties are expected to
generate sufficient cash from operations to meet their needs for the remainder
of 1996.

Partnership assets decreased $948,000 from October 1, 1995 to September 30,
1996.  The change in total assets is a combination of an increase in
accumulated depreciation and amortization of $627,000 and a decrease in cash of
$260,000 due to payments for distributions.  Liabilities increased $37,000 due
to increases in accounts payable.  Partners' equity decreased $984,000 from net
losses incurred and the payment of distributions.
<PAGE>   12
                                    PART II

                               OTHER INFORMATION


Item 6.           Exhibits and Reports on Form 8-K

        a.        Exhibits

                  None

        b.        Reports on Form 8-K

                  None





                                   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:  November 7, 1996           /s/ Lorrie L. LoFaso
                                   --------------------------------------------
                                   Essex Hospitality Associates III L.P.  
                                   Essex Partners Inc.  
                                   Lorrie L. LoFaso 
                                   Vice President and Chief Accounting Officer