FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF
                        THE SECURITIES EXCHANGE ACT OF 1934
                        Quarterly or Transitional Report


                     U.S. Securities And Exchange Commission
                             Washington, D.C. 20549

                                   Form 10-QSB

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                 For the quarterly period ended September 30, 2000


[ ] 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 0-15676


                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.
         (Exact name of small business issuer as specified in its charter)



           Delaware                                              62-1242599
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

                          55 Beattie Place, P.O. Box 1089
                        Greenville, South Carolina 29602
                      (Address of principal executive offices)

                                 (864) 239-1000
                           (Issuer's telephone number)


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___



<PAGE>



                         PART I - FINANCIAL INFORMATION


ITEM 1.     FINANCIAL STATEMENTS

a)

                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

                           CONSOLIDATED BALANCE SHEET
                                   (Unaudited)
                          (in thousands, except unit data)


                               September 30, 2000

<TABLE>
<CAPTION>

Assets
<S>                                                                          <C>
   Cash and cash equivalents                                                 $   699
   Receivables and deposits                                                      326
   Restricted escrows                                                            157
   Other assets                                                                  330
   Investment properties:
      Land                                                    $  2,821
      Buildings and related personal property                   33,005
                                                                35,826
      Less accumulated depreciation                            (19,185)       16,641
                                                                            $ 18,153

Liabilities and Partners' Deficit
Liabilities
   Accounts payable                                                           $   87
   Due to affiliate                                                              145
   Tenant security deposit liabilities                                           124
   Accrued property taxes                                                        433
   Other liabilities                                                             224
   Mortgage notes payable                                                     23,539

Partners' Deficit
   General partners                                            $  (128)
   Limited partners (1,011.5 units issued and
      outstanding)                                              (6,271)       (6,399)
                                                                            $ 18,153
</TABLE>

            See Accompanying Notes to Consolidated Financial Statements


<PAGE>


b)


                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
                          (in thousands, except unit data)
<TABLE>
<CAPTION>

                                         Three Months Ended        Nine Months Ended
                                            September 30,            September 30,
                                          2000         1999         2000         1999
                                                    (Restated)                (Restated)
Revenues:
<S>                                     <C>           <C>          <C>          <C>
  Rental income                         $  1,405      $ 1,414      $ 4,232      $ 4,106
  Other income                               154           98          423          307
      Total revenues                       1,559        1,512        4,655        4,413

Expenses:
  Operating                                  586          517        1,753        1,615
  General and administrative                 102           60          193          172
  Depreciation                               389          384        1,186        1,128
  Interest                                   541          536        1,616        1,615
  Property taxes                             102          136          260          338
      Total expenses                       1,720        1,633        5,008        4,868

Loss before cumulative effect of a
  change in accounting principle            (161)        (121)        (353)        (455)
Cumulative effect on prior years
  of a change in accounting for
  the cost of exterior painting and
  major landscaping                           --           --           --          165

Net loss                                 $ (161)      $ (121)      $ (353)      $ (290)

Net loss allocated to general
  partners (2%)                           $  (3)        $ (2)        $ (7)        $ (6)
Net loss allocated to limited
  partners (98%)                           (158)        (119)        (346)        (284)

                                         $ (161)      $ (121)      $ (353)      $ (290)
Per limited partnership unit:
  Loss before cumulative effect
    of a change in accounting
    principle                           $(156.20)    $(117.65)    $(342.07)    $(440.93)
  Cumulative effect of a change in
    accounting principle                      --           --           --       160.16

Net loss                                $(156.20)    $(117.65)    $(342.07)    $(280.77)
</TABLE>

            See Accompanying Notes to Consolidated Financial Statements


<PAGE>


c)

                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

               CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
                                   (Unaudited)
                          (in thousands, except unit data)

<TABLE>
<CAPTION>

                                     Limited
                                     Partnership     General      Limited
                                        Units        Partners    Partners     Total

<S>                                    <C>            <C>         <C>        <C>
Original capital contributions         1,013.0        $    1      $20,240    $20,241

Partners' deficit at
   December 31, 1999                   1,011.5        $ (121)     $(5,925)   $(6,046)

Net loss for the nine months
   ended September 30, 2000                 --            (7)        (346)      (353)

Partners' deficit at
   September 30, 2000                  1,011.5        $ (128)     $(6,271)   $(6,399)
</TABLE>

            See Accompanying Notes to Consolidated Financial Statements


<PAGE>


d)

                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                   (in thousands)
<TABLE>
<CAPTION>

                                                                 Nine Months Ended
                                                                   September 30,
                                                                  2000        1999
                                                                           (Restated)
Cash flows from operating activities:
<S>                                                              <C>         <C>
  Net loss                                                       $ (353)     $  (290)
  Adjustments to reconcile net loss to net cash
   provided by operating activities:
     Depreciation                                                 1,186        1,128
     Amortization of mortgage discounts and loan costs               50           45
     Cumulative effect of a change in accounting principle           --         (165)
     Change in accounts:
      Receivables and deposits                                      (66)         (74)
      Other assets                                                  (39)         (47)
      Accounts payable                                               (8)          74
      Due to affiliate                                              145           --
      Tenant security deposit liabilities                             8            9
      Accrued property taxes                                        149           62
      Other liabilities                                            (115)          59
         Net cash provided by operating activities                  957          801

Cash flows from investing activities:
  Property improvements and replacements                           (567)        (546)
  Net (deposits to) withdrawals from restricted escrows             (69)          96
         Net cash used in investing activities                     (636)        (450)

Cash flows used in financing activities:
  Payments on mortgage notes payable                               (102)         (95)

Net increase in cash and cash equivalents                           219          256

Cash and cash equivalents at beginning of period                    480          168
Cash and cash equivalents at end of period                       $  699        $ 424

Supplemental disclosure of cash flow information:
  Cash paid for interest                                        $ 1,566      $ 1,570

At  December  31,  1999,  approximately  $78,000 of  property  improvements  and
replacements were included in accounts payable.
</TABLE>

            See Accompanying Notes to Consolidated Financial Statements


<PAGE>

e)

                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Note A - Basis of Presentation

The  accompanying   unaudited  consolidated  financial  statements  of  Davidson
Diversified Real Estate III, L.P. (the  "Partnership" or "Registrant") have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-QSB and Item 310(b)
of Regulation S-B.  Accordingly,  they do not include all of the information and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements.  In the opinion of Davidson Diversified  Properties,  Inc.
(the  "Managing  General  Partner"),   all  adjustments  (consisting  of  normal
recurring  accruals)  considered  necessary  for a fair  presentation  have been
included. Operating results for the three and nine month periods ended September
30, 2000 are not necessarily  indicative of the results that may be expected for
the year  ending  December  31,  2000.  For  further  information,  refer to the
consolidated   financial  statements  and  footnotes  thereto  included  in  the
Partnership's Annual Report on Form 10-KSB for the year ended December 31, 1999.

Principles of Consolidation

The financial  statements include all of the accounts of the Partnership and its
99.9% limited partnership interest in Plainview Apartments,  L.P. and its wholly
owned limited  liability  company Salem GP, LLC. The managing general partner of
the consolidated  partnership is Davidson Diversified Properties,  Inc. Davidson
Diversified  Properties,  Inc. may be removed as the managing general partner of
the  consolidated  partnership by the Registrant;  therefore,  the  consolidated
partnership is controlled and  consolidated by the  Registrant.  All significant
inter-entity balances have been eliminated.

Change in Accounting Principle

Effective  January 1, 1999, the Partnership  changed its method of accounting to
capitalize the cost of exterior painting and major landscaping.  The Partnership
believes that this accounting principle change is preferable because it provides
a better matching of expenses with the related benefit of the  expenditures  and
it is consistent with industry practice and the policies of the Managing General
Partner.  This accounting change was first reported during the fourth quarter of
1999.  Accordingly,  net loss for the three and nine months ended  September 30,
1999 has been restated to reflect the  accounting  change as if it were reported
then. This adjustment increased  (decreased) income before the cumulative effect
of the accounting  change for the three and nine months ended September 30, 1999
by   approximately   $2,000  ($1.98  per  limited   partnership   unit)  and  by
approximately $(20,000) ($19.77 per limited partnership unit), respectively. The
cumulative effect adjustment of approximately $165,000 is the result of applying
the aforementioned change in accounting principle  retroactively and is included
in the loss for 1999. The accounting principle change will not have an effect on
cash flow,  funds  available  for  distribution  or fees payable to the Managing
General Partner and affiliates.

Note B - Transfer of Control

Pursuant  to a series  of  transactions  which  closed  on  October  1, 1998 and
February 26, 1999,  Insignia Financial Group, Inc. and Insignia Properties Trust
merged into Apartment  Investment and Management Company  ("AIMCO"),  a publicly
traded real estate investment trust, with AIMCO being the surviving  corporation
(the "Insignia Merger").  As a result, AIMCO acquired 100% ownership interest in
the Managing General Partner. The Managing General Partner does not believe that
this  transaction  has had or will have a  material  effect on the  affairs  and
operations of the Partnership.

Note C - Transactions with Affiliated Parties

The  Partnership  has no employees  and is  dependent  on the  Managing  General
Partner  and  its  affiliates  for  the  management  and  administration  of all
Partnership  activities.  The  Partnership  Agreement  provides  for (i) certain
payments to affiliates for services and (ii)  reimbursement  of certain expenses
incurred by affiliates on behalf of the Partnership. The following expenses were
incurred by the  Partnership  to the  Managing  General  Partner and  affiliates
during the nine months ended September 30, 2000 and 1999:

                                                         2000       1999
                                                          (in thousands)
         Property management fees (included in
           operating expenses)                           $232       $222
         Reimbursement for services of affiliates
           (included in operating and general and
            administrative expenses and investment
            properties)                                   139         83
         Advance from Managing General Partner
            (included in due to affiliate)                 64         --

During the nine months  ended  September  30, 2000 and 1999,  affiliates  of the
Managing General Partner were entitled to receive 5% of gross receipts from both
of the  Registrant's  investment  properties for providing  property  management
services.  The Registrant  paid to such  affiliates  approximately  $232,000 and
$222,000 for the nine months ended September 30, 2000 and 1999, respectively.

An  affiliate  of  the  Managing  General  Partner  received   reimbursement  of
accountable  administrative  expenses  amounting to  approximately  $139,000 and
$83,000 for the nine months ended September 30, 2000 and 1999, respectively.  At
September  30, 2000  approximately  $81,000 of  reimbursement  for  services was
accrued  by  the  Partnership  and is  included  in  due  to  affiliates  on the
accompanying  consolidated balance sheet.  Approximately  $34,000 of the accrued
amount was paid subsequent to September 30, 2000.

During the nine months ended September 30, 2000 the Managing General Partner has
loaned  the  Partnership  approximately  $73,000 to cover  operational  expenses
required at  Plainview  Apartments.  This loan was made in  accordance  with the
terms of the  Partnership  Agreement.  At September  30, 2000 the balance of the
loan was approximately  $64,000.  Interest is charged at the prime rate plus 1%.
Interest  expense was  approximately  $4,000 for the nine months ended September
30, 2000 and is included in interest expense.

In addition to its  indirect  ownership of the general  partner  interest in the
Partnership,  AIMCO and its affiliates  currently own 361.55 limited partnership
units in the Partnership representing 35.744% of the outstanding units. A number
of these  units were  acquired  pursuant  to tender  offers made by AIMCO or its
affiliates.  It is possible that AIMCO or its  affiliates  will make one or more
additional offers to acquire  additional  limited  partnership  interests in the
Partnership  for cash or in exchange for units in the operating  partnership  of
AIMCO. Under the Partnership  Agreement,  unitholders  holding a majority of the
Units are  entitled to take action with  respect to a variety of matters,  which
would  include  without   limitation,   voting  on  certain  amendments  to  the
Partnership  Agreement and voting to remove the Managing General  Partner.  When
voting on matters, AIMCO would in all likelihood vote the Units it acquired in a
manner  favorable  to the interest of the Managing  General  Partner  because of
their affiliation with the Managing General Partner.

Note D - Segment Reporting

Description  of the types of products  and  services  from which the  reportable
segment derives its revenue:

The  Partnership  has one  reportable  segment:  residential  properties,  which
consists of two  apartment  complexes,  one located in Kentucky and the other in
Indiana.  The  Partnership  rents  apartment units to tenants for terms that are
typically twelve months or less.

Measurement of segment profit or loss:

The  Partnership  evaluates  performance  based on segment  profit (loss) before
depreciation.  The accounting policies of the reportable segment are the same as
those described in the Partnership's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1999.

Factors management used to identify the enterprise's reportable segment:

The  Partnership's  reportable  segment  consists of investment  properties that
offer similar products and services.  Although each of the investment properties
is  managed  separately,  they have been  aggregated  into one  segment  as they
provide services with similar types of products and customers.

Segment  information  for the three and nine months ended September 30, 2000 and
1999 is shown in the tables below (in  thousands).  The "Other" column  includes
Partnership administration related items and income and expense not allocated to
the reportable segment.

 Three Months Ended September 30, 2000    Residential      Other       Totals

Rental income                               $ 1,405         $  --     $ 1,405
Other income                                    154            --         154
Interest expense                                541            --         541
Depreciation                                    389            --         389
General and administrative expense               --           102         102
Segment (loss) profit                           (59)         (102)       (161)


  Nine Months Ended September 30, 2000    Residential      Other       Totals

Rental income                               $ 4,232         $  --     $ 4,232
Other income                                    422             1         423
Interest expense                              1,616            --       1,616
Depreciation                                  1,186            --       1,186
General and administrative expense               --           193         193
Segment loss                                   (161)         (192)       (353)
Total assets                                 18,124            29      18,153
Capital expenditures for investment
  properties                                    489            --         489


 Three Months Ended September 30, 1999    Residential      Other       Totals

Rental income                               $ 1,414         $  --     $ 1,414
Other income                                     98            --          98
Interest expense                                536            --         536
Depreciation                                    384            --         384
General and administrative expense               --            60          60
Segment loss                                    (61)          (60)       (121)


  Nine Months Ended September 30, 1999    Residential      Other       Totals

Rental income                               $ 4,106         $  --      $ 4,106
Other income                                    306             1          307
Interest expense                              1,615            --        1,615
Depreciation                                  1,128            --        1,128
General and administrative expense               --           172          172
Cumulative effect of a change in
  in accounting principle                       165            --          165
Segment loss                                   (119)         (171)        (290)
Total assets                                 18,756            85       18,841
Capital expenditures for investment
  properties                                    546            --          546


Note E - Legal Proceedings

In March 1998, several putative unit holders of limited partnership units of the
Partnership  commenced an action  entitled  Rosalie  Nuanes,  et al. v. Insignia
Financial  Group,  Inc., et al. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs  named as defendants,  among others,
the  Partnership,  its Managing  General Partner and several of their affiliated
partnerships  and corporate  entities.  The action  purports to assert claims on
behalf of a class of limited  partners and derivatively on behalf of a number of
limited  partnerships  (including  the  Partnership)  which are named as nominal
defendants,  challenging the acquisition of interests in certain general partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one  time,  affiliates  of  Insignia;  past  tender  offers  by the  Insignia
affiliates to acquire limited  partnership units; the management of partnerships
by the  Insignia  affiliates;  and the  Insignia  Merger.  The  plaintiffs  seek
monetary damages and equitable  relief,  including  judicial  dissolution of the
Partnership.  On June 25, 1998,  the  Managing  General  Partner  filed a motion
seeking  dismissal  of the action.  In lieu of  responding  to the  motion,  the
plaintiffs have filed an amended  complaint.  The Managing General Partner filed
demurrers to the amended complaint which were heard February 1999.

Pending the ruling on such  demurrers,  settlement  negotiations  commenced.  On
November 2, 1999,  the parties  executed and filed a Stipulation  of Settlement,
settling claims,  subject to final court approval,  on behalf of the Partnership
and all limited  partners  who owned  units as of November 3, 1999.  Preliminary
approval of the settlement  was obtained on November 3, 1999 from the Court,  at
which time the Court set a final approval  hearing for December 10, 1999.  Prior
to the December 10, 1999 hearing,  the Court received various  objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement.  On
December 14, 1999, the Managing  General  Partner and its affiliates  terminated
the  proposed  settlement.  In  February  2000,  counsel  for some of the  named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated  the  settlement.  On June  27,  2000,  the  Court  entered  an order
disqualifying them from the case. The Court is considering applications for lead
counsel and has  currently  scheduled a hearing on the matter for  November  20,
2000. The Managing  General  Partner does not anticipate  that costs  associated
with this case will be material to the Partnership's overall operations.

The Partnership is unaware of any pending or outstanding  litigation that is not
of a routine nature arising in the ordinary course of business.


<PAGE>

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS

The  matters  discussed  in this Form  10-QSB  contain  certain  forward-looking
statements  and  involve  risks and  uncertainties  (including  changing  market
conditions,   competitive  and  regulatory   matters,   etc.)  detailed  in  the
disclosures  contained  in this  Form  10-QSB  and the  other  filings  with the
Securities and Exchange Commission made by the Registrant from time to time. The
discussion of the  Registrant's  business and results of  operations,  including
forward-looking  statements  pertaining  to such  matters,  does not  take  into
account the effects of any changes to the  Registrant's  business and results of
operation.  Accordingly,  actual  results  could  differ  materially  from those
projected in the forward-looking  statements as a result of a number of factors,
including those identified herein.

The Partnership's  investment properties consist of two apartment complexes. The
following  table sets forth the average  occupancy of these  properties  for the
nine months ended September 30, 2000 and 1999:

                                                 Average Occupancy
                                                 2000        1999
         Salem Courthouse
            Indianapolis, Indiana                 93%         95%
         Plainview Apartments
            Louisville, Kentucky (1)              96%         92%

(1)   The increase in occupancy at Plainview  Apartments is a result of improved
      retention  of tenants  during the latter  half of 1999 and into 2000.  The
      first part of 1999 was adversely affected by employment  transfers and new
      home  purchases.  Various  concessions  are being  offered in an effort to
      maintain occupancy levels.

Results of Operations

The  Registrant's  net loss for the nine  months  ended  September  30, 2000 was
approximately  $353,000 as compared to approximately  $290,000 (as restated) for
the same period in 1999.  The  Registrant's  net loss for the three months ended
September  30, 2000 was  approximately  $161,000  as  compared to  approximately
$121,000 (as restated) for the same period in 1999. The increase in net loss for
the nine months  ended  September  30,  2000 is  primarily  attributable  to the
cumulative effect of a change in accounting principle recognized during the nine
months ended  September  30, 1999, as discussed  below.  The  Registrant's  loss
before cumulative effect of a change in accounting principle for the nine months
ended September 30, 2000 was approximately $353,000 as compared to approximately
$455,000 (as restated) for the same period in 1999.  The decrease in loss before
cumulative effect of a change in accounting  principle for the nine months ended
September 30, 2000 is  attributable  to an increase in total revenues  partially
offset by an increase in total expenses.  The increase in loss before cumulative
effect of a change in accounting  principle for the three months ended September
30,  2000 is  attributable  to an increase in total  expenses  and is  partially
offset by an  increase in total  revenues.  Total  revenues  for the nine months
ended September 30, 2000 increased due to an increase in rental and other income
compared to the corresponding  period in 1999. Total revenues  increased for the
three months ended September 30, 2000 as compared to the corresponding period in
1999 primarily due to an increase in other income,  as discussed  below, and was
partially  offset by a decrease in rental  income due to an increase in bad debt
expense.  Rental  income for the nine month period  increased  primarily  due to
increased rental rates at both of the Registrant's properties and an increase in
occupancy  at  Plainview  Apartments  which  more than  offset the  decrease  in
occupancy  at Salem  Courthouse.  Other income  increased  due to an increase in
interest income at Salem Courthouse Apartments and an increase in tenant utility
reimbursements and furnished apartment rentals at Plainview Apartments.

Total expenses for the three and nine months ended  September 30, 2000 increased
primarily  due to an increase in  operating,  general  and  administrative,  and
depreciation  expenses that more than offset a decrease in property  taxes.  The
increase in  operating  expense is primarily  due to an increase in  maintenance
expense  at Salem  Courthouse,  an  increase  in utility  expense  at  Plainview
Apartments,  and  increases  in  salaries  and  related  benefits at both of the
Registrant's properties. Maintenance expense increased as a result of ground and
yard  work,  contract  repairs,  and  interior  building  improvements  at Salem
Courthouse.  Utility expense  increased due to increased  occupancy at Plainview
Apartments.  Depreciation  expense increased due to new depreciable assets being
placed into service at both properties in the past twelve months. Property taxes
decreased as a result of the taxing  authority  lowering the assessed  value for
Salem Courthouse during 2000.

General and  administrative  expense increased due to an increase in the cost of
services  included in the  management  reimbursements  to the  Managing  General
Partner  as  allowed  under  the  Partnership  Agreement  partially  offset by a
decrease in professional fees. In addition,  costs associated with the quarterly
and annual  communications with investors and regulatory agencies and the annual
audit  required  by the  Partnership  Agreement  are  included  in  general  and
administrative expenses at both September 30, 2000 and 1999.

Effective  January 1, 1999, the Partnership  changed its method of accounting to
capitalize the cost of exterior painting and major landscaping.  The Partnership
believes that this accounting principle change is preferable because it provides
a better matching of expenses with the related benefit of the  expenditures  and
it is consistent with industry practice and the policies of the Managing General
Partner.  This accounting change was first reported during the fourth quarter of
1999.  Accordingly,  net loss for the three and nine months ended  September 30,
1999 has been restated to reflect the  accounting  change as if it were reported
then. This adjustment increased  (decreased) income before the cumulative effect
of the accounting  change for the three and nine months ended September 30, 1999
by   approximately   $2,000  ($1.98  per  limited   partnership   unit)  and  by
approximately $(20,000) ($19.77 per limited partnership unit), respectively. The
cumulative effect adjustment of approximately $165,000 is the result of applying
the aforementioned change in accounting principle  retroactively and is included
in the loss for 1999. The accounting principle change will not have an effect on
cash flow,  funds  available  for  distribution  or fees payable to the Managing
General Partner and affiliates.

As part of the ongoing  business plan of the  Partnership,  the Managing General
Partner monitors the rental market  environment of its investment  properties to
assess the feasibility of increasing rents,  maintaining or increasing occupancy
levels and protecting  the  Partnership  from increases in expenses.  As part of
this plan, the Managing General Partner attempts to protect the Partnership from
the burden of  inflation-related  increases in expenses by increasing  rents and
maintaining a high overall  occupancy  level.  However,  due to changing  market
conditions,  which  can  result  in the use of  rental  concessions  and  rental
reductions to offset softening market conditions, there is no guarantee that the
Managing General Partner will be able to sustain such a plan.

Liquidity and Capital Resources

At  September  30,  2000,  the  Registrant  had  cash and  cash  equivalents  of
approximately  $699,000 as compared to  approximately  $424,000 at September 30,
1999. Cash and cash equivalents  increased  approximately  $219,000 for the nine
months ended  September 30, 2000 from the  Registrant's  year ended December 31,
1999  and is  primarily  due to  approximately  $957,000  of  cash  provided  by
operating  activities,  which is partially offset by  approximately  $636,000 of
cash used in investing  activities  and  approximately  $102,000 of cash used in
financing  activities.  Cash used in investing  activities consisted of property
improvements  and replacements  and, to a lesser extent,  net deposits to escrow
accounts  maintained by the mortgage lender.  Cash used in financing  activities
consisted  of  payments  of  principal  made on the  mortgages  encumbering  the
Registrant's properties.  The Registrant invests its working capital reserves in
a money market account.

The sufficiency of existing  liquid assets to meet future  liquidity and capital
expenditure   requirements   is  directly   related  to  the  level  of  capital
expenditures  required at the  properties  to  adequately  maintain the physical
assets and other  operating  needs of the Registrant and to comply with Federal,
state, and local legal and regulatory requirements. Capital improvements planned
for both of the Registrant's properties are detailed below.

Plainview Apartments:  The Partnership has budgeted  approximately  $206,000 for
capital improvements during 2000 at Plainview Apartments consisting primarily of
floor covering replacements,  roof replacements,  air conditioning improvements,
appliances,  and  heating  upgrades.  The  Partnership  completed  approximately
$322,000  in  budgeted  and  non-budgeted   capital  expenditures  at  Plainview
Apartments as of September 30, 2000,  consisting  primarily of heating upgrades,
structural  improvements,  and air  conditioning,  appliances,  roof,  and floor
covering replacements.  These improvements were funded from operating cash flow.
Additional  improvements  may be  considered  and will  depend  on the  physical
condition of the property as well as replacement  reserves and anticipated  cash
flow generated by the property.

Salem Courthouse Apartments: The Partnership has budgeted approximately $223,000
for capital improvements during 2000 at Salem Courthouse consisting primarily of
floor covering  replacements,  fencing,  recreation facility  enhancements,  air
conditioning   improvements,   and   appliances.   The   Partnership   completed
approximately $167,000 in capital expenditures at Salem Courthouse Apartments as
of September  30, 2000,  consisting  primarily of floor  covering and  appliance
replacements and exterior building painting. These improvements were funded from
operating cash flow.  Additional  improvements may be considered and will depend
on the physical  condition of the property as well as  replacement  reserves and
anticipated cash flow generated by the property.

The additional  capital  expenditures will be incurred only if cash is available
from operations or from Partnership  reserves.  To the extent that such budgeted
capital improvements are completed, the Registrant's distributable cash flow, if
any, may be adversely affected at least in the short term.

The  Registrant's  current assets are thought to be sufficient for any near-term
needs  (exclusive  of capital  improvements)  of the  Registrant.  The  mortgage
indebtedness of approximately  $23,539,000,  net of discount,  is amortized over
360 months  with a balloon  payment of  approximately  $23,120,000  due at dates
ranging from October 15, 2003 to November 15, 2010. The Managing General Partner
will attempt to refinance such indebtedness  and/or sell the properties prior to
such  maturity  dates.  If the  properties  cannot be  refinanced  or sold for a
sufficient  amount,  the  Registrant  will risk losing such  properties  through
foreclosure.

The Partnership did not make any  distributions  to its partners during the nine
months ended September 30, 2000 or 1999. The Partnership's  distribution  policy
is reviewed on an annual  basis.  Future cash  distributions  will depend on the
levels of net cash generated from operations, the availability of cash reserves,
and the timing of the debt maturities, refinancings and/or property sales. There
can be no assurance, however, that the Registrant will generate sufficient funds
from operations  after planned capital  expenditures to permit  distributions to
its partners  during the remainder of 2000 or subsequent  periods.  In addition,
the Partnership may be restricted from making distributions if the amount in the
reserve  account for Salem  Courthouse  Apartments  maintained  by the  mortgage
lender is less than $400 per  apartment  unit or $155,200.  As of September  30,
2000, the balance in the reserve account was approximately $157,000.


<PAGE>


                           PART II - OTHER INFORMATION


ITEM 1      LEGAL PROCEEDINGS

In March 1998, several putative unit holders of limited partnership units of the
Partnership  commenced an action  entitled  Rosalie  Nuanes,  et al. v. Insignia
Financial  Group,  Inc., et al. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs  named as defendants,  among others,
the  Partnership,  its Managing  General Partner and several of their affiliated
partnerships  and corporate  entities.  The action  purports to assert claims on
behalf of a class of limited  partners and derivatively on behalf of a number of
limited  partnerships  (including  the  Partnership)  which are named as nominal
defendants,  challenging the acquisition of interests in certain general partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one  time,  affiliates  of  Insignia;  past  tender  offers  by the  Insignia
affiliates to acquire limited  partnership units; the management of partnerships
by the  Insignia  affiliates;  and the  Insignia  Merger.  The  plaintiffs  seek
monetary damages and equitable  relief,  including  judicial  dissolution of the
Partnership.  On June 25, 1998,  the  Managing  General  Partner  filed a motion
seeking  dismissal  of the action.  In lieu of  responding  to the  motion,  the
plaintiffs have filed an amended  complaint.  The Managing General Partner filed
demurrers to the amended complaint which were heard February 1999.

Pending the ruling on such  demurrers,  settlement  negotiations  commenced.  On
November 2, 1999,  the parties  executed and filed a Stipulation  of Settlement,
settling claims,  subject to final court approval,  on behalf of the Partnership
and all limited  partners  who owned  units as of November 3, 1999.  Preliminary
approval of the settlement  was obtained on November 3, 1999 from the Court,  at
which time the Court set a final approval  hearing for December 10, 1999.  Prior
to the December 10, 1999 hearing,  the Court received various  objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement.  On
December 14, 1999, the Managing  General  Partner and its affiliates  terminated
the  proposed  settlement.  In  February  2000,  counsel  for some of the  named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated  the  settlement.  On June  27,  2000,  the  Court  entered  an order
disqualifying them from the case. The Court is considering applications for lead
counsel and has  currently  scheduled a hearing on the matter for  November  20,
2000. The Managing  General  Partner does not anticipate  that costs  associated
with this case will be material to the Partnership's overall operations.

ITEM 6      EXHIBITS AND REPORTS ON FORM 8-K

            a)    Exhibits

                  Exhibit 27, Financial Data Schedule, is filed as an exhibit to
                  this report.

            b)    Reports on Form 8-K:

                  None filed during the quarter ended September 30, 2000.

<PAGE>


                                   SIGNATURES



In accordance with the  requirements of the Exchange Act, the registrant  caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.



                                    DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.


                                    By:   Davidson Diversified Properties, Inc.
                                          Its Managing General Partner


                                    By:   /s/Patrick J. Foye
                                          Patrick J. Foye
                                          Executive Vice President


                                    By:   /s/Martha L. Long
                                          Martha L. Long
                                          Senior Vice President and
                                          Controller


                                    Date: