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 March 31, 2001


[ ] 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)


                                 March 31, 2001

<TABLE>
<CAPTION>

Assets
<S>                                                                          <C>
   Cash and cash equivalents                                                 $   185
   Receivables and deposits                                                      161
   Restricted escrows                                                             80
   Other assets                                                                  366
   Investment properties:
      Land                                                    $ 2,821
      Buildings and related personal property                   33,775
                                                                36,596
      Less accumulated depreciation                            (20,099)       16,497
                                                                            $ 17,289

Liabilities and Partners' Deficit
Liabilities
   Accounts payable                                                           $ 66
   Tenant security deposit liabilities                                           110
   Accrued property taxes                                                        341
   Due to affiliates                                                              40
   Other liabilities                                                             207
   Mortgage notes payable                                                     23,481

Partners' Deficit
   General partners                                            $ (139)
   Limited partners (1,011.5 units issued and
      outstanding)                                              (6,817)       (6,956)
                                                                            $ 17,289

            See Accompanying Notes to Consolidated Financial Statements

</TABLE>

<PAGE>


b)

                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

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



                                                               Three Months Ended
                                                                   March 31,
                                                               2001          2000
Revenues:
<S>                                                          <C>            <C>
   Rental income                                             $ 1,359        $ 1,376
   Other income                                                   168           132
      Total revenues                                            1,527         1,508

Expenses:
   Operating                                                      642           615
   General and administrative                                      60            39
   Depreciation                                                   431           404
   Interest                                                       537           536
   Property taxes                                                 105            97
      Total expenses                                            1,775         1,691

Net loss                                                      $ (248)       $ (183)

Net loss allocated to general partners (2%)                    $ (5)         $ (4)
Net loss allocated to limited partners (98%)                     (243)         (179)

                                                              $ (248)       $ (183)

Net loss per limited partnership unit                        $(240.24)     $(176.96)

            See Accompanying Notes to Consolidated Financial Statements

</TABLE>

<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, 2000                   1,011.5        $ (134)     $(6,574)   $(6,708)

Net loss for the three months
   ended March 31, 2001                    --             (5)        (243)      (248)

Partners' deficit at
   March 31, 2001                      1,011.5        $ (139)     $(6,817)   $(6,956)

            See Accompanying Notes to Consolidated Financial Statements

</TABLE>

<PAGE>


d)

                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

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



                                                                 Three Months Ended
                                                                       March 31,
                                                                  2001        2000
Cash flows from operating activities:
<S>                                                              <C>         <C>
  Net loss                                                       $ (248)     $ (183)
  Adjustments to reconcile net loss to net cash
   provided by operating activities:
     Depreciation                                                   431          404
     Amortization of mortgage discounts and loan costs               17           16
     Change in accounts:
      Receivables and deposits                                      (22)          79
      Other assets                                                  (95)         (58)
      Accounts payable                                              (59)          83
      Tenant security deposit liabilities                            (3)           4
      Accrued property taxes                                        105          108
      Other liabilities                                              11           (7)

         Net cash provided by operating activities                  137          446

Cash flows from investing activities:
  Property improvements and replacements                           (361)        (223)
  Net deposits to restricted escrows                                 (1)          (1)

         Net cash used in investing activities                     (362)        (224)

Cash flows used in financing activities:
  Payments on mortgage notes payable                                (36)         (35)
  Payments on advances from affiliates                              (13)          --

         Net cash used in financing activities                      (49)         (35)

Net (decrease) increase in cash and cash equivalents               (274)         187
Cash and cash equivalents at beginning of period                    459          480

Cash and cash equivalents at end of period                       $ 185        $ 667

Supplemental disclosure of cash flow information:
  Cash paid for interest                                         $ 519        $ 520

Included in property  improvements  and  replacements for the three months ended
March 31, 2001 are approximately $240,000 of improvements which were included in
accounts payable at December 31, 2000.

            See Accompanying Notes to Consolidated Financial Statements

</TABLE>

<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 month period ended March 31, 2001 are
not  necessarily  indicative  of the results  that may be expected  for the year
ending  December 31, 2001. 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, 2000. The Managing General
Partner is a wholly owned  subsidiary  of Apartment  Investment  and  Management
Company ("AIMCO").

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. which 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-partnership balances have
been eliminated.

Segment Reporting

Statement of Financial  Accounting Standards ("SFAS") No. 131, "Disclosure about
Segments of an Enterprise and Related Information" established standards for the
way that public business enterprises report information about operating segments
in annual  financial  statements  and  requires  that those  enterprises  report
selected  information about operating segments in interim financial reports.  It
also establishes  standards for related disclosures about products and services,
geographic  areas,  and  major  customers.  As  defined  in SFAS  No.  131,  the
Partnership  has only one  reportable  segment.  The  Managing  General  Partner
believes that  segment-based  disclosures  will not result in a more  meaningful
presentation than the financial statements as currently presented.


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 payments were
paid or accrued to the Managing General Partner and affiliates  during the three
months ended March 31, 2001 and 2000:

                                                         2001       2000
                                                          (in thousands)
         Property management fees (included in
           operating expenses)                           $ 77       $ 77
         Reimbursement for services of affiliates
           (included in operating and general and
           administrative expenses and investment
           properties)                                     44         25

Affiliates of the Managing  General  Partner are entitled to receive 5% of gross
receipts  from  both  of the  Registrant's  properties  for  providing  property
management  services.  The  Registrant  paid  to such  affiliates  approximately
$77,000 for each of the three month periods ended March 31, 2001 and 2000.

An  affiliate  of  the  Managing  General  Partner  received   reimbursement  of
accountable  administrative  expenses  amounting  to  approximately  $44,000 and
$25,000 for the three  months  ended March 31, 2001 and 2000,  respectively.  At
March 31, 2001,  approximately $15,000 of reimbursement for services was accrued
by the  Partnership  and is included in due to  affiliates  on the  accompanying
consolidated balance sheet.

During the year ended December 31, 2000, the Managing  General Partner  advanced
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  March  31,  2001,  the  balance  of  the  loan  was
approximately  $25,000.  Interest is charged at the prime rate plus 1%. Interest
expense was approximately $1,000 for the three months ended March 31, 2001.

In addition to its  indirect  ownership of the general  partner  interest in the
Partnership,  AIMCO and its affiliates owned 377 limited  partnership units (the
"Units") in the  Partnership  representing  37.27% of the  outstanding  Units at
March 31, 2001. 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 its affiliation with the Managing General Partner.

Note C - 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,  among other things,  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;  management of
the  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 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 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 and an  appeal  was  taken  from the order on
October 5, 2000. On December 4, 2000, the Court  appointed the law firm of Lieff
Cabraser  Heimann & Bernstein  LLP as new lead  counsel for  plaintiffs  and the
putative class.  Plaintiffs filed a third amended complaint on January 19, 2001.
On March 2, 2001,  the  Managing  General  Partner  and its  affiliates  filed a
demurrer to the third amended  complaint.  The demurrer is scheduled to be heard
on May 14,  2001.  The Court has also  scheduled a hearing on a motion for class
certification  for August 27, 2001.  Plaintiffs must file their motion for class
certification no later than June 15, 2001. 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 other pending or outstanding  litigation that
is not of a routine nature arising in the ordinary course of business.

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
three months ended March 31, 2001 and 2000:

                                                 Average Occupancy
                                                 2001        2000
         Salem Courthouse
            Indianapolis, Indiana                 94%         92%

         Plainview Apartments
            Louisville, Kentucky                  86%         95%

The Managing  General Partner  attributes the decrease in occupancy at Plainview
Apartments to many first time home purchasers during the first quarter.

Results of Operations

The  Registrant's  net  loss for the  three  months  ended  March  31,  2001 was
approximately  $248,000 as compared to a net loss of approximately  $183,000 for
the  corresponding  period  in  2000.  The  increase  in net  loss is  primarily
attributable  to an  increase  in total  expenses  partially  offset by a slight
increase  in total  revenues.  The  increase  in  total  expenses  is  primarily
attributable  to  an  increase  in  operating,   depreciation  and  general  and
administrative  expenses.  The increase in operating expense is primarily due to
increased utilities at Plainview Apartments and to a lesser extent, salaries and
related employee benefits at both properties. Depreciation expense increased due
to  additions  to  property  improvements  and  replacements  of the past twelve
months.   General  and   administrative   expense  increased  due  to  increased
reimbursements for services to the Managing General Partner as allowed under the
Partnership Agreement.

Included in general and administrative  expenses at both March 31, 2001 and 2000
are reimbursements to the Managing General Partner allowed under the Partnership
Agreement.  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 also included.

Total revenues  increased due to an increase in other income partially offset by
a slight decrease in rental income. Other income increased due to an increase in
tenant   reimbursements   and  interest  income  at  both  of  the  Registrant's
properties.  The decrease in rental  revenue was  primarily due to a decrease in
occupancy at  Plainview  Apartments  partially  offset by an increase in average
rental rates at both of the Registrant's properties.

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 March 31, 2001, the Registrant had cash and cash equivalents of approximately
$185,000 as compared to approximately  $667,000 at March 31, 2000. Cash and cash
equivalents  decreased  approximately  $274,000 for the three months ended March
31, 2001 from the  Registrant's  year ended December 31, 2000.  This decrease is
primarily  due to  approximately  $362,000 and $49,000 of cash used in investing
and financing activities, respectively, offset by approximately $137,000 of cash
provided by operating  activities.  Cash used in investing  activities consisted
primarily 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  principal  payments  made on the  mortgages
encumbering  the  Registrant's  properties.  The Registrant  invests its working
capital in interest bearing accounts.

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  $132,000  for  capital
improvements  during 2001 at  Plainview  Apartments  consisting  of interior and
exterior building improvements.  The Partnership completed approximately $47,000
in capital expenditures at Plainview Apartments as of March 31, 2001, consisting
primarily  of  floor   coverings,   heating   upgrades,   plumbing,   structural
improvements  and  roof  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 $189,000
for capital improvements during 2001 at Salem Courthouse  consisting of interior
and exterior  building  improvements.  The Partnership  completed  approximately
$74,000 in capital  expenditures at Salem Courthouse  Apartments as of March 31,
2001, consisting primarily of structural improvements and floor coverings. 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  $23,481,000,  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 three
month  periods  ended March 31, 2001 or 2000.  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. The Partnership's distribution policy is reviewed on a quarterly
basis.  There can be no assurance that the Registrant  will generate  sufficient
funds from operations after planned capital expenditures to permit distributions
to  its  partners   during  the  remainder  of  2001  or   subsequent   periods.
Distributions  may be  restricted by the  requirements  to deposit net operating
income (as  defined in the  mortgage  note) into the reserve  account  until the
reserve  account is funded in an amount equal to a minimum of $200 and a maximum
of $400  per  apartment  unit for  Salem  Courthouse  Apartments  for a total of
approximately $78,000 to $155,000. The reserve account balance at March 31, 2001
was approximately $80,000.

In addition to its  indirect  ownership of the general  partner  interest in the
Partnership,  AIMCO and its affiliates owned 377 limited  partnership units (the
"Units") in the  Partnership  representing  37.27% of the  outstanding  Units at
March 31, 2001. 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 its affiliation with the Managing General Partner.


<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,  among other things,  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;  management of
the  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 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 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 and an  appeal  was  taken  from the order on
October 5, 2000. On December 4, 2000, the Court  appointed the law firm of Lieff
Cabraser  Heimann & Bernstein  LLP as new lead  counsel for  plaintiffs  and the
putative class.  Plaintiffs filed a third amended complaint on January 19, 2001.
On March 2, 2001,  the  Managing  General  Partner  and its  affiliates  filed a
demurrer to the third amended  complaint.  The demurrer is scheduled to be heard
on May 14,  2001.  The Court has also  scheduled a hearing on a motion for class
certification  for August 27, 2001.  Plaintiffs must file their motion for class
certification no later than June 15, 2001. 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

                  None.

            b)    Reports on Form 8-K:

                  None filed during the quarter ended March 31, 2001.

<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.
                                          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: