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, 1999


[ ]  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

                         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, 1999


Assets
Cash and cash equivalents                                             $    424
Receivables and deposits                                                   443
Restricted escrows                                                          87
Other assets                                                               365
Investment properties:
Land                                                       $  2,821
Buildings and related personal property                      32,136
                                                             34,957
Less accumulated depreciation                               (17,567)    17,390
                                                                      $ 18,709
Liabilities and Partners' Deficit
Liabilities
Accounts payable                                                      $    118
Tenant security deposit liabilities                                        118
Accrued property taxes                                                     463
Other liabilities                                                          286
Mortgage notes payable                                                  23,657
Partners' Deficit
General partners                                           $   (118)
Limited partners (1011.5 units issued and
outstanding)                                                 (5,815)    (5,933)

                                                                      $ 18,709

          See Accompanying Notes to Consolidated Financial Statements
b)


                   DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)
                        (in thousands, except unit data)



                                   Three Months Ended      Nine Months Ended
                                     September 30,           September 30,
                                    1999       1998         1999        1998
Revenues:
Rental income                    $  1,414   $  1,380    $  4,106     $  4,018
Other income                           98        106         307          350
Total revenues                      1,512      1,486       4,413        4,368

Expenses:
Operating                             517        709       1,615        1,970
General and administrative             60         46         172          142
Depreciation                          373        358       1,095        1,055
Interest                              536        541       1,615        1,626
Property taxes                        136        107         338          327
Total expenses                      1,622      1,761       4,835        5,120

Net loss                         $   (110)  $   (275)   $   (422)    $   (752)
Net loss allocated to general
partners (2%)                          (2)        (5)         (8)         (15)
Net loss allocated to limited
  partners (98%)                     (108)      (270)       (414)        (737)
                                 $   (110)  $   (275)   $   (422)    $   (752)

Net loss per limited partnership
unit                             $(106.77)  $(266.93)   $(409.29)    $(728.62)

          See Accompanying Notes to Consolidated Financial Statements
c)

                   DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

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


                                    Limited
                                  Partnership  General   Limited
                                     Units     Partners Partners   Total

Original capital contributions       1,013.0   $     1  $20,240  $20,241

Partners' deficit at
December 31, 1998                    1,011.5   $  (110) $(5,401) $(5,511)

Net loss for the nine months
ended September 30, 1999                  --        (8)    (414)    (422)

Partners' deficit at
September 30, 1999                   1,011.5   $  (118) $(5,815) $(5,933)

          See Accompanying Notes to Consolidated Financial Statements
d)

                   DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                                 (in thousands)



                                                          Nine Months Ended
                                                             September 30,
                                                          1999         1998
Cash flows from operating activities:
Net loss                                               $  (422)     $  (752)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation                                             1,095        1,055
Amortization of mortgage discounts and loan costs           45           49
Change in accounts:
Receivables and deposits                                   (74)        (150)
Other assets                                               (47)          16
Accounts payable                                            74          (93)
Tenant security deposit liabilities                          9           23
Accrued property taxes                                      62          193
Other liabilities                                           59           (6)

Net cash provided by operating activities                  801          335

Cash flows used in investing activities:
Property improvements and replacements                    (546)        (384)
  Net receipts from (deposits to) restricted escrows        96           (6)

     Net cash used in investing activities                (450)        (390)

Cash flows used in financing activities:
  Payments on mortgage notes payable                       (95)         (88)

Net increase (decrease) in cash and cash equivalents       256         (143)
Cash and cash equivalents at beginning of period           168          251

Cash and cash equivalents at end of period             $   424      $   108

Supplemental disclosure of cash flow information:
Cash paid for interest                                 $ 1,570      $ 1,577

          See Accompanying Notes to Consolidated Financial Statements


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, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.  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, 1998.

Principles of Consolidation

The consolidated financial statements of the Partnership include its 99.9%
limited partnership interest in Plainview Apartments, L.P. and its wholly owned
limited liability company, Salem GP, LLC.  Because the Partnership may remove
the general partner of Plainview Apartments, L.P., the partnership is controlled
and consolidated by the Partnership.  All significant inter-entity balances have
been eliminated.

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 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 payments
were paid to the Managing General Partner and affiliates during the nine months
ended September 30, 1999 and 1998:

                                              1999       1998
                                               (in thousands)

Property management fees (included in
  operating expenses)                         $222       $220
Reimbursement for services of affiliates
  (included in operating and general and
 administrative expenses and investment
 properties)                                    83        120

During the nine months ended September 30, 1999 and 1998, affiliates of the
Managing General Partner were entitled to receive 5% of gross receipts from both
of the Registrant's residential properties for providing property management
services.  The Registrant paid to such affiliates approximately $222,000 and
$220,000 for the nine month periods ended September 30, 1999 and 1998,
respectively.

An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $83,000 and
$120,000 for the nine months ended September 30, 1999 and 1998, respectively.
Included in these expenses is approximately $2,000 and $20,000 of construction
services reimbursements for the nine months ended September 30, 1999 and 1998,
respectively.

On July 30, 1999, AIMCO Properties, L.P., an affiliate of the Managing General
Partner, commenced a tender offer to purchase up to 437.42 units of limited
partnership interest in the Partnership (approximately 43.24% of the total
outstanding units) for a purchase price of $1,285 per unit.  The offer expired
on September 19, 1999.  Pursuant to the offer, AIMCO Properties, L.P. acquired
96.5 units.  As a result, AIMCO and its affiliates currently own 139 units of
limited partnership interest in the Partnership representing approximately
13.74% of the total outstanding units.  It is possible that AIMCO or its
affiliate 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 (see "Note E - Legal Proceedings").

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 each of Kentucky and
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 net income.  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, 1998.

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 nine months ended September 30, 1999 and 1998 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.

                1999                  RESIDENTIAL      OTHER       TOTALS

Rental income                           $ 4,106       $    --     $ 4,106
Other income                                306             1         307
Interest expense                          1,615            --       1,615
Depreciation                              1,095            --       1,095
General and administrative expense           --           172         172
Segment loss                               (251)         (171)       (422)
Total assets                             18,624            85      18,709
Capital expenditures                        546            --         546

                1998                  RESIDENTIAL      OTHER       TOTALS

Rental income                           $ 4,108       $    --     $ 4,018
Other income                                345             5         350
Interest expense                          1,626            --       1,626
Depreciation                              1,055            --       1,055
General and administrative expense           --           142         142
Segment loss                               (615)         (137)       (752)
Total assets                             19,214            77      19,291
Capital expenditures                        384            --         384

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, the Managing General Partner and several of their affiliated
partnerships and corporate entities.  The complaint 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 by Insignia Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia Affiliates") of interests in certain general partner entities, past
tender offers by Insignia Affiliates to acquire limited partnership units, the
management of partnerships by Insignia Affiliates and the Insignia Merger (see
"Note B - Transfer of Control").  The complaint seeks 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 ("Stipulation"), settling claims, subject
to final court approval, on behalf of the Partnership and all limited partners
who own units as of November 3, 1999.  The Court has preliminarily approved the
Settlement and scheduled a final approval hearing for December 10, 1999.  In
exchange for a release of all claims, the Stipulation provides that, among other
things, an affiliate of the Managing General Partner will make tender offers for
all outstanding limited partnership interests in 49 partnerships, including the
Registrant, subject to the terms and conditions set forth in the Stipulation,
and has agreed to establish a reserve to pay an additional amount in settlement
to qualifying class members (the "Settlement Fund").  At the final approval
hearing, Plaintiffs' counsel will make an application for attorneys' fees and
reimbursement of expenses, to be paid in part by the partnerships and in part
from the Settlement Fund.  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.

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 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, 1999 and 1998:

                                       Average Occupancy
                                       1999        1998
Salem Courthouse
 Indianapolis, Indiana                 95%         96%

Plainview Apartments
 Louisville, Kentucky                  92%         92%


Results of Operations

The Registrant's net loss for the nine months ended September 30, 1999 was
approximately $422,000 as compared to approximately $752,000 for the
corresponding period in 1998.  The Registrant's net loss for the three months
ended September 30, 1999, was approximately $110,000 as compared to
approximately $275,000 for the corresponding period in 1998.  The decrease in
net loss for the three and nine month periods is the result of a decrease in
total expenses and, to a lesser extent, an increase in total revenues. Total
expenses decreased for both the three and nine month periods ended September 30,
1999, primarily due to a reduction in operating expense that more than offset an
increase in general and administrative expense and depreciation expense.
Operating expense decreased primarily due to the completion of the following
projects during 1998: interior and exterior building improvements and yard and
grounds improvements at both properties, parking lot repairs at Salem Courthouse
and swimming pool repairs and exterior painting at Plainview Apartments.
Insurance expense, which is included in operating expense, also decreased at
both properties due to a change in insurance carrier late in 1998 which has
resulted in lower premiums.  General and administrative expense increased due to
increased legal costs as a result of the settlement of legal cases in the first
and second quarters of 1999, as previously disclosed in prior quarters.
Depreciation expense increased as a result of an increase in capitalized
property improvements and replacements during the past 18 months which are now
being depreciated.

The increase in total revenues is attributable to an increase in rental income
that more than offset a decrease in other income.  Rental income increased due
to an increase in average annual rental rates at both properties as well as a
decrease in rental concessions offered by Salem Courthouse, which more than
offset the small decrease in average occupancy at Salem Courthouse.  Other
income decreased due to a decrease in utility income collected at Plainview
Apartments and a decrease in lease cancellation fees at both properties.

Included in general and administrative expenses at both September 30, 1999 and
1998 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.

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, 1999, the Registrant had cash and cash equivalents of
approximately $424,000 as compared to approximately $108,000 at September 30,
1998.  Cash and cash equivalents increased approximately $256,000 for the nine
months ended September 30, 1999 from the Registrant's fiscal year end and is
primarily due to approximately $801,000 of cash provided by operating
activities, which is partially offset by approximately $450,000 of cash used in
investing activities and approximately $95,000 of cash used in financing
activities.  Cash used in investing activities consisted primarily of property
improvements and replacements, partially offset by net receipts from escrow
accounts maintained by the mortgage lender.  Cash used in financing activities
consisted of payments of principal made on the mortgage 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 the both of the Registrant's properties are detailed below.

Salem Courthouse: Based on a report received from an independent third party
consultant analyzing necessary exterior improvements and estimates made by the
Managing General Partner on interior improvements, it is estimated that Salem
Courthouse requires approximately $397,000 of capital improvements over the next
few years.  The Partnership has budgeted, but is not limited to, capital
improvements of approximately $479,000 for 1999 at this property which include
certain of the required improvements and consist primarily of HVAC improvements,
siding/trim/facia/soffit improvements and balcony replacements.  As of September
30, 1999, approximately $133,000 has been incurred consisting primarily of
flooring, countertops, water heater and appliance replacements, landscaping,
computers and other equipment purchases.  These improvements were funded from
cash flow and replacement reserves.

Plainview Apartments: Based on a report received from an independent third party
consultant analyzing necessary exterior improvements and estimates made by the
Managing General Partner on interior improvements, it is estimated that
Plainview Apartments requires approximately $600,000 of capital improvements
over the next few years.  The Partnership is still evaluating the extent of the
improvements to be budgeted at this property.  The property has, however,
incurred costs associated with capital expenditures which have been deemed
necessary to compete within the local market, until a final assessment of the
total capital improvements required for the property is completed.  As of
September 30, 1999 approximately $413,000 has been incurred consisting primarily
of building improvements, HVAC condensing units, air conditioning and heating
upgrades, landscaping, flooring, appliance and water heater replacements, and
interior improvements.  These improvements were funded from cash flow.

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 $23,657,000, 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, 1999 or 1998.  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 an annual basis.
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 1999 or subsequent periods.

Tender Offer

On July 30, 1999, AIMCO Properties, L.P., an affiliate of the Managing General
Partner, commenced a tender offer to purchase up to 437.42 units of limited
partnership interest in the Partnership (approximately 43.24% of the total
outstanding units) for a purchase price of $1,285 per unit.  The offer expired
on September 19, 1999.  Pursuant to the offer, AIMCO Properties, L.P. acquired
96.5 units.  As a result, AIMCO and its affiliates currently own 139 units of
limited partnership interest in the Partnership representing approximately
13.74% of the total outstanding units.  It is possible that AIMCO or its
affiliate 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 (see "Item 1. Financial Statements, Note E -
Legal Proceedings").

Year 2000 Compliance

General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems

The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year.  The Partnership
is dependent upon the Managing General Partner and its affiliates for management
and administrative services ("Managing Agent").  Any of the computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000.  This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.

Over the past two years, the Managing Agent has determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999.  The Managing Agent presently believes that with modifications or
replacements of existing software and certain hardware, the Year 2000 issue can
be mitigated. However, if such modifications and replacements are not made, or
not completed in time, the Year 2000 issue could have a material impact on the
operations of the Partnership.

The Managing Agent's plan to resolve Year 2000 issues involves four phases:
assessment, remediation, testing, and implementation.  To date, the Managing
Agent has fully completed its assessment of all the information systems that
could be significantly affected by the Year 2000, and has begun the remediation,
testing and implementation phases on both hardware and software systems.
Assessments are continuing in regards to embedded systems.  The status of each
is detailed below.

Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase

Computer Hardware:

During 1997 and 1998, the Managing Agent identified all of the computer systems
at risk and formulated a plan to repair or replace each of the affected systems.
In August 1998, the main computer system used by the Managing Agent became fully
functional.  In addition to the main computer system, PC-based network servers,
routers and desktop PCs were analyzed for compliance.  The Managing Agent has
begun to replace each of the non-compliant network connections and desktop PCs
and, as of September 30, 1999, had virtually completed this effort.

The total cost to the Managing Agent to replace the PC-based network servers,
routers and desktop PCs is expected to be approximately $1.5 million of which
$1.3 million has been incurred to date.

Computer Software:

The Managing Agent utilizes a combination of off-the-shelf, commercially
available software programs as well as custom-written programs that are designed
to fit specific needs.  Both of these types of programs were studied, and
implementation plans written and executed with the intent of repairing or
replacing any non-compliant software programs.

In April 1999 the Managing Agent embarked on a data center consolidation project
that unifies its core financial systems under its Year 2000 compliant system.
The estimated completion date for this project is October 1999.

During 1998, the Managing agent began converting the existing property
management and rent collection systems to its management properties Year 2000
compliant systems.  The estimated additional costs to convert such systems at
all properties, is $200,000, and the implementation and testing process was
completed in June 1999.

The final software area is the office software and server operating systems.
The Managing Agent has upgraded all non-compliant office software systems on
each PC and has upgraded virtually all of the server operating systems.

Operating Equipment:

The Managing Agent has operating equipment, primarily at the property sites,
which needed to be evaluated for Year 2000 compliance.  In September 1997, the
Managing Agent began taking a census and inventory of embedded systems
(including those devices that use time to control systems and machines at
specific properties, for example elevators, heating, ventilating, and air
conditioning systems, security and alarm systems, etc.).

The Managing Agent has chosen to focus its attention mainly upon security
systems, elevators, heating, ventilating and air conditioning systems, telephone
systems and switches, and sprinkler systems.  While this area is the most
difficult to fully research adequately, management has not yet found any major
non-compliance issues that put the Managing Agent at risk financially or
operationally.

A pre-assessment of the properties by the Managing Agent has indicated virtually
no Year 2000 issues.  A complete, formal assessment of all the properties by the
Managing Agent was virtually completed by September 30, 1999.  Any operating
equipment that is found non-compliant will be repaired or replaced.

The total cost incurred for all properties managed by the Managing Agent as of
September 30, 1999 to replace or repair the operating equipment was
approximately $75,000. The Managing Agent estimates the cost to replace or
repair any remaining operating equipment is approximately $125,000.

The Managing Agent continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within its enterprise.

Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000

The Managing Agent has banking relationships with three major financial
institutions, all of which have designated their compliance.  The Managing Agent
has updated data transmission standards with all of the financial institutions.
All financial institutions have communicated that they are Year 2000 compliant
and accordingly no accounts were required to be moved from the existing
financial institutions.

The Partnership does not rely heavily on any single vendor for goods and
services, and does not have significant suppliers and subcontractors who share
information systems (external agent).  To date, the Partnership is not aware of
any external agent with a Year 2000 compliance issue that would materially
impact the Partnership's results of operations, liquidity, or capital resources.
However, the Partnership has no means of ensuring that external agents will be
Year 2000 compliant.

The Managing Agent does not believe that the inability of external agents to
complete their Year 2000 remediation process in a timely manner will have a
material impact on the financial position or results of operations of the
Partnership. However, the effect of non-compliance by external agents is not
readily determinable.

Costs to Address Year 2000

The total cost of the Year 2000 project to the Managing Agent is estimated at
$3.5 million and is being funded from operating cash flows.  To date, the
Managing Agent has incurred approximately $2.9 million ($0.7 million expenses
and $2.2 million capitalized for new systems and equipment) related to all
phases of the Year 2000 project.  Of the total remaining project costs,
approximately $0.5 million is attributable to the purchase of new software and
operating equipment, which will be capitalized.  The remaining $0.2 million
relates to repair of hardware and software and will be expensed as incurred.
The Partnership's portion of these costs are not material.

Risks Associated with the Year 2000

The Managing Agent believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner.  As noted above, the Managing Agent has not
yet completed all necessary phases of the Year 2000 program.  In the event that
the Managing Agent does not complete any additional phases, certain worst case
scenarios could occur.  The worst case scenarios could include elevators,
security and heating, ventilating and air conditioning systems that read
incorrect dates and operate with incorrect schedules (e.g., elevators will
operate on Monday as if it were Sunday). Although such a change would be
annoying to residents, it is not business critical.

In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Partnership.  The Partnership could be
subject to litigation for, among other things, computer system failures,
equipment shutdowns or failure to properly date business records.  The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.

Contingency Plans Associated with the Year 2000

The Managing Agent has contingency plans for certain critical applications and
is working on such plans for others.  These contingency plans involve, among
other actions, manual workarounds and selecting new relationships for such
activities as banking relationships and elevator operating systems.


                          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, the Managing General Partner and several of their affiliated
partnerships and corporate entities.  The complaint 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 by Insignia Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia Affiliates") of interests in certain general partner entities, past
tender offers by Insignia Affiliates to acquire limited partnership units, the
management of partnerships by Insignia Affiliates and the Insignia Merger (see
"Part I _ Financial Information, Item 1. Financial Statements, Note B _ Transfer
of Control").  The complaint seeks 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 ("Stipulation"), settling claims, subject
to final court approval, on behalf of the Partnership and all limited partners
who own units as of November 3, 1999.  The Court has preliminarily approved the
Settlement and scheduled a final approval hearing for December 10, 1999.  In
exchange for a release of all claims, the Stipulation provides that, among other
things, an affiliate of the Managing General Partner will make tender offers for
all outstanding limited partnership interests in 49 partnerships, including the
Registrant, subject to the terms and conditions set forth in the Stipulation,
and has agreed to establish a reserve to pay an additional amount in settlement
to qualifying class members (the "Settlement Fund").  At the final approval
hearing, Plaintiffs' counsel will make an application for attorneys' fees and
reimbursement of expenses, to be paid in part by the partnerships and in part
from the Settlement Fund.  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, 1999.


                                   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: