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, 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___

                         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, 2000

Assets

   Cash and cash equivalents                                       $   667
   Receivables and deposits                                            181
   Restricted escrows                                                   89
   Other assets                                                        374
   Investment properties:
      Land                                          $ 2,821
      Buildings and related personal property         32,660
                                                      35,481

      Less accumulated depreciation                  (18,402)       17,079
                                                                  $ 18,390

Liabilities and Partners' Deficit
Liabilities

   Accounts payable                                               $    178
   Tenant security deposit liabilities                                 120
   Accrued property taxes                                              392
   Other liabilities                                                   332
   Mortgage notes payable                                           23,597

Partners' Deficit

   General partners                                  $ (125)
   Limited partners (1,011.5 units issued and
      outstanding)                                    (6,104)       (6,229)
                                                                  $ 18,390

            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)



                                                           Three Months Ended
                                                                March 31,
                                                            2000        1999
                                                                     (restated)
Revenues:
   Rental income                                         $  1,376   $  1,354
   Other income                                               132        110
      Total revenues                                        1,508      1,464

Expenses:
   Operating                                                  615        563
   General and administrative                                  39         52
   Depreciation                                               404        372
   Interest                                                   536        540
   Property taxes                                              97        111
      Total expenses                                        1,691      1,638

Loss before cumulative effect of a change in
  accounting principle                                       (183)      (174)
Cumulative effect on prior years of a change in
  accounting for the cost of exterior painting and
  major landscaping                                            --        165
Net loss                                                 $   (183)  $     (9)

Net loss allocated to general partners (2%)                    (4)        --
Net loss allocated to limited partners (98%)                 (179)        (9)
                                                         $   (183)  $     (9)

Per limited partnership unit:
Loss before cumulative effect of a change in
  accounting principle                                   $(176.96)  $(169.06)
Cumulative effect of a change in accounting principle          --     160.16
Net loss                                                 $(176.96)  $  (8.90)

            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 three months
   ended March 31, 2000                     --            (4)       (179)      (183)

Partners' deficit at

   March 31, 2000                      1,011.5       $  (125)    $(6,104)   $(6,229)

            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,

                                                                  2000        1999
                                                                           (restated)
Cash flows from operating activities:

<S>                                                           <C>          <C>
   Net loss                                                   $  (183)     $    (9)
   Adjustments to reconcile net loss to net cash
     provided by operating activities:
     Depreciation                                                 404          372
     Amortization of mortgage discounts and loan costs             16           16
     Cumulative effect of a change in accounting principle         --         (165)
     Change in accounts:
      Receivables and deposits                                     79           14
      Other assets                                                (58)         (63)
      Accounts payable                                             83           29
      Tenant security deposit liabilities                           4           (6)
      Accrued property taxes                                      108          (12)
      Other liabilities                                            (7)          50

         Net cash provided by operating activities                446          226

Cash flows from investing activities:

   Property improvements and replacements                        (223)         (69)
   Net deposits to restricted escrows                              (1)          (2)

         Net cash used in investing activities                   (224)         (71)

Cash flows used in financing activities:

   Payments on mortgage notes payable                             (35)         (31)

Net increase in cash and cash equivalents                         187          124
Cash and cash equivalents at beginning of period                  480          168

Cash and cash equivalents at end of period                    $   667      $   292

Supplemental disclosure of cash flow information:

   Cash paid for interest                                     $   520      $   524

At  December  31,  1999,   accounts   payable  and  property   improvements  and
replacements were adjusted by $78,000 for noncash activity.

            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, 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 first quarter of 1999 has been restated to
reflect the  accounting  change as if it were  reported  then.  This  adjustment
decreased income before the cumulative  effect of the accounting  change for the
first quarter of 1999 by approximately  $11,000 ($10.66 per limited  partnership
unit). 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 affect 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 payments were
paid or accrued to the Managing General Partner and affiliates  during the three
months ended March 31, 2000 and 1999:

                                                         2000       1999
                                                          (in thousands)

         Property management fees (included in
           operating expenses)                           $ 77       $ 74
         Reimbursement for services of affiliates
           (included in operating and general and
            administrative expenses and investment
            properties)                                    25         33

During  the three  months  ended  March 31,  2000 and  1999,  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  $77,000 and
$74,000 for the three month periods ended March 31, 2000 and 1999, respectively.

An  affiliate  of  the  Managing  General  Partner  received   reimbursement  of
accountable  administrative  expenses  amounting  to  approximately  $25,000 and
$33,000 for the three months ended March 31, 2000 and 1999, respectively.

AIMCO and its affiliates  currently own 297.55 limited  partnership units in the
Partnership  representing  29.417% 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.  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 months ended March 31, 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.

                 2000                   Residential      Other       Totals

Rental income                             $ 1,376         $ --      $ 1,376
Other income                                  132            --         132
Interest expense                              536            --         536
Depreciation                                  404            --         404
General and administrative expense             --            39          39
Segment loss                                 (144)          (39)       (183)
Total assets                               18,322            68      18,390
Capital expenditures for investment
  properties                                  145            --         145

                 1999                   Residential      Other       Totals
                                               (restated)
Rental income                             $ 1,354         $ --      $ 1,354
Other income                                  110            --         110
Interest expense                              540            --         540
Depreciation                                  372            --         372
General and administrative expense             --            52          52
Cumulative effect of a change in
  in accounting principle                     165            --         165
Segment profit (loss)                          43           (52)         (9)
Total assets                               18,942            93      19,035
Capital expenditures for investment
  properties                                   69            --          69


<PAGE>



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 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  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  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 own units as
of November 3, 1999.  Preliminary  approval of the  settlement  was  obtained on
November 3, 1999 from the Superior Court of the State of  California,  County of
San Mateo, 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 class  plaintiffs'  counsel
to enter the settlement.  On December 14, 1999, the Managing General Partner and
its affiliates terminated the proposed settlement. Certain plaintiffs have filed
a motion to  disqualify  some of the  plaintiffs'  counsel  in the  action.  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
three months ended March 31, 2000 and 1999:

                                                 Average Occupancy
                                                 2000        1999
         Salem Courthouse

            Indianapolis, Indiana (1)             92%         96%

         Plainview Apartments

            Louisville, Kentucky (2)              95%         88%

(1)   The decrease in occupancy at Salem  Courthouse  is  attributable  to major
      road construction  which was begun during 2000 and is expected to continue
      throughout the year which has had a negative impact on the curb appeal and
      traffic flow in the area.

(2)   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  three  months  ended  March  31,  2000 was
approximately $183,000 as compared to approximately $9,000 for the corresponding
period  in 1999.  The  increase  in net loss is  primarily  attributable  to the
cumulative  effect of a change in  accounting  principle  recognized  during the
three  months ended March 31, 1999 and 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  expense and  depreciation
expense.  The increase in operating  expense is primarily  due to an increase in
maintenance  expense  at both of the  Registrant's  properties  and  advertising
expense at Plainview  Apartments.  Maintenance  expense increased as a result of
ground and yard work at Salem  Courthouse  and  plumbing  repairs  at  Plainview
Apartments.  In addition Salem Courthouse had received insurance proceeds during
1999 related to some water damage which reduced maintenance expense during 1999.
Depreciation  expense increased due to new depreciable  assets being placed into
service at both properties.  Partially offsetting the increase in total expenses
was a decrease  in  property  taxes.  Property  taxes  decreased  as a result of
several years of tax refunds received for Salem Courthouse during 2000.

Total  revenues  increased due to an increase in rental income and other income.
Rental income  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 lease  cancellation  fees, late charges,
and miscellaneous income at Salem Courthouse Apartments.

Included in general and administrative  expenses at both March 31, 2000 and 1999
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.

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 first quarter of 1999 has been restated to
reflect the  accounting  change as if it were  reported  then.  This  adjustment
decreased income before the cumulative  effect of the accounting  change for the
first quarter of 1999 by approximately  $11,000 ($10.66 per limited  partnership
unit). 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 affect 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 March 31, 2000, the Registrant had cash and cash equivalents of approximately
$667,000 as compared to approximately  $292,000 at March 31, 1999. Cash and cash
equivalents  increased  approximately  $187,000 for the three months ended March
31, 2000 from the Registrant's year ended December 31, 1999 and is primarily due
to  approximately  $446,000 of cash provided by operating  activities,  which is
partially offset by approximately  $224,000 of cash used in investing activities
and  approximately  $35,000 of cash used in financing  activities.  Cash used in
investing   activities   consisted   primarily  of  property   improvements  and
replacements  and 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
$120,000 in capital  expenditures at Plainview  Apartments as of March 31, 2000,
consisting primarily of heating upgrades, building improvements, appliances, 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  $25,000 in capital expenditures at Salem Courthouse Apartments as
of March  31,  2000,  consisting  primarily  of  floor  covering  and  appliance
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.

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  $23,597,000,  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, 2000 or 1999.  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 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 March 31, 2000, the balance in the reserve  account was
approximately $89,000.

                           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 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  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  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 own units as of November
3, 1999. Preliminary approval of the settlement was obtained on November 3, 1999
from the  Superior  Court of the State of  California,  County of San Mateo,  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 class  plaintiffs'  counsel  to  enter  the
settlement.  On  December  14,  1999,  the  Managing  General  Partner  and  its
affiliates  terminated the proposed settlement.  Certain plaintiffs have filed a
motion to disqualify some of the plaintiffs' counsel in the action. 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 March 31, 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: May 15, 2000