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 June 30, 1998


[ ]  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 LIMITED PARTNERSHIP
       (Exact name of small business issuer as specified in its charter)

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

                  One Insignia Financial Plaza, 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 LIMITED PARTNERSHIP
                           CONSOLIDATED BALANCE SHEET
                        (in thousands, except unit data)
                                  (Unaudited)

                                 June 30, 1998


Assets
  Cash and cash equivalents                                        $  204
  Receivables and deposits                                            290
  Restricted escrows                                                  179
  Other assets                                                        389
  Investment properties:
     Land                                            $  2,821
     Buildings and related personal property           31,362
                                                       34,183
     Less accumulated depreciation                    (15,751)      18,432

                                                                   $19,494

Liabilities and Partners' Deficit
Liabilities
  Accounts payable                                                 $   133
  Tenant security deposit liabilities                                  105
  Accrued property taxes                                               363
  Other liabilities                                                    197
  Mortgage notes payable                                            23,792

Partners' Deficit
  General partners                                   $   (102)
  Limited partners (1,011.5 units issued
     and outstanding)                                  (4,994)      (5,096)

                                                                   $19,494

          See Accompanying Notes to Consolidated Financial Statements


b)
            DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                        (in thousands, except unit data)
                                  (Unaudited)



                                     Three Months Ended     Six Months Ended
                                          June 30,              June 30,
                                       1998       1997       1998       1997
Revenues:
  Rental income                     $  1,325   $  1,269   $  2,638   $  2,538
  Other income                           145        102        244        251
    Total revenues                     1,470      1,371      2,882      2,789

Expenses:
  Operating                              672        640      1,261      1,235
  General and administrative              49         40         96         83
  Depreciation                           351        348        697        693
  Interest                               543        544      1,085      1,089
  Property taxes                         106        113        220        222
    Total expenses                     1,721      1,685      3,359      3,322

     Net loss                       $   (251)  $   (314)  $   (477)  $   (533)

Net loss allocated to general
  partners (2%)                     $     (5)  $     (6)  $    (10)  $    (11)
Net loss allocated to limited
  partners (98%)                        (246)      (308)      (467)      (522)
                                    $   (251)  $   (314)  $   (477)  $   (533)
Net loss per limited partnership
  unit:                             $(243.20)  $(304.50)  $(461.69)  $(516.07)

          See Accompanying Notes to Consolidated Financial Statements

c)
             DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
             CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
                         (in thousands, except unit data)
                                   (Unaudited)



                                   Limited
                                 Partnership   General    Limited
                                    Units      Partners   Partners    Total

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

Partners' deficit at
  December 31, 1997                1,011.5      $ (92)    $ (4,527) $ (4,619)

Net loss for the six months
  ended June 30, 1998                   --        (10)        (467)     (477)

Partners' deficit at
  June 30, 1998                    1,011.5      $(102)    $ (4,994) $ (5,096)

          See Accompanying Notes to Consolidated Financial Statements


d)
            DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                  (Unaudited)


                                                            Six Months Ended
                                                                June 30,
                                                            1998        1997
Cash flows from operating activities:
  Net loss                                                 $ (477)     $ (533)
  Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
    Depreciation                                              697         693
    Amortization of mortgage discounts and loan costs          33          33
    Change in accounts:
      Receivables and deposits                                (35)        (58)
      Other assets                                             11         (60)
      Accounts payable                                        (76)        (95)
      Tenant security deposit liabilities                      21         (13)
      Accrued property taxes                                   85          82
      Other liabilities                                       (11)        (93)

         Net cash provided by (used in)
           operating activities                               248         (44)

Cash flows from investing activities:
  Property improvements and replacements                     (233)       (134)
  Net (deposits to) receipts from restricted escrows           (4)         82

         Net cash used in investing activities               (237)        (52)

Cash flows used in financing activities:
  Payments on mortgage notes payable                          (58)        (54)

Net decrease in cash and cash equivalents                     (47)       (150)
Cash and cash equivalents at beginning of period              251         465

Cash and cash equivalents at end of period                 $  204      $  315

Supplemental disclosure of cash flow information:
  Cash paid for interest                                   $1,052      $1,056

          See Accompanying Notes to Consolidated Financial Statements

e)
            DAVIDSON DIVERSIFIED REAL ESTATE III LIMITED PARTNERSHIP
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)


NOTE A - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Davidson
Diversified Real Estate III Limited Partnership (the "Partnership") 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.
("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 six month periods ended June 30, 1998, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. 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, 1997.

Reclassifications

Certain reclassifications have been made to the 1997 balances to conform to the
1998 presentation.

NOTE B - TRANSACTIONS WITH AFFILIATED PARTIES

The Managing General Partner is owned by MAE GP Corporation ("MAE GP"), an
affiliate of Insignia Financial Group, Inc. ("Insignia").  Effective February
25, 1998, MAE GP was merged into Insignia Properties Trust ("IPT"), an affiliate
of Insignia.  Thus the Managing General Partner is now a wholly-owned subsidiary
of IPT.  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 payments for
services and as reimbursement of certain expenses incurred by affiliates on
behalf of the Partnership.

On March 17, 1998, Insignia entered into an agreement to merge its national
residential property management operations, and its controlling interest in IPT,
with Apartment Investment and Management Company ("AIMCO"), a publicly traded
real estate investment trust.  The closing, which is anticipated to happen in
September or October of 1998, is subject to customary conditions, including
government approvals and the approval of Insignia's shareholders.  If the
closing occurs, AIMCO will then control the Managing General Partner of the
Partnership.

The following transactions with affiliates of Insignia were incurred during the
six months ended June 30, 1998 and 1997:


                                                        1998       1997
                                                         (in thousands)
  Property management fees (included in
    operating expenses)                                 $ 147      $ 140
  Reimbursement for services of affiliates
    (included in operating and general and
    administrative expenses and investment
    property)                                              85         55

Included in reimbursement for services of affiliates is approximately $18,000 of
construction services reimbursements for the six months ended June 30, 1998.

For the period from January 1, 1997, to August 31, 1997, the Partnership insured
its properties under a master policy through an agency affiliated with the
Managing General Partner with an insurer unaffiliated with the Managing General
Partner.  An affiliate of the Managing General Partner acquired, in the
acquisition of a business, certain financial obligations from an insurance
agency which was later acquired by the agent who placed the master policy.  The
agent assumed the financial obligations to the affiliate of the Managing General
Partner which receives payments on these obligations from the agent.  The amount
of the Partnership's insurance premiums that accrued to the benefit of the
affiliate of the Managing General Partner by virtue of the agent's obligations
was not significant.


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

The Partnership's investment properties consist of two apartment complexes. The
following table sets forth the average occupancy of these properties for the six
months ended June 30, 1998 and 1997:


                                                   Average
                                                  Occupancy
                                              1998         1997
  Salem Courthouse
    Indianapolis, Indiana                      96%          90%
  Plainview Apartments
    Louisville, Kentucky                       92%          91%

The Managing General Partner attributes the increase in occupancy at Salem
Courthouse Apartments to a change in the timing of lease expirations.  They now
expire in summer when more traffic is running to the property rather than the
winter months when traffic is historically slower.

The Partnership realized a net loss of approximately $477,000 for the six months
ended June 30, 1998, compared to a net loss of approximately $533,000 for the
corresponding period of 1997.  The Partnership realized net losses of $251,000
and $314,000 for the three months ended June 30, 1998 and 1997, respectively.
The decrease in net loss for the three and six month periods ended June 30,
1998, versus the same periods in 1997 is primarily attributable to an increase
in rental income, partially offset by an increase in operating expense. Rental
income increased for the six months ended June 30, 1998, predominantly due to an
increase in average occupancy at Salem Courthouse, as discussed above. Operating
expense increased for the six months ended June 30, 1998, due to an exterior
painting project and interior repair work at Plainview Apartments. For the three
months ended June 30, 1998, other income increased due to an increase in utility
collections at Plainview Apartments.

Included in operating expense for the six months ended June 30, 1998, is
approximately $77,000 of major repairs and maintenance comprised primarily of
exterior building repairs and painting, construction service reimbursements
related to a roof project at Plainview Apartments in 1997, and window covering
replacements.  Included in operating expense for the six months ended June 30,
1997, is approximately $47,000 of major repairs and maintenance comprised
primarily of office equipment, exterior painting and exterior building
improvements.

As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environment of each 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.

The Partnership had cash and cash equivalents of approximately $204,000 at June
30, 1998, compared to cash and cash equivalents of approximately $315,000 at
June 30, 1997. Cash and cash equivalents decreased approximately $47,000 and
$150,000 for the periods ended June 30, 1998 and 1997, respectively.  The
increase in net cash provided by operating activities for the six months ended
June 30, 1998, was due primarily to the smaller decrease in other liabilities,
as compared to the six months ended June 30, 1997, a decrease in other assets,
and a decrease in the net loss, as discussed previously. The decrease in other
liabilities at June 30, 1997, is due to the payment of expenses which were
accrued at December 31, 1996, related to a casualty at Plainview Apartments.
The decrease in other assets for the six months ended June 30, 1998, as compared
to an increase for the six months ended June 30, 1997, is attributable to the
timing of insurance payments.  Net cash used in investing activities increased
due to an increase in property improvements and replacements and a decrease in
receipts from restricted escrows.  Net cash used in financing activities results
from payments on mortgage notes payable for the six months ended June 30, 1998.

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 various properties to adequately maintain the
physical assets as well as future maturing mortgage obligations and related
refinancing expenses.  Such assets are currently thought to be sufficient for
any near-term needs of the Partnership.  The mortgage indebtedness of
approximately $23,792,000, net of discount, requires balloon payments which
total approximately $23,120,000 at dates ranging from October 15, 2003, to
November 15, 2010, at which time the Managing General Partner intends to sell or
refinance the individual properties.  There were no cash distributions made for
the six months ended June 30, 1998 or 1997.  Future cash distributions will
depend on the levels of net cash generated from operations, refinancings and
property sales.

Year 2000

The Partnership is dependent upon the Managing General Partner and Insignia for
management and administrative services.  Insignia has completed an assessment
and will have to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter (the "Year 2000 Issue").  The project is estimated to be completed
not later than December 31, 1998, which is prior to any anticipated impact on
its operating systems.  The Managing General Partner believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Partnership.

Other

Certain items discussed in this quarterly report may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act") and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Partnership to be materially different from any results,
performance or achievements expressed or implied by such forward-looking
statements.  Such forward-looking statements speak only as of the date of this
quarterly report. The Partnership expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in the Partnership's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.


                          PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDING

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 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 which are named as nominal defendants, challenging the acquisition
by Insignia Financial Group, Inc. ("Insignia") and its 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 as well as a recently announced agreement between Insignia and
Apartment Investment and Management Company.  The complaint seeks monetary
damages and equitable relief, including judicial dissolution of the Partnership.
The Managing General Partner believes the action to be without merit, and
intends to vigorously defend it.  On June 24, 1998, the Managing General Partner
filed a motion seeking dismissal of the action.

The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature.  The Managing General Partner of the Partnership
believes that all such pending or outstanding litigation will be resolved
without a material adverse effect upon the business, financial condition, or
operations of the Partnership.



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 June 30, 1998.


                                   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

                 By:  Davidson Diversified Properties, Inc.
                      Managing General Partner



                 By:  /s/Carroll D. Vinson
                      Carroll D. Vinson
                      President/Director



                 By:  /s/Robert D. Long, Jr.
                      Robert D. Long, Jr.
                      Vice President/CAO



                 Date: August 6, 1998