FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF

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


(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, 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                          (IRS Employer
incorporation or organization)                         Identification No.)

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

                                 (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
                        (in thousands, except unit data)
                                  (Unaudited)

                                 March 31, 1999



Assets

  Cash and cash equivalents                            $    292

  Receivables and deposits                                  355

  Restricted escrows                                        185

  Other assets                                              402

  Investment properties:

     Land                                    $  2,821

     Buildings and related personal property   31,659

                                               34,480

     Less accumulated depreciation            (16,833)    17,647


                                                        $ 18,881


Liabilities and Partners' Deficit

Liabilities

  Accounts payable                                      $     73

  Tenant security deposit liabilities                        103

  Accrued property taxes                                     389

  Other liabilities                                          277

  Mortgage notes payable                                  23,713


Partners' Deficit

  General partners                           $     (113)

  Limited partners (1,011.5 units issued

     and outstanding)                            (5,561)  (5,674)


                                                          $18,881


                 See Accompanying Notes to Financial Statements

b)
                   DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

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


                                                    Three Months Ended

                                                         March 31,

                                                     1999         1998

Revenues:

Rental income                                      $  1,354     $  1,313

Other income                                            110           99

        Total revenues                                1,464        1,412

Expenses:

  Operating                                             563          589

  General and administrative                             52           47

  Depreciation                                          361          346

  Interest                                              540          542

  Property taxes                                        111          114

        Total expenses                                1,627        1,638

         Net loss                                  $   (163)    $   (226)

 Net loss allocated to general partners (2%)       $     (3)    $     (5)

    Net loss allocated to limited partners (98%)       (160)        (221)

                                                   $   (163)    $   (226)

 Net loss per limited partnership unit:            $(158.18)     $(218.49)


                 See Accompanying Notes to Financial Statements


c)
                   DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

            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, 1998             1,011.5     $   (110)  $ (5,401)  $ (5,511)

Net loss for the three months

     ended March 31, 1999               --           (3)      (160)      (163)

Partners' deficit at

     March 31, 1999                1,011.5     $   (113)  $ (5,561)  $ (5,674)


                 See Accompanying Notes to Financial Statements


d)
                   DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

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



                                                        Three Months Ended

                                                            March 31,

                                                          1999      1998

Cash flows from operating activities:

  Net loss                                             $   (163) $   (226)

  Adjustments to reconcile net loss to net cash

    provided by operating activities:

    Depreciation                                            361       346

    Amortization of mortgage discounts and loan costs        16        16

    Change in accounts:

      Receivables and deposits                               14      (114)

      Other assets                                          (63)       23

      Accounts payable                                       29      (110)

      Tenant security deposit liabilities                    (6)        4

      Accrued property taxes                                (12)      114

      Other liabilities                                      50       (15)


         Net cash provided by operating activities          226        38


Cash flows from investing activities:

  Property improvements and replacements                    (69)      (69)

  Net deposits to restricted escrows                         (2)       (2)


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


Cash flows used in financing activities:

  Payments on mortgage notes payable                        (31)      (29)


Net increase (decrease) in cash and cash equivalents        124       (62)

Cash and cash equivalents at beginning of period            168       251


Cash and cash equivalents at end of period             $    292  $    189


Supplemental disclosure of cash flow information:

  Cash paid for interest                               $    524  $    526

                 See Accompanying Notes to 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.
("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, 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 99.99%
limited partnership interest in Plainview Apartments, L.P. and its wholly owned
Limited Liability Company, Salem GP, LLC.  The Partnership may remove the
General Partner of Plainview Apartments, L.P.; therefore, the partnership is
controlled and consolidated by the Partnership.  All significant
interpartnership 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 a 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 made to the Managing General Partner and affiliates during the three months
ended March 31, 1999 and 1998:

                                               1999        1998

                                                (in thousands)


Property management fees (included in

 operating expenses)                           $ 74         $ 72

Reimbursement for services of affiliates

 (included in operating and general and

 administrative expenses and investment

 property)                                       33         50


Included in "Reimbursement for services of affiliates" is approximately $15,000
of construction services reimbursements for the three months ended March 31,
1998.  No such costs were incurred for the three months ended March 31, 1999.

During the three months ended March 31, 1999 and 1998, affiliates of the
Managing General Partner were entitled to receive 5% of gross receipts from all
of the Registrant's properties for providing property management services.  The
Registrant paid to such affiliates approximately $74,000 and $72,000 for the
three months ended March 31, 1999 and 1998, respectively.

An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $33,000 and
$50,000 for the three months ended March 31, 1999 and 1998, respectively.

NOTE D - SEGMENT REPORTING

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

The Partnership has one reportable segment:  residential properties, which
consists of two apartment complexes located in 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
summary of significant accounting policies in the Partnership's annual report on
Form 10-KSB for the 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 three months ended March 31, 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                         $ 1,354       $    --     $ 1,354
Other income                              110            --         110
Interest expense                          540            --         540
Depreciation                              361            --         361
General and administrative expense         --            52          52
Segment loss                              111            52         163
Total assets                           18,788            93      18,881
Capital expenditures                       69            --          69

               1998                  RESIDENTIAL     OTHER       TOTALS

Rental income                         $ 1,313       $    --     $ 1,313
Other income                               97             2          99
Interest expense                          542            --         542
Depreciation                              346            --         346
General and administrative expense         --            47          47
Segment loss                              181            45         226
Total assets                           19,606           138      19,744
Capital expenditures for
  investment properties                    69             --         69

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 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 entities which were, at the
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
as well as a recently announced agreement between Insignia and AIMCO.  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 has filed demurrers to the amended complaint which were heard during
February 1999. No ruling on such demurrers has been received.  The Managing
General Partner does not anticipate that costs associated with this case, if
any, will be material to the Partnership's overall operations.

On July 30, 1998, certain entities claiming to own limited partnership interests
in certain limited partnerships whose general partners were, at the time,
affiliates of Insignia filed a complaint entitled Everest Properties, LLC. v.
Insignia Financial Group, Inc., et al. in the Superior Court of the State of
California, county of Los Angeles. The action involves 44 real estate limited
partnerships (including the Partnership) in which the plaintiffs allegedly own
interests and which Insignia Affiliates allegedly manage or control (the
"Subject Partnerships").  This case was settled on March 3, 1999.  The
Partnership is responsible for a portion of the settlement costs.  The expense
will not have a material effect on the Partnership's overall operations.

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

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR 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, 1999 and 1998:

                                               Average Occupancy

                                                1999        1998

  Salem Courthouse

    Indianapolis, Indiana                       96%          96%

  Plainview Apartments

    Louisville, Kentucky                        88%          92%

The Managing General Partner attributes the decrease in occupancy at Plainview
Apartments to employment transfers and an increase in home purchases due to low
mortgage rates.

Results from Operations

The Registrant's net loss for the three months ended March 31, 1999, was
$163,000 as compared to a net loss of $226,000 for the three months ended March
31, 1998. The decrease in net loss is primarily attributable to an increase in
total revenues and to a lesser extent, a decrease in total expenses.  The
increase in total revenues is due primarily to an increase in rental income as a
result of increases in average annual rental rates at both properties as well as
a decrease in rental concessions offered by Plainview Apartments, which more
than offset the decrease in occupancy at Plainview Apartments.  In addition,
other income increased due to an increase in utility income collected at
Plainview Apartments.

Total expenses decreased due to a reduction in operating expense, which more
than offset the slight increase in depreciation.  Operating expense decreased
primarily due to decreases in interior building improvements at both investment
properties, construction service fees at Plainview Apartments and hazard
insurance expense at both properties due to a change in insurance carrier.  Also
contributing to the decrease in operating expense is the receipt of insurance
proceeds relating to some water damage at Salem Courthouse.  Depreciation
expense increased due to capital improvements completed at both investment
properties over the past several years.

General and administrative, interest and property tax expenses remained
relatively constant for the comparable periods.  Included in general and
administrative expenses at both March 31, 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 expense.  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, 1999, the Registrant had cash and cash equivalents of approximately
$292,000 as compared to approximately $189,000 at March 31, 1998. Cash and cash
equivalents increased approximately $124,000 for the period ended March 31, 1999
from the Registrant's fiscal year end and is primarily due to $226,000 of cash
provided by operating activities, offset by $71,000 used in investing activities
and $31,000 used in financing activities.  Cash used in investing activities
consisted primarily of property improvements and replacements and, to a lesser
extent, net deposits to escrow accounts maintained by the mortgage lender.  Cash
used in financing activities consisted of 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.

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 near
term.  The Partnership has budgeted capital improvements of approximately
$479,000 for 1999 at this property consisting primarily of HVAC repairs,
siding/trim/facia/sofit repairs, exterior painting and balcony repairs.  As of
March 31, 1999 approximately $31,000 has been incurred consisting primarily of
flooring and appliance replacements and computer and other equipment purchases.
These improvements were funded from cash flow.

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 requires approximately $600,000 of capital improvements over the near
term.  The Partnership has currently budgeted capital improvements of
approximately $30,000 for 1999 at this property consisting primarily of exterior
painting.  Additional improvements are planned for 1999 however the costs of
these improvements has not yet been determined.  As of March 31, 1999
approximately $38,000 has been incurred consisting primarily of flooring
replacements and water heater repairs.  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 $23,713,000, 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 date.  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
months ended March 31, 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 debt maturities, refinancings, and/or property
sales.  The Partnership's distribution policy will be reviewed on a quarterly
basis. There can be no assurance, however, that the Partnership will generate
sufficient funds from operations, after planned capital expenditures, to permit
distributions to its partners in 1999 or subsequent periods.

Potential Tender Offer

On October 1, 1998,  Insignia Financial Group, Inc. merged into Apartment
Investment and Management Company ("AIMCO"), a real estate investment trust,
whose Class A Common Shares are listed on the New York Stock Exchange. As a
result of such merger, AIMCO and AIMCO Properties, L.P., a Delaware limited
partnership and the operating partnership of AIMCO ("AIMCO OP") acquired
indirect control of the Managing General Partner.  AIMCO and its affiliates
currently own 3.238% of the limited partnership interests in the Partnership.
AIMCO is presently considering whether it will engage in an exchange offer for
additional limited partnership interests in the Partnership. There is a
substantial likelihood that, within a short period of time, AIMCO OP will offer
to acquire limited partnership interests in the Partnership for cash or
preferred units or common units of limited partnership interests in AIMCO OP.
While such an exchange offer is possible, no definite plans exist as to when or
whether to commence such an exchange offer, or as to the terms of any such
exchange offer, and it is possible that none will occur.

A registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This Form 10-QSB shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to the registration or
qualification under the securities laws of any such state.

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 mainframe system used by the Managing Agent became fully
functional.  In addition to the mainframe, 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
March 31, 1999, had completed approximately 75% of 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.  The remaining network connections and
desktop PCs are expected to be upgraded to Year 2000 compliant systems by July
31, 1999.

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.

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 the testing process is
expected to be completed by July 31, 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 80% of the server operating systems.  The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
July 31, 1999.

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.  The Managing Agent intends to have a third-party conduct an
audit of these systems and report their findings by July 31, 1999.

Any of the above operating equipment that has been found to be non-compliant to
date has been replaced or repaired.  To date, these have consisted only of
security systems and phone systems.  As of March 31, 1999 the Managing Agent has
evaluated approximately 86% of the operating equipment for the Year 2000
compliance.

The total cost incurred for all properties managed by the Managing Agent as of
March 31, 1999 to replace or repair the operating equipment was approximately
$400,000.  The Managing Agent estimates the cost to replace or repair any
remaining operating equipment is approximately $325,000, which is expected to be
completed by August 30, 1999.

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 continues to conduct surveys of its banking and other vendor
relationships to assess risks regarding their Year 2000 readiness.  The Managing
Agent has banking relationships with three major financial institutions, all of
which have indicated their compliance efforts will be complete before May 1999.
The Managing Agent has updated data transmission standards with two of the three
financial institutions.  The Managing Agent's contingency plan in this regard is
to move accounts from any institution that cannot be certified Year 2000
compliant by June 1, 1999.

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 $2.8 million ($0.6 million expensed
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 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 entities which were, at the
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
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. 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 has filed demurrers to the
amended complaint which were heard during February 1999. No ruling on such
demurrers has been received.  The Managing General Partner does not anticipate
that costs associated with this case, if any, will be material to the
Partnership's overall operations.

On July 30, 1998, certain entities claiming to own limited partnership interests
in certain limited partnerships whose general partners were, at the time,
affiliates of Insignia filed a complaint entitled Everest Properties, LLC. v.
Insignia Financial Group, Inc., ET AL. in the Superior Court of the State of
California, county of Los Angeles. The action involves 44 real estate limited
partnerships (including the Partnership) in which the plaintiffs allegedly own
interests and which Insignia Affiliates allegedly manage or control (the
"Subject Partnerships").  This case was settled on March 3, 1999.  The
Partnership is responsible for a portion of the settlement costs.  The expense
will not have a material effect on 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, 1999.



                                   SIGNATURES

In accordance with Section 13 or 15(d) 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/Patrick J. Foye
                                   Patrick J. Foye
                                   Executive Vice President

                              By:  /s/Carla R. Stoner
                                   Carla R. Stoner
                                   Senior Vice President 
                                   Finance and Administration

                              Date: May 12, 1999