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, 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)


                                  June 30, 2000
<TABLE>
<CAPTION>

Assets

<S>                                                           <C>            <C>
   Cash and cash equivalents                                                 $   583
   Receivables and deposits                                                      267
   Restricted escrows                                                            156
   Other assets                                                                  351
   Investment properties:
      Land                                                    $ 2,821
      Buildings and related personal property                  32,785
                                                               35,606

      Less accumulated depreciation                            (18,796)       16,810
                                                                            $ 18,167

Liabilities and Partners' Deficit
Liabilities

   Accounts payable                                                           $   69
   Tenant security deposit liabilities                                           128
   Accrued property taxes                                                        331
   Other liabilities                                                             310
   Mortgage notes payable                                                     23,567

Partners' Deficit

   General partners                                            $ (125)
   Limited partners (1,011.5 units issued and
      outstanding)                                              (6,113)       (6,238)
                                                                            $ 18,167

            See Accompanying Notes to Consolidated Financial Statements
</TABLE>


b)


                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                   (Unaudited)

                          (in thousands, except unit data)

<TABLE>
<CAPTION>

                                        Three Months Ended         Six Months Ended
                                             June 30,                  June 30,
                                         2000         1999         2000         1999
                                                   (restated)                 (restated)
Revenues:
<S>                                    <C>          <C>          <C>          <C>
   Rental income                       $  1,451     $  1,338     $  2,827     $  2,692
   Other income                             137           99          269          209
      Total revenues                      1,588        1,437        3,096        2,901

Expenses:
   Operating                                552          535        1,167        1,098
   General and administrative                52           60           91          112
   Depreciation                             393          372          797          744
   Interest                                 539          539        1,075        1,079
   Property taxes                            61           91          158          202
      Total expenses                      1,597        1,597        3,288        3,235
Loss before cumulative effect
  of a change in accounting
  principle                                  (9)        (160)        (192)        (334)
Cumulative effect on prior years
  of a change in accounting for
  the cost of exterior painting
  and major landscaping                      --           --           --          165

Net loss                               $     (9)    $   (160)    $   (192)    $   (169)

Net loss allocated to general
   partners (2%)                       $     --     $     (3)    $     (4)    $     (3)
Net loss allocated to limited
   partners (98%)                            (9)        (157)        (188)        (166)
                                       $     (9)    $   (160)    $   (192)    $   (169)
Per limited partnership unit:
   Loss before cumulative effect
     of a change in accounting
     principle                         $  (8.90)    $(155.21)    $(185.86)    $(324.27)
   Cumulative effect of a change
     in accounting principle                 --           --           --       160.16

Net loss                               $  (8.90)    $(155.21)    $(185.86)    $(164.11)

            See Accompanying Notes to Consolidated Financial Statements
</TABLE>

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 six months
   ended June 30, 2000                      --            (4)        (188)      (192)

Partners' deficit at

   June 30, 2000                       1,011.5       $  (125)     $(6,113)   $(6,238)

            See Accompanying Notes to Consolidated Financial Statements
</TABLE>

d)

                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (Unaudited)

                                   (in thousands)



<TABLE>
<CAPTION>
                                                                  Six Months Ended
                                                                        June 30,

                                                                  2000        1999
                                                                           (restated)
Cash flows from operating activities:

<S>                                                           <C>          <C>
   Net loss                                                   $  (192)     $  (169)
   Adjustments to reconcile net loss to net cash
     provided by operating activities:
     Depreciation                                                 797          744
     Amortization of mortgage discounts and loan costs             32           32
     Cumulative effect of a change in accounting principle         --         (165)
     Change in accounts:
      Receivables and deposits                                     (7)          55
      Other assets                                                (47)         (62)
      Accounts payable                                            (26)          27
      Tenant security deposit liabilities                          12            6
      Accrued property taxes                                       47          (57)
      Other liabilities                                           (29)          70

         Net cash provided by operating activities                587          481

Cash flows from investing activities:

   Property improvements and replacements                        (347)        (231)
   Net deposits to restricted escrows                             (68)          (4)

         Net cash used in investing activities                   (415)        (235)

Cash flows used in financing activities:

   Payments on mortgage notes payable                             (69)         (62)

Net increase in cash and cash equivalents                         103          184
Cash and cash equivalents at beginning of period                  480          168

Cash and cash equivalents at end of period                    $   583      $   352

Supplemental disclosure of cash flow information:

   Cash paid for interest                                     $ 1,041      $ 1,048

At  December  31,  1999,  approximately  $78,000 of  property  improvements  and
replacements were included in accounts payable.

            See Accompanying Notes to Consolidated Financial Statements
</TABLE>

e)

                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Note A - Basis of Presentation

The  accompanying   unaudited  consolidated  financial  statements  of  Davidson
Diversified Real Estate III, L.P. (the  "Partnership" or "Registrant") have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-QSB and Item 310(b)
of Regulation S-B.  Accordingly,  they do not include all of the information and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements.  In the opinion of Davidson Diversified  Properties,  Inc.
(the  "Managing  General  Partner"),   all  adjustments  (consisting  of  normal
recurring  accruals)  considered  necessary  for a fair  presentation  have been
included.  Operating  results for the three and six month periods ended June 30,
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 three and six months ended June 30, 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 three and six months ended June 30, 1999 by approximately $11,000
($10.87 per limited  partnership unit) and by approximately  $22,000 ($20.76 per
limited  partnership  unit),  respectively.  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 six
months ended June 30, 2000 and 1999:

                                                         2000       1999
                                                          (in thousands)

         Property management fees (included in
           operating expenses)                           $154       $146
         Reimbursement for services of affiliates
           (included in operating and general and
            administrative expenses and investment
            properties)                                    57         53
         Advance from Managing General Partner
            (included in other liabilities)                73         --

During the six months ended June 30, 2000 and 1999,  affiliates  of the Managing
General  Partner were entitled to receive 5% of gross  receipts from both of the
Registrant's  investment  properties for providing property management services.
The Registrant paid to such affiliates  approximately  $154,000 and $146,000 for
the six months ended June 30, 2000 and 1999, respectively.

An  affiliate  of  the  Managing  General  Partner  received   reimbursement  of
accountable  administrative  expenses  amounting  to  approximately  $57,000 and
$53,000 for the six months ended June 30, 2000 and 1999, respectively.

As of June 30, 2000 the  Managing  General  Partner  has loaned the  Partnership
approximately  $73,000  to cover  operational  expenses  required  at  Plainview
Apartments.  This loan was made in accordance  with the terms of the Partnership
Agreement.  Interest is charged at the prime rate plus 1%. Interest  expense was
approximately  $2,000 for the six months  ended June 30, 2000 and is included in
interest expense.

AIMCO and its affiliates  currently own 321.05 limited  partnership units in the
Partnership  representing  31.74% 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 and six months ended June 30, 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.

   Three months ended June 30, 2000     Residential      Other       Totals

Rental income                             $ 1,451         $ --      $ 1,451
Other income                                  136             1         137
Interest expense                              539            --         539
Depreciation                                  393            --         393
General and administrative expense             --            52          52
Segment profit (loss)                          42           (51)         (9)

   Three months ended June 30, 1999     Residential      Other       Totals
                                               (restated)
Rental income                             $ 1,338         $ --      $ 1,338
Other income                                   98             1          99
Interest expense                              539            --         539
Depreciation                                  372            --         372
General and administrative expense             --            60          60
Segment loss                                 (101)          (59)       (160)

    Six months ended June 30, 2000      Residential      Other       Totals

Rental income                             $ 2,827         $ --      $ 2,827
Other income                                  268             1         269
Interest expense                            1,075            --       1,075
Depreciation                                  797            --         797
General and administrative expense             --            91          91
Segment loss                                 (102)          (90)       (192)
Total assets                               18,131            36      18,167
Capital expenditures for investment
  properties                                  269            --         269

    Six months ended June 30, 1999      Residential      Other       Totals
                                               (restated)
Rental income                             $ 2,692         $ --      $ 2,692
Other income                                  208             1         209
Interest expense                            1,079            --       1,079
Depreciation                                  744            --         744
General and administrative expense             --           112         112
Cumulative effect of a change in
  in accounting principle                     165            --         165
Segment loss                                  (58)         (111)       (169)
Total assets                               18,778            55      18,833
Capital expenditures for investment
  properties                                  231            --         231

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,  its Managing  General Partner and several of their affiliated
partnerships  and corporate  entities.  The action  purports to assert claims on
behalf of a class of limited  partners and derivatively on behalf of a number of
limited  partnerships  (including  the  Partnership)  which are named as nominal
defendants,  challenging the acquisition of interests in certain general partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one  time,  affiliates  of  Insignia;  past  tender  offers  by the  Insignia
affiliates to acquire limited  partnership units; the management of partnerships
by the  Insignia  affiliates;  and the  Insignia  Merger.  The  plaintiffs  seek
monetary damages and equitable  relief,  including  judicial  dissolution of the
Partnership.  On June 25, 1998,  the  Managing  General  Partner  filed a motion
seeking  dismissal  of the action.  In lieu of  responding  to the  motion,  the
plaintiffs 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 owned  units as of November 3, 1999.  Preliminary
approval of the settlement  was obtained on November 3, 1999 from the Court,  at
which time the Court set a final approval  hearing for December 10, 1999.  Prior
to the December 10, 1999 hearing,  the Court received various  objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement.  On
December 14, 1999, the Managing  General  Partner and its affiliates  terminated
the  proposed  settlement.  In  February  2000,  counsel  for some of the  named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated  the  settlement.  On June  27,  2000,  the  Court  entered  an order
disqualifying them from the case. The Court will entertain applications for lead
counsel which must be filed by August 4, 2000. The Court has scheduled a hearing
on August 21, 2000 to address the issue of appointing lead counsel. The Managing
General Partner does not anticipate that costs associated with this case will be
material to the Partnership's overall operations.

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

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

The  matters  discussed  in this Form  10-QSB  contain  certain  forward-looking
statements  and  involve  risks and  uncertainties  (including  changing  market
conditions,   competitive  and  regulatory   matters,   etc.)  detailed  in  the
disclosures  contained  in this  Form  10-QSB  and 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 six
months ended June 30, 2000 and 1999:

                                                 Average Occupancy
                                                 2000        1999
         Salem Courthouse
            Indianapolis, Indiana (1)             93%         96%

         Plainview Apartments
            Louisville, Kentucky (2)              96%         90%

(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  six  months  ended  June  30,  2000  was
approximately $192,000 as compared to approximately $169,000 for the same period
in 1999. The  Registrant's net loss for the three months ended June 30, 2000 was
approximately  $9,000 as compared to approximately  $160,000 for the same period
in 1999.  The  increase  in net loss for the six months  ended June 30,  2000 is
primarily  attributable  to the  cumulative  effect  of a change  in  accounting
principle  recognized  during the six months ended June 30,  1999,  as discussed
below. The Registrant's  loss before cumulative effect of a change in accounting
principal for the six months ended June 30, 2000 was  approximately  $192,000 as
compared to approximately $334,000 for the same period in 1999. The Registrant's
loss before cumulative effect of a change in accounting  principal for the three
months ended June 30, 2000 was approximately $9,000 as compared to approximately
$160,000  for the same period in 1999.  The  decrease in loss before  cumulative
effect of a change in  accounting  principal  for both the three and six  months
ended June 30, 2000 is primarily  attributable to an increase in total revenues.
Total revenues  increased due to an increase in rental 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, interest income,
auxiliary services, and miscellaneous income at Salem Courthouse Apartments.

For the six months ended June 30, 2000 total expenses  increased compared to the
same period in 1999.  Total expenses  increased  primarily due to an increase in
operating and depreciation  expenses that more than offset decreases in property
tax and general and administrative  expenses.  The increase in operating expense
is primarily due to an increase in maintenance  expense at Salem  Courthouse and
increases  in  advertising  and  utility   expenses  at  Plainview   Apartments.
Maintenance  expense  increased  as a result  of  ground  and yard work at Salem
Courthouse.  In addition Salem Courthouse had received insurance proceeds during
1999 related to some water damage,  which  reduced  maintenance  expense  during
1999.  Advertising  expense increased as a result of increased marketing efforts
at Plainview Apartments. Utility expense increased due to increased occupancy at
Plainview  Apartments.  Depreciation  expense  increased due to new  depreciable
assets being placed into service at both  properties  during the previous twelve
months.  Property  tax  expense  decreased  as a result of several  years of tax
refunds received for Salem Courthouse  during 2000.  General and  administrative
expense  decreased due to decreased legal costs as a result of the settlement of
a legal case during the six months ended June 30, 1999. Total expenses  remained
constant for the three months ended June 30, 2000 compared to the same period in
1999 but did have  increases in operating  and  depreciation  expenses that were
offset by decreases in property tax and general and  administrative  expenses as
discussed above.

Included in general and  administrative  expenses at both June 30, 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 three and six months ended June 30, 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 three and six months ended June 30, 1999 by approximately $11,000
($10.87 per limited  partnership unit) and by approximately  $22,000 ($20.76 per
limited  partnership  unit),  respectively.  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 June 30, 2000, the Registrant had cash and cash  equivalents of approximately
$583,000 as compared to  approximately  $352,000 at June 30, 1999. Cash and cash
equivalents increased  approximately  $103,000 for the six months ended June 30,
2000 from the Registrant's  year ended December 31, 1999 and is primarily due to
approximately  $587,000  of cash  provided  by  operating  activities,  which is
partially offset by approximately  $415,000 of cash used in investing activities
and  approximately  $69,000 of cash used in financing  activities.  Cash used in
investing activities consisted 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.

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
$210,000 in budgeted and unbudgeted capital expenditures at Plainview Apartments
as of  June  30,  2000,  consisting  primarily  of  heating  upgrades,  building
improvements,  and  air  conditioning,  appliances,  roof,  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  $59,000 in capital expenditures at Salem Courthouse Apartments as
of  June  30,  2000,  consisting  primarily  of  floor  covering  and  appliance
replacements  and recreation  facility  enhancements.  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  $23,567,000,  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 six
months ended June 30, 2000 or 1999.  The  Partnership's  distribution  policy is
reviewed on an annual basis. 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. 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 June 30, 2000,
the balance in the reserve account was approximately $156,000.

                           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,  its Managing  General Partner and several of their affiliated
partnerships  and corporate  entities.  The action  purports to assert claims on
behalf of a class of limited  partners and derivatively on behalf of a number of
limited  partnerships  (including  the  Partnership)  which are named as nominal
defendants,  challenging the acquisition of interests in certain general partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one  time,  affiliates  of  Insignia;  past  tender  offers  by the  Insignia
affiliates to acquire limited  partnership units; the management of partnerships
by the  Insignia  affiliates;  and the  Insignia  Merger.  The  plaintiffs  seek
monetary damages and equitable  relief,  including  judicial  dissolution of the
Partnership.  On June 25, 1998,  the  Managing  General  Partner  filed a motion
seeking  dismissal  of the action.  In lieu of  responding  to the  motion,  the
plaintiffs 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 owned  units as of November 3, 1999.  Preliminary
approval of the settlement  was obtained on November 3, 1999 from the Court,  at
which time the Court set a final approval  hearing for December 10, 1999.  Prior
to the December 10, 1999 hearing,  the Court received various  objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement.  On
December 14, 1999, the Managing  General  Partner and its affiliates  terminated
the  proposed  settlement.  In  February  2000,  counsel  for some of the  named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated  the  settlement.  On June  27,  2000,  the  Court  entered  an order
disqualifying them from the case. The Court will entertain applications for lead
counsel which must be filed by August 4, 2000. The Court has scheduled a hearing
on August 21, 2000 to address the issue of appointing lead counsel. 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 June 30, 2000.

                                              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: August 9, 2000