DAVIDSON DIVERSIFIED REAL ESTATE III L P, 10KSB, 1999-03-26

DAVIDSON DIVERSIFIED REAL ESTATE III L P
10KSB, 1999-03-26
REAL ESTATE

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FORM 10-KSB--ANNUAL OR TRANSITIONAL REPORT UNDER
SECTION 13 OR 15(D)

(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [No Fee Required]

For the fiscal year ended December 31, 1998

[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]

For the transition period from to

Commission file number 0-15676

DAVIDSON DIVERSIFIED REAL ESTATE III, L. P.
(Name of small business issuer 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) (Zip Code)

Issuer's telephone number (864) 239-1000

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

Units of Limited Partnership Interest
(Title of class)

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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year: $5,861,000

State the aggregate market value of the voting partnership interests held by
non-affiliates computed by reference to the price at which the partnership
interests were sold, or the average bid and asked prices of such partnership
interests, as of December 31, 1998. No market exists for the limited
partnership interests of the Registrant, and, therefore, no aggregate market
value can be determined.

DOCUMENTS INCORPORATED BY REFERENCE

None

PART I

ITEM 1. DESCRIPTION OF BUSINESS

Davidson Diversified Real Estate III, L.P. (the "Registrant" or "Partnership")
is a Delaware limited partnership organized in July 1985. The general partners
of the Registrant are Davidson Diversified Properties, Inc., a Tennessee
corporation ("Managing General Partner"); Freeman Equities, Limited, a Tennessee
limited partnership ("Associate General Partner"); and David W. Talley and
James T. Gunn (collectively, "Individual General Partners") (collectively, the
"General Partners"). The Partnership Agreement provides that the Partnership is
to terminate on December 31, 2010 unless terminated prior to such date.

The Managing General Partner is owned by MAE GP corporation ("MAE GP"), which is
wholly owned by Metropolitan Asset Enhancement, L.P., 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.
Effective October 1, 1998 and February 26, 1999, Insignia and IPT respectively
were merged into Apartment Investment and Management Company ("AIMCO"). (See
"Transfer of Control"). Thus the Managing General Partner is now a wholly-owned
subsidiary of AIMCO.

The offering of the Partnership's limited partnership units ("Units") commenced
on October 28, 1985, and terminated on October 24, 1986. The Partnership
received gross proceeds from the offering of $20,240,000 from the sale of 1,013
units and net proceeds of $17,912,400. Since its initial offering, the
Registrant has not received, nor are limited partners required to make,
additional capital contributions.

Holders of Units shall hereinafter be referred to as Limited Partners ("Limited
Partners"). Limited Partners together with the General Partners shall be
referred to as the Partners ("Partners").

The Partnership's primary business is to operate and hold for investment
existing income-producing residential real properties. All of the net proceeds
of the offering were invested in the Partnership's six properties, four of which
have since been sold or foreclosed. The Partnership continues to own and
operate two of these properties. See "Item 2. Description of Properties," for a
description of the Partnership's remaining properties.

The Partnership receives income from its properties and is responsible for
operating expenses, capital improvements and debt service payments under
mortgage obligations secured by the properties. The Partnership financed its
properties primarily through non-recourse debt. Therefore, in the event of
default, the lender can generally look only to the subject property for recovery
of amounts due.

A further description of the Partnership's business is included in "Management's
Discussion and Analysis or Plan of Operation" included in "Item 6" of this Form
10-KSB.

The business in which the Partnership is engaged is highly competitive. There
are other residential properties within the market area of the registrant's
properties. The number and quality of competitive properties, including those
which may be managed by an affiliate of the Managing General Partner in such
market area, could have a material effect on the rental market for the
apartments at the Registrant's properties and the rents that may be charged for
such apartments. While the Managing General Partner and its affiliates are a
significant factor in the United States in the apartment industry, competition
for the apartments is local. In addition, various limited partnerships have
been formed by the Managing General Partner and/or affiliates to engage in
business which may be competitive with the Registrant.

The Registrant has no employees. Management and administrative services are
provided by the Managing General Partner and by agents retained by the Managing
General Partner. Property management services were performed at the
Partnership's properties by an affiliate of the Managing General Partner.

Both the income and expenses of operating the remaining properties owned by the
Partnership are subject to factors outside of the Partnership's control, such as
an oversupply of similar properties resulting from overbuilding, increases in
unemployment or population shifts, reduced availability of permanent mortgage
financing, changes in zoning laws, or changes in patterns or needs of users. In
addition, there are risks inherent in owning and operating residential
properties because such properties are susceptible to the impact of economic and
other conditions outside of the control of the Partnership.

There have been, and it is possible there may be other, Federal, state and local
legislation and regulations enacted relating to the protection of the
environment. The Partnership is unable to predict the extent, if any, to which
such new legislation or regulations might occur and the degree to which such
existing or new legislation or regulations might adversely affect the properties
owned by the Partnership.

The Partnership monitors its properties for evidence of pollutants, toxins and
other dangerous substances, including the presence of asbestos. In certain
cases environmental testing has been performed, which resulted in no material
adverse conditions or liabilities. In no case has the Partnership received
notice that it is a potentially responsible party with respect to an
environmental clean up site.

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, a publicly traded real
estate investment trust, with AIMCO being the surviving corporation (the
"Insignia Merger"). As a result, AIMCO ultimately acquired a 100% ownership
interest in Insignia Properties Trust ("IPT"), the entity which controls 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.

ITEM 2. DESCRIPTION OF PROPERTIES:

The following table sets forth the Partnership's investments in properties:

Date of
Property Purchase Type of Ownership Use

Plainview Apartments 05/06/86 Fee ownership subject Apartment
Louisville, Kentucky to wraparound mortgage (1) 480 units

Salem Courthouse Apartments 11/30/85 Fee ownership subject Apartment
Indianapolis, Indiana to first and second 388 units
mortgages

(1) Property is held by a Limited Partnership which the Registrant owns a
99.99% interest in.

SCHEDULE OF PROPERTIES:

Set forth below for each of the Registrant's properties is the gross carrying
value, accumulated depreciation, depreciable life, method of depreciation and
Federal tax basis.

Gross

Carrying Accumulated Useful Federal

Property Value Depreciation Life Method Tax Basis

(in thousands) (in thousands)

Plainview Apartments $21,224 $ 9,845 5-25 years S/L $ 7,629

Salem Courthouse 13,187 6,627 5-25 years S/L 3,989

Totals $34,411 $16,472 $11,618

See "Note A" of the consolidated financial statements included in "Item 7." for
a description of the Partnership's depreciation policy.

SCHEDULE OF PROPERTY INDEBTEDNESS:

The following table sets forth certain information relating to the loans
encumbering the Registrant's properties.

Principal Principal

Balance At Stated Balance

December 31, Interest Period Maturity Due At

Property 1998 Rate Amortized Date (3) Maturity (3)

(in thousands) (in thousands)

Plainview Apartments

1st mortgage $15,336 9.33% (1) 11/15/10 $15,336

Salem Courthouse

1st mortgage (2) 8,234 7.83% 28.67 yrs 10/15/03 7,513

2nd mortgage 271 7.83% (1) 10/15/03 271

23,841

Less unamortized

discounts (101)

Total $23,740 $23,120

(1) Interest only payments

(2) The discount from the mortgage refinancing of this property is reflected as
a reduction of the mortgage notes payable and increases the effective rate
of the debt to 8.13% for Salem Courthouse.

(3) See "Item 7, Financial Statements _ Note C" for information with respect to
the Registrant's ability to prepay these loans and other specific details
about the loans.

RENTAL RATES AND OCCUPANCY:

Average annual rental rates and occupancy for 1998 and 1997 for each property:

Average Annual Average Annual

Rental Rates Occupancy

Property 1998 1997 1998 1997

Plainview Apartments $7,199/unit $6,974/unit 92% 92%

Salem Courthouse 6,171/unit 6,021/unit 97% 93%

The Managing General Partner attributes the increase in occupancy at Salem
Courthouse Apartments to the effort to coordinate lease expirations more closely
with periods of high rental traffic in order to maintain a constant level of
occupancy.

As noted under "Item 1. Description of Business," the real estate industry is
highly competitive. All of the properties are subject to competition from other
residential apartment complexes in the area. The Managing General Partner
believes that all of the properties are adequately insured. Each property is an
apartment complex which leases units for lease terms of one year or less. No
residential tenant leases 10% or more of the available rental space. All of the
properties are in good physical condition, subject to normal depreciation and
deterioration as is typical for assets of this type and age. See "Capital
Improvements" below for information relating to budgeted capital expenditures at
the properties.

REAL ESTATE TAXES AND RATES:

Real estate taxes and rates in 1998 for each property were:

1998 1998

Billing Rate

(in thousands)

Plainview $148 1.1%

Salem Courthouse (a) 264 9.6%

(a) Amount per 1997 billings, tax bills for 1998 not yet received.

CAPITAL IMPROVEMENTS:

During 1998, the Partnership completed $235,000 of capital improvements at Salem
Courthouse, consisting primarily of clubhouse renovations, office furniture, and
carpet and vinyl replacements. These improvements were funded from operating
cash flow. 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 the
property requires approximately $397,000 of capital improvements over the near
term. Capital improvements planned for 1999 are expected to cost approximately
$479,000 which consist of, but is not limited to, HVAC repairs,
siding/trim/facia/soffit repairs, exterior painting and balcony repairs.

In 1998, the Partnership expended $226,000 on capital improvements at Plainview,
consisting primarily of HVAC condensing units, water heaters, and carpet and
vinyl replacements. These improvements were funded primarily from cash flow.
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 the property requires
approximately $600,000 of capital improvements over the near term. Capital
improvements costing approximately $30,000 are planned for 1999 which consist
of, but is not limited to, painting the exterior of the buildings.

The capital improvements planned for 1999 at the Partnership's properties will
be made only to the extent of cash available from operations and Partnership
reserves.

ITEM 3. 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, to 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 net income.

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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Unit holders of the Partnership did not vote on any matter during the fourth
quarter ended December 31, 1998.

PART II

ITEM 5. MARKET FOR PARTNERSHIP EQUITY AND RELATED PARTNER MATTERS

The Partnership, a publicly-held limited partnership, offered and sold 1,013
limited partnership units aggregating $20,240,000. The Partnership currently
has 1,355 holders of record owning an aggregate of 1,011.5 Units. Affiliates of
the Managing General Partner owned 32.75 units or 3.238% at December 31, 1998.
No public trading market has developed for the Units, and it is not anticipated
that such a market will develop in the future.

There were no distributions to the partners for the years ending December 31,
1997 and 1998. Future cash distributions will depend on the levels of net cash
generated from operations, refinancings, property sales and the availability of
cash reserves. 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 required capital expenditures to
permit any distributions to its partners in 1999 or subsequent periods.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The matters discussed in this Form 10-KSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the disclosure
contained in this Form 10-KSB 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.

This item should be read in conjunction with the financial statements and other
items contained elsewhere in this report.

Result of Operations

The Registrant's net loss for the year ended December 31, 1998 was $892,000 as
compared to a net loss of $1,168,000 for the year ended December 31, 1997 (See
"Note D" of the financial statements for a reconciliation of these amounts to
the Registrant's federal taxable losses). The decrease in net loss was due
primarily to an increase in total revenues and to a lesser extent, a decrease in
total expenses. Revenues increased due to an increase in rental income and other
income. The increase in rental income is primarily attributable to the increase
in average annual rental rates at both of the Registrant's investment properties
as well as an increase in average occupancy at Salem Courthouse. Other income
increased primarily due to an increase in utility income resulting from a
revision to the calculation of amounts to be charged to the tenants at Plainview
Apartments.

Total expenses decreased primarily due to a reduction in operating expenses
which more than offset the slight increases in general and administrative
expenses and depreciation. Operating expense decreased due to a decrease in
utility expense and the completion of exterior building improvements at
Plainview in 1997, as well as the completion of a major landscaping project at
Salem Courthouse in 1997. General and administrative expense increased due to
an increase in reimbursement of certain expenses incurred by affiliates on
behalf of the Partnership.

Included in general and administrative expenses at both December 31, 1998 and
1997 are management 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 Registrant, 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 Registrant from increases in
expense. As part of this plan, the Managing General Partner attempts to protect
the Registrant 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 December 31, 1998, the Registrant had cash and cash equivalents of
approximately $168,000 as compared to approximately $251,000 at December 31,
1997. The decrease in cash and cash equivalents is due to $469,000 of cash used
in investing activities and $118,000 of cash used in financing activities, which
was partially offset by $504,000 of cash provided by operating activities. Cash
used in investing activities consisted primarily of property improvements and
replacements and, to a lesser extent, deposits to escrow accounts maintained by
the mortgage lender. Cash used in financing activities consisted of payments of
principal made on the mortgage encumbering the Registrant's properties. The
Registrant invests its working capital reserves in a money market account.

The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the properties to adequately maintain the physical
assets and other operating needs of the Registrant and to comply with federal,
state and local legal and regulatory requirements. The Registrant has budgeted
approximately $509,000 in capital improvements for all of the Registrant's
properties in 1999. Capital improvements planned for Plainview consist of, but
is not limited to, painting the exterior of the buildings. Capital improvements
planned for Salem Courthouse consist of, but is not limited to, HVAC repairs,
siding/trim/facia repairs, exterior painting and balcony repairs. The 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 $23,740,000, net of discount, requires balloon
payments which total approximately $23,120,000 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 property cannot be refinanced or sold for a sufficient amount, the
Registrant will risk losing such property through foreclosure.

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 and 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
December 31, 1998, 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 March
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 March 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
March 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 March 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 December 31, 1998 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
December 31, 1998 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 April 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 our 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.

ITEM 7. FINANCIAL STATEMENTS

DAVIDSON DIVERSIFIED REAL ESTATE III, L. P.

LIST OF CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Auditors

Consolidated Balance Sheet - December 31, 1998

Consolidated Statements of Operations - Years ended December 31, 1998 and 1997

Consolidated Statements of Changes in Partners' Deficit - Years ended December
31, 1998 and 1997

Consolidated Statements of Cash Flows - Years ended December 31, 1998 and 1997

Notes to Consolidated Financial Statements

Report of Ernst & Young LLP, Independent Auditors

The Partners
Davidson Diversified Real Estate III, L.P.

We have audited the accompanying consolidated balance sheet of Davidson
Diversified Real Estate III, L.P. as of December 31, 1998, and the related
consolidated statements of operations, changes in partners' deficit and cash
flows for each of the two years in the period ended December 31, 1998. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Partnership's management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Davidson
Diversified Real Estate III, L.P. at December 31, 1998, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.

/s/ ERNST & YOUNG LLP

Greenville, South Carolina
March 3, 1999

DAVIDSON DIVERSIFIED REAL ESTATE III, L. P.
CONSOLIDATED BALANCE SHEET
(in thousands, except unit data)

December 31, 1998

Assets

Cash and cash equivalents $ 168

Receivables and deposits 369

Restricted escrows 183

Other assets 351

Investment properties (Notes C and F):

Land $ 2,821

Buildings and related personal property 31,590

34,411

Less accumulated depreciation (16,472) 17,939

$19,010

Liabilities and Partners' Deficit

Liabilities

Accounts payable $ 44

Tenant security deposit liabilities 109

Accrued property taxes 401

Other liabilities 227

Mortgage notes payable (Notes C and F) 23,740

Partners' Deficit

General partners $ (110)

Limited partners (1,011.5 units issued and

outstanding) (5,401) (5,511)

$19,010

See Accompanying Notes to Consolidated Financial Statements

DAVIDSON DIVERSIFIED REAL ESTATE III, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)

Years Ended December 31,

1998 1997

Revenues:

Rental income $ 5,426 $ 5,236

Other income 435 409

Total revenues 5,861 5,645

Expenses:

Operating 2,560 2,628

General and administrative 190 172

Depreciation 1,418 1,403

Interest 2,167 2,174

Property taxes 418 436

Total expenses 6,753 6,813

Net loss $ (892) $ (1,168)

Net loss allocated to general partners (2%) $ (18) $ (23)

Net loss allocated to limited partners (98%) (874) (1,145)

$ (892) $ (1,168)

Net loss per limited partnership unit: $ (864.06) $(1,131.98)

See Accompanying Notes to Consolidated Financial Statements

DAVIDSON DIVERSIFIED REAL ESTATE III, L. P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
(in thousands, except unit data)

Limited

Partnership General Limited

Units Partners Partners Total

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

Partners' deficit at

December 31, 1996 1,011.5 $ (69) $ (3,382) $ (3,451)

Net loss for the year ended

December 31, 1997 -- (23) (1,145) (1,168)

Partners' deficit at

December 31, 1997 1,011.5 (92) (4,527) (4,619)

Net loss for the year ended

December 31, 1998 -- (18) (874) (892)

Partners' deficit at

December 31, 1998 1,011.5 $ (110) $ (5,401) $ (5,511)

See Accompanying Notes to Consolidated Financial Statements

DAVIDSON DIVERSIFIED REAL ESTATE III, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Years Ended December 31,

1998 1997

Cash flows from operating activities:

Net loss $ (892) $ (1,168)

Adjustments to reconcile net loss to net cash

provided by operating activities:

Depreciation 1,418 1,403

Amortization of mortgage discounts and loan costs 65 64

Change in accounts:

Receivables and deposits (114) (3)

Other assets 25 (37)

Accounts payable (165) 18

Accrued property taxes 123 11

Tenant security deposit liabilities 25 (34)

Other liabilities 19 (101)

Net cash provided by operating activities 504 153

Cash flows used in investing activities:

Property improvements and replacements (461) (337)

Net (deposits to) withdrawals from restricted escrows (8) 79

Net cash used in investing activities (469) (258)

Cash flows used in financing activities:

Payments on mortgage notes payable (118) (109)

Net decrease in cash and cash equivalents (83) (214)

Cash and cash equivalents at beginning of period 251 465

Cash and cash equivalents at end of period $ 168 $ 251

Supplemental disclosure of cash flow information:

Cash paid for interest $ 2,102 $ 2,111

See Accompanying Notes to Consolidated Financial Statements

DAVIDSON DIVERSIFIED REAL ESTATE III, L. P.
Notes to Consolidated Financial Statements
December 31, 1998

NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Davidson Diversified Real Estate III, L. P. (the "Partnership" or the
"Registrant") is a Delaware limited partnership organized in July 1985 to
acquire and operate residential and commercial real estate properties. The
Partnership owns and operates two apartment complexes located in Kentucky and
Indiana. The general partners of the Registrant are Davidson Diversified
Properties, Inc., a Tennessee corporation ("Managing General Partner"); Freeman
Equities, Limited, a Tennessee limited partnership ("Associate General
Partner"); and David W. Talley and James T. Gunn (collectively, "Individual
General Partners")(collectively, the "General Partners"). The Partnership
Agreement provides that the Partnership is to terminate on December 31, 2010
unless terminated prior to such date.

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.

ALLOCATIONS OF PROFITS, GAINS, AND LOSSES

Net income (other than that arising from the occurrence of a sale or
disposition) and net loss shall be allocated 2% to the General Partners and 98%
to the Limited Partners.

Net income arising from the occurrence of a sale or disposition shall be
allocated as follows:

First, to each Partner having a negative balance in his capital account, an
amount of such net income (limited to such negative balance) in the same ratio
as the negative balance in such Partner's capital account bears to the aggregate
of the negative balances in all Partners' capital accounts;

Second, the remainder of such net income, if any, shall be allocated 2% to the
General Partners and 98% to the Limited Partners until the capital account
balance of each Limited Partner shall equal an amount equal to the excess, if
any, of (A) the sum of such Limited Partner's original invested capital, as
defined, plus an amount equal to an 8% per annum cumulative noncompounded return
on such Limited Partner's adjusted invested capital (commencing on the last day
of the calendar quarter in which such Limited Partner's contribution of original
invested capital is received by the Partnership), over (B) distributions
previously made to such Limited Partner in payment of such amounts.

Third, the remainder of such net income, if any, shall be allocated 15% to the
General Partners and 85% to the Limited Partners.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

Includes cash on hand and in banks and money market accounts. At certain times,
the amount of cash deposited at a bank may exceed the limit on insured deposits.

TENANT SECURITY DEPOSITS

The Partnership requires security deposits from lessees for the duration of the
lease and such deposits are included in receivables and deposits. Deposits are
refunded when the tenant vacates, provided the tenant has not damaged its space
and is current on its rental payments.

RESTRICTED ESCROWS

CAPITAL IMPROVEMENT RESERVES

At the time of the 1993 refinancing of the Salem Courthouse mortgage note
payable, approximately $176,000 of the proceeds were designated for a "Capital
Improvement Reserve" for certain capital improvements. At December 31, 1998,
the remaining reserve balance was $5,000.

RESERVE ACCOUNT

In addition to the Capital Improvement Reserve, a general operating reserve
account of approximately $114,000 was established with the refinancing proceeds
for Salem Courthouse. These funds were established to fund necessary repairs
and replacements of investment property, debt service, out-of-pocket expenses
incurred for ordinary and necessary administrative tasks, and payment of real
property taxes and insurance premiums. The Partnership was required to deposit
net operating income (as defined in the mortgage note) from the refinanced
property to the reserve account until the reserve account equaled $400 per
apartment unit or approximately $155,000 in total. At December 31, 1998, the
balance in the reserve account was approximately $179,000 including interest
earned on the reserves.

INVESTMENT PROPERTIES

Investment properties consist of two apartment complexes and are stated at cost.
Acquisition fees are capitalized as a cost of real estate. In accordance with
Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the Partnership records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. No adjustments for
the impairment of value were necessary in the years ended December 31, 1998 or
1997.

DEPRECIATION

Depreciation is provided by the straight-line method over the estimated lives of
the apartment properties and related personal property. For Federal income tax
purposes, the accelerated cost recovery method is used (1) for real property
over 15 years for additions prior to March 16, 1984, 18 years for additions
after March 15, 1984 and before May 9, 1985, and 19 years for additions after
May 8, 1985, and before January 1, 1987, and (2) for personal property over 5
years for additions prior to January 1, 1987. As a result of the Tax Reform Act
of 1986, for additions after December 31, 1986, the modified accelerated cost
recovery method is used for depreciation of (1) real property additions over 27
1/2 years, and (2) personal property additions over 7 years.

LOAN COSTS

Loan costs of approximately $559,000 less accumulated amortization of
approximately $221,000 are included in other assets and are being amortized on a
straight-line basis over the life of the loans.

LEASES

The Partnership generally leases apartment units for twelve-month terms or less.
The Partnership recognizes income as earned on its leases. In addition, the
Managing General Partner's policy is to offer rental concessions during
particularly slow months or in response to heavy competition from other similar
complexes in the area. Concessions are charged against rental income as
incurred.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about
Fair Value of Financial Instruments", as amended by SFAS No. 119, "Disclosures
about Derivative Financial Instruments and Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value. Fair value is defined in the SFAS as the amount at which
the instruments could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. The Partnership believes
that the carrying amount of its financial instruments (except for long term
debt) approximates their fair value due to the short term maturity of these
instruments. The fair value of the Partnership's long term debt, after
discounting the scheduled loan payments to maturity, approximates its carrying
balance.

ADVERTISING

The Partnership expenses the costs of advertising as incurred. Advertising
costs, of approximately $69,000 and $68,000 for the years ended December 31,
1998 and 1997, respectively, were charged to operating expense as incurred.

SEGMENT REPORTING

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("Statement 131"), which is effective for
years beginning after December 15, 1997. Statement 131 established standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. See Note "G" for detailed
disclosure of the Partnership's segments.

RECLASSIFICATIONS

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

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 ultimately acquired a 100%
ownership interest in Insignia Properties Trust ("IPT"), the entity which
controls 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 - MORTGAGE NOTES PAYABLE

The principle terms of mortgage notes payable are as follows:

Principal Monthly Principal

Balance At Payment Stated Balance

December 31, Including Interest Maturity Due At

Property 1998 Interest Rate Date Maturity
(in thousands) (in thousands)

Plainview Apartments $15,336 $119 (1) 9.33% 11/15/10 $15,336

Salem Courthouse

1st mortgage 8,234 64 7.83% 10/15/03 7,513

2nd mortgage 271 2 (1) 7.83% 10/15/03 271

23,841

Less unamortized

discounts (101)

Totals $23,740 $23,120

(1) Interest only payments.

The Partnership exercised an interest rate buy-down option for Salem Courthouse
when the debt was refinanced, reducing the stated rate from 8.13% to 7.83%. The
fee for the interest rate reduction amounted to $177,000 and is being amortized
as a mortgage discount on the interest method over the life of the loan. The
unamortized discount fee is reflected as a reduction of the mortgage notes
payable and increases the effective rate of the debt to 8.13%.

The mortgage notes payable are non-recourse and are secured by pledge of the
respective investment properties and by pledge of revenues from the respective
apartment properties. Certain of the notes require prepayment penalties if
repaid prior to maturity and prohibit the sale of the properties subject to
existing indebtedness.

Scheduled principal payments of mortgage notes payable subsequent to December
31, 1998, are as follows (dollar amounts in thousands):

Years Ending December 31,

1999 $ 128

2000 138

2001 149

2002 161

2003 7,929

Thereafter 15,336

$23,841

NOTE D - INCOME TAXES

The Partnership has received a ruling from the Internal Revenue Service that it
is classified as a partnership for Federal income tax purposes. Accordingly, no
provision for income taxes is made in the consolidated financial statements of
the Partnership. Taxable income or loss of the Partnership is reported in the
income tax returns of its partners.

The following is a reconciliation of reported net loss and Federal taxable loss
(dollar amounts in thousands, except unit data):

1998 1997

Net loss as reported $ (892) $ (1,168)

Add (deduct)

Debt write-off -- 104

Depreciation differences (28) 2

Unearned income (19) 26

Other 13 (39)

Federal taxable loss $ (926) $ (1,075)

Federal taxable loss per

limited partnership unit $(897.16) $(1,041.52)

The following is a reconciliation between the Partnership's reported amounts and
Federal tax basis of net liabilities (dollar amounts in thousands):

Net deficit as reported $ (5,511)

Land and buildings 635

Accumulated depreciation (6,956)

Syndication 1,621

Distribution fees 1,051

Other 91

Net deficit - Federal tax basis $ (9,069)

NOTE E - 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 certain payments
to affiliates for services and as 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 year ended December 31,
1998 and 1997:

1998 1997

(in thousands)

Property management fees (included in

operating expenses) $298 $284

Reimbursement for services of affiliates

(included in operating and general and

administrative expenses and investment

property) 154 130

Included in reimbursement for services of affiliates is approximately $22,000
and $2,000 of construction services reimbursements for the years ended December
31, 1998 and 1997, respectively.

During the years ended December 31, 1998 and 1997, 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 $298,000 and $284,000 for the years ended
December 31, 1998 and 1997, respectively.

An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $154,000 and
$130,000 for the years ended December 31, 1998 and 1997, respectively.

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. However, the insurer was 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.

On August 27, 1998, an affiliate of the Managing General Partner (the
"Purchaser") commenced a tender offer for limited partnership interests in the
Partnership. The Purchaser offered to purchase up to 300 of the outstanding
units of limited partnership interest in the Partnership at $3,000 per Unit, net
to the seller in cash. This tender offer has subsequently been withdrawn by the
Purchaser. AIMCO currently owns, through its affiliates, a total of 32.75
limited partnership units or 3.238%.

NOTE F - REAL ESTATE AND ACCUMULATED DEPRECIATION

Initial Cost

To Partnership

(in thousands)

Investment Properties Buildings Cost

and Related Capitalized

Personal Subsequent to

Description Encumbrances Land Property Acquisition

Salem Courthouse

Indianapolis, Indiana $ 8,505 $ 774 $11,198 $ 1,215

Plainview Apartments

Louisville, Kentucky 15,336 2,047 16,584 2,593

Totals $23,841 $2,821 $27,782 $ 3,808

</TABLE>

Gross Amount At Which Carried

At December 31, 1998

(in thousands)

Buildings

And Related

Personal Accumulated Date of Date Depreciable

Description Land Property Total Depreciation Construction Acquired Life-Years

Salem Courthouse $ 774 $12,413 $13,187 $ (6,627) 1978 11/85 5-25

Phase I 1973 05/86

Plainview 2,047 19,177 21,224 (9,845) Phase II 1978 05/86 5-25

Apartments

Totals $ 2,821 $31,590 $34,411 $(16,472)

</TABLE>

Reconciliation of "Real Estate and Accumulated Depreciation":

Years Ended December 31,

1998 1997

(in thousands)

Investment Properties

Balance at beginning of year $ 33,950 $ 33,613

Property improvements 461 337

Balance at end of Year $ 34,411 $ 33,950

Accumulated Depreciation

Balance at beginning of year $ 15,054 $ 13,651

Additions charged to expense 1,418 1,403

Balance at end of year $ 16,472 $ 15,054

The aggregate cost of the real estate for Federal income tax purposes at
December 31, 1998 and 1997, is $35,046,000 and $34,591,000. The accumulated
depreciation taken for Federal income tax purposes at December 31, 1998 and
1997, is $23,428,000 and $21,983,000.

NOTE G - SEGMENT REPORTING

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

As defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information, the Partnership has one reportable segment: residential
properties. The Partnership's residential property segment consists of two
apartment complexes located in Kentucky and Indiana. The Partnership rents
apartment units to people 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 (see "Note A").

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 years 1998 and 1997 is shown in the tables below.
The "Other" column includes partnership administration related items and income
and expense not allocated to reportable segments.

1998 RESIDENTIAL OTHER TOTALS

Rental income $ 5,426 $ -- $ 5,426
Other income 433 2 435
Interest expense 2,167 -- 2,167
Depreciation 1,418 -- 1,418
General and administrative expense -- 190 190
Segment loss (704) (188) (892)
Total assets 18,974 36 19,010
Capital expenditures for
investment properties 461 -- 461

1997 RESIDENTIAL OTHER TOTALS

Rental income $ 5,236 $ -- $ 5,236
Other income 395 14 409
Interest expense 2,174 -- 2,174
Depreciation 1,403 -- 1,403
General and administrative expense -- 172 172
Segment loss (1,010) (158) (1,168)
Total assets 19,808 194 20,002
Capital expenditures for
investment properties 337 -- 337

NOTE I - LEGAL PROCEEDINGS

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 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

On December 31, 1998 Davidson Diversified Properties, Inc., (the "Managing
General Partner"), was owned by MAE GP Corporation, which was wholly owned by
Metropolitan Asset Enhancement, L.P., which was 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.
Effective October 1, 1998 and February 26, 1999 Insignia and IPT respectively
were merged into Apartment Investment and Management Company ("AIMCO"). Thus the
Managing General Partner is now a wholly-owned subsidiary of AIMCO.

The Registrant has no officers or directors. The Managing General Partner
manages and controls the Registrant and has general responsibility and authority
in all matters affecting its business.

The names of the directors and executive officers of the Managing General
Partner, as of December 31, 1998, their ages and the nature of all positions
presently held by them are as follows:

Name Age Position

Patrick J. Foye 41 Executive Vice President and Director

Timothy R. Garrick 42 Vice President _ Accounting and Director

Patrick J. Foye has been Executive Vice President and Director of the General
Partner since October 1, 1998. Mr. Foye has served as Executive Vice President
of AIMCO since May 1998. Prior to joining AIMCO, Mr. Foye was a partner in the
law firm of Skadden, Arps, Slate, Meagher & Flom LLP from 1989 to 1998 and was
Managing Partner of the firm's Brussels, Budapest and Moscow offices from 1992
through 1994. Mr. Foye is also Deputy Chairman of the Long Island Power
Authority and serves as a member of the New York State Privatization Council.
He received a B.A. from Fordham College and a J.D. from Fordham University Law
School.

Timothy R. Garrick has served as Vice President-Accounting of AIMCO and Vice
President-Accounting and Director of the Managing General Partner since October
1, 1998. Prior to that date, Mr. Garrick served as Vice President-Accounting
Services of Insignia Financial Group since June of 1997. From 1992 until June
of 1997, Mr. Garrick served as Vice President of Partnership Accounting and from
1990 to 1992 as an Asset Manager for Insignia Financial Group. From 1984 to
1990, Mr. Garrick served in various capacities with U.S. Shelter Corporation.
From 1979 to 1984, Mr. Garrick worked on the audit staff of Ernst & Whinney.
Mr. Garrick received his B.S. Degree from the University of South Carolina and
is a Certified Public Accountant.

ITEM 10. EXECUTIVE COMPENSATION

No compensation or remuneration was paid by the Partnership to any officer or
director of the Managing General Partner. However, fees and other payments have
been made to the Partnership's Managing General Partner and its affiliates, as
described in "Item 12. Certain Relationships and Related Transactions."

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As of December 31, 1998, no security holder was known by the Registrant to be
the beneficial owner of more than 5% of the Units of the Registrant.

As of December 31, 1998, no director or officer of the Managing General Partner
owns, nor do the directors or officers as a whole own more than 1% of the
Registrant's Units. No such director or officer had any right to acquire
beneficial ownership of additional Units of the Registrant.

On October 1, 1998, Insignia Financial Group, Inc. merged into 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 additional limited partnership interests in the
Partnership for cash or preferred units or common units of limited partnerships
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-KSB 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.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

1998 1997

(in thousands)

Property management fees (included in

operating expenses) $298 $284

Reimbursement for services of affiliates

(included in operating and general and

Administrative expenses and investment

property) 154 130

Included in reimbursement for services of affiliates is approximately $22,000
and $2,000 of construction services reimbursements for the years ended December
31, 1998 and 1997, respectively.

ITEM 13. 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 filed in the fourth quarter of fiscal year
1998:

Current Report on Form 8-K dated October 1, 1998 filed on October
16, 1998 disclosing change in control of Registrant from Insignia
Financial Group, Inc. to AIMCO.

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/Timothy R. Garrick
Timothy R. Garrick
Vice President - Accounting

Date: March 26, 1999

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
date indicated.

Signature/Name

By:/s/Patrick J. Foye Date: March 26, 1999
Patrick J. Foye
Executive Vice President and Director

By:/s/Timothy R. Garrick Date: March 26, 1999
Timothy R. Garrick
Vice President - Accounting
and Director

EXHIBIT INDEX

EXHIBIT NO.

3 Partnership Agreement dated July 8, 1985 and amended as of October
9, 1985 is incorporated by reference to Exhibit A to the Prospectus
of the Registrant dated October 28, 1985 as filed with the
Commission pursuant to Rule 424(b) under the Act.

3A Second Amendment dated April 1, 1986 to the Partnership Agreement
dated July 8, 1985 as amended October 9, 1985 is incorporated by
reference to Exhibit 3A to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1986.

4 Certificate of Limited Partnership dated June 28, 1985 is
incorporated by reference to Exhibit 4 to the Registrant's
Registration Statement on Form S-11 (Registration No. 2-99257).

10A Property Management Agreement dated July 26, 1985 between the
Registrant and Harvey Freeman & Sons, Inc., is incorporated by
reference to Exhibit 10B to Amendment No. 1 to the Registrant's
Registration Statement on Form S-11 (Registration No. 2-99257).

10B Agreement Among Agents dated November 1, 1983 by and among Harvey
Freeman & Sons, Inc., Harvey Freeman & Sons, Inc. of Arkansas,
Harvey Freeman & Sons, Inc. of Florida, Harvey Freeman & Sons, Inc.
of Georgia, Harvey Freeman & Sons, Inc. of Indiana, Harvey Freeman &
Sons, Inc. of Kentucky, Harvey Freeman & Sons, Inc. of Mississippi,
Harvey Freeman & Sons, Inc. of North Carolina, Harvey Freeman and
Sons, Inc. of Ohio and Harvey Freeman & Sons, Inc. of South Carolina
is incorporated by reference to Exhibit 10C to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1983.

10C Acquisition and Disposition Services Agreement dated October 28,
1985 between the Registrant and Criswell Freeman Company is
incorporated by reference to Exhibit 10D to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1985.

10D Contract for Sale of Real Estate for Salem Courthouse Apartments
dated September 25, 1985 between Salem-Oxford Associates, an Indiana
limited partnership and Tennessee Trust Company, Trustee, is
incorporated by reference to Exhibit 10(a) to the Registrant's
Current Report on Form 8-K dated December 2, 1985.

10E First Amendment to Contract for Sale of Real Estate dated October
29, 1985 between Salem Courthouse Associates, an Indiana limited
partnership and Tennessee Trust Company is incorporated by reference
to Exhibit 10(b) to the Registrant's Current Report on Form 8-K
dated December 2, 1985.

10F Assignment of Contract for Sale of Real Estate dated November 20,
1985 between Tennessee Trust Company, Trustee and the Registrant is
incorporated by reference to Exhibit 19(c) to the Registrant's
Current Report on Form 8-K dated December 2, 1985.

10G Mortgage Note dated December 2, 1985 payable to BancOhio National
Bank executed by the Registrant is incorporated by reference to
Exhibit 10H to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1985.

10H Real Estate Mortgage and Security Agreement dated December 2, 1985
to BancOhio National Bank executed by the Registrant is incorporated
by reference to Exhibit 10I to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1985.

10I Promissory Note dated December 2, 1985 payable to Freeman Mortgage
Corporation executed by the Registrant is incorporated by reference
to Exhibit 10J to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1985.

10J Note executed by the Registrant payable to Phoenix Mutual Life
Insurance Company dated March 28, 1986 relating to Salem Courthouse
Apartments, is incorporated by reference to Exhibit 10J to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986.

10K Mortgage and Security Agreement executed by the Registrant to
Phoenix Mutual Life Insurance Company dated March 28, 1986 relating
to Salem Courthouse Apartments, is incorporated by reference to
Exhibit 10K to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1986.

10L Contract for Sale of Real Estate for Plainview Apartments dated
November 11, 1985 between NTS-Plainview Partners, a Kentucky limited
partnership and Tennessee Trust Company, a Tennessee corporation, is
incorporated by reference to Exhibit 10(a) to the Registrant's
Current Report on Form 8-K dated May 6, 1986.

10M Assignment of Contract for Sale of Real Estate dated May 2, 1986
between Tennessee Trust Company, a Tennessee corporation and the
Registrant is incorporated by reference to Exhibit 10(b) to the
Registrant's Current Report on Form 8-K dated May 6, 1986.

10N Amendment and Reinstatement of Contract for Sale of Real Estate
dated April 15, 1986 between NTS-Plainview Partners and Tennessee
Trust company is incorporated by reference to Exhibit 10(c) to the
Registrant's Current Report on Form 8-K dated May 6, 1986.

10O Mortgage Note dated May 6, 1986 executed by the Registrant payable
to NTS-Plainview partners, a Kentucky limited partnership, is
incorporated by reference to Exhibit 10(f) to the Registrant's
Current Report on Form 8-K dated May 6, 1986.

10P Mortgage and Security Agreement dated May 6, 1986 executed by the
Registrant to NTS-Plainview Partners, a Kentucky limited
partnership, is incorporated by reference to Exhibit 10(g) to the
Registrant's Current Report on Form 8-K dated May 6, 1986.

10Q Agreement for Purchase and Sale of Woodbridge Apartments dated April
4, 1986 between Regal Oaks Associates, an Illinois general
partnership and Tennessee Trust Company, a Tennessee corporation, is
incorporated by reference to Exhibit 10(a) to the Registrant's
Current Report on Form 8-K dated May 30, 1986.

10R Assignment of Agreement dated May 30, 1986 between Tennessee Trust
Company, a Tennessee corporation and the Registrant is incorporated
by reference to Exhibit 10(b) to the Registrant's Current Report on
Form 8-K dated May 30, 1986.

10S Memorandum of Understanding amount SEC Realty Corp., Tennessee
Properties, L.P., Freeman Mortgage Corporation, J. Richard Freeman,
W. Criswell Freeman and Jacques-Miller Properties, Inc. is
incorporated by reference to Exhibit 10II to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1988.

10T Partnership Administration and Consultation Agreement among Freeman
Properties, Inc., Freeman Diversified Properties, Inc., Residual
Equities Limited and Jacques-Miller Properties, Inc. is incorporated
by reference to Exhibit 10JJ to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1988.

10U Termination Agreement, dated December 31, 1991 among Jacques-Miller,
Inc., Jacques-Miller Property Management, Davidson Diversified
Properties, Inc., and Supar, Inc. is incorporated by reference to
Exhibit 10KK to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.

10V Assignment of Limited Partnership Interest of Freeman Equities,
Limited, dated December 31, 1991 between Davidson Diversified
Properties, Inc. and Insignia Jacques-Miller, L.P. is incorporated
by reference to Exhibit 10LL to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.

10W Assignment of General Partner Interests of Freeman Equities,
Limited, dated December 31, 1991 between Davidson Diversified
Properties, Inc. and MAE GP Corporation is incorporated by reference
to Exhibit 10MM to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.

10X Stock certificate, dated December 31, 1991 showing ownership of
1,000 shares of Davidson Diversified Properties, Inc. by MAE GP
Corporation is incorporated by reference to Exhibit 10NN to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.

10Y Notice of Trustee's Sale of Real Estate in the Matter of Foreclosure
of the Deed of Trust of Davidson Diversified Real Estate III, L.P.
(regarding Woodbridge Apartments).

10Z Contracts related to refinancing of debt:

(a) First Mortgage and Security Agreement dated September 30, 1993
between Salem Courthouse, L.P. and Lexington Mortgage Company, a
Virginia Corporation, securing Salem Courthouse.

(b) Seconds Mortgage and Security Agreement dated September 30, 1993
between Salem Courthouse, L.P. and Lexington Mortgage Company, a
Virginia Corporation, securing Salem Courthouse.

(c) First Assignments of Leases and Rents dated September 30, 1993
between Salem Courthouse, L.P. and Lexington Mortgage Company, a
Virginia Corporation, securing Salem Courthouse.

(d) Second Assignments of Leases and Rents dated September 30, 1993
between Salem Courthouse, L.P. and Lexington Mortgage Company, a
Virginia Corporation, securing Salem Courthouse.

(e) First Mortgage Note dated September 30, 1993 between Salem
Courthouse, L.P. and Lexington Mortgage Company, relating to Salem
Courthouse.

(f) Second Mortgage Note dated September 30, 1993 between Salem
Courthouse, L.P. and Lexington Mortgage Company, relating to Salem
Courthouse.

10AA Amended, Restated and Substituted Mortgage Note dated November 15,
1995, executed by Plainview Apartments, L.P. payable to NTS-
Plainview Associates.

10BB Assignment of Leases, Rents, and Profits dated November 15, 1995,
executed by Plainview Apartments, L.P. to Nationwide Life Insurance
Co. and West Coast Life Insurance Co.

16 Letter from the Registrant's former independent accountant regarding
its concurrence with the statements made by the Registrant is
incorporated by reference to the exhibit filed with Form 8-K dated
September 30, 1992.

27 Financial Data Schedule

99A Agreement of Limited Partnership for Davidson III GP Limited
Partnership between Davidson Diversified Properties, Inc. and
Davidson Diversified Real Estate III.

99B Agreement of Limited Partnership for Salem Courthouse L.P. between
Davidson III GP Limited Partnership and Davidson Diversified Real
Estate III, L.P. entered into on September 15, 1993.

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Davidson
Diversified Real Estate III, L.P. 1998 Year-End 10-KSB and is qualified in its
entirety by reference to such 10-KSB filing.
</LEGEND>
<CIK> 0000773679
<NAME> DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 168
<SECURITIES> 0
<RECEIVABLES> 369
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 34,411
<DEPRECIATION> 16,472
<TOTAL-ASSETS> 19,010
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 23,740
0
0
<COMMON> 0
<OTHER-SE> (5,511)
<TOTAL-LIABILITY-AND-EQUITY> 19,010
<SALES> 0
<TOTAL-REVENUES> 5,861
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,753
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,167
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (892)
<EPS-PRIMARY> (864.06)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>

</TABLE>