MONTGOMERY FUNDS III, N-30D, 2000-09-08

MONTGOMERY FUNDS III
N-30D, 2000-09-08

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<PAGE>

------------------------
Montgomery
Variable Series
------------------------
GROWTH FUND
------------------------
Portfolio Highlights
(Unaudited)

INVESTMENT REVIEW

Q: HOW DID THE FUND PERFORM OVER THE SIX MONTHS ENDED JUNE 30, 2000?

A: The Fund produced a total return of 2.50% over the period, versus a return of
-0.42% for the Standard & Poor's 500 Index.

Q: WHAT FACTORS AFFECTED THE FUND'S PERFORMANCE?

A: For most of the fiscal year, the Fund was overweighted in some
underperforming sectors such as basic materials and other cyclicals. Its
overweighting in those economically sensitive areas corresponded to an
underweight stance in some of the more growth-oriented areas of the market, such
as technology. During the first quarter, this stance ran counter to market
trends. It was rewarded, however, when technology stocks fell into a correction
and cyclical stocks began to outperform in March and April.

On June 1, 2000, the Fund's management team changed to more efficiently leverage
investment ideas generated by our Global Research Platform, and the Fund's
strategy was aligned with a more growth-oriented focus. We believe that this
transition will add greater value for the Fund's shareholders over time.
Consistent with this transition, we deemphasized basic materials, chemicals,
paper and other economically cyclical areas by lightening the Fund's exposure to
Alcoa and Dow Chemical and eliminating its positions in Boise Cascade and
Whirlpool. This move proved timely, as the U.S. economy appeared to be slowing
at the end of the first half.

Rest assured that throughout this process, we have remained aware of the
potential tax effects associated with making significant changes to the
portfolio, balancing potential tax ramifications with the importance of making
constructive changes that will serve to enhance the Fund's performance and,
therefore, shareholder value.

Q: WHAT STOCKS WERE HELPFUL TO THE FUND'S PERFORMANCE OVER THE PAST YEAR?

A: Technology stocks were among the Fund's strongest holdings. These included
Comverse Technology, the leading provider of telecommunications applications and
enhanced service platforms to wireless and wireline communications companies.
These systems are in great demand because they allow communications service
providers to offer a better product and increase subscriber revenues. Comverse
is leveraging its leadership position in voice messaging systems to sell new
applications involving wireless Internet access. We believe that the growth
potential for these new applications is tremendous, especially as cellular
telephone systems add to their bandwidth capabilities. Another good performer
was Hewlett-Packard, whose new management team is reasserting its leadership in
growth markets, including PC sales, UNIX servers and computer printers. Comverse
Technology and Hewlett-Packard are just two examples of companies that fit our
strategy of investing in high-quality, profitable market leaders positioned for
growth.

Although we have increased the Fund's exposure to technology and more growth-
oriented companies, the Fund remains well diversified, holding strong performers
in other market segments as well. One example is Golden West Financial, a
California-based thrift institution that specializes in adjustable-rate
mortgages (ARMs). Many

-------------------------------------------------
PORTFOLIO MANAGEMENT
-------------------------------------------------
Andrew Pratt ...................Portfolio Manager

-------------------------------------------------
FUND PERFORMANCE
-------------------------------------------------
Average annual total returns
for the period ended 6/30/00

-------------------------------------------------
MONTGOMERY VARIABLE SERIES:
GROWTH FUND

<TABLE>
<S> <C>
Since inception (2/9/96)...................18.21%
One year ...................................3.90%
Three years ...............................12.08%
</TABLE>

-------------------------------------------------
S&P 500 INDEX
<TABLE>
<S> <C>
Since 1/31/96 .............................22.58%
One year ...................................7.25%
Three years ...............................19.67%
</TABLE>

-------------------------------------------------

Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.

The performance figures provided do not reflect the effect of (i) any securities
purchased or sold by the Fund after 6/30/00 but that were effective on 6/30/00
or (ii) any purchases or redemptions of Fund shares completed after 6/30/00 that
were effective on 6/30/00.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

GROWTH FUND S&P 500 LIPPER
<S> <C> <C> <C>
2/2/96 10000 10000 10000
Feb-96 10040 10093 10235
Mar-96 10437 10190 10318
Apr-96 11081 10340 10659
May-96 11766 10607 10943
Jun-96 11508 10647 10793
Jul-96 11002 10177 10154
Aug-96 11448 10392 10510
Sep-96 11954 10976 11123
Oct-96 12272 11279 11216
Nov-96 12817 12131 11911
Dec-96 12722 11890 11732
Jan-97 13166 12633 12352
Feb-97 13125 12732 12201
Mar-97 12671 12210 11633
Apr-97 13145 12938 12100
May-97 14229 13729 12973
Jun-97 14807 14339 13475
Jul-97 16354 15480 14619
Aug-97 16179 14613 14120
Sep-97 17066 15413 14907
Oct-97 16458 14899 14340
Nov-97 16499 15588 14588
Dec-97 16357 15856 14736
Jan-98 15956 16031 14822
Feb-98 17495 17187 15952
Mar-98 18416 18066 16657
Apr-98 18622 18251 16860
May-98 17972 17938 16377
Jun-98 17744 18666 16979
Jul-98 16769 18468 16580
Aug-98 13821 15800 13842
Sep-98 14189 16813 14675
Oct-98 15490 18179 15712
Nov-98 16400 19280 16682
Dec-98 16936 20390 18055
Jan-99 17109 21249 18087
Feb-99 16431 20589 18093
Mar-99 17000 21416 18932
Apr-99 18815 22232 19404
May-99 18761 21718 18994
Jun-99 20063 22905 19596
Jul-99 19417 22207 19083
Aug-99 18716 22104 18897
Sep-99 18432 21492 18580
Oct-99 18540 22858 19663
Nov-99 18857 23325 20517
Dec-99 20336 24691 22443
Jan-00 19207 23441 21570
Feb-00 19296 22998 22610
Mar-00 20920 25248 24025
Apr-00 20743 24488 22975
May-00 20687 23985 22074
Jun-00 20842 24577 23216
</TABLE>

(1) The Standard & Poor's 500 Index is composed of 500 widely held common stocks
listed on the NYSE, AMEX and OTC markets.

(2) The Lipper Growth Funds Average consists of 905 funds.

1
<PAGE>
------------------------
Montgomery
Variable Series
------------------------
GROWTH FUND
------------------------
Portfolio Highlights

----------------------------------------------------
TOP TEN HOLDINGS
----------------------------------------------------
(as a percentage of total net assets)

<TABLE>
<S> <C>
General Electric Company .......................3.9%
Intel Corporation ..............................3.6%
Cisco Systems, Inc..............................3.5%
Microsoft Corporation ..........................3.3%
Exxon Mobil Corporation ........................2.5%
Oracle Corporation..............................2.1%
Wal-Mart Stores, Inc............................2.1%
Nortel Networks Corporation ....................2.0%
Citigroup, Inc..................................1.9%
Pfizer, Inc.....................................1.9%
</TABLE>

----------------------------------------------------
TOP FIVE INDUSTRIES
----------------------------------------------------
(as a percentage of total net assets)

<TABLE>
<S> <C>
Major Pharmaceuticals ..........................9.0%
Electronic Data Processing .....................6.9%
Telecommunications Equipment ...................5.9%
Semiconductors..................................5.4%
Computer Software...............................5.4%
</TABLE>

Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.

financial services stocks performed poorly as interest rates rose over the past
year, but Golden West has actually benefited from rising rates. With fixed-rate
mortgages rising above 8%, ARMs have become much more popular, and that trend is
boosting Golden West's stock.

Q: WHAT ARE SOME RECENT ADDITIONS TO THE FUND?

A: One of the Fund's significant purchases was EMC, a leading provider of data
storage. The need for storage is growing exponentially along with the growth of
the Internet and the sheer volume of data that corporations must process. EMC is
just one example of a holding whose products are integral to building and
maintaining the Internet's infrastructure. We have long held the view that this
type of company will be among the most profitable Internet-related investments.

Other additions include Pfizer, the large pharmaceuticals company. In general,
drug stocks have done well lately because their earnings growth rates should
hold up well even in a slowing economy. In addition to a very promising pipeline
of potential new products, Pfizer's existing line of prescription
pharmaceuticals should be relatively immune to changes in public policy. For
example, Pfizer's most famous product, Viagra, is not affected by changes in
Medicare.

We have also added PepsiCo, which has performed well in the midst of lackluster
performance by rival Coca-Cola and disastrous results from consumer nondurable
bellwether Procter & Gamble (P&G). The company has benefited from its successful
expansion into the snack-food business and, unlike Coke and P&G, PepsiCo has
continued to successfully execute its business plan.

Q: HAVE YOU SOLD ANY HOLDINGS?

A: As part of the portfolio's repositioning, we sold a number of economically
sensitive companies that had detracted from the Fund's performance. These sales
included railroad operator Union Pacific, printing company Donnelley (RR) & Sons
and mining company Rio Tinto. We replaced these positions with less cyclical
companies that we believe have a greater opportunity to increase their sales and
earnings on a sustained basis.

Q: WHAT IS YOUR LONGER-TERM OUTLOOK?

A: We have had a volatile backdrop recently, including the series of Federal
Reserve rate hikes and the resulting concerns about where the economy and
corporate profits are headed. In the near term, we expect some of this
uncertainty to remain. Our continuing strategy will be to identify companies
that will do well independent of the market backdrop. To that end we will
maintain a diversified portfolio, focusing on leading, high-quality companies
that are poised for growth. Consistent with the stylistic changes that have
taken place in the portfolio, we see the best opportunities in technology,
health care, telecommunications and more-traditional growth sectors. We expect
that the Fund will migrate toward a higher-weighted average market cap and be
more heavily weighted in these market segments and less so in such areas as
basic materials and transportation.

2
<PAGE>

------------------------
Montgomery
Variable Series
------------------------
GROWTH FUND
------------------------
Investments

PORTFOLIO INVESTMENTS
June 30, 2000 (Unaudited)

<TABLE>
<CAPTION>
SHARES VALUE (NOTE 1)
<S> <C>
COMMON STOCKS - 97.0%

AEROSPACE/DEFENSE - 1.1%
5,900 Boeing Company .................................. $ 246,694

AIR FREIGHT/DELIVERY SERVICES - 0.5%
3,000 FedEx Corporation+ .............................. 114,000

ALUMINUM - 0.6%
4,600 Alcoa, Inc. ..................................... 133,400

BIOTECHNOLOGY - 0.9%
2,800 Amgen, Inc.+ .................................... 196,788

BUILDING MATERIAL CHAINS - 1.0%
4,700 Home Depot, Inc. ................................ 234,706

CELLULAR TELEPHONE - 1.6%
6,000 Sprint PCS+ ..................................... 357,000

CLOTHING/SHOE/ACCESSORY STORES - 0.3%
2,400 The Gap, Inc. ................................... 75,000

COMPUTER COMMUNICATIONS - 3.5%
12,500 Cisco Systems, Inc.+ ............................ 794,141

COMPUTER SOFTWARE - 5.4%
9,400 Microsoft Corporation+ .......................... 751,706
5,700 Oracle Corporation+ ............................. 478,978
--------------
1,230,684

CONSTRUCTION/AGRICULTURE EQUIPMENT/TRUCKS - 0.5%
3,300 Deere & Company ................................. 122,100

CONSUMER SERVICE - 0.7%
3,900 CVS Corporation ................................. 156,000

DEPARTMENT STORES - 1.0%
4,000 Kohl's Department Stores, Inc.+ ................. 222,500

DISCOUNT STORES - 2.6%
3,700 Costco Wholesale Corporation+ ................... 122,216
8,300 Wal-Mart Stores, Inc. ........................... 478,287
--------------
600,503

DIVERSIFIED FINANCIAL SERVICES - 2.9%
4,300 American Express Company ........................ 224,137
7,300 Citigroup, Inc. ................................. 439,825
--------------
663,962

DIVERSIFIED MANUFACTURE - 0.9%
4,400 Tyco International Ltd. ......................... 208,450

EDP PERIPHERALS - 1.6%
4,800 EMC Corporation+ ................................ 369,300

EDP SERVICES - 1.8%
5,000 Automatic Data Processing, Inc. ................. 267,812
1,850 Computer Sciences Corporation+ .................. 138,172
--------------
405,984

ELECTRICAL PRODUCTS - 1.5%
5,500 Emerson Electric Company+ ....................... $ 332,062

ELECTRONIC DATA PROCESSING - 6.9%
1,800 Apple Computers, Inc.+ .......................... 94,219
10,000 Compaq Computer Corporation ..................... 255,625
5,300 Dell Computer Corporation+ ...................... 261,522
2,100 Hewlett-Packard Company ......................... 262,238
3,400 International Business Machines Corporation ..... 372,512
3,700 Sun Mircosystems, Inc.+ ......................... 336,584
--------------
1,582,700

ELECTRONIC PRODUCTION EQUIPMENT - 0.7%
1,800 Applied Material, Inc.+ ......................... 163,181

FINANCE COMPANIES - 0.8%
3,600 Fannie Mae ...................................... 187,875

FOOD CHAINS - 0.6%
3,000 Safeway, Inc.+ .................................. 135,375

FOREST PRODUCTS - 0.5%
2,800 Weyerhauser Company ............................. 120,400

INSURANCE BROKERS/SERVICES - 0.8%
1,800 Marsh & McLennan Companies ...................... 187,988

INTEGRATED OIL COMPANIES - 4.4%
2,800 Chevron Corporation ............................. 237,475
7,200 Exxon Mobil Corporation ......................... 565,200
3,800 Texaco, Inc. .................................... 202,350
--------------
1,005,025
INTERNET SERVICES - 1.6%
4,700 America Online, Inc.+ ........................... 247,925
900 Yahoo!, Inc.+ ................................... 111,516
--------------
359,441

INVESTMENT BANKERS/BROKERS/SERVICES - 2.4%
2,800 Charles Schwab Corporation ...................... 94,150
1,700 Merrill Lynch & Company ......................... 195,500
3,000 Morgan Stanley Dean Witter & Company ............ 249,750
--------------
539,400

MAJOR BANKS - 4.9%
5,797 Bank of America Corporation ..................... 249,271
5,000 Bank of New York Company, Inc. .................. 232,500
4,850 Chase Manhattan Corporation ..................... 223,403
1,900 State Street Corporation ........................ 201,519
5,200 Wells Fargo Company ............................. 201,500
--------------
1,108,193

MAJOR CHEMICALS - 0.7%
5,450 Dow Chemical Company ............................ 164,522

MAJOR PHARMACEUTICALS - 9.0%
4,400 Bristol-Meyers Squibb Company ................... 256,300
3,500 Eli Lilly and Company ........................... 349,563
</TABLE>

3
The accompayning notes are an integral part of the financial statements.
<PAGE>
------------------------
Montgomery
Variable Series
------------------------
GROWTH FUND
------------------------
Investments

<TABLE>
<CAPTION>
SHARES VALUE (NOTE 1)
<S> <C>
COMMON STOCKS - CONTINUED

MAJOR PHARMACEUTICALS - CONTINUED
3,600 Johnson & Johnson ............................... $ 366,750
5,500 Merck & Company, Inc. ........................... 421,437
8,800 Pfizer, Inc. .................................... 422,400
4,900 Schering Plough Corporation ..................... 247,450
--------------
2,063,900

MAJOR U.S. TELECOMMUNICATIONS - 5.0%
5,200 AT&T Corporation ................................ 164,450
3,600 Bell Atlantic Corporation ....................... 182,925
5,100 BellSouth Corporation ........................... 217,388
8,000 SBC Communications, Inc. ........................ 346,000
5,200 WorldCom, Inc.+ ................................. 238,712
--------------
1,149,475

MEDIA CONGLOMERATES - 3.3%
3,300 Time Warner, Inc. ............................... 250,800
3,400 Viacom, Inc.+ ................................... 231,837
6,800 Walt Disney Company ............................. 263,925
--------------
746,562
MEDICAL ELECTRONICS - 1.0%
4,600 Medtronics, Inc. ................................ 229,138

MOTOR VEHICLES - 0.7%
2,750 General Motors Corporation ...................... 159,672

MULTI-LINE INSURANCE - 1.8%
3,500 American International Group, Inc. .............. 411,250

MULTI-SECTOR COMPANIES - 3.9%
17,000 General Electric Company ........................ 901,000

OIL/GAS TRANSMISSION - 2.0%
4,100 Enron Corporation ............................... 264,450
4,900 Williams Companies, Inc. ........................ 204,269
--------------
468,719

OILFIELD SERVICES/EQUIPMENT - 1.0%
3,050 Schlumberger Ltd. ............................... 227,606

OTHER TELEPHONE/COMMUNICATION - 0.4%
3,400 Global Crossing Ltd.+ ........................... 89,569

PACKAGE GOODS/COSMETICS - 1.5%
2,400 Colgate Palmolive Company ....................... 143,700
3,500 Kimberly Clark Corporation ...................... 200,812
--------------
344,512

SEMICONDUCTORS - 5.4%
6,200 Intel Corporation ............................... 828,669
1,400 Micron Technology, Inc.+ ........................ 123,287
4,100 Texas Instruments, Inc. ......................... 281,619
--------------
1,233,575

SOFT DRINKS - 2.6%
6,000 Coca-Cola Company ............................... 344,625
5,500 PepsiCo, Inc. ................................... 244,406
--------------
589,031

TELECOMMUNICATIONS EQUIPMENT - 5.9%
2,600 Comverse Technology, Inc.+ ...................... 241,881
900 Corning, Inc. ................................... 242,887

TELECOMMUNICATIONS EQUIPMENT - CONTINUED
4,800 Lucent Technologies, Inc. ....................... $ 284,400
3,900 Motorola, Inc. .................................. 113,344
6,700 Nortel Networks Corporation ..................... 457,275
--------------
1,339,787
UNREGULATED POWER GENERATION - 0.8%
3,900 AES Corporation+ ................................ 177,938

TOTAL COMMON STOCKS
(Cost $21,728,630) ........................................... 22,149,108
--------------

MONEY MARKET FUND - 0.0%@
708 Chase Vista Federal Money Market Fund
(Cost $708) ..................................... 708
--------------

TOTAL SECURITIES
(Cost $21,729,338) ............................................ 22,149,816
--------------

PRINCIPAL AMOUNT

REPURCHASE AGREEMENTS - 3.4%
$ 765,000 Agreement with Greenwich Capital Markets,
Tri-Party, 7.000% dated 6/30/00, to be
repurchased at $765,440 on 07/03/00,
collateralized by $780,303 market value of
U.S. government and mortgage-backed
securities, having various maturities and
interest rates
(Cost $765,000) ................................. 765,000
--------------

TOTAL INVESTMENTS - 100.4%
(Cost $22,494,338) ............................................ 22,914,816

OTHER ASSETS AND LIABILITIES - (0.4)%
(Net) ......................................................... (86,479)
--------------

NET ASSETS - 100.0% ............................................ $ 22,828,337
==============
</TABLE>

+ Non-income-producing security.
@ Amount represents less than 0.1%.

The accompayning notes are an integral part of the financial statements.
<PAGE>

------------------------
Montgomery
Variable Series
------------------------
STATEMENT OF
ASSETS AND LIABILITIES
------------------------
June 30, 2000
(Unaudited)

<TABLE>
<CAPTION>
ASSETS: GROWTH FUND
------------------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value (note 1)
Securities ........................................................ $22,149,816
Repurchase agreements ............................................. 765,000
-----------
Total Investments ........................................................ 22,914,816
Receivables:
Shares of beneficial interest sold ................................ 29,244
Dividends ......................................................... 10,678
Expenses absorbed by Manager ...................................... 1,642
Interest .......................................................... 245
Deferred organization costs (note 1) ..................................... 10,874
-----------
Total Assets ............................................................. 22,967,499
-----------

LIABILITIES:
------------------------------------------------------------------------------------------
Payables:
Investment securities purchased ................................... 81,110
Management fees (note 2) .......................................... 19,588
Shares of beneficial interest redeemed ............................ 12,836
Trustees' fees and expenses (note 2) .............................. 4,147
Custodian fees .................................................... 1,303
Accounting fees ................................................... 837
Transfer agency and servicing fees ................................ 132
Other accrued liabilities and expenses ............................ 19,209
-----------
Total Liabilities ........................................................ 139,162
-----------
Net Assets ............................................................... $22,828,337
Investments at identified cost ........................................... $22,494,338

NET ASSETS CONSIST OF:
------------------------------------------------------------------------------------------
Undistributed net investment income ...................................... 111,227
Accumulated net realized gain ............................................ 3,919,047
Net unrealized appreciation of investments ............................... 420,478
Shares of beneficial interest ............................................ 12,112
Additional paid-in capital ............................................... 18,365,473
-----------
Net Assets ............................................................... $22,828,337

NET ASSETS:
------------------------------------------------------------------------------------------
Net assets ............................................................... $22,828,337
Number of Fund shares outstanding ........................................ 1,211,151
Net asset value, offering and redemption price per share outstanding ..... $ 18.85
-----------

</TABLE>

The accompayning notes are an integral part of the financial statements.
<PAGE>

------------------------------
Montgomery
Variable Series
------------------------------
STATEMENT OF OPERATIONS
------------------------------
Six Months Ended June 30, 2000
(Unaudited)

<TABLE>
<CAPTION>
NET INVESTMENT INCOME: GROWTH FUND
-----------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends ................................................................. $ 109,919
Interest .................................................................. 65,727
-----------
Total Income .............................................................. 175,646
-----------
EXPENSES:
Management fee (note 2) ................................................... 199,279
Printing fees ............................................................. 13,863
Legal and audit fees ...................................................... 11,659
Transfer agency and servicing fees ........................................ 6,701
Custodian fee ............................................................. 3,653
Accounting fees ........................................................... 3,635
Trustees' fees and expenses (note 2) ...................................... 868
Other ..................................................................... 5,915
-----------
Total Expenses ............................................................ 245,573
-----------
Fees deferred and/or expenses absorbed by Manager (note 2) ................ (109,157)
-----------
Net Expenses .............................................................. 136,416
-----------
NET INVESTMENT INCOME ..................................................... 39,230
-----------

NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
-----------------------------------------------------------------------------------------
Net realized gain from securities transactions ............................ 2,514,378
Net change in unrealized appreciation/(depreciation) of investments ....... (1,920,503)
-----------

NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ........................... 593,875
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ...................... $ 633,105
-----------
</TABLE>

The accompayning notes are an integral part of the financial statements.

<PAGE>

------------------------
Montgomery
Variable Series
------------------------
STATEMENT OF
CHANGES IN NET ASSETS
------------------------
<TABLE>
<CAPTION>

GROWTH FUND
------------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
6/30/00 YEAR ENDED
INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS: (UNAUDITED) 12/31/99
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income ....................................................... $ 39,230 $ 71,098
Net realized gain from securities transactions . ............................ 2,514,378 1,447,036
Net change in unrealized appreciation/(depreciation) of investments ......... (1,920,503) 1,464,366
----------- -----------
Net Increase in Net Assets Resulting from Operations ........................ 633,105 2,982,500

DISTRIBUTIONS TO SHAREHOLDERS:
------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income .................... -- (11,607)
Distributions to shareholders from net realized gains on investments ........ -- (189,184)
----------- -----------
Total distributions ......................................................... -- (200,791)

BENEFICIAL INTEREST TRANSACTIONS:
------------------------------------------------------------------------------------------------------------------
Net increase from beneficial interest transactions (note 4) ................. 2,546,711 3,415,177
----------- -----------
Net Increase in Net Assets .................................................. 3,179,816 6,196,886

NET ASSETS:
------------------------------------------------------------------------------------------------------------------
Beginning of period ......................................................... 19,648,521 13,451,635
End of Period ............................................................... $22,828,337 $19,648,521
Undistributed Net Investment Income ......................................... $ 111,227 $71,997
</TABLE>

The accompayning notes are an integral part of the financial statements.

<PAGE>

------------------------------
Montgomery
Variable Series
------------------------------
FINANCIAL HIGHLIGHTS
------------------------------

<TABLE>
<CAPTION>
GROWTH FUND

Selected Per-Share Data for the Year or Period Ended:

FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------
06/30/00
(UNAUDITED) 1999 1998 1997 1996(a)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $18.39 $15.39 $15.09 $12.33 $10.08
--------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.02 0.06 0.09 0.16 0.15
Net realized and unrealized gain on investments 0.44 3.13 0.35 3.35 2.59
--------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 0.46 3.19 0.44 3.51 2.74
--------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- (0.01) (0.06) (0.16) (0.15)
Distributions from net realized capital gains -- (0.18) (0.08) (0.59) (0.34)
--------------------------------------------------------------------------------------------------------------------------------
Total distributions -- (0.19) (0.14) (0.75) (0.49)
--------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE - END OF PERIOD $18.85 $18.39 $15.39 $15.09 $12.33
--------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN* 2.50% 20.79% 2.93% 28.57% 27.22%
--------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
--------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $22,828 $19,649 $13,452 $12,597 $2,127
--------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.36% 0.46% 0.57% 1.74% 2.55%+
--------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager $(0.01) $(0.07) $0.07 $0.01 $(0.27)
--------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 127% 77% 57% 53% 78%
--------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.25% 1.26% 1.25% 0.35% 0.01%+
--------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest and tax expense 4.03% 2.25% 1.40% 1.97% 6.98%+
--------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 1.25% 1.25% 1.25% 0.34% --
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Montgomery Variable Series: Growth Fund commenced operations on
February 9, 1996.

* Total return represents aggregate total return for the periods indicated.

+ Annualized.

The accompayning notes are an integral part of the financial statements.
<PAGE>

------------------------
The Montgomery
Funds III
------------------------
NOTES
------------------------
to Financial Statements
(Unaudited)

The Montgomery Funds III (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-end
management investment company and was organized as a Delaware business trust on
August 24, 1994. As of June 30, 2000, the Trust had two series: the Montgomery
Variable Series: Growth Fund and the Montgomery Variable Series: Emerging
Markets Fund. Information presented in these financial statements pertains to
the Montgomery Variable Series: Growth Fund (the "Fund"). The Montgomery
Variable Series: Emerging Markets Fund is presented under a separate cover.

1. SIGNIFICANT ACCOUNTING POLICIES:

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates. The following is a summary of signif-
icant accounting policies.

a. PORTFOLIO VALUATION

Portfolio securities are valued using current market valuations: either the last
reported sale price or, in the case of securities for which there is no reported
last sale, the mean between the closing bid and ask prices.

Securities traded on the over-the-counter market or on the NASDAQ national
market are valued at the mean between the last available bid and ask prices
prior to the time of valuation.

Securities for which market quotations are not readily available (including
restricted securities that are subject to limitations as to their sale) are
valued at fair value as determined in good faith by or under the supervision of
the Trust's officers in accordance with methods authorized by the Trust's Board
of Trustees. Short-term securities with maturities of 60 days or less are
carried at amortized cost, which approximates market value.

b. REPURCHASE AGREEMENTS

The Fund may engage in repurchase agreements individually or jointly through
a joint repurchase account with other series of the Trust and affiliated
registered investment companies pursuant to a joint repurchase agreement.
Under the terms of a typical repurchase agreement, the Fund takes possession
of government debt obligations as collateral. The Fund also agrees with the
counterparty to allow the counterparty to repurchase, and the Fund to resell,
the obligations at a specified date and price, thereby determining the yield
during the Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. The value of the collateral is at least equal at all times to the
total amount of the repurchase obligations, including interest. In the event
of counterparty default, the Fund has the right to use the collateral to
offset losses incurred. There could be potential loss to the Fund in the
event the Fund is delayed or prevented from exercising its rights to dispose
of the collateral securities, including the risk of a possible decline in the
value of the underlying securities during the period in which the Fund seeks
to assert its rights. The Fund's Manager, acting under the supervision of the
Board of Trustees, reviews the value of the collateral and the
creditworthiness of those banks and dealers with which the Fund enters into
repurchase agreements to evaluate potential risks. The Fund may also
participate on an individual or joint basis in tri-party repurchase
agreements that involve a counterparty and a custodian bank.

c. DIVIDENDS AND DISTRIBUTIONS

Dividends from net investment income, if any, are declared and paid at least
annually. Distributions of net realized capital gains (including net short-term
capital gains) are distributed at least annually. Additional distributions of
net investment income and capital gains for the Fund may be made in order to
avoid the application of a 4% non-deductible excise tax on certain undistributed
amounts of ordinary income and capital gains. Income distributions and
capital-gain distributions are determined in accordance with income tax
regulations, which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments of income and gains
on various investment securities held by the Fund, timing differences and
differing characterizations of distributions made by the Fund.

d. SECURITIES TRANSACTIONS AND INVESTMENT INCOME

Securities transactions are recorded on a trade date basis. Realized gain and
loss from securities transactions are computed on the specific identified cost
basis of the securities sold. Dividend income is recognized on the ex-dividend
date. Interest income, including accretion/amortization of premium/discount on
short-term investments, is recognized on the accrual basis.

e. FEDERAL INCOME TAXES

The Fund has elected and qualified, and it is the intention of the Fund to
continue to qualify, as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), by complying with
the applicable requirements of the Code and by making distributions of
taxable income to shareholders sufficient to relieve the Fund of all or
substantially all federal income taxes. Accordingly, no provision for federal
income taxes is required.

f. ORGANIZATION COSTS

Expenses incurred in connection with the organization of the fund are amortized
on a straight-line basis over a period of five years from commencement of
operations.

g. EXPENSES

General expenses of the Trust are allocated to the Fund and other series of the
Trust based on relative net assets. Operating expenses directly attributable to
the Fund are charged to the Fund's operations.

2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES:

a. Montgomery Asset Management, LLC, is the Fund's Manager (the "Manager"). The
Manager, a Delaware limited liability company, is an investment adviser
registered with the Securities and Exchange Commission under the Investment
Advisers Act of 1940, as amended. The Manager is a subsidiary of Commerzbank AG.

9
<PAGE>

------------------------
The Montgomery
Funds III
------------------------
NOTES
------------------------
to Financial Statements
(Unaudited)

Pursuant to the Investment Management Agreement (the "Agreement") between the
Manager and the Trust with respect to the Fund, the Manager provides the Fund
with advice on buying and selling securities, manages the investments of the
Fund including the placement of orders for portfolio transactions, furnishes the
Fund with office space and certain administrative services, and provides the
personnel needed by the Trust with respect to the Manager's responsibilities
under the Agreement. As compensation, the Fund pays the Manager a monthly
management fee (accrued daily) at the following annual rates based on the
average daily net assets of the Fund:

First Next Over
$500 Million $500 Million $1 Billion
------------ ------------ ----------
<S> <C> <C>
1.00% 0.90% 0.80%
</TABLE>

For the six months ended June 30, 2000, the effective management fee and
management fee including effect of fee reduced were 1.83% And 0.83%,
respectively.

Under an Operating Expense Agreement with the Trust, the Manager has agreed to
reduce some or all of its management fee or absorb Fund expenses if necessary to
keep the Fund's annual operating expenses, exclusive of any Rule 12b-1 fees,
interest, extraordinary expenses or taxes, at or below 1.25% of the average
daily net assets of the Fund. Any reductions or absorptions made to the Fund by
the Manager are subject to recovery within the following three years, provided
the Fund is able to effect such reimbursement and remain in compliance with
applicable expense limitations. The Operating Expense Agreement has a rolling
10-year term extendable for one year at the end of each Fund's administrative
operations.

The Manager recouped previously deferred fees during the six months ended June
30, 2000, of $90,122. This amount has been included with current annual
management fees in the Statement of Operations and is part of the effective
management fee shown. For the six months ended June 30, 2000, the Manager has
deferred fees of $109,157 and deferred management fees and absorbed expenses
subject to recoupment of $303,290.

b. Montgomery Asset Management, LLC, serves as the Fund's administrator (the
"Adminstrator"). The Administrator performs services with regard to various
aspects of the Fund's administrative operations. The Administrator does not
recieve any compensation from the Fund for performing these services.

c. Certain officers and Trustees of the Trust are, with respect to the Trust's
Manager, "affiliated persons" as defined in the 1940 Act. Each Trustee who is
not an affiliated person will receive an annual retainer and quarterly meeting
fee totaling $55,000 per annum, as well as reimbursement for expenses, for
services as a Trustee of all three Trusts advised by the Manager ($5,000 of
which will be allocated to The Montgomery Funds III).

3. SECURITIES TRANSACTIONS:

a. The aggregate amounts of purchases and sales of investment securities, other
than short-term securities, for the six months ended June 30, 2000, were
$28,348,184 and $24,951,953, respectively.

b. At June 30, 2000, cost for federal income-tax purposes is $22,494,338,
aggregate gross unrealized appreciation for all securities in which there was an
excess of value over tax cost and aggregate gross unrealized depreciation for
all securities in which there was an excess of tax cost over value for federal
income-tax purposes were $1,236,201 and $815,723, respectively.

c. Under an unsecured Revolving Credit Agreement with Deutsche Bank, New York,
the Fund, along with other Funds of The Montgomery Funds, The Montgomery Funds
II and The Montgomery Funds III, may, for one year starting August 13, 1999,
borrow (consistent with applicable law and its investment policies) up to 10% of
its net asset value, provided that the aggregate principal amount of outstanding
loans under the agreement to all Funds does not exceed $175,000,000. The Fund
pays its pro rata share of the quarterly commitment fee of 0.08% per annum of
the unutilized credit line balance. For the six months ended June 30, 2000,
borrowings by the Fund under the agreement were as follows:

AMOUNT OUTSTANDING AVERAGE AMOUNT MAXIMUM AVERAGE AVERAGE DEBT
AT 6/30/00 OUTSTANDING DEBT OUTSTANDING INTEREST RATE AVERAGE SHARES PER SHARE
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-- $9,341 $1,700,000 5.61% 1,199,071 $0.01
</TABLE>

The average amount outstanding during the year was calculated by totaling
borrowings at the end of each day and dividing the sum by the number of days in
the year ended June 30, 2000. There were no reverse repurchase agreements
outstanding at June 30, 2000.

4. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:

The Trust has authorized an unlimited number of shares of beneficial interest
which have a par value of $0.01. Transactions in shares of beneficial interest
for the periods indicated below were:

SIX MONTHS ENDED 6/30/00 YEAR ENDED 12/31/99
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 613,466 $11,230,174 1,155,865 $19,719,780
Issued as reinvestment of dividends -- -- 11,549 200,791
Redeemed (470,675) (8,683,463) (973,289) (16,505,394)
----------------------------------------------------------------------------------------------------
Net increase 142,791 $2,546,711 194,125 $3,415,177
----------------------------------------------------------------------------------------------------

</TABLE>

10
<PAGE>

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<PAGE>

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<PAGE>

-------------------------------------------------
MONTGOMERY
VARIABLE SERIES
-------------------------------------------------
EMERGING MARKETS FUND
-------------------------------------------------

INVESTMENT REVIEW

Q: HOW DID THE FUND PERFORM DURING THE SIX MONTHS ENDED JUNE 30, 2000?

A: The Fund produced a total return of -5.71% over that period, compared with a
return of -7.99% for its benchmark, the Morgan Stanley Capital International
(MSCI) Emerging Markets Free Index.

Q: WHAT MAIN FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE?

A: Stock selection and strategic over- and underweightings in certain markets
played an important role in the Fund's performance relative to its benchmark
index. The Fund's absolute returns did, however, reflect a generally weak period
for the emerging markets, which were depressed by rising interest rates and
fears of higher inflation over the first half of 2000.

Over most of the reporting period, our decision to overweight Brazil and Mexico
relative to the index was rewarded. Both markets were especially strong in the
second quarter of 2000, even as other markets, including the United States',
declined. In Brazil we have focused on large-cap telecommunications firms and
energy companies. Like Brazil's, Mexico's economy has been gaining momentum, and
that has helped boost shares of banks such as Grupo Financiero Banamex and
beverage companies such as Fomento Economico Mexicano.

The Fund also benefited from its exposure to technology and telecommunications
companies. As in developed markets, these sectors led many emerging markets
around the world during the first quarter. The trend was positive for northern
Asian markets in particular, which are home to a number of world-class
technology companies, such as Samsung Electronics (South Korea). Samsung was a
strong holding for the Fund over the reporting period, as was Taiwan
Semiconductor Manufacturing. The tech/telecom rally was less of a driving factor
in Southeast Asian markets, though domestically oriented telecom stocks in
Thailand and Indonesia performed fairly well. The Fund has remained
underweighted in Southeast Asia, though we did raise its exposure to Malaysia
during the reporting period.

Q: WERE THERE ANY SPECIFIC DISAPPOINTMENTS IN THE FUND?

A: We reduced the Fund's weighting in Latin American copper-mining stocks over
the past few months. The direction of interest rates has an impact on the price
of many metals, including copper; so as interest rates rose in the United
States, the near-term prospects for copper-mining stocks deteriorated. We sold
them to take advantage of better opportunities elsewhere.

Q: HAVE YOU MADE ANY SIGNIFICANT CHANGES TO THE FUND RECENTLY?

A: Yes. We reduced the Fund's position in South Africa, where domestically
oriented companies seem especially vulnerable to a potential economic slowdown.
We think that the outlook for export-oriented issues is still quite positive,
however, especially

[SIDENOTE]

PORTFOLIO HIGHLIGHTS
(Unaudited)
<TABLE>
<CAPTION>
<S><C>
-------------------------------------------------
PORTFOLIO MANAGEMENT
-------------------------------------------------
Josephine Jimenez, CFA....Sr. Portfolio Manager
Frank Chiang................. Portfolio Manager
</TABLE>

-------------------------------------------------
FUND PERFORMANCE
-------------------------------------------------
Average annual total returns
for the period ended 6/30/00
-------------------------------------------------
MONTGOMERY VARIABLE SERIES:
EMERGING MARKETS FUND
<TABLE>
<S> <C>
Since inception (2/2/96)............. 0.69%
One year............................. 18.39%
Three years.......................... (7.24)%
-------------------------------------------------
<CAPTION>
MSCI EMERGING MARKETS FREE INDEX
Since 1/31/96........................ 0.01%
One year............................. 9.47%
Three years.......................... (4.96)%
-------------------------------------------------
</TABLE>

Past performance is no guarantee of future results.
Net asset value, investment return and principal
value will fluctuate, so shares, when redeemed, may
be worth more or less than their original cost.

The performance figures provided do not reflect the
effect of (i) any securities purchased or sold by
the Fund after 6/30/00 but that were effective on
6/30/00 or (ii) any purchases or redemptions of Fund
shares completed after 6/30/00 that were effective
on 6/30/00.

GROWTH OF $10,000 INVESTMENT

<TABLE>
<CAPTION>
VARIABLE
SERIES:
EMERGING MSCI
MARKETS INDEX LIPPER
<S> <C> <C> <C>
2/2/96 10000 10000 10000
Mar-96 10100 9918 9955
Apr-96 10330 10314 10350
May-96 10580 10268 10454
Jun-96 10560 10332 10489
Jul-96 10050 9626 9845
Aug-96 10500 9872 10086
Sep-96 10510 9958 10162
Oct-96 10310 9692 9898
Nov-96 10470 9855 10121
Dec-96 10679 9899 10281
Jan-97 11532 10575 11058
Feb-97 11782 11028 11449
Mar-97 11592 10738 11188
Apr-97 11542 10757 11242
May-97 12023 11065 11673
Jun-97 12915 11657 12305
Jul-97 13337 11831 12699
Aug-97 12003 10325 11439
Sep-97 12514 10611 11900
Oct-97 10499 8870 10043
Nov-97 10188 8547 9719
Dec-97 10617 8753 9863
Jan-98 9382 8066 9211
Feb-98 9914 8908 9970
Mar-98 10105 9295 10373
Apr-98 10236 9193 10480
May-98 8860 7933 9146
Jun-98 7855 7101 8302
Jul-98 8267 7326 8583
Aug-98 5756 5208 6202
Sep-98 6047 5538 6360
Oct-98 6449 6122 6859
Nov-98 6981 6631 7233
Dec-98 6633 6535 7177
Jan-99 6402 6429 7035
Feb-99 6231 6492 6993
Mar-99 7106 7347 7772
Apr-99 7962 8256 8794
May-99 7751 8208 8688
Jun-99 8707 9140 9546
Jul-99 8486 8892 9341
Aug-99 8436 8972 9233
Sep-99 8114 8669 8897
Oct-99 8345 8853 9212
Nov-99 9281 9647 10225
Dec-99 10933 10874 12079
Jan-00 10,933 10,939 11,964
Feb-00 11,356 11,084 12,497
Mar-00 11,336 11,138 12,552
Apr-00 10,228 10,082 11,146
May-00 9,886 9,665 10,528
Jun-00 10,309 10,006 11,052
</TABLE>

(1) The Morgan Stanley Capital International Emerging
Markets Free Index is an unmanaged, capitalization-weighted
composite index that covers individual securities
within the equity markets of approximately 25 emerging
markets countries.

(2) The Lipper Emerging Markets Funds Average universe
consists of 150 funds.

1
<PAGE>

-------------------------------------------------
MONTGOMERY
VARIABLE SERIES
-------------------------------------------------
EMERGING MARKETS FUND
-------------------------------------------------

mining stocks such as Impala Platinum Holdings and De Beers,
which have been driven up this year by strong demand for platinum and diamonds.

With the proceeds from South Africa, we increased the Fund's weighting in
Russia, where the political and economic environments appear to be improving. We
also increased exposure to Israeli technology companies. As attacks by hackers
and computer viruses became a very visible global threat in early 2000,
companies like Check Point Software Technologies, a leader in building computer
firewalls, have attracted more and more business.

Q: WHERE DO YOU BELIEVE THE BEST OPPORTUNITIES IN THE EMERGING MARKETS WILL
BE IN THE SECOND HALF OF 2000 AND BEYOND?

A: Right now we are seeking opportunities to profit from potentially stronger
economic growth in Latin America. Last year Asian economies garnered a lot of
attention as they emerged from recession. In 2000, Latin American economies
(especially Brazil's and Mexico's) are boasting the fastest growth rates, driven
by a decline in domestic real interest rates as well as by the strength of the
U.S. economy. We believe that Brazil and Mexico are the most attractive markets
in Latin America and have continued to overweight them versus the benchmark. Our
focus in these two markets is on domestically oriented companies, which should
benefit from an increase in consumer spending and industrial production.

We also see some encouraging trends developing in Russia, which appears to offer
much better opportunities than do most European emerging markets. Higher prices
for crude oil, Russia's major export, have driven up shares of Lukoil and helped
shore up that country's current accounts. Russia's improved foreign-reserve
position has also stabilized its currency and helped spur economic activity. In
fact, we believe that Russia's gross domestic product (GDP) may grow by 5% this
year. In addition, the new government of Vladimir Putin has been proactive in
advancing reforms, including possible privatization of such enterprises as
Unified Energy Systems, a Fund holding.

Although the Fund continues to have a significant underweighting in Asia, we
have increased its exposure to China, which it now seems more likely will be
admitted to the World Trade Organization (WTO). If that does in fact occur, we
expect companies in the shipping and container-leasing business, such as Cosco
Pacific, to be among the prime beneficiaries of increased trade. We will
continue to seek out opportunities like this around the world.

PORTFOLIO HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------
TOP TEN HOLDINGS
-------------------------------------------------
(as a percentage of total net assets)
<S> <C>
Samsung Electronics......................... 5.8%
Telefonos de Mexico S.A., ADR............... 4.5%
Taiwan Semiconductor Manufacturing
Company, Ltd................................ 3.8%
Embratel Participacoes ADR.................. 2.5%
Microelectronics Corporation, Ltd........... 2.4%
China Mobile (Hong Kong) Ltd, ADR........... 2.0%
Alpha Credit Bank........................... 2.0%
Check Point Software Technologies, Ltd...... 2.0%
Wal-Mart de Mexico S.A. de C.V.............. 1.9%
Petroleo Brasileiro S.A..................... 1.9%

<CAPTION>
-------------------------------------------------
TOP FIVE COUNTRIES
-------------------------------------------------
(as a percentage of total net assets)
<S> <C>
Brazil..................................... 14.0%
Mexico..................................... 13.9%
Korea...................................... 11.0%
Taiwan..................................... 9.0%
South Africa............................... 6.3%
</TABLE>

Portfolio holdings are subject to change and
should not be considered a recommendation to
buy individual securities.

There are risks associated with investing in
a fund of this type that invests in securities
of foreign countries, such as erratic market
conditions, economic and political instability,
and fluctuations in currency exchange rates.

2
<PAGE>

-------------------------------------------------
MONTGOMERY
VARIABLE SERIES
-------------------------------------------------
EMERGING MARKETS FUND
-------------------------------------------------
Investments

PORTFOLIO INVESTMENTS

June 30, 2000 (Unaudited)

<TABLE>
<CAPTION>
SHARES VALUE (NOTE 1)
<S> <C>
COMMON STOCKS - 85.7%
ARGENTINA - 0.4%
21,500 Banco de Galicia y Buenos Aires S.A. de C.V.
(Non-U.S. Banks)...................................... $ 319,141
11,000 PC Holdings S.A., Sponsored ADR
(Oil & Gas Production)................................ 201,437
-----------
520,578
BRAZIL - 10.1%
76,200 Aracruz Celulose S.A. de C.V., Sponsored
ADR (Paper)........................................... 1,471,613
32,000,000 Companhia Siderurgica Nacional
(Metal Fabrication)................................... 1,003,915
156,500 Embratel Participacoes ADR
(Other Telephone/Communication)....................... 3,697,312
45,500 Pao de Acucar ADR (Food Chains)....................... 1,461,688
95,000 Petroleo Brasileiro S.A.
(Integrated Oil Companies)............................ 2,790,740
29,300 Tele Celular Sul Participacoes S.A.
(Cellular Telephone).................................. 1,325,825
148,200 Tele Centro Oeste Celular
Participacoes S.A., ADR
(Other Telephone/Communication)....................... 1,778,400
16,100 Telecom Participacoes S.A., ADR
(Other Telephone/Communication)....................... 1,176,306
-----------
14,705,799
CHILE - 0.6%
51,900 Cia de Telecom Chile de S.A., ADR
(Other Telephone/Communication)....................... 940,687

CHINA/HONG KONG - 5.2%
16,300 AsiaInfo Holdings, Inc.+(Internet Services)........... 728,915
166,000 China Mobile (Hong Kong) Ltd.+
(Other Telephone/Communication)....................... 1,463,986
16,400 China Mobile (Hong Kong) Ltd., ADR+
(Other Telephone/Communication)....................... 2,916,125
502,000 China Unicom Ltd.+
(Other Telephone/Communication)....................... 1,065,756
1,864,000 Cosco Pacific Ltd. (Marine Transportation)............ 1,470,541
-----------
7,645,323
CZECH REPUBLIC - 1.6%
32,410 Ceske Radiokomunikace GDR+,++
(Other Telephone/Communication)....................... 1,439,814
46,500 Komercni Banka A.S.+
(Non-U.S. Banks)...................................... 941,387
-----------
2,381,201
EGYPT - 2.2%
32,600 Al-Ahram Beverages Company, GDR
(Alcoholic Beverages)................................. 559,905
50,600 Al-Ahram Beverages Company, GDR+,++
(Alcoholic Beverages)................................. 869,055
52,366 Egyptian Company for Mobile Services+
(Cellular Telephone).................................. 1,704,205
-----------
3,133,165
GREECE - 2.0%
73,201 Alpha Credit Bank (Non-U.S. Banks).................... 2,885,340

HUNGARY - 0.5%
103,200 Magyar Tavkozlesi Rt.
(Other Telephone/Communication)....................... 717,324

INDIA - 4.6%
47,600 Hindalco Industries Ltd., GDR++
(Aluminum)............................................ 931,770
22,255 Hindustan Lever Ltd.
(Package Goods/Cosmetics)............................. 1,413,728
11,740 Infosys Technologies Ltd.
(Computer Software)................................... 2,187,308
72,300 Sri Adhikari Brothers Telephone
Network Ltd. (Broadcasting)........................... 932,128
81,700 Videsh Sanchar Nigam Ltd., GDR
(Other Telephone/Communication)....................... 1,276,562
-----------
6,741,496
INDONESIA - 0.4%
1,520,000 PT Telekomunikasi Indonesia
(Other Telephone/Communication)....................... 534,019
ISRAEL - 6.0%
1,013,000 Bank Leumi Le-Israel (Non-U.S. Banks)................. 2,091,499
147,100 Bezeq Israeli Telecommunication
Corporation, Ltd.
(Other Telephone/Communication)....................... 819,624
13,500 Check Point Software Technologies Ltd.+
(Computer Software)................................... 2,866,641
26,500 IDB Holding Corporation, Ltd.
(Miscellaneous)....................................... 1,017,683
13,000 NICE Systems Ltd., ADR+
(Telecommunications Equipment)........................ 1,004,656
10,850 Orbotech Ltd. (Electronic Components)................. 1,008,033
-----------
8,808,136
KOREA - 11.0%
7,095 Cheil Communications, Inc. (Advertising).............. 925,829
73,829 Kookmin Bank (Non-U.S. Banks)......................... 940,223
25,070 Korea Electric Power Corporation
(Non-U.S. Utilities).................................. 777,940
140,600 Korea Electric Power Corporation, ADR
(Non-U.S. Utilities).................................. 2,592,312
16,800 Korea Telecom Corporation
(Other Telephone/Communication)....................... 812,700
25,666 Samsung Electronics
(Diversified Electronic Products)..................... 8,493,759

The accompanying notes are an integral part of these financial statements.

<PAGE>

------------------------------------------------
MONTGOMERY
VARIABLE SERIES
------------------------------------------------
EMERGING MARKETS FUND
------------------------------------------------
Investments

<CAPTION>
SHARES VALUE (NOTE 1)
<S> <C>
COMMON STOCKS - CONTINUED
KOREA - CONTINUED
4,430 SK Telecom Company, Ltd.+
(Other Telephone/Communication).......................$ 1,450,147
-----------
15,992,910
MALAYSIA - 4.4%
380,000 AMMB Holdings Berhad
(Investment Bankers/Brokers/Services)................. 1,270,000
289,000 Commerce Asset Holdings Berhad
(Non-U.S. Banks)...................................... 836,579
194,000 Digi.com Berhad+
(Other Telephone/Communication)....................... 354,816
182,000 Malayan Banking Berhad
(Non-U.S. Banks)...................................... 737,579
106,000 New Straits Times Press Berhad
(Newspapers).......................................... 251,052
1,012,000 Public Bank Berhad+
(Non-U.S. Banks)...................................... 932,105
482,000 Resorts World Berhad
(Hotels/Resorts)...................................... 1,319,158
235,000 Tenaga Nasional Berhad
(Non-U.S. Utilities).................................. 766,842
-----------
6,468,131
MEXICO - 13.9%
127,000 Apasco S.A. de C.V. (Building Materials).............. 729,106
54,200 Cemex S.A. de C.V., Sponsored ADR
(Building Products)................................... 1,266,925
631,000 Controladora Comercial Mexicana S.A. de
C.V. (Department Stores).............................. 589,869
154,975 Corporacion Interamericana de
Entretanimiento S.A., Series B+
(Advertising)......................................... 606,263
58,500 Fomento Economico Mexicano
S.A. de C.V.+ (Soft Drinks)........................... 2,519,156
370,000 Grupo Financiero Banamex Accival S.A. de
C.V., Series B-Banacci+ (Non-U.S. Banks).............. 1,556,470
348,000 Grupo Mexico S.A., Series B+
(Other Metals/Minerals)............................... 979,485
19,400 Grupo Televisa S.A., GDR+,++
(Broadcasting) ....................................... 1,337,387
199,000 Kimberly-Clark de Mexico S.A. de C.V.
(Package Goods/Cosmetics) ............................ 566,174
200,000 Organizacion Soriana S.A. de C.V.+
(Other Specialty Stores).............................. 796,627
115,200 Telefonos de Mexico S.A., ADR
(Other Telephone/Communication)....................... 6,580,800
1,195,000 Wal-Mart de Mexico S.A. de C.V.+
(Other Specialty Stores).............................. 2,804,908
-----------
20,333,170
PERU - 0.3%
25,100 Compania de Minas Buenaventura S.A., ADR
(Precious Metals)..................................... 434,544
POLAND - 0.2%
31,100 Elektrim Spolka Akcyjna S.A.+
(Wholesale Distributors).............................. 357,110

RUSSIA - 2.8%
89,700 Lukoil Holding Company, Sponsored ADR
(Integrated Oil Companies)........................... $ 1,794,000
66,500 Mobile Telesystems, Sponsored ADR+
(Cellular Telephone).................................. 1,487,937
6,800,000 RAO Unified Energy Systems+
(Non-U.S. Utilities).................................. 782,000
-----------
4,063,937
SOUTH AFRICA - 6.3%
1,516,200 African Bank Investments Ltd.+
(Diversified Financial Services)...................... 1,982,809
61,600 Anglo American Platinum Corporation, Ltd.
(Precious Metals)..................................... 1,776,626
46,900 De Beers Centenary AG
(Other Metals/Minerals)............................... 1,142,214
87,000 Dimensions Data Holdings Ltd.+
(Electronic Data Processing).......................... 720,399
48,900 Impala Platinum Holdings Ltd.
(Precious Metals)..................................... 1,820,307
86,800 Sappi Ltd. (Paper).................................... 653,402
156,100 Sasol Ltd. (Coal Mining).............................. 1,048,347
-----------
9,144,104
TAIWAN - 9.0%
303,200 Hon Hai Precision Industry Company, Ltd.+
(EDP Peripherals)..................................... 2,743,356
163,010 Synnex Technology International
Corporation (Electronics Distributors)................ 875,400
1,155,246 Taiwan Semiconductor
Manufacturing Company, Ltd.
(Electronic Production Equipment)..................... 5,489,533
1,264,800 Microelectronics Corporation, Ltd.
(Semiconductors) ..................................... 3,519,622
976,000 Yang Ming Marine Transport+
(Marine Transportation)............................... 536,840
-----------
13,164,751
THAILAND - 1.7%
49,000 Advanced Info Service Public Company, Ltd.+
(Cellular Telephone) .................................. 610,389
88,800 Hana Microelectronics Public Company, Ltd.
(Diversified Electronic Products)...................... 698,160
383,000 TelecomAsia Corporation
Public Company, Ltd.(F)+
(Other Telephone/Communication)........................ 425,284
871,900 Thai Farmers Bank Public Company, Ltd.
(F) (Non-U.S. Banks)................................... 734,466
-----------
2,468,299
TURKEY - 2.5%
11,815,500 Arcelik A.S.
(Consumer Electronics/Appliances)...................... 580,830
20,200,000 Dogan Sirketler Grubu Holdings A.S.
(Diversified Manufacture).............................. 488,359
37,212,000 Turkiye Is Bankasi, Class C
(Non-U.S. Banks)....................................... 794,686

The accompanying notes are an integral part of these financial statements.

<PAGE>

<CAPTION>
SHARES VALUE (NOTE 1)

COMMON STOCKS - CONTINUED
TURKEY - CONTINUED
166,218,775 Yapi Ve Kredi Bankasi S.A.+
(Non-U.S. Banks)...................................... $ 1,848,527
------------
3,712,402
TOTAL COMMON STOCKS
(Cost $107,759,937)................................................ 125,152,426
------------
PREFERRED STOCKS - 3.9%
BRAZIL 3.9%
90,200,000 Banco Bradesco S.A. (Non-U.S. Banks)................... 785,218
1,419,000 Itausa Investimentos Itau
(Multi-Sector Companies)............................... 1,376,906
99,868,141 Tele Norte Leste Participacoes S.A.
(Other Telephone/Communication)........................ 2,339,578
8 Telesp Participacoes S.A.
(Other Telephone/Communication)........................ --
45,500 Vale do Rio Doce, Series A
(Other Metals/Minerals)................................ 1,284,142
20,000 Vale do Rio Doce, Series B
(Other Metals/Minerals)................................ --
-----------

TOTAL PREFERRED STOCKS
(Cost $4,824,582)................................................... 5,785,844
-----------

MONEY MARKET FUND - 0.0%@
36 Chase Vista Federal Money Market Fund
(Cost $36)............................................. 36
-----------
TOTAL SECURITIES
(Cost $112,584,555).................................................130,938,306
-----------

PRINCIPAL AMOUNT VALUE (NOTE 1)

REPURCHASE AGREEMENTS - 8.0%
$11,662,000 Agreement with Greenwich Capital
Markets, Tri-Party, 7.000% dated 6/30/00,
to be repurchased at $11,668,710
on 07/03/00, collateralized
by $11,895,281 market value of U.S.
government and mortgage-backed securities,
having various maturities and interest rates
(Cost $11,662,000)............................... $ 11,662,000
----------

TOTAL INVESTMENTS - 97.6%
(Cost $124,246,555)............................................ 142,600,306
OTHER ASSETS AND LIABILITIES - 2.4%
(Net).......................................................... 3,475,596
------------
NET ASSETS - 100.0%............................................$ 146,075,902
============
</TABLE>

+ Non-income-producing security.
++ 144A security. Certain conditions for public sale may exist.
@ Amount represents less then 0.1%.

ABBREVIATIONS
ADR American Depositary Receipt
(F) Foreign or Alien Shares
GDR Global Depositary Receipt

The accompanying notes are an integral part of these financial statements.

<PAGE>

-------------------------------------------------
MONTGOMERY
VARIABLE SERIES
-------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
-------------------------------------------------
June 30, 2000
(Unaudited)

ASSETS: EMERGING MARKETS FUND
--------------------------------------------------------------------------------------------------------------------------
<S> <C>

Investments in securities, at value (note 1)
Securities....................................................................................... $130,938,306
Repurchase agreements............................................................................ 11,662,000
------------
Total Investments.................................................................................. 142,600,306
Foreign currency, at value (Cost $1,877,484) (note 1).............................................. 1,883,019
Receivables:
Investment securities sold....................................................................... 3,295,151
Shares of beneficial interest sold............................................................... 3,113,460
Dividends........................................................................................ 188,347
Interest......................................................................................... 3,866
Deferred organization costs (note 1)............................................................... 9,495
------------
Total Assets....................................................................................... 151,093,644
------------
LIABILITIES:
------------------------------------------------------------------------------------------------------------------------
Forward foreign-currency exchange contracts:
Net unrealized depreciation of forward foreign-currency exchange contracts (note 3).............. 1,091
Payables:
Investment securities purchased.................................................................. 4,214,091
Shares of beneficial interest redeemed........................................................... 358,007
Management fees (note 2)......................................................................... 147,594
Custodian fees................................................................................... 18,820
Accounting fees.................................................................................. 4,402
Transfer agency and servicing fees............................................................... 3,788
Trustees' fees and expenses (note 2)............................................................. 1,655
Other accrued liabilities and expenses........................................................... 268,294
------------
Total Liabilities.................................................................................. 5,017,742
------------
Net Assets......................................................................................... $146,075,902
Investments at identified cost..................................................................... $124,246,555

NET ASSETS CONSIST OF:
------------------------------------------------------------------------------------------------------------------------
Accumulated net investment loss.................................................................... (336,624)
Accumulated net realized loss...................................................................... (27,747,095)
Net unrealized appreciation of investments......................................................... 18,123,925
Shares of beneficial interest...................................................................... 142,622
Additional paid-in capital......................................................................... 155,893,074
-------------
Net Assets......................................................................................... $146,075,902

NET ASSETS:
----------------------------------------------------------------------------------------------------------------------------
Net assets........................................................................................ $146,075,902
Number of Fund shares outstanding................................................................. 14,262,248
Net asset value, offering and redemption price per share outstanding.............................. $ 10.24
-------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>

-------------------------------------------------
MONTGOMERY
VARIABLE SERIES
-------------------------------------------------
STATEMENT OF OPERATIONS
-------------------------------------------------
Six Months Ended June 30, 2000
(Unaudited)

<TABLE>
<CAPTION>
NET INVESTMENT INCOME: EMERGING MARKETS FUND
----------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of $55,733)........................................... $ 995,228
Interest.......................................................................................... 178,493
-------------
Total Income...................................................................................... 1,173,721
-------------
EXPENSES:
Management fee (note 2) .......................................................................... 904,218
Country tax expense............................................................................... 289,359
Custodian fee..................................................................................... 102,906
Legal and audit fees.............................................................................. 22,504
Accounting fees................................................................................... 20,983
Transfer agency and servicing fees................................................................ 6,701
Printing fees..................................................................................... 3,180
Trustees' fees and expenses (note 2).............................................................. 129
Interest expense.................................................................................. 415
Other............................................................................................. 8,578
-------------
Total Expenses.................................................................................... 1,358,973
-------------
NET INVESTMENT LOSS (185,252)
-------------

NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
----------------------------------------------------------------------------------------------------------------------------
Net realized gain/(loss) from:
Securities transactions.......................................................................... 12,199,472
Foreign-currency transactions and other assets................................................... (397,621)
-------------
Net Realized Gain on Investments................................................................... 11,801,851
Net change in unrealized depreciation of:
Securities....................................................................................... (19,394,451)
Foreign-currency transactions and other assets ................................................. (222,855)
-------------
Net Unrealized Depreciation of Investments......................................................... (19,617,306)
-------------

NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS.................................................... (7,815,455)
-------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS............................................... $ (8,000,707)
-------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>

EMERGING MARKETS FUND
-----------------------------------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS: SIX MONTHS ENDED
6/30/00 YEAR ENDED
(UNAUDITED) 12/31/99
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income/(loss).................................................................. $ (185,252) $ 191,260
Net realized gain/(loss) on securities transactions, forward foreign-currency exchange
contracts, foreign-currency transactions and other assets................................. 11,801,851 (2,302,535)
Net unrealized appreciation/(depreciation) of securities, forward foreign-currency exchange
contracts, foreign-currency transactions and other assets................................. (19,617,306) 51,823,541
------------ ----------
Net Increase/(Decrease) in Net Assets Resulting from Operations .............................. (8,000,707) 49,712,266

DISTRIBUTIONS TO SHAREHOLDERS:
-----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income...................................... -- (13,165)

BENEFICIAL INTEREST TRANSACTIONS:
-----------------------------------------------------------------------------------------------------------------------------------
Net increase from beneficial interest transactions (note 4)................................... 22,880,035 9,174,950
------------ -----------
Net Increase in Net Assets.................................................................... 14,879,328 58,874,051

NET ASSETS:
-----------------------------------------------------------------------------------------------------------------------------------
Beginning of period........................................................................... 131,196,574 72,322,523
End of Period................................................................................. $146,075,902 $131,196,574
Accumulated Net Investment Loss............................................................... $ (336,624) $ (151,372)
</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>

-------------------------------------------
MONTGOMERY
VARIABLE SERIES
-------------------------------------------
FINANCIAL HIGHTLIGHTS
-------------------------------------------

<TABLE>
<CAPTION> EMERGING MARKETS FUND

Selected Per-Share Data for the Year or Period Ended: FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------------------
06/30/00 1999 1998 1997 1996(a)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD $ 10.86 $ 6.59 $ 10.57 $ 10.65 $ 10.00
---------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) (0.01) 0.02 0.01 0.02 0.03
Net realized and unrealized gain/(loss) on investments (0.61) 4.25 (3.98) (0.08) 0.65
---------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations (0.62) 4.27 (3.97) (0.06) 0.68
---------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- (0.00)@ (0.01) (0.02) (0.03)
---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE - END OF PERIOD $ 10.24 $ 10.86 $ 6.59 $ 10.57 $ 10.65
---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN* (5.71)% 64.81% (37.53)% (0.58)% 6.79%
---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $146,076 $131,197 $72,323 $114,837 $26,966
---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets (0.26)% 0.20% 0.67% 0.63% 0.81%+
---------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ (0.01) $ 0.02 $ 0.01 $ 0.02 $ (0.01)
---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 51% 124% 112% 71% 43%
---------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.88% 1.65% 1.80% 1.76% 1.45%+
---------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest and tax expense 1.88% 1.65% -- 1.81% 2.47%+
---------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 1.48% 1.62% 1.75% 1.75% 1.44%+
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Montgomery Variable Series: Emerging Markets Fund commenced operations on
February 2, 1996.
* Total return represents aggregate total return for the periods indicated.
+ Annualized.
@ Amount represents less than $0.01.

The accompanying notes are an integral part of these financial statements.

<PAGE>

------------------------------------------
THE MONTGOMERY
FUNDS III
------------------------------------------
NOTES
------------------------------------------
TO FINANCIAL STATEMENTS
(Unaudited)

The Montgomery Funds III (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-end
management investment company and was organized as a Delaware business
trust on August 24, 1994. As of June 30, 2000, the Trust had two series: the
Montgomery Variable Series: Growth Fund and the Montgomery Variable
Series: Emerging Markets Fund. Information presented in these financial
statements pertains to the Montgomery Variable Series: Emerging Markets Fund
(the "Fund"). The Montgomery Variable Series: Growth Fund is presented under
a separate cover.

1. SIGNIFICANT ACCOUNTING POLICIES:

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates. The following is a summary
of significant accounting policies.

a. PORTFOLIO VALUATION
Portfolio securities are valued using current market valuations: either the
last reported sale price or, in the case of securities for which there is no
reported last sale, the mean between the closing bid and ask prices.

Portfolio securities that are traded primarily on foreign securities
exchanges or for which market quotations are readily available are generally
valued at the last reported sale price on the respective exchanges or
markets; except that when an occurrence subsequent to the time that a value
was so established is likely to have changed said value, the fair value of
those securities will be determined by consideration of other factors by or
under the direction of the Board of Trustees or its delegates. Securities
traded on the over-the-counter market or on the NASDAQ national market are
valued at the mean between the last available bid and ask prices prior to the
time of valuation.

Securities for which market quotations are not readily available (including
restricted securities that are subject to limitations as to their sale) are
valued at fair value as determined in good faith by or under the supervision
of the Trust's officers in accordance with methods authorized by the Trust's
Board of Trustees. Short-term securities with maturities of 60 days or less
are carried at amortized cost, which approximates market value.

b. FORWARD FOREIGN-CURRENCY EXCHANGE CONTRACTS
The Fund may engage in forward foreign-currency exchange contracts ("forward
contracts") as a hedge in connection with portfolio purchases and sales of
securities denominated in foreign currencies. A forward contract is a
commitment to purchase or sell a foreign currency at the settlement date at a
negotiated rate.

Forward contracts are valued at the prevailing forward exchange rate of the
underlying currencies, and unrealized gain/(loss) is recorded daily. Realized
and unrealized gains and losses that represent the difference between the
value of the forward contract to buy and the forward contract to sell are
included in net realized and unrealized gain/(loss) from
foreign-currency-related transactions.

Certain risks may arise upon entering into forward contracts from the
potential inability of counterparties to meet the terms of their contracts.
Additionally, when utilizing forward contracts to hedge, the Fund gives up
the opportunity to profit from favorable exchange rate movements during the
term of the contract.

c. FOREIGN CURRENCY
The accounting records of the Fund are maintained in U.S. dollars. Investment
securities and all other assets and liabilities of the Fund denominated in a
foreign-currency are translated into U.S. dollars at the exchange rate each
day. Purchases and sales of securities, income receipts and expense payments
are translated into U.S. dollars at the exchange rate in effect on the date
of the respective transactions.

The Fund does not isolate the portion of the fluctuations on investments
resulting from changes in foreign-currency exchange rates from the
fluctuations in market prices of investments held. Such fluctuations are
included with the net realized gain/(loss) and unrealized
appreciation/(depreciation) from investments.

d. REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreements individually or jointly through
a joint repurchase account with other series of the Trust and affiliated
registered investment companies pursuant to a joint repurchase agreement.
Under the terms of a typical repurchase agreement, the Fund takes possession
of government debt obligations as collateral. The Fund also agrees with the
counterparty to allow the counterparty to repurchase, and the Fund to resell,
the obligations at a specified date and price, thereby determining the yield
during the Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. The value of the collateral is at least equal at all times to the
total amount of the repurchase obligations, including interest. In the event
of counterparty default, the Fund has the right to use the collateral to
offset losses incurred. There could be potential loss to the Fund in the
event the Fund is delayed or prevented from exercising its rights to dispose
of the collateral securities, including the risk of a possible decline in the
value of the underlying securities during the period in which the Fund seeks
to assert its rights. The Fund's Manager, acting under the supervision of the
Board of Trustees, reviews the value of the collateral and the
creditworthiness of those banks and dealers with which the Fund enters into
repurchase agreements to evaluate potential risks. The Fund may also
participate on an individual or joint basis in tri-party repurchase
agreements that involve a counterparty and a custodian bank.

e. DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income, if any, are declared and paid at least
annually. Distributions of net realized capital gains (including net
short-term capital gains) are distributed at least annually. Additional
distributions of net investment income and

10
<PAGE>

------------------------------------------
THE MONTGOMERY
FUNDS III
------------------------------------------
NOTES
------------------------------------------
TO FINANCIAL STATEMENTS
(Unaudited)

capital gains for the Fund may be made in order to avoid the application of a
4% nondeductible excise tax on certain undistributed amounts of ordinary
income and capital gains. Income distributions and capital-gain distributions
are determined in accordance with income-tax regulations, which may differ
from generally accepted accounting principles. These differences are
primarily due to differing treatments of income and gains on various
investment securities held by the Fund, timing differences and differing
characterizations of distributions made by the Fund.

f. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded on a trade date basis. Realized gain and
loss from securities transactions are computed on the specific identified
cost basis of the securities sold. Dividend income is recognized on the
ex-dividend date. Dividend income on foreign securities is recognized as soon
as the Fund is informed of the ex-dividend date. Interest income, including
accretion/amortization of premium/discount on short-term investments, is
recognized on the accrual basis.

g. FEDERAL INCOME TAXES
The Fund has elected and qualified, and it is the intention of the Fund to
continue to qualify, as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), by complying with
the applicable requirements of the Code and by making distributions of
taxable income to shareholders sufficient to relieve the Fund of all or
substantially all federal income taxes. Accordingly, no provision for federal
income taxes is required.

The Fund may be subject to foreign taxes on income, gains on investment or
currency repatriation, a portion of which may be recoverable. The Fund will
accrue such taxes and recoveries as applicable, based on their current
interpretation of tax rules and regulations that exist in the markets in
which they invest.

h. ORGANIZATION COSTS
Expenses incurred in connection with the organization of the Fund are
amortized on a straight-line basis over a period of five years from
commencement of operations.

i. EXPENSES
General expenses of the Trust are allocated to the Fund and other series of
the Trust based on relative net assets. Operating expenses directly
attributable to the Fund are charged to the Fund's operations.

2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES:

a. Montgomery Asset Management, LLC, is the Fund's Manager (the "Manager").
The Manager, a Delaware limited liability company, is an investment adviser
registered with the Securities and Exchange Commission under the Investment
Advisers Act of the 1940, as amended. The Manager is a subsidiary of
Commerzbank AG.

Pursuant to the Investment Management Agreement (the "Agreement") between the
Manager and the Trust with respect to the Fund, the Manager provides the Fund
with advice on buying and selling securities, manages the investments of the
Fund including the placement of orders for portfolio transactions, furnishes
the Fund with office space and certain administrative services, and provides
the personnel needed by the Trust with respect to the Manager's
responsibilities under the Agreement. As compensation, the Fund pays the
Manager a monthly management fee (accrued daily) at the following annual
rates based on the average daily net assets of the Fund:

<TABLE>
<CAPTION>
FIRST $250 MILLION OVER $250 MILLION
<S> <C>
1.25% 1.00%
</TABLE>

The effective management fee and management fee including effect of fee
reduced was 1.25% for the six months ended June 30, 2000.

Under an Operating Expense Agreement with the Trust, the Manager has agreed
to reduce some or all of its management fee or absorb Fund expenses if
necessary to keep the Fund's annual operating expenses, exclusive of any Rule
12b-1 fees, interest, extraordinary expenses or taxes, at or below 1.75% of
the average daily net assets of the Fund. Any reductions or absorptions made
to the Fund by the Manager are subject to recovery within the following three
years, provided the Fund is able to effect such reimbursement and remain in
compliance with applicable expense limitations. The Operating Expense
Agreement has a rolling 10-year term, extendable for one year at the end of
each fiscal year.

The Manager has not deferred or recouped any management fees during the six
months ended June 30, 2000. No recoupable balance is outstanding.

b. Certain officers and Trustees of the Trust are, with respect to the
Trust's Manager, "affiliated persons" as defined in the 1940 Act. Each
Trustee who is not an affiliated person receives an annual retainer and
quarterly meeting fee totaling $55,000 per annum, as well as reimbursement
for expenses, for services as Trustee of all three Trusts advised by the
Manager ($5,000 of which is allocated to The Montgomery Funds III).

11
<PAGE>

------------------------------------------
THE MONTGOMERY
FUNDS III
------------------------------------------
NOTES
------------------------------------------
TO FINANCIAL STATEMENTS
(Unaudited)

3. SECURITIES TRANSACTIONS:

a. The aggregate amounts of purchases and sales of investment securities,
other than short-term securities, for the six months ended June 30, 2000,
were $81,085,044 and $69,355,525, respectively.

b. At June 30, 2000, cost for federal income tax purposes was $124,246,555,
aggregate gross unrealized appreciation for all securities in which there was
an excess of value over tax cost and aggregate gross unrealized depreciation
for all securities in which there was an excess of tax cost over value for
federal income-tax purposes was $26,490,506 and $8,136,755, respectively.

c. Under an unsecured Revolving Credit Agreement with Deutsche Bank, New
York, the Fund, along with other Funds of The Montgomery Funds, The
Montgomery Funds II and The Montgomery Funds III, may for one year starting
August 13, 1999, borrow (consistent with applicable law and its investment
policies) up to 10% of its net asset value, provided that the aggregate
principal amount of outstanding loans under the agreement to all Funds does
not exceed $175,000,000. The Fund pays its pro rata share of the quarterly
commitment fee of 0.08% per annum of the unutilized credit line balance. For
the six months ended June 30, 2000, borrowings by the Fund under the
agreement were as follows:

<TABLE>
<CAPTION>
Amount Outstanding Average Amount Maximum Average Average Debt
at 6/30/00 Outstanding Debt Outstanding Interest Rate Average Shares per Share
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- $250,549 $9,700,000 5.72% 13,538,579 $0.02
</TABLE>

The average amount outstanding during the year was calculated by totaling
borrowings at the end of each day and dividing the sum by the number of days
in the year ended June 30, 2000.

d. The schedule of forward foreign-currency exchange contracts at June 30,
2000, was as follows:

<TABLE>
<CAPTION>
Foreign-Currency Settlement Net Unrealized
Amount Date In Exchange for ($US) Depreciation
------------------------------------------------------------------------------------------------------------
Forward Foreign-Currency Exchange Contracts to Deliver
<S> <C> <C> <C>
1,014,304 Mexican Peso 07/03/00 $103,064 $ (816)
5,641,355 Thai Baht 07/03/00 144,004 (275)
-------- --------
Net Unrealized Depreciation $247,068 $(1,091)
======== ========
</TABLE>

4. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:

The Trust has authorized an unlimited number of shares of beneficial interest
which have a par value of $0.01. Transactions in shares of beneficial
interest for the years indicated below were:

<TABLE>
<CAPTION>
SIX MONTHS ENDED 6/30/00 YEAR ENDED 12/31/99

SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 13,137,961 $ 137,337,988 18,681,262 $ 153,220,187
Issued as reinvestment of dividends -- -- 1,330 13,165
Redeemed (10,953,759) (114,457,953) (17,584,895) (144,058,402)
----------------------------------------------------------------------------------------------------------------------------------
Net increase 2,184,202 $ 22,880,035 1,097,697 $ 9,174,950
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

12
<PAGE>

------------------------------------------
THE MONTGOMERY
FUNDS III
------------------------------------------
NOTES
------------------------------------------
TO FINANCIAL STATEMENTS
(Unaudited)

5. FOREIGN SECURITIES:

The Fund purchases securities in emerging markets countries. Securities of
foreign companies and foreign governments involve risks and considerations
not typically associated with investing in U.S. companies and the U.S.
government. These risks include revaluation of currencies, less-reliable
information about issuers, differences in the clearance and settlement of
securities transactions practices, and future adverse political and economic
developments. These risks are heightened for investments in emerging markets
countries. Moreover, securities of many foreign companies and governments and
their markets may be less liquid and their prices more volatile than those of
securities of comparable U.S. companies and the U.S. government.

6. CAPITAL LOSS CARRYFORWARDS:

At December 31, 1999, the Fund had available for federal income-tax purposes
unused capital losses of $84,636 expiring in 2004, $5,851,470 expiring in
2005, $26,489,358 expiring in 2006 and $6,909,499 expiring in 2007.

Under current tax law, net capital and currency losses realized after October
31 may be deferred and treated as occurring on the first day of the following
fiscal year. For the fiscal year ended December 31, 1999, the Fund elected to
defer net capital and currency losses of $108,884 occurring between November
1, 1999, and December 31, 1999.

Such deferred losses will be treated as arising on the first day of the
fiscal year ending December 31, 2000.

13
<PAGE>

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<PAGE>

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<PAGE>

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