UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-Q

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number		811-08110
SPECIAL SITUATIONS FUND III, L.P.
(Exact name of registrant as specified in charter)
527 MADISON AVENUE, SUITE 2600, NEW YORK, NEW YORK				10022
(Address of principal executive offices)				(Zip code)
Allen Levithan, Esq. Lowenstein Sandler, PC 65 Livingston Avenue Rosedale, NJ  07068-1791
(Name and address of agent for service)
Registrant’s telephone number, including area code			(212) 319-6670
Date of fiscal year end:	DECEMBER 31, 2010
Date of reporting period:	SEPTEMBER 30, 2010

Form N-Q is to be used by management investment companies, other than small

business investment companies registered on Form N-5 (SS 239.24 and 274.5 of

this chapter), to file reports with the Commission not later than 60 days after

the close of the first and third fiscal quarters, pursuant to rule 30b-1 under

the Investment Company Act of 1940 (17 CFR 270.30b1-5).  The Commission may

use the information provided on Form N-Q in its regulatory, disclosure review,

inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-Q,

and the Commission will make this information public.  A registrant is not

required to respond to the collection of information contained in Form N-Q

unless the Form displays a currently valid Office of Management and Budget

("OMB") control number.  Please direct comments concerning the accuracy of

the information collection burden estimate and any suggestions for reducing

the burden to Secretary, Securities and Exchange Commission, 450 Fifth

Street, NW, Washington, DC 20549-0609.  The OMB has reviewed this collection

of information under the clearance requirements of 44 U.S.C. § 3507.

Item 1.                                Schedule of Investments.

SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
PORTFOLIO OF INVESTMENTS - LIQUIDATION BASIS
SEPTEMBER 30, 2010
			Fair
Shares		Common Stocks	Value
		Electronic - Display 8.46%
92,820		Prime View International Co. (Taiwan) (Restricted - 3/3/11)	$	149,681
				149,681
		Total Common Stocks 8.46% (cost $0)		149,681
			Fair
Shares		Preferred Stocks	Value
		Data Security 11.39%
100,739		Verdasys, Inc. Series B convertible (Illiquid)	$	201,478
		Total Preferred Stocks 11.39% (cost $201,478)		201,478
Principal			Fair
Amount		Corporate Debt	Value
		Data Security 3.42%
$    60,450		Verdasys, Inc. Term Loan 13.50% due 10/30/12 (Illiquid)	$	60,450
		Total Corporate Debt 3.42% (cost $60,450)		60,450
		TOTAL INVESTMENTS 23.27% (cost $261,928)	$	411,609
	All percentages are relative to Partners' Capital.
	The above securities are non-income producing, except Verdasys, Inc. Corporate Debt.
See the accompanying Notes to the Financial Statements.

SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
PORTFOLIO OF INVESTMENTS - LIQUIDATION BASIS
SEPTEMBER 30, 2010
			% of
			Partners'
Industry Concentration		Total	Capital
Data Security	$	261,928	14.81%
Electronic - Display		149,681	8.46%
TOTAL PORTFOLIO	$	411,609	23.27%

See the accompanying Notes to the Financial Statements.

Item 2.                                Controls and Procedures.

(a)              Based on an evaluation of the registrant's disclosure controls and procedures as of a date within 90 days of the filing date of this report, the registrant’s principal executive and principal financial officers, or persons performing similar functions, concluded that the disclosure controls and procedures are effective.

(b)              There were no significant changes in the registrant's internal control over financial reporting that occurred during the registrant's last fiscal half-year that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting.

Item 3.                                Exhibits

Separate certifications for the registrant’s principal executive officer and principal financial officer, as required by rule 30a-2(a) under the Investment Company Act of 1940, are attached as EX99.CERT.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SPECIAL SITUATIONS FUND III, L.P.

By:              __/s/ Austin Marxe_______________

Austin Marxe, Principal Executive Officer

Date: November 30, 2010

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By:              _/s/ Austin Marxe_______________________

Austin Marxe, Principal Executive Officer

Date:  November 30, 2010

By:              __/s/Rose M. Carling ______________

Rose M. Carling, Principal Financial Officer

Date:  November 30, 2010