United States
                       Securities And Exchange Commission
                             Washington, D.C. 20549

                                   Form 10-QSB

(Mark One)
[X]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934

                 For the quarterly period ended September 30, 2004


[ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT


                For the transition period from _________to _________

                         Commission file number 0-15676


                   DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.
        (Exact name of small business issuer as specified in its charter)



           Delaware                                               62-1242599
(State or other jurisdiction of                                (I.R.S. Employer
 incorporation or organization)                              Identification No.)

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

                                 (864) 239-1000
                           (Issuer's telephone number)


Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___


                         PART I - FINANCIAL INFORMATION


ITEM 1.     FINANCIAL STATEMENTS



                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

                           CONSOLIDATED BALANCE SHEET
                                   (Unaudited)
                        (in thousands, except unit data)

                               September 30, 2004


<TABLE>
<CAPTION>

Assets
<S>                                                                          <C>
   Cash and cash equivalents                                                 $ 296
   Receivables and deposits                                                      622
   Other assets                                                                  341
   Investment properties:
      Land                                                    $ 2,821
      Buildings and related personal property                   40,823
                                                                43,644
      Less accumulated depreciation                            (25,580)       18,064
                                                                            $ 19,323

Liabilities and Partners' Deficit
Liabilities
   Accounts payable                                                          $ 172
   Tenant security deposit liabilities                                           131
   Accrued property taxes                                                        311
   Other liabilities                                                             227
   Due to affiliates (Note B)                                                 10,999
   Mortgage notes payable                                                     20,428

Partners' Deficit
   General partners                                            $ (259)
   Limited partners (1,011.5 units issued and
      outstanding)                                             (12,686)      (12,945)
                                                                            $ 19,323

            See Accompanying Notes to Consolidated Financial Statements
</TABLE>


                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

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


<TABLE>
<CAPTION>

                                        Three Months Ended           Nine Months Ended
                                           September 30,               September 30,
                                        2004          2003           2004          2003


Revenues:
<S>                                    <C>           <C>           <C>            <C>
  Rental income                        $ 1,307       $ 1,059       $ 3,636        $ 2,993
  Other income                             135           140            484            428
  Casualty gain (Note D)                    --            --             --             62
      Total revenues                     1,442         1,199          4,120          3,483

Expenses:
  Operating                                807           685          2,255          1,852
  General and administrative                36            50            129            153
  Depreciation                             484           464          1,461          1,318
  Interest                                 538           566          1,572          1,530
  Property taxes (Note E)                 (105)          189            101            422
      Total expenses                     1,760         1,954          5,518          5,275

Net loss                               $ (318)       $ (755)       $ (1,398)     $ (1,792)

Net loss allocated to general
  partners (2%)                         $ (6)         $ (15)        $ (28)         $ (36)
Net loss allocated to limited
  partners (98%)                          (312)         (740)        (1,370)        (1,756)

                                       $ (318)       $ (755)       $ (1,398)     $ (1,792)

Net loss per limited partnership
  unit                                $(308.45)     $(731.59)     $(1,354.42)   $(1,736.04)

            See Accompanying Notes to Consolidated Financial Statements
</TABLE>



<PAGE>




                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

               CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
                                   (Unaudited)
                        (in thousands, except unit data)

<TABLE>
<CAPTION>


                                     Limited
                                     Partnership     General      Limited
                                        Units        Partners    Partners      Total

<S>                                    <C>             <C>       <C>          <C>
Original capital contributions         1,013.0         $ 1       $ 20,240     $ 20,241

Partners' deficit at
   December 31, 2003                   1,011.5        $ (231)    $(11,316)    $(11,547)

Net loss for the nine months
   ended September 30, 2004                 --           (28)      (1,370)      (1,398)

Partners' deficit at
   September 30, 2004                  1,011.5        $ (259)    $(12,686)    $(12,945)

            See Accompanying Notes to Consolidated Financial Statements
</TABLE>


                   DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                 (in thousands)
<TABLE>
<CAPTION>

                                                                    Nine Months Ended
                                                                      September 30,
                                                                    2004         2003
Cash flows from operating activities:
<S>                                                                <C>          <C>
  Net loss                                                         $(1,398)     $(1,792)
  Adjustments to reconcile net loss to net cash provided by
   (used in) operating activities:
     Depreciation                                                    1,461        1,318
     Amortization of mortgage discounts and loan costs                  24           52
     Bad debt expense                                                   82          200
     Casualty gain                                                      --          (62)
     Change in accounts:
      Receivables and deposits                                        (442)        (343)
      Other assets                                                    (105)         (68)
      Accounts payable                                                   8          (91)
      Tenant security deposit liabilities                              (12)          60
      Accrued property taxes                                            25          285
      Other liabilities                                                  1           39
      Due to affiliate                                                 410          264
         Net cash provided by (used in) operating activities            54         (138)

Cash flows from investing activities:
  Insurance proceeds received                                           --           62
  Property improvements and replacements                              (596)      (4,378)
  Net withdrawals from restricted escrows                               --          635
         Net cash used in investing activities                        (596)      (3,681)

Cash flows from financing activities:
  Payments on mortgage notes payable                                   (97)        (130)
  Advances from affiliates                                             521        4,567
  Payments on advances from affiliates                                  (2)         (42)
         Net cash provided by financing activities                     422        4,395

Net (decrease) increase in cash and cash equivalents                  (120)         576
Cash and cash equivalents at beginning of period                       416          311

Cash and cash equivalents at end of period                          $ 296        $ 887

Supplemental disclosure of cash flow information:
  Cash paid for interest                                           $ 1,223      $ 1,547

Supplemental disclosure of non-cash information:
  Property improvements and replacements included in
   accounts payable                                                 $ 53         $ 842

At December 31, 2003 and 2002, approximately $235,000 and $12,000, respectively,
of property  improvements and replacements were included in accounts payable and
which are included in property  improvements  and  replacements  during the nine
months ended September 30, 2004 and 2003, respectively.

            See Accompanying Notes to Consolidated Financial Statements
</TABLE>



<PAGE>

                   DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Note A - Basis of Presentation

The  accompanying   unaudited  consolidated  financial  statements  of  Davidson
Diversified Real Estate III, L.P. (the  "Partnership" or "Registrant") have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-QSB and Item 310(b)
of Regulation S-B.  Accordingly,  they do not include all of the information and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements.  In the opinion of Davidson Diversified  Properties,  Inc.
(the  "Managing  General  Partner"),   all  adjustments  (consisting  of  normal
recurring  accruals)  considered  necessary  for a fair  presentation  have been
included. Operating results for the three and nine month periods ended September
30, 2004 are not necessarily  indicative of the results that may be expected for
the year  ending  December  31,  2004.  For  further  information,  refer to the
consolidated   financial  statements  and  footnotes  thereto  included  in  the
Partnership's Annual Report on Form 10-KSB for the year ended December 31, 2003.
The  Managing  General  Partner  is  a  wholly  owned  subsidiary  of  Apartment
Investment  and  Management  Company  ("AIMCO"),  a publicly  traded real estate
investment trust.

Note B - Transactions with Affiliated Parties

The Partnership has no employees and depends on the Managing General Partner and
its  affiliates  for  the  management  and  administration  of  all  Partnership
activities.  The  Partnership  Agreement  provides  for (i) certain  payments to
affiliates for services and (ii)  reimbursement of certain expenses  incurred by
affiliates on behalf of the  Partnership.  The  following  payments were paid or
accrued to the Managing  General  Partner and affiliates  during the nine months
ended September 30, 2004 and 2003.

Affiliates of the Managing  General  Partner are entitled to receive 5% of gross
receipts  from both of the  Partnership's  investment  properties  for providing
property   management   services.   The  Partnership  paid  to  such  affiliates
approximately $199,000 and $168,000 for the nine months ended September 30, 2004
and 2003, respectively, which is included in operating expenses.

Affiliates   of  the   Managing   General   Partner   charged  the   Partnership
reimbursements of accountable administrative expenses amounting to approximately
$106,000 and $221,000  for the nine months  ended  September  30, 2004 and 2003,
respectively.  Included  in these  amounts  are  fees  related  to  construction
management  services provided by an affiliate of the Managing General Partner of
approximately  $13,000 and $109,000 for the nine months ended September 30, 2004
and 2003,  respectively.  Such costs are included in general and  administrative
expense and investment properties.  The construction management service fees are
calculated  based on a  percentage  of  current  year  additions  to  investment
properties.  At September 30, 2004, approximately $617,000 of reimbursements for
services were accrued by the  Partnership  and are included in due to affiliates
on the accompanying consolidated balance sheet.

During the nine months ended  September 30, 2004 and 2003, the Managing  General
Partner  advanced  the  Partnership   approximately   $521,000  and  $4,567,000,
respectively,  for  redevelopment  costs and  operational  expenses at Plainview
Apartments and the Partnership.  These advances were made in accordance with the
terms of the  Partnership  Agreement.  At September 30, 2004, the balance of the
advances,  including  accrued  interest,  was  approximately  $10,382,000 and is
included in due to affiliates on the  accompanying  consolidated  balance sheet.
Interest  is accrued at the prime rate plus 2% (6.75% at  September  30,  2004).
Interest  expense was  approximately  $385,000  and $125,000 for the nine months
ended  September 30, 2004 and 2003,  respectively.  During the nine months ended
September 30, 2004 and 2003, the Partnership  repaid  advances of  approximately
$2,000 and $42,000, respectively.

The Partnership  insures Salem  Courthouse up to certain limits through coverage
provided by AIMCO which is  generally  self-insured  for a portion of losses and
liabilities  related to workers  compensation,  property  casualty  and  vehicle
liability.  The  Partnership  insures  Salem  Courthouse  above the AIMCO limits
through insurance policies obtained by AIMCO from insurers unaffiliated with the
Managing  General Partner.  The Managing General Partner has obtained  insurance
coverage for  Plainview  Apartments  for 2004 from both AIMCO and a third party.
For 2003, the Managing General Partner obtained insurance coverage for Plainview
Apartments  from a third party.  During the nine months ended September 30, 2004
and 2003, the Partnership was charged by AIMCO and its affiliates  approximately
$71,000 and $36,000,  respectively,  for insurance  coverage and fees associated
with policy claims administration.

Note C - Plainview Apartments Redevelopment

During 2002 the Managing General Partner began a major redevelopment  project at
Plainview  Apartments.  The property  discovered  mold growth  relating to water
leaks in two buildings in October 2001 and  experienced  fires in December 2001,
January 2002 and August 2002. The property also needed to be updated due to many
new  properties  being built which  significantly  increased the  competition in
Plainview's  market  area and the  older  property  has had  difficulty  staying
competitive.   Therefore,   in  an  effort  to  increase  occupancy  and  become
competitive  in  the  local  market  a  significant  redevelopment  project  was
undertaken  at the  property  and  was  complete  as of  December  31,  2003.  A
significant  number of units were  unrentable  during the ongoing  redevelopment
project.  As of December  31,  2003,  all units had been  restored to a leasable
state.

During the  construction  period certain expenses were capitalized and are being
depreciated  over the  remaining  life of the  property.  During the nine months
ended  September  30, 2003,  approximately  $208,000 of interest,  approximately
$32,000 of real estate taxes and  approximately  $94,000 of operating costs were
capitalized.  No such  costs  were  capitalized  during  the nine  months  ended
September 30, 2004.

Note D - Casualty Gain

During  the year  ended  December  31,  2002 a  casualty  gain of  approximately
$211,000 was recorded at Plainview Apartments related to a fire that occurred in
August 2002 which caused  damage to ten units of the  complex.  The gain was the
result of the receipt in 2002 of insurance  proceeds of  approximately  $316,000
offset by the write off of  approximately  $105,000  of  undepreciated  property
improvements and replacements.  During the nine months ended September 30, 2003,
the Partnership recognized an additional casualty gain of approximately $62,000.
The gain was the result of the receipt of additional proceeds from the insurance
carrier.

Note E - Accrued Property Taxes

During 2003, the state of Indiana implemented a reassessment of property values.
The Partnership successfully appealed the reassessed property tax value of Salem
Courthouse  Apartments.  In the state of Indiana property tax bills are paid one
year in arrears.  Thus,  the 2003  property  tax bills are  received and paid in
2004.  As a result of the  Partnership's  successful  appeal  of the  reassessed
property value an adjustment of  approximately  $205,000 was recorded during the
third quarter of 2004. The appeal  resulted in a lower assessed value which will
result in a refund of 2002 taxes paid in 2003,  a reduction in the 2003 taxes to
be paid in 2004 and a  reduction  in the  accrual  for 2004  taxes to be paid in
2005.

Note F - Contingencies

In March 1998, several putative unit holders of limited partnership units of the
Partnership  commenced an action  entitled  Rosalie  Nuanes,  et al. v. Insignia
Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the
State of  California  for the  County  of San  Mateo.  The  plaintiffs  named as
defendants,  among others,  the  Partnership,  its Managing  General Partner and
several of their  affiliated  partnerships  and corporate  entities.  The action
purported  to  assert  claims  on  behalf  of a class of  limited  partners  and
derivatively  on behalf  of a number  of  limited  partnerships  (including  the
Partnership)  that are named as nominal  defendants,  challenging,  among  other
things,  the  acquisition  of  interests  in certain  Managing  General  Partner
entities by Insignia Financial Group, Inc.  ("Insignia") and entities that were,
at one  time,  affiliates  of  Insignia;  past  tender  offers  by the  Insignia
affiliates to acquire limited partnership units;  management of the partnerships
by the  Insignia  affiliates;  and the series of  transactions  which  closed on
October 1, 1998 and February 26, 1999 whereby  Insignia and Insignia  Properties
Trust,  respectively,  were merged into AIMCO.  The plaintiffs  sought  monetary
damages and equitable relief, including judicial dissolution of the Partnership.
In addition,  during the third quarter of 2001, a complaint  captioned Heller v.
Insignia  Financial  Group (the  "Heller  action")  was filed  against  the same
defendants  that are named in the  Nuanes  action.  On or about  August 6, 2001,
plaintiffs filed a first amended  complaint.  The Heller action was brought as a
purported derivative action, and asserted claims for, among other things, breach
of fiduciary  duty,  unfair  competition,  conversion,  unjust  enrichment,  and
judicial dissolution.

On January 8, 2003,  the parties filed a  Stipulation  of Settlement in proposed
settlement of the Nuanes action and the Heller action.

In general  terms,  the  proposed  settlement  provides  for  certification  for
settlement  purposes of a settlement class consisting of all limited partners in
this  Partnership and others (the  "Partnerships")  as of December 20, 2002, the
dismissal  with  prejudice  and  release  of claims  in the  Nuanes  and  Heller
litigation,  payment by AIMCO of $9.9  million  (which shall be  distributed  to
settlement  class  members  after  deduction of attorney fees and costs of class
counsel and certain costs of settlement) and up to $1 million toward the cost of
independent  appraisals of the  Partnerships'  properties  by a court  appointed
appraiser.  An affiliate of the Managing General Partner has also agreed to make
at least one round of tender offers to purchase all of the partnership interests
in the Partnerships within one year of final approval,  if it is granted, and to
provide  partners with the independent  appraisals at the time of these tenders.
The proposed  settlement also provided for the limitation of the allowable costs
which  the  Managing   General   Partner  or  its  affiliates  will  charge  the
Partnerships  in connection with this litigation and imposes limits on the class
counsel  fees and  costs in this  litigation.  On April  11,  2003,  notice  was
distributed  to  limited   partners   providing  the  details  of  the  proposed
settlement.

On June 13, 2003, the court granted final approval of the settlement and entered
judgment in both the Nuanes and Heller actions.  On August 12, 2003, an objector
("Objector") filed an appeal (the "Appeal") seeking to vacate and/or reverse the
order approving the settlement and entering  judgment  thereto.  On November 24,
2003,  the Objector  filed an  application  requesting  the court order AIMCO to
withdraw settlement tender offers it had commenced,  refrain from making further
offers  pending  the appeal and auction  any units  tendered  to third  parties,
contending  that the offers did not  conform  with the terms of the  settlement.
Counsel  for the  Objector  (on behalf of another  investor)  had  alternatively
requested the court take certain action  purportedly to enforce the terms of the
settlement agreement. On December 18, 2003, the court heard oral argument on the
motions  and denied them both in their  entirety.  The  Objector  filed a second
appeal challenging the court's use of a referee and its order requiring Objector
to pay those fees.

On January 28, 2004,  the  Objector  filed his opening  brief in the Appeal.  On
April 23, 2004, the Managing General Partner and its affiliates filed a response
brief in support of the settlement and the judgment thereto. The plaintiffs have
also filed a brief in support of the settlement. On June 4, 2004, Objector filed
a reply to the briefs  submitted by the Managing General Partner and Plaintiffs.
In addition both the Objector and plaintiffs filed briefs in connection with the
second  appeal.  The Court of Appeals  heard oral  argument  on both  appeals on
September 22, 2004 and took the matters under submission.

The  Managing  General  Partner  does  not  anticipate  that  any  costs  to the
Partnership, whether legal or settlement costs, associated with these cases will
be material to the Partnership's overall operations.

On August 8, 2003 AIMCO  Properties  L.P., an affiliate of the Managing  General
Partner,  was served  with a  complaint  in the United  States  District  Court,
District of Columbia alleging that AIMCO Properties L.P.  willfully violated the
Fair Labor Standards Act ("FLSA") by failing to pay maintenance workers overtime
for all  hours  worked  in  excess  of forty  per  week.  On  March 5,  2004 the
Plaintiffs filed an amended complaint also naming NHP Management Company,  which
is also an affiliate of the Managing General Partner. The complaint is styled as
a Collective  Action  under the FLSA and seeks to certify  state  subclasses  in
California, Maryland, and the District of Columbia. Specifically, the plaintiffs
contend that AIMCO Properties L.P. failed to compensate  maintenance workers for
time  that they were  required  to be  "on-call".  Additionally,  the  complaint
alleges AIMCO  Properties  L.P.  failed to comply with the FLSA in  compensating
maintenance  workers  for time that they  worked in  responding  to a call while
"on-call".  The defendants have filed an answer to the amended complaint denying
the  substantive  allegations.  Some  discovery  has taken place and  settlement
negotiations  continue.  Although the outcome of any  litigation  is  uncertain,
AIMCO  Properties,  L.P. does not believe that the ultimate  outcome will have a
material  adverse  effect on its financial  condition or results of  operations.
Similarly,  the  Managing  General  Partner  does not believe  that the ultimate
outcome will have a material  adverse effect on the  Partnership's  consolidated
financial condition or results of operations.

The  Partnership  is unaware  of any other  pending  or  outstanding  litigation
matters  involving  it or its  investment  properties  that are not of a routine
nature arising in the ordinary course of business.

As  previously  disclosed,  the  Central  Regional  Office of the United  States
Securities  and  Exchange   Commission   (the  "SEC")  is  conducting  a  formal
investigation relating to certain matters.  Although the staff of the SEC is not
limited  in the  areas  that it may  investigate,  AIMCO  believes  the areas of
investigation include AIMCO's miscalculated monthly net rental income figures in
third quarter 2003,  forecasted  guidance,  accounts payable,  rent concessions,
vendor  rebates,  capitalization  of payroll and certain  other  costs,  and tax
credit  transactions.  AIMCO is cooperating  fully. AIMCO is not able to predict
when the matter  will be  resolved.  AIMCO does not  believe  that the  ultimate
outcome  will  have a  material  adverse  effect on its  consolidated  financial
condition or results of operations. Similarly, the Managing General Partner does
not believe that the ultimate outcome will have a material adverse effect on the
Partnership's consolidated financial condition or results of operations.


<PAGE>



ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The matters discussed in this report contain certain forward-looking statements,
including, without limitation, statements regarding future financial performance
and the effect of government  regulations.  Actual results may differ materially
from those described in the forward-looking statements and will be affected by a
variety of risks and factors including,  without limitation:  national and local
economic  conditions;  the terms of  governmental  regulations  that  affect the
Registrant and interpretations of those regulations; the competitive environment
in which the Registrant operates;  financing risks, including the risk that cash
flows from operations may be insufficient to meet required payments of principal
and interest;  real estate risks, including variations of real estate values and
the general  economic  climate in local markets and  competition  for tenants in
such markets;  litigation,  including  costs  associated  with  prosecuting  and
defending  claims  and  any  adverse   outcomes,   and  possible   environmental
liabilities.   Readers  should  carefully  review  the  Registrant's   financial
statements and the notes thereto,  as well as the risk factors  described in the
documents  the  Registrant  files  from  time to time  with the  Securities  and
Exchange Commission.

The Partnership's  investment properties consist of two apartment complexes. The
following  table sets forth the average  occupancy of these  properties  for the
nine months ended September 30, 2004 and 2003:

                                                 Average Occupancy
                                                   2004     2003
         Salem Courthouse
            Indianapolis, Indiana                 86%         92%

         Plainview Apartments
            Louisville, Kentucky                  87%         61%

The  Managing  General  Partner  attributes  the  decrease in occupancy at Salem
Courthouse Apartments to changes in the criteria used to accept new tenants. The
changes  were  instituted  in an effort to attract and maintain  more  desirable
tenants which will help control operating expenses.

Plainview  Apartments is located in a local market where the apartment  industry
has  been  soft  recently.  In  addition,  two of  the  buildings  at  Plainview
Apartments had roof leaks which has led to some mold growth,  several  buildings
have had units down as a result of fires and the  property  needed to be updated
in order to become competitive in the local market. These factors contributed to
approximately  32% of the property's total available units at September 30, 2003
being  vacated in order to  expedite  reconstruction.  The  Partnership  engaged
architectural and environmental engineering experts to perform corrective action
on the affected buildings.  As of December 31, 2003, all units had been restored
to a leasable state.

The  Partnership's  financial  results depend upon a number of factors including
the  ability to attract  and  maintain  tenants  at the  investment  properties,
interest  rates on mortgage  loans,  costs  incurred  to operate the  investment
properties,  general  economic  conditions  and weather.  As part of the ongoing
business plan of the  Partnership,  the Managing  General  Partner  monitors the
rental market environment of its investment properties to assess the feasibility
of increasing rents,  maintaining or increasing  occupancy levels and protecting
the Partnership  from increases in expenses.  As part of this plan, the Managing
General  Partner  attempts  to  protect  the  Partnership  from  the  burden  of
inflation-related  increases in expenses by increasing  rents and  maintaining a
high overall  occupancy  level.  However,  the Managing  General Partner may use
rental  concessions  and  rental  rate  reductions  to offset  softening  market
conditions, accordingly, there is no guarantee that the Managing General Partner
will be able to  sustain  such a plan.  Further,  a number of  factors  that are
outside the control of the  Partnership  such as the local economic  climate and
weather can adversely or positively affect the Partnership's financial results.

Results of Operations

The Partnership  recognized a net loss of approximately  $1,398,000 for the nine
months  ended  September  30,  2004  compared  to a net  loss  of  approximately
$1,792,000  for the nine months ended  September  30, 2003.  The decrease in net
loss is due to an increase in total revenues  partially offset by an increase in
total expenses.

The Partnership  recognized a net loss of  approximately  $318,000 for the three
months ended September 30, 2004 compared to a net loss of approximately $755,000
for the three months ended  September 30, 2003.  The decrease in net loss is due
to a decrease in total expenses and an increase in total revenues.

Total  expenses  increased  for the nine months ended  September 30, 2004 due to
increases in operating,  depreciation and interest expense,  partially offset by
decreases in property  tax and general and  administrative  expenses.  Operating
expense  increased due to increases in property  management  fees,  advertising,
utility,  salaries  and  contract  maintenance  expenses  and a decrease  in the
capitalization of construction  operating expense at Plainview  Apartments which
are all attributable to completion of the reconstruction of the property late in
2003  which  has  led to  increased  occupancy  and  operating  costs  in  2004.
Depreciation  expense  increased due to property  improvements  and replacements
placed  into  service  during  the  past  twelve  months  which  are  now  being
depreciated.  Interest expense increased due to a decrease in the capitalization
of  construction  period interest  associated  with Plainview  Apartments and an
increase  in interest  expense  related to advances  from the  Managing  General
Partner.  Partially offsetting the increase in interest expense is a decrease in
interest expense related to the mortgage on Salem Courthouse  Apartments,  which
refinanced  in October  2003 at a lower  interest  rate.  Property  tax  expense
decreased  due to the  Partnership's  appeal  of the  reassessed  value of Salem
Courthouse  by the  taxing  authorities.  During  2003,  the  state  of  Indiana
implemented a reassessment  of property  values.  The  Partnership  successfully
appealed the reassessed  property tax value of Salem Courthouse  Apartments.  In
the state of Indiana property tax bills are paid one year in arrears.  Thus, the
2003  property  tax  bills  are  received  and paid in 2004.  As a result of the
Partnership's  successful appeal of the reassessed  property value an adjustment
of  approximately  $205,000 was recorded  during the third quarter of 2004.  The
appeal  resulted in a lower assessed value which will result in a refund of 2002
taxes  paid in 2003,  a  reduction  in the  2003  taxes to be paid in 2004 and a
reduction in the accrual for 2004 taxes to be paid in 2005.

Total  expenses  decreased for the three months ended  September 30, 2004 due to
decreases  in general and  administrative,  interest  and  property tax expenses
partially offset by increases in operating and depreciation  expenses.  Interest
expense  decreased  due to the  refinancing  of the mortgage  encumbering  Salem
Courthouse  Apartments in October 2003 at a lower  interest  rate.  Property tax
expense decreased and operating and depreciation expenses increased as discussed
above.

General and administrative expense decreased for the three and nine months ended
September 30, 2004 due to a decrease in  reimbursements  to the Managing General
Partner allowed under the Partnership  Agreement  associated with the management
of the Partnership.  In addition, costs associated with the quarterly and annual
communications  with  investors  and  regulatory  agencies  and the annual audit
required by the Partnership are also included.

Total  revenues  for both the three and nine  months  ended  September  30, 2004
increased  due to an  increase  in rental  income  and for the nine  months  the
increase was also due to an increase in other income.  For the nine months ended
September  30,  2004 these  increases  were  partially  offset by a decrease  in
casualty  gain. The increase in rental income is due to an increase in occupancy
at Plainview  Apartments and a decrease in bad debt expense at Salem  Courthouse
Apartments  partially  offset by a decrease  in  occupancy  at Salem  Courthouse
Apartments.  Other income increased for the nine months ended September 30, 2004
due to an increase in utility reimbursements at Plainview Apartments,  partially
offset  by a  decrease  in late  charges  and lease  cancellation  fees at Salem
Courthouse Apartments.

During the year ended  December  31,  2002,  a  casualty  gain of  approximately
$211,000 was recorded at Plainview Apartments related to a fire that occurred in
August 2002 which caused  damage to ten units of the  complex.  The gain was the
result of the receipt in 2002 of insurance  proceeds of  approximately  $316,000
offset by the write off of  approximately  $105,000  of  undepreciated  property
improvements and replacements.  During the nine months ended September 30, 2003,
the Partnership recognized an additional casualty gain of approximately $62,000.
The gain was the result of the receipt of additional proceeds from the insurance
carrier.

Liquidity and Capital Resources

At  September  30,  2004,  the  Partnership  had cash and  cash  equivalents  of
approximately $296,000 compared to approximately $887,000 at September 30, 2003.
The  decrease  in cash and  cash  equivalents  of  approximately  $120,000  from
December  31, 2003 is due to  approximately  $596,000 of cash used in  investing
activities  partially  offset by  approximately  $422,000  and  $54,000  of cash
provided by financing activities and operating  activities,  respectively.  Cash
used  in   investing   activities   consisted  of  property   improvements   and
replacements. Cash provided by financing activities consisted of advances to the
Partnership made by the Managing General Partner,  partially offset by principal
payments  made on the  mortgage  encumbering  Salem  Courthouse  Apartments  and
payments on advances  made by the  Managing  General  Partner.  The  Partnership
invests its working capital in interest bearing accounts.

The sufficiency of existing  liquid assets to meet future  liquidity and capital
expenditure   requirements   is  directly   related  to  the  level  of  capital
expenditures  required at the  properties  to  adequately  maintain the physical
assets and other  operating needs of the Partnership and to comply with Federal,
state, and local legal and regulatory requirements. The Managing General Partner
monitors  developments  in the  area of legal  and  regulatory  compliance.  For
example,  the  Sarbanes-Oxley  Act  of  2002  mandates  or  suggests  additional
compliance  measures  with  regard to  governance,  disclosure,  audit and other
areas.  In light of these changes,  the  Partnership  expects that it will incur
higher expenses related to compliance.  Capital improvements planned for both of
the Partnership's properties are detailed below.

Plainview  Apartments:  During the nine months ended  September  30,  2004,  the
Partnership  completed   approximately   $230,000  in  capital  expenditures  at
Plainview  Apartments  consisting  of  floor  covering  replacements,   building
improvements,  water heaters, parking lot resurfacing,  new office computers and
electrical improvements.  These expenditures were funded primarily through loans
from affiliates of the Managing General Partner.  The Partnership  evaluates the
capital  improvement needs of the property during the year and currently expects
to complete an additional $34,000 in capital  improvements  during the remainder
of 2004.  Additional  improvements may be considered during 2004 and will depend
on the  physical  condition  of the  property as well as  anticipated  cash flow
generated by the property.

Salem  Courthouse  Apartments:  During the nine months ended September 30, 2004,
the  Partnership  completed  approximately  $184,000 of capital  improvements at
Salem  Courthouse  Apartments,   consisting  primarily  of  floor  covering  and
appliance  replacements,  building improvements,  air conditioning upgrades, and
parking lot  resurfacing.  These  improvements  were funded from  operating cash
flow. The Partnership  evaluates the capital  improvement  needs of the property
during the year and  currently  expects to  complete  an  additional  $29,000 in
capital improvements during the remainder of 2004.  Additional  improvements may
be  considered  during 2004 and will  depend on the  physical  condition  of the
property as well as anticipated cash flow generated by the property.

The additional  capital  expenditures will be incurred only if cash is available
from operations or from Partnership  reserves.  To the extent that such budgeted
capital improvements are completed,  the Partnership's  distributable cash flow,
if any, may be adversely affected at least in the short term.

The  Partnership's  assets are thought to be sufficient for any near-term  needs
(exclusive of capital improvements) of the Partnership. The mortgage encumbering
Salem Courthouse  Apartments of approximately  $5,092,000 has a maturity date of
September  15,  2007 at which  time a  balloon  payment  totaling  approximately
$4,710,000 is due. At that time, the Managing  General Partner has the option to
extend  the  maturity  of  this  loan  for  another  five  years.  The  mortgage
indebtedness  encumbering  Plainview  Apartments  of  approximately  $15,336,000
requires a balloon payment of  approximately  $15,336,000 due November 15, 2010.
The Managing General Partner will attempt to refinance such indebtedness  and/or
sell the properties prior to maturity. If the properties cannot be refinanced or
sold for a sufficient  amount,  the Partnership  will risk losing the properties
through foreclosure.

There  were no  distributions  to the  partners  during  the nine  months  ended
September 30, 2004 and 2003. Future cash distributions will depend on the levels
of net cash generated from operations, the availability of cash reserves and the
timing of debt maturities, refinancings and/or property sales. The Partnership's
cash available for  distribution is reviewed on a monthly basis. In light of the
amounts  accrued and payable to the Managing  General  Partner at September  30,
2004,  there can be no assurance that the Partnership  will generate  sufficient
funds  from  operations,  after  required  capital  expenditures,  to permit any
distributions to its partners during 2004 or subsequent periods.

Other

In addition to its indirect  ownership of the managing  general partner interest
in the Partnership,  AIMCO and its affiliates  owned 440.50 limited  partnership
units (the "Units") in the  Partnership  representing  43.55% of the outstanding
Units at September 30, 2004. A number of these Units were  acquired  pursuant to
tender offers made by AIMCO or its affiliates.  It is possible that AIMCO or its
affiliates will acquire  additional  Units in exchange for cash or a combination
of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO,
either through private  purchases or tender offers.  Pursuant to the Partnership
Agreement,  unitholders  holding a majority  of the Units are  entitled  to take
action with  respect to a variety of matters that  include,  but are not limited
to,  voting on certain  amendments  to the  Partnership  Agreement and voting to
remove the Managing General  Partner.  As a result of its ownership of 43.55% of
the outstanding  Units,  AIMCO and its affiliates are in a position to influence
all such voting decisions with respect to the Partnership. Although the Managing
General  Partner  owes  fiduciary   duties  to  the  limited   partners  of  the
Partnership, the Managing General Partner also owes fiduciary duties to AIMCO as
its sole stockholder.  As a result,  the duties of the Managing General Partner,
as managing  general  partner,  to the Partnership and its limited  partners may
come into conflict with the duties of the Managing  General  Partner to AIMCO as
its sole stockholder.

Critical Accounting Policies

The consolidated financial statements are prepared in accordance with accounting
principles   generally  accepted  in  the  United  States,   which  require  the
Partnership to make estimates and assumptions.  The Partnership believes that of
its significant  accounting policies,  the following may involve a higher degree
of judgment and complexity.

Impairment of Long-Lived Assets

The Partnership's  investment  properties are recorded at cost, less accumulated
depreciation,  unless considered impaired.  If events or circumstances  indicate
that the carrying  amount of a property may be impaired,  the  Partnership  will
make an assessment of its  recoverability by estimating the undiscounted  future
cash flows,  excluding interest charges, of the property. If the carrying amount
exceeds the aggregate  future cash flows,  the  Partnership  would  recognize an
impairment  loss to the extent the carrying amount exceeds the fair value of the
property.

Real  property  investments  are  subject  to varying  degrees of risk.  Several
factors  may  adversely  affect  the  economic  performance  and  value  of  the
Partnership's investment properties.  These factors include, but are not limited
to,  changes  in the  national,  regional  and  local  economic  climate;  local
conditions,  such as an oversupply of multifamily  properties;  competition from
other available  multifamily property owners and changes in market rental rates.
Any adverse changes in these factors could cause impairment of the Partnership's
assets.

Revenue Recognition

The Partnership generally leases apartment units for twelve-month terms or less.
Rental income  attributable to leases is recognized monthly as it is earned. The
Partnership  evaluates all accounts receivable from residents and establishes an
allowance, after the application of security deposits, for accounts greater than
30 days past due on current tenants and all receivables due from former tenants.
The Partnership will offer rental concessions during particularly slow months or
in response to heavy  competition from other similar  complexes in the area. Any
concessions  given at the inception of the lease are amortized  over the life of
the lease.

ITEM 3.     CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures.  The Partnership's management,  with the
participation of the principal executive officer and principal financial officer
of the Managing  General  Partner,  who are the equivalent of the  Partnership's
principal executive officer and principal financial officer,  respectively,  has
evaluated  the  effectiveness  of  the  Partnership's  disclosure  controls  and
procedures (as such term is defined in Rules  13a-15(e) and 15d-15(e)  under the
Securities  Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this report.  Based on such  evaluation,  the principal
executive  officer  and  principal  financial  officer of the  Managing  General
Partner, who are the equivalent of the Partnership's principal executive officer
and principal  financial officer,  respectively,  have concluded that, as of the
end of such period,  the  Partnership's  disclosure  controls and procedures are
effective.

(b) Internal Control Over Financial  Reporting.  There have not been any changes
in the Partnership's  internal control over financial reporting (as such term is
defined in Rules  13a-15(f)  and  15d-15(f)  under the Exchange  Act) during the
fiscal quarter to which this report relates that have  materially  affected,  or
are reasonably likely to materially affect,  the Partnership's  internal control
over financial reporting.


<PAGE>



                           PART II - OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

In March 1998, several putative unit holders of limited partnership units of the
Partnership  commenced an action  entitled  Rosalie  Nuanes,  et al. v. Insignia
Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the
State of  California  for the  County  of San  Mateo.  The  plaintiffs  named as
defendants,  among others,  the  Partnership,  its Managing  General Partner and
several of their  affiliated  partnerships  and corporate  entities.  The action
purported  to  assert  claims  on  behalf  of a class of  limited  partners  and
derivatively  on behalf  of a number  of  limited  partnerships  (including  the
Partnership)  that are named as nominal  defendants,  challenging,  among  other
things,  the  acquisition  of  interests  in certain  Managing  General  Partner
entities by Insignia Financial Group, Inc.  ("Insignia") and entities that were,
at one  time,  affiliates  of  Insignia;  past  tender  offers  by the  Insignia
affiliates to acquire limited partnership units;  management of the partnerships
by the  Insignia  affiliates;  and the series of  transactions  which  closed on
October 1, 1998 and February 26, 1999 whereby  Insignia and Insignia  Properties
Trust,  respectively,  were merged into AIMCO.  The plaintiffs  sought  monetary
damages and equitable relief, including judicial dissolution of the Partnership.
In addition,  during the third quarter of 2001, a complaint  captioned Heller v.
Insignia  Financial  Group (the  "Heller  action")  was filed  against  the same
defendants  that are named in the  Nuanes  action.  On or about  August 6, 2001,
plaintiffs filed a first amended  complaint.  The Heller action was brought as a
purported derivative action, and asserted claims for, among other things, breach
of fiduciary  duty,  unfair  competition,  conversion,  unjust  enrichment,  and
judicial dissolution.

On January 8, 2003,  the parties filed a  Stipulation  of Settlement in proposed
settlement of the Nuanes action and the Heller action.

In general  terms,  the  proposed  settlement  provides  for  certification  for
settlement  purposes of a settlement class consisting of all limited partners in
this  Partnership and others (the  "Partnerships")  as of December 20, 2002, the
dismissal  with  prejudice  and  release  of claims  in the  Nuanes  and  Heller
litigation,  payment by AIMCO of $9.9  million  (which shall be  distributed  to
settlement  class  members  after  deduction of attorney fees and costs of class
counsel and certain costs of settlement) and up to $1 million toward the cost of
independent  appraisals of the  Partnerships'  properties  by a court  appointed
appraiser.  An affiliate of the Managing General Partner has also agreed to make
at least one round of tender offers to purchase all of the partnership interests
in the Partnerships within one year of final approval,  if it is granted, and to
provide  partners with the independent  appraisals at the time of these tenders.
The proposed  settlement also provided for the limitation of the allowable costs
which  the  Managing   General   Partner  or  its  affiliates  will  charge  the
Partnerships  in connection with this litigation and imposes limits on the class
counsel  fees and  costs in this  litigation.  On April  11,  2003,  notice  was
distributed  to  limited   partners   providing  the  details  of  the  proposed
settlement.

On June 13, 2003, the court granted final approval of the settlement and entered
judgment in both the Nuanes and Heller actions.  On August 12, 2003, an objector
("Objector") filed an appeal (the "Appeal") seeking to vacate and/or reverse the
order approving the settlement and entering  judgment  thereto.  On November 24,
2003,  the Objector  filed an  application  requesting  the court order AIMCO to
withdraw settlement tender offers it had commenced,  refrain from making further
offers  pending  the appeal and auction  any units  tendered  to third  parties,
contending  that the offers did not  conform  with the terms of the  settlement.
Counsel  for the  Objector  (on behalf of another  investor)  had  alternatively
requested the court take certain action  purportedly to enforce the terms of the
settlement agreement. On December 18, 2003, the court heard oral argument on the
motions  and denied them both in their  entirety.  The  Objector  filed a second
appeal challenging the court's use of a referee and its order requiring Objector
to pay those fees.

On January 28, 2004,  the  Objector  filed his opening  brief in the Appeal.  On
April 23, 2004, the Managing General Partner and its affiliates filed a response
brief in support of the settlement and the judgment thereto. The plaintiffs have
also filed a brief in support of the settlement. On June 4, 2004, Objector filed
a reply to the briefs  submitted by the Managing General Partner and Plaintiffs.
In addition both the Objector and plaintiffs filed briefs in connection with the
second  appeal.  The Court of Appeals  heard oral  argument  on both  appeals on
September 22, 2004 and took the matters under submission.

The  Managing  General  Partner  does  not  anticipate  that  any  costs  to the
Partnership, whether legal or settlement costs, associated with these cases will
be material to the Partnership's overall operations.

On August 8, 2003 AIMCO  Properties  L.P., an affiliate of the Managing  General
Partner,  was served  with a  complaint  in the United  States  District  Court,
District of Columbia alleging that AIMCO Properties L.P.  willfully violated the
Fair Labor Standards Act ("FLSA") by failing to pay maintenance workers overtime
for all  hours  worked  in  excess  of forty  per  week.  On  March 5,  2004 the
plaintiffs filed an amended complaint also naming NHP Management Company,  which
is also an affiliate of the Managing General Partner. The complaint is styled as
a Collective  Action  under the FLSA and seeks to certify  state  subclasses  in
California, Maryland, and the District of Columbia. Specifically, the plaintiffs
contend that AIMCO Properties L.P. failed to compensate  maintenance workers for
time  that they were  required  to be  "on-call".  Additionally,  the  complaint
alleges AIMCO  Properties  L.P.  failed to comply with the FLSA in  compensating
maintenance  workers  for time that they  worked in  responding  to a call while
"on-call".  The defendants have filed an answer to the amended complaint denying
the  substantive  allegations.  Some  discovery  has taken place and  settlement
negotiations  continue.  Although the outcome of any  litigation  is  uncertain,
AIMCO  Properties,  L.P. does not believe that the ultimate  outcome will have a
material  adverse  effect on its financial  condition or results of  operations.
Similarly,  the  Managing  General  Partner  does not believe  that the ultimate
outcome will have a material  adverse effect on the  Partnership's  consolidated
financial condition or results of operations.

ITEM 6.     EXHIBITS


            See Exhibit Index attached.



<PAGE>


                                   SIGNATURES



In accordance with the  requirements of the Exchange Act, the registrant  caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.



                                    DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.


                                    By:   Davidson Diversified Properties, Inc.,
                                          Managing General Partner


                                    By:   /s/Martha L. Long
                                          Martha L. Long
                                          Senior Vice President


                                    By:   /s/Stephen B. Waters
                                          Stephen B. Waters
                                          Vice President


                                    Date: November 12, 2004



<PAGE>


                    DAVIDSON DIVERSIFIED REAL ESTATE III, LP
                                  EXHIBIT INDEX



Exhibit Number    Description of Exhibit

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

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

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

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

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

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

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

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

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

      10AA        Amended, Restated and Substituted Mortgage Note dated November
                  15, 1995,  executed by Plainview  Apartments,  L.P. payable to
                  NTS-Plainview  Associates  is  incorporated  by  reference  to
                  Exhibit 10AA to the Registrant's  Annual Report on Form 10-KSB
                  for the year ended December 31, 1995.

          10BB Assignment of Leases, Rents, and Profits dated November 15, 1995,
               executed  by  Plainview  Apartments,   L.P.  to  Nationwide  Life
               Insurance Co. and West Coast Life  Insurance Co. is  incorporated
               by reference to Exhibit 10BB to the Registrant's Annual Report on
               Form 10-KSB for the year ended December 31, 1995.

      10CC        a)  Multifamily  Note dated  October  15, 2003  between  Salem
                  Courthouse,  L.P., a South Carolina  Limited  Partnership  and
                  GMAC  Commercial  Mortgage  Corporation,  is  incorporated  by
                  reference to Form 8-K dated October 15, 2003.

      10CC        b) Guaranty dated October 15, 2003 by AIMCO  Properties,  L.P.
                  for the benefit of GMAC Commercial  Mortgage  Corporation,  is
                  incorporated by reference to Form 8-K dated October 15, 2003.

      10CC        c) Completion/Repair  and Security Agreement dated October 15,
                  2003 between Salem Courthouse,  L.P., a South Carolina Limited
                  Partnership  and  GMAC  Commercial  Mortgage  Corporation,  is
                  incorporated by reference to Form 8-K dated October 15, 2003.

      10CC        d) Replacement  Reserve and Security  Agreement  dated October
                  15, 2003 between  Salem  Courthouse,  L.P.,  a South  Carolina
                  Limited Partnership and GMAC Commercial Mortgage  Corporation,
                  is  incorporated  by reference  to Form 8-K dated  October 15,
                  2003.

      10CC        e)  Assignment of Security  Instrument  dated October 15, 2003
                  between GMAC Commercial  Mortgage  Corporation and Fannie Mae,
                  is  incorporated  by reference  to Form 8-K dated  October 15,
                  2003.

      10CC        f) Ninth Reaffirmation and Joinder Agreement dated October 15,
                  2003 between AIMCO Properties,  L.P., GMAC Commercial Mortgage
                  Corporation,  Salem  Courthouse,  L.P.,  and  Fannie  Mae,  is
                  incorporated by reference to Form 8-K dated October 15, 2003.

      31.1        Certification   of  equivalent  of  Chief  Executive   Officer
                  pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a),
                  as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley  Act
                  of 2002.

      31.2        Certification   of  equivalent  of  Chief  Financial   Officer
                  pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a),
                  as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley  Act
                  of 2002.

      32.1        Certification  Pursuant to 18 U.S.C.  Section 1350, as Adopted
                  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

      99A         Agreement of Limited  Partnership  for Davidson III GP Limited
                  Partnership between Davidson Diversified Properties,  Inc. and
                  Davidson Diversified Real Estate III entered into on September
                  15, 1993.

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




<PAGE>



Exhibit 31.1


                                  CERTIFICATION


I, Martha L. Long, certify that:


1.    I  have  reviewed  this  quarterly  report  on  Form  10-QSB  of  Davidson
      Diversified Real Estate III, L.P.;

2.    Based on my knowledge,  this report does not contain any untrue  statement
      of a material fact or omit to state a material fact  necessary to make the
      statements made, in light of the circumstances under which such statements
      were made,  not  misleading  with  respect  to the period  covered by this
      report;

3.    Based on my  knowledge,  the  financial  statements,  and other  financial
      information  included  in this  report,  fairly  present  in all  material
      respects the financial condition,  results of operations and cash flows of
      the small  business  issuer as of, and for, the periods  presented in this
      report;

4.    The  small  business  issuer's  other  certifying  officer(s)  and  I  are
      responsible  for  establishing  and  maintaining  disclosure  controls and
      procedures (as defined in Exchange Act Rules  13a-15(e) and 15d-15(e)) for
      the small business issuer and have:

      (a)   Designed such  disclosure  controls and  procedures,  or caused such
            disclosure   controls  and  procedures  to  be  designed  under  our
            supervision,  to ensure that  material  information  relating to the
            small business issuer, including its consolidated  subsidiaries,  is
            made  known to us by  others  within  those  entities,  particularly
            during the period in which this report is being prepared;

      (b)   Evaluated  the   effectiveness   of  the  small  business   issuer's
            disclosure  controls and procedures and presented in this report our
            conclusions about the  effectiveness of the disclosure  controls and
            procedures, as of the end of the period covered by this report based
            on such evaluation; and

      (c)   Disclosed in this report any change in the small  business  issuer's
            internal  control over financial  reporting that occurred during the
            small  business  issuer's  most  recent  fiscal  quarter  (the small
            business  issuer's  fourth  fiscal  quarter in the case of an annual
            report) that has  materially  affected,  or is reasonably  likely to
            materially affect, the small business issuer's internal control over
            financial reporting; and

5.    The  small  business  issuer's  other  certifying  officer(s)  and I  have
      disclosed,  based on our most recent  evaluation of internal  control over
      financial reporting, to the small business issuer's auditors and the audit
      committee of the small  business  issuer's  board of directors (or persons
      performing the equivalent functions):

      (a)   All significant  deficiencies and material  weaknesses in the design
            or operation of internal control over financial  reporting which are
            reasonably  likely to adversely  affect the small business  issuer's
            ability  to  record,   process,   summarize  and  report   financial
            information; and

      (b)   Any fraud,  whether or not  material,  that  involves  management or
            other  employees who have a significant  role in the small  business
            issuer's internal control over financial reporting.

Date:  November 12, 2004

                               /s/Martha L. Long
                                Martha L. Long
                                Senior Vice  President  of Davidson  Diversified
                                Properties,   Inc.,   equivalent  of  the  chief
                                executive officer of the Partnership


<PAGE>



Exhibit 31.2


                                  CERTIFICATION


I, Stephen B. Waters, certify that:


1.    I  have  reviewed  this  quarterly  report  on  Form  10-QSB  of  Davidson
      Diversified Real Estate III, L.P.;

2.    Based on my knowledge,  this report does not contain any untrue  statement
      of a material fact or omit to state a material fact  necessary to make the
      statements made, in light of the circumstances under which such statements
      were made,  not  misleading  with  respect  to the period  covered by this
      report;

3.    Based on my  knowledge,  the  financial  statements,  and other  financial
      information  included  in this  report,  fairly  present  in all  material
      respects the financial condition,  results of operations and cash flows of
      the small  business  issuer as of, and for, the periods  presented in this
      report;

4.    The  small  business  issuer's  other  certifying  officer(s)  and  I  are
      responsible  for  establishing  and  maintaining  disclosure  controls and
      procedures (as defined in Exchange Act Rules  13a-15(e) and 15d-15(e)) for
      the small business issuer and have:

      (a)   Designed such  disclosure  controls and  procedures,  or caused such
            disclosure   controls  and  procedures  to  be  designed  under  our
            supervision,  to ensure that  material  information  relating to the
            small business issuer, including its consolidated  subsidiaries,  is
            made  known to us by  others  within  those  entities,  particularly
            during the period in which this report is being prepared;

      (b)   Evaluated  the   effectiveness   of  the  small  business   issuer's
            disclosure  controls and procedures and presented in this report our
            conclusions about the  effectiveness of the disclosure  controls and
            procedures, as of the end of the period covered by this report based
            on such evaluation; and

      (c)   Disclosed in this report any change in the small  business  issuer's
            internal  control over financial  reporting that occurred during the
            small  business  issuer's  most  recent  fiscal  quarter  (the small
            business  issuer's  fourth  fiscal  quarter in the case of an annual
            report) that has  materially  affected,  or is reasonably  likely to
            materially affect, the small business issuer's internal control over
            financial reporting; and

5.    The  small  business  issuer's  other  certifying  officer(s)  and I  have
      disclosed,  based on our most recent  evaluation of internal  control over
      financial reporting, to the small business issuer's auditors and the audit
      committee of the small  business  issuer's  board of directors (or persons
      performing the equivalent functions):

      (a)   All significant  deficiencies and material  weaknesses in the design
            or operation of internal control over financial  reporting which are
            reasonably  likely to adversely  affect the small business  issuer's
            ability  to  record,   process,   summarize  and  report   financial
            information; and

      (b)   Any fraud,  whether or not  material,  that  involves  management or
            other  employees who have a significant  role in the small  business
            issuer's internal control over financial reporting.

Date:  November 12, 2004

                                 /s/Stephen B. Waters
                                Stephen B. Waters
                                Vice    President   of   Davidson    Diversified
                                Properties,   Inc.,   equivalent  of  the  chief
                               financial officer of the Partnership


<PAGE>

Exhibit 32.1


                          Certification of CEO and CFO
                       Pursuant to 18 U.S.C. Section 1350,
                             As Adopted Pursuant to
                   Section 906 of the Sarbanes-Oxley Act of 2002



In connection with the Quarterly  Report on Form 10-QSB of Davidson  Diversified
Real Estate III,  L.P.  (the  "Partnership"),  for the  quarterly  period  ended
September 30, 2004 as filed with the Securities  and Exchange  Commission on the
date hereof  (the  "Report"),  Martha L. Long,  as the  equivalent  of the Chief
Executive  Officer of the Partnership,  and Stephen B. Waters, as the equivalent
of the Chief  Financial  Officer  of the  Partnership,  each  hereby  certifies,
pursuant to 18 U.S.C.  Section 1350,  as adopted  pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

      (1)   The Report fully complies with the  requirements of Section 13(a) or
            15(d) of the Securities Exchange Act of 1934; and

      (2)   The  information  contained in the Report  fairly  presents,  in all
            material respects, the financial condition and results of operations
            of the Partnership.


                                           /s/Martha L. Long
                                    Name:  Martha L. Long
                                    Date:  November 12, 2004


                                           /s/Stephen B. Waters
                                    Name:  Stephen B. Waters
                                    Date:  November 12, 2004


This  certification is furnished with this Report pursuant to Section 906 of the
Sarbanes-Oxley  Act of 2002 and shall not be deemed filed by the Partnership for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.