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 June 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 ___


<PAGE>



                         PART I - FINANCIAL INFORMATION


ITEM 1.     FINANCIAL STATEMENTS



                 DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

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


                                  June 30, 2004
<TABLE>
<CAPTION>

Assets
<S>                                                                          <C>
   Cash and cash equivalents                                                 $ 231
   Receivables and deposits                                                      427
   Other assets                                                                  350
   Investment properties:
      Land                                                    $ 2,821
      Buildings and related personal property                   40,619
                                                                43,440
      Less accumulated depreciation                            (25,096)       18,344
                                                                            $ 19,352

Liabilities and Partners' Deficit
Liabilities
   Accounts payable                                                          $ 193
   Tenant security deposit liabilities                                           136
   Accrued property taxes (Note E)                                               323
   Other liabilities                                                             157
   Due to affiliate (Note B)                                                  10,709
   Mortgage notes payable                                                     20,461

Partners' Deficit
   General partners                                            $ (253)
   Limited partners (1,011.5 units issued and
      outstanding)                                             (12,374)      (12,627)
                                                                            $ 19,352


        See Accompanying Notes to Consolidated Financial Statements
</TABLE>

<PAGE>

                 DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

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

<TABLE>
<CAPTION>
                                        Three Months Ended            Six Months Ended
                                             June 30,                     June 30,
                                        2004          2003           2004          2003

Revenues:
<S>                                    <C>            <C>          <C>            <C>
  Rental income                        $ 1,163        $ 984        $ 2,329        $ 1,934
  Other income                             176           154            349            288
  Casualty gain (Note D)                    --            --             --             62
      Total revenues                     1,339         1,138          2,678          2,284

Expenses:
  Operating                                787           596          1,448          1,167
  General and administrative                51            45             93            103
  Depreciation                             489           437            977            854
  Interest                                 524           525          1,034            964
  Property taxes                           104           116            206            233
      Total expenses                     1,955         1,719          3,758          3,321

Net loss                               $ (616)       $ (581)       $ (1,080)     $ (1,037)

Net loss allocated to general
  partners (2%)                         $ (13)        $ (12)        $ (22)         $ (21)
Net loss allocated to limited
  partners (98%)                          (603)         (569)        (1,058)        (1,016)

                                       $ (616)       $ (581)       $ (1,080)     $ (1,037)

Net loss per limited partnership
  unit                                $(596.14)     $(562.53)     $(1,045.97)   $(1,004.45)


        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 six months
   ended June 30, 2004                      --           (22)      (1,058)      (1,080)

Partners' deficit at
   June 30, 2004                       1,011.5        $ (253)    $(12,374)    $(12,627)


        See Accompanying Notes to Consolidated Financial Statements

</TABLE>

<PAGE>

                 DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

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

                                                                    Six Months Ended
                                                                        June 30,
                                                                    2004         2003
Cash flows from operating activities:
<S>                                                                <C>          <C>
  Net loss                                                         $(1,080)     $(1,037)
  Adjustments to reconcile net loss to net cash (used in)
   provided by operating activities:
     Depreciation                                                      977          854
     Amortization of mortgage discounts and loan costs                  16           34
     Bad debt expense                                                   55          125
     Casualty gain                                                      --          (62)
     Change in accounts:
      Receivables and deposits                                        (220)        (238)
      Other assets                                                    (106)         (83)
      Accounts payable                                                  36           51
      Tenant security deposit liabilities                               (7)          44
      Accrued property taxes                                            37          275
      Other liabilities                                                (69)          75
      Due to affiliate                                                 238          167
         Net cash (used in) provided by operating activities          (123)         205

Cash flows from investing activities:
  Insurance proceeds received                                           --           62
  Property improvements and replacements                              (399)      (2,022)
  Net withdrawals from restricted escrows                               --          570
         Net cash used in investing activities                        (399)      (1,390)

Cash flows from financing activities:
  Payments on mortgage notes payable                                   (64)         (86)
  Advances from affiliates                                             403        1,510
  Payments on advances from affiliates                                  (2)          --
         Net cash provided by financing activities                     337        1,424

Net (decrease) increase in cash and cash equivalents                  (185)         239
Cash and cash equivalents at beginning of period                       416          311

Cash and cash equivalents at end of period                          $ 231        $ 550

Supplemental disclosure of cash flow information:
  Cash paid for interest                                            $ 836       $ 1,024

Supplemental disclosure of non-cash information:
  Property improvements and replacements included in accounts
   payable                                                          $ 46         $ 640

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 six
months ended June 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 six month periods ended June 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 is  dependent  on the  Managing  General
Partner  and  its  affiliates  for  the  management  and  administration  of all
Partnership  activities.  The  Partnership  Agreement  provides  for (i) certain
payments to affiliates for services and (ii)  reimbursement  of certain expenses
incurred by affiliates on behalf of the Partnership. The following payments were
paid or accrued to the Managing  General  Partner and affiliates  during the six
months ended June 30, 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  $132,000  and $109,000 for the six months ended June 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
$78,000  and  $169,000  for the  six  months  ended  June  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  $95,000  for the six months  ended June 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 June 30,  2004,  approximately  $583,000 of  reimbursements  for
services were accrued by the Partnership and are included in due to affiliate on
the accompanying consolidated balance sheet.

During the six months ended June 30, 2003, the Managing General Partner advanced
the  Partnership  approximately  $403,000  and  $1,510,000,   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 June 30, 2004, the balance of the advances,  including
accrued  interest,  was  approximately  $10,126,000  and are  included in due to
affiliate on the accompanying consolidated balance sheet. Interest is charged at
the prime rate plus 2%. Interest expense was approximately  $247,000 and $64,000
for the six months ended June 30, 2004 and 2003, 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 six months  ended June 30, 2004 and
2003,  the  Partnership  was charged by AIMCO and its  affiliates  approximately
$35,000 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 six months ended
June 30, 2003, approximately $208,000 of interest, approximately $34,000 of real
estate taxes and approximately $102,000 of operating costs were capitalized.  No
such costs were capitalized during the six months ended June 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 six months ended June 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 tax
values. The Partnership is currently appealing 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. Due to the Partnership's  appeal of the reassessed property value,
the  property  tax accrual for 2004 and, in certain  situations,  the  remaining
liability  for the 2003 and 2002 property tax bills is based on the property tax
value as estimated by a third party property tax specialist.  If the Partnership
is  unsuccessful  in its  appeal,  it  could  potentially  be  liable  for up to
approximately $90,000 of additional property taxes related to 2002, 2003 and the
first two quarters of 2004. The Partnership believes that the recorded liability
is the best estimate of the amounts  ultimately to be paid for Indiana  property
taxes.

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 (the "Heller action")
was filed  against  the same  defendants  that are named in the  Nuanes  action,
captioned  Heller v.  Insignia  Financial  Group.  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  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.

On January 28, 2004,  Objector filed his opening brief in his pending 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.  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.
No hearing has been scheduled in the matter.

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  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
taken as a whole. Similarly,  the Managing General Partner does not believe that
the ultimate  outcome will have a material  adverse effect on the  Partnership's
financial condition or results of operations taken as a whole.

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 is conducting an  investigation  relating to
certain  matters.  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, and
capitalization of expenses and payroll.  AIMCO is cooperating  fully. AIMCO does
not believe that the ultimate outcome will have a material adverse effect on its
consolidated  financial  condition  or results of  operations  taken as a whole.
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 taken as a whole.

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 six
months ended June 30, 2004 and 2003:

                                                 Average Occupancy
                                                 2004        2003
         Salem Courthouse
            Indianapolis, Indiana                 88%         92%

         Plainview Apartments
            Louisville, Kentucky                  82%         56%

The  Managing  General  Partner  attributes  the  decrease in occupancy at Salem
Courthouse  Apartments to low interest  rates and increased  competition  in the
local market.

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 June 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  are  dependent  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  which are
outside the control of the  Partnership  such as the local economic  climate and
weather can adversely or positively impact the Partnership's financial results.

Results of Operations

The Partnership  recognized a net loss of approximately  $616,000 and $1,080,000
for the three and six  months  ended  June 30,  2004  compared  to a net loss of
approximately  $581,000 and  $1,037,000  for the three and six months ended June
30,  2003.  The  increase in net loss is due to an  increase  in total  expenses
partially offset by an increase in total revenues.

Total  expenses for both the three and six months ended June 30, 2004  increased
due to increases in operating and  depreciation  expense,  partially offset by a
decrease in property tax expense.  General and administrative  expenses remained
relatively constant between the comparable periods.  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 the increase in  occupancy,  as discussed  above.  Depreciation
expense  increased due to property  improvements  and  replacements  placed into
service during the past twelve months which are now being  depreciated.  For the
six months ended June 30, 2004,  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 was  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 tax values.  The Partnership is
currently  appealing the reassessed  property tax value of Salem Courthouse.  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. Due to the  Partnership's
appeal of the reassessed  property value, the property tax accrual for 2004 and,
in certain  situations,  the remaining  liability for the 2003 and 2002 property
tax bills is based on the  property  tax  value as  estimated  by a third  party
property tax specialist.  If the  Partnership is unsuccessful in its appeal,  it
could  potentially  be liable  for up to  approximately  $90,000  of  additional
property  taxes  related to 2002,  2003 and the first two quarters of 2004.  The
Partnership  believes  that the recorded  liability is the best  estimate of the
amounts ultimately to be paid for Indiana property taxes.

Included in general  and  administrative  expenses  for the three and six months
ended  June 30,  2004 are  reimbursements  to the  Managing  General  Partner as
allowed under the Partnership Agreement. In addition,  costs associated with the
quarterly and annual  communications  with investors and regulatory agencies and
the annual audit required by the Partnership are also included.

Total  revenues for both the three and six months ended June 30, 2004  increased
due to an increase in rental income and other  income.  For the six months ended
June 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 due to an increase in utility reimbursements
at Plainview Apartments, partially offset by a decrease in late charges 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 six months ended June 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 June 30, 2004, the Partnership had cash and cash equivalents of approximately
$231,000  compared to  approximately  $550,000 at June 30, 2003. The decrease in
cash and cash  equivalents of  approximately  $185,000 from December 31, 2003 is
due to  approximately  $399,000  and  $123,000  of cash  used in  investing  and
operating activities,  respectively,  partially offset by approximately $337,000
of cash  provided by financing  activities.  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, including increased legal and audit fees.
Capital  improvements  planned  for  both of the  Partnership's  properties  are
detailed below.

Plainview Apartments: During the six months ended June 30, 2004, the Partnership
completed approximately $114,000 in capital expenditures at Plainview Apartments
consisting  of  floor  covering   replacements,   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
$150,000 in capital  improvements  during the remainder of 2004.  The additional
capital  improvements  will consist  primarily of floor  covering  replacements,
swimming  pool  improvements,  lighting  and  furniture  and  fixture  upgrades.
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 six months ended June 30,  2004,  the
Partnership  completed  approximately  $96,000 of capital  improvements at Salem
Courthouse  Apartments,  consisting  primarily of floor  covering and  appliance
replacements  and building  improvements.  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
$117,000 in capital  improvements  during the remainder of 2004.  The additional
capital  improvements  will consist  primarily of floor  covering and  appliance
replacements,  parking  lot  resurfacing  and  interior  building  improvements.
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  $5,125,000 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 property cannot be refinanced or
sold for a  sufficient  amount,  the  Partnership  will risk losing the property
through foreclosure.

There were no distributions to the partners during the six months ended June 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 June 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 June 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.

                           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 (the "Heller action")
was filed  against  the same  defendants  that are named in the  Nuanes  action,
captioned  Heller v.  Insignia  Financial  Group.  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  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.

On January 28, 2004,  Objector filed his opening brief in his pending 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.  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.
No hearing has been scheduled in the matter.

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  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
taken as a whole. Similarly,  the Managing General Partner does not believe that
the ultimate  outcome will have a material  adverse effect on the  Partnership's
financial condition or results of operations taken as a whole.

ITEM 6      EXHIBITS AND REPORTS ON FORM 8-K

            a)    Exhibits

                  See Exhibit Index attached.

            b)    Reports on Form 8-K:

                  None filed during the quarter ended June 30, 2004.


<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: August 13, 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:  August 13, 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:  August 13, 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 June
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:  August 13, 2004


                                           /s/Stephen B. Waters
                                    Name:  Stephen B. Waters
                                    Date:  August 13, 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.