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, 2005


[ ]   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, 2005

<TABLE>
<CAPTION>

<S>                                                            <C>            <C>
Assets
   Cash and cash equivalents                                                 $ 301
   Receivables and deposits                                                      490
   Other assets                                                                  362
   Investment properties:
      Land                                                    $ 2,821
      Buildings and related personal property                   41,525
                                                               44,346
      Less accumulated depreciation                            (27,035)       17,311
                                                                            $ 18,464

Liabilities and Partners' Deficit
Liabilities
   Accounts payable                                                           $ 48
   Tenant security deposit liabilities                                           125
   Accrued property taxes                                                        316
   Other liabilities                                                             234
   Deferred tax liability (Note C)                                               301
   Due to affiliates (Note B)                                                 11,781
   Mortgage notes payable                                                     20,318

Partners' Deficit
   General partners                                            $ (293)
   Limited partners (1,011.5 units issued and
      outstanding)                                             (14,366)      (14,659)
                                                                            $ 18,464

            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,
<S>                                     <C>           <C>            <C>           <C>
                                        2005          2004           2005          2004

Revenues:
  Rental income                        $ 1,373       $ 1,163       $ 2,713        $ 2,329
  Other income                             193           176            376            349
      Total revenues                     1,566         1,339          3,089          2,678

Expenses:
  Operating                                755           787          1,526          1,448
  General and administrative                58            51            103             93
  Depreciation                             487           489            972            977
  Interest                                 618           524          1,210          1,034
  Property taxes                            98           104            192            206
  Deferred tax expense (Note C)            301            --            301             --
      Total expenses                     2,317         1,955          4,304          3,758

Net loss                               $ (751)       $ (616)       $ (1,215)     $ (1,080)

Net loss allocated to general
  partners (2%)                         $ (15)        $ (13)        $ (24)         $ (22)
Net loss allocated to limited
  partners (98%)                          (736)         (603)        (1,191)        (1,058)

                                       $ (751)       $ (616)       $ (1,215)     $ (1,080)

Net loss per limited partnership
  unit                                $(727.63)     $(596.14)     $(1,177.46)   $(1,045.97)


            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, 2004                   1,011.5        $ (269)    $(13,175)    $(13,444)

Net loss for the six months
   ended June 30, 2005                      --           (24)      (1,191)      (1,215)

Partners' deficit at
   June 30, 2005                       1,011.5        $ (293)    $(14,366)    $(14,659)


            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,
<S>                                                                 <C>          <C>
                                                                    2005         2004
Cash flows from operating activities:
  Net loss                                                         $(1,215)     $(1,080)
  Adjustments to reconcile net loss to net cash provided by
   (used in) by operating activities:
     Depreciation                                                      972          977
     Amortization of mortgage discounts and loan costs                  16           16
     Bad debt expense                                                   45           55
     Change in accounts:
      Receivables and deposits                                          21         (220)
      Other assets                                                    (105)        (106)
      Accounts payable                                                 (44)          36
      Tenant security deposit liabilities                                2           (7)
      Accrued property taxes                                            89           37
      Other liabilities                                                (10)         (69)
      Deferred tax liability                                           301           --
      Due to affiliates                                                454          238
         Net cash provided by (used in) operating activities           526         (123)

Cash flows used in investing activities:
  Property improvements and replacements                              (385)        (399)

Cash flows from financing activities:
  Payments on mortgage notes payable                                   (66)         (64)
  Advances from affiliates                                              --          403
  Payments on advances from affiliates                                  --           (2)
         Net cash  (used in) provided by financing activities          (66)         337

Net increase (decrease) in cash and cash equivalents                    75         (185)
Cash and cash equivalents at beginning of period                       226          416

Cash and cash equivalents at end of period                          $ 301        $ 231

Supplemental disclosure of cash flow information:
  Cash paid for interest                                            $ 809        $ 836

Supplemental disclosure of non-cash information:
  Property improvements and replacements included in accounts
   payable                                                          $ 15         $ 46

At  December  31, 2003  approximately  $235,000  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.


            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,
2005 are not necessarily  indicative of the results that may be expected for the
year  ending  December  31,  2005.  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, 2004.
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 six months
ended June 30, 2005 and 2004.

Affiliates of the Managing  General  Partner  received 5% of gross receipts from
both  of  the  Partnership's   investment   properties  for  providing  property
management  services.  The  Partnership  paid to such  affiliates  approximately
$152,000  and  $132,000  for the six  months  ended  June  30,  2005  and  2004,
respectively, which is included in operating expenses.

Affiliates of the Managing General Partner charged the Partnership reimbursement
of accountable  administrative  expenses amounting to approximately $109,000 and
$78,000 for the six months ended June 30, 2005 and 2004, respectively,  which is
included in general and administrative  expenses and investment properties.  The
portion of these  reimbursements  included in investment  properties for the six
months ended June 30, 2005 and 2004 are fees related to construction  management
services   provided  by  an  affiliate  of  the  Managing   General  Partner  of
approximately $36,000 and $13,000. The construction management services fees are
calculated based on a percentage of additions to investment properties.  At June
30, 2005,  approximately  $774,000 of reimbursements for services and associated
interest were accrued by the  Partnership  and are included in due to affiliates
on the accompanying consolidated balance sheet.

During the six months ended June 30, 2005, no advances were made by the Managing
General Partner to the  Partnership.  During the six months ended June 30, 2004,
the Managing General Partner advanced the Partnership approximately $403,000 for
redevelopment  costs and  operational  expenses at Plainview  Apartments.  These
advances were made in accordance with the terms of the Partnership Agreement. At
June 30, 2005,  the balance of the advances,  including  accrued  interest,  was
approximately   $11,007,000  and  is  included  in  due  to  affiliates  on  the
accompanying  consolidated balance sheet.  Interest is charged at the prime rate
plus 2% (8.25% at June 30, 2005).  Interest expense was  approximately  $358,000
and $247,000 for the six months ended June 30, 2005 and 2004, 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,   general
liability 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 2005 and 2004 from both
AIMCO and a third party. During the six months ended June 30, 2005 and 2004, the
Partnership  was charged by AIMCO and its affiliates  approximately  $81,000 and
$68,000  for  insurance   coverage  and  fees   associated  with  policy  claims
administration.

Note C - Partnership Income Taxes

The state of Kentucky has recently enacted tax legislation,  effective for years
beginning on or after January 1, 2005,  concerning income taxes that will impact
the  Partnership.  One of the  provisions  of the  legislation  will require the
Partnership to be liable for any Kentucky income taxes that arise as a result of
one of the Partnership's properties,  Plainview Apartments, being located in the
state of  Kentucky.  The  Partnership  has  estimated  that at June  30,  2005 a
deferred tax liability exists of approximately  $301,000 as a result of this tax
legislation and accordingly recorded such liability during the second quarter of
2005.

Note D - 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 28, 2002, the trial court granted  defendants
motion to strike the complaint. Plaintiffs took an appeal from this order.

On January 8, 2003,  the parties filed a  Stipulation  of Settlement in proposed
settlement of the Nuanes  action and the Heller  action.  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 May 4, 2004, the Objector filed a
second appeal  challenging  the court's use of a referee and its order requiring
Objector to pay those fees.

On March 21, 2005, the Court of Appeals issued opinions in both pending appeals.
With regard to the settlement and judgment entered thereto, the Court of Appeals
vacated  the trial  court's  order and  remanded  to the trial court for further
findings  on the basis that the "state of the record is  insufficient  to permit
meaningful  appellate  review".  With regard to the second appeal,  the Court of
Appeals  reversed the order requiring the Objector to pay referee fees. On April
26, 2005,  the Court of Appeals  lifted the stay of a pending  appeal related to
the Heller action and the trial court's order striking the  complaint.  On April
28, 2005, the Objector  filed a Petition for Review with the California  Supreme
Court in connection with the opinion vacating the order approving settlement and
remanding for further findings.  On June 10, 2005, the California  Supreme Court
denied  Objector's  Petition for Review and the Court of Appeals sent the matter
back to the trial court on June 21,  2005.  The parties  intend to ask the trial
court to make further findings in connection with settlement consistent with the
Court of Appeal's  remand order.  With respect to the related Heller appeal,  on
July 28, 2005, the Court of Appeal reversed the trial court's order striking the
first amended complaint.

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.

As previously disclosed,  AIMCO Properties L.P. and NHP Management Company, both
affiliates of the Managing General Partner, are defendants in a lawsuit alleging
that they 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.  The  complaint  attempts to bring 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. and
NHP Management  Company failed to compensate  maintenance  workers for time that
they were required to be "on-call".  Additionally,  the complaint  alleges AIMCO
Properties  L.P. and NHP  Management  Company  failed to comply with the FLSA in
compensating maintenance workers for time that they worked in excess of 40 hours
in a week. On June 23, 2005 the Court  conditionally  certified  the  collective
action  on both the  on-call  and  overtime  issues.  The  Court  ruling  allows
plaintiffs  to  provide  notice  of the  collective  action  to  all  non-exempt
maintenance  workers from August 7, 2000 through the  present.  Those  employees
will have the  opportunity to opt-in to the collective  action.  Defendants have
asked the Court to  reconsider  its  ruling or in the  alternative  certify  the
ruling for appeal on that issue. After the notice goes out, defendants will have
the  opportunity to move to decertify the collective  action.  The Court further
denied plaintiffs' Motion for Certification of the state subclass.  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
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.

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.

Environmental

Various  Federal,  state and local laws subject  property owners or operators to
liability for management,  and the costs of removal or  remediation,  of certain
hazardous  substances  present on a property.  Such laws often impose  liability
without regard to whether the owner or operator knew of, or was responsible for,
the release or presence of the  hazardous  substances.  The  presence of, or the
failure to manage or remedy properly,  hazardous substances may adversely affect
occupancy at affected  apartment  communities and the ability to sell or finance
affected properties.  In addition to the costs associated with investigation and
remediation  actions  brought by government  agencies,  and  potential  fines or
penalties  imposed by such  agencies in  connection  therewith,  the presence of
hazardous  substances on a property could result in claims by private plaintiffs
for personal injury, disease, disability or other infirmities. Various laws also
impose  liability for the cost of removal,  remediation or disposal of hazardous
substances  through a  licensed  disposal  or  treatment  facility.  Anyone  who
arranges for the disposal or treatment of hazardous  substances  is  potentially
liable  under such laws.  These laws often impose  liability  whether or not the
person arranging for the disposal ever owned or operated the disposal  facility.
In connection  with the ownership,  operation and management of its  properties,
the Partnership  could  potentially be liable for  environmental  liabilities or
costs associated with its properties.

Mold

The Partnership is aware of lawsuits  against owners and managers of multifamily
properties asserting claims of personal injury and property damage caused by the
presence of mold, some of which have resulted in substantial  monetary judgments
or settlements. The Partnership has only limited insurance coverage for property
damage loss claims  arising from the  presence of mold and for  personal  injury
claims related to mold exposure. Affiliates of the Managing General Partner have
implemented a national  policy and  procedures to prevent or eliminate mold from
its properties  and the Managing  General  Partner  believes that these measures
will  minimize  the  effects  that mold could have on  residents.  To date,  the
Partnership  has not  incurred  any material  costs or  liabilities  relating to
claims of mold exposure. During 2003, the Partnership completed a rehabilitation
project at Plainview Apartments which cost approximately $5,300,000. Part of the
rehabilitation  project was to address mold abatement  conditions  with the rest
relating to general updating of the property.  Because the law regarding mold is
unsettled  and  subject  to change  the  Managing  General  Partner  can make no
assurance  that  liabilities  resulting from the presence of or exposure to mold
will  not have a  material  adverse  effect  on the  Partnership's  consolidated
financial condition or results of operations.

SEC Investigation

The  Central  Regional  Office of the  United  States  Securities  and  Exchange
Commission (the "SEC")  continues its 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  have included  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, tax credit transactions,  and
tender offers for limited  partnership  interests.  AIMCO is cooperating  fully.
AIMCO is not able to predict when the investigation 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 OF 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, 2005 and 2004:
<TABLE>
<CAPTION>

                                                 Average Occupancy
<S>                                               <C>        <C>
                                                  2005       2004
         Salem Courthouse
            Indianapolis, Indiana                 90%         88%

         Plainview Apartments
            Louisville, Kentucky                  95%         82%
</TABLE>

The Managing  General Partner  attributes the increase in occupancy at Plainview
Apartments to a redevelopment  project which was completed in December 2003 that
made  the  property  more  competitive  in the  local  market  and to  increased
employment opportunities in the local market.

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  $751,000 and $1,215,000
for the three and six  months  ended  June 30,  2005  compared  to a net loss of
approximately  $616,000 and  $1,080,000  for the three and six months ended June
30, 2004.  The increase in net loss for both the three and six months ended June
30, 2005 is due to an increase in total expenses partially offset by an increase
in total  revenues.  Total revenues for both the three and six months ended June
30, 2005 increased due to an increase in rental income and other income.  Rental
income  increased  due to an increase in occupancy  and average  rental rates at
both  properties  and a  decrease  in  bad  debt  expense  at  Salem  Courthouse
Apartments. Other income increased due to an increase in utility reimbursements,
lease  cancellation  fees, and cleaning and damage fees at Plainview  Apartments
partially offset by a decrease in late fees, lease  cancellation fees, and legal
fees at Salem Courthouse Apartments.

Total expenses increased for the six months ended June 30, 2005 due to increases
in  operating,  general and  administrative,  interest and deferred tax expenses
partially  offset by a decrease in property  tax expense.  Depreciation  expense
remained  relatively  constant  for the  comparable  period.  Operating  expense
increased due to an increase in property  expense and property  management  fees
partially  offset  by  a  decrease  in  maintenance  expense.  Property  expense
increased  due to an  increase  in utility  expense  and  salaries  and  related
employee benefits at both of the Partnership's  investment properties.  Property
management  fees  increased  as a  result  of the  increase  in  rental  income,
predominately at Plainview Apartments,  on which such fee is based.  Maintenance
expense  decreased due to a decrease in contract  repairs expense at both of the
Partnership's  investment  properties.  Interest  expense  increased  due  to an
increase in the variable interest rate charged on the mortgage encumbering Salem
Courthouse  Apartments and an increase in the prime rate which is charged on the
advances from affiliates of the Managing General  Partner.  Property tax expense
decreased  due  to the  successful  appeal  of the  reassessed  value  of  Salem
Courthouse Apartments during 2004.

The state of Kentucky has recently enacted tax legislation,  effective for years
beginning on or after January 1, 2005,  concerning income taxes that will impact
the  Partnership.  One of the  provisions  of the  legislation  will require the
Partnership to be liable for any Kentucky income taxes that arise as a result of
one of the Partnership's properties,  Plainview Apartments, being located in the
state of  Kentucky.  The  Partnership  has  estimated  that at June  30,  2005 a
deferred tax liability exists of approximately  $301,000 as a result of this tax
legislation and accordingly recorded such liability during the second quarter of
2005.

Total  expenses  increased  for the  three  months  ended  June 30,  2005 due to
increases in interest,  general and administrative and deferred tax expenses, as
discussed above and below partially  offset by a decrease in operating  expense.
Depreciation  and  property tax expenses  remained  relatively  constant for the
comparable period.  Operating expense decreased due to a decrease in maintenance
expense partially offset by an increase in property expense. Maintenance expense
decreased  due  to a  decrease  in  contract  repairs  expense  at  both  of the
Partnership's  investment  properties.  Property  expense  increased  due  to an
increase in utility expense at both of the Partnership's  investment  properties
and salaries and related benefits at Salem Courthouse Apartments.

General and administrative expenses increased for the three and six months ended
June 30, 2005 due to an  increase  in  reimbursements  to the  Managing  General
Partner as allowed under the  Partnership  Agreement and costs  associated  with
investor  communications.  In addition,  costs associated with the quarterly and
annual  communications  with  investors and  regulatory  agencies and the annual
audit required by the Partnership Agreement are also included.

Liquidity and Capital Resources

At June 30, 2005, the Partnership had cash and cash equivalents of approximately
$301,000  compared to  approximately  $231,000 at June 30, 2004. The increase in
cash and cash equivalents of approximately $75,000 from December 31, 2004 is due
to  approximately  $526,000 of cash provided by operating  activities  partially
offset by  approximately  $385,000  and  $66,000 of cash used in  investing  and
financing activities,  respectively. Cash used in investing activities consisted
of property  improvements and  replacements.  Cash used in financing  activities
consisted  of  principal  payments  made  on  the  mortgage   encumbering  Salem
Courthouse  Apartments.  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 six months ended June 30, 2005, the Partnership
completed  approximately $85,000 in capital expenditures at Plainview Apartments
consisting  of floor  covering  and water  heater  replacements,  furniture  and
fixture upgrades, and swimming pool improvements. These expenditures were funded
from  operating  cash flow.  The  Partnership  regularly  evaluates  the capital
improvement  needs  of the  property.  While  the  Partnership  has no  material
commitments for property improvements and replacements,  certain routine capital
expenditures are anticipated during 2005. Such capital  expenditures 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,  2005,  the
Partnership  completed  approximately  $315,000 of capital improvements at Salem
Courthouse  Apartments,  consisting  primarily of floor  covering and  appliance
replacements,  exterior  upgrades,  plumbing fixtures,  air conditioning  units,
interior   painting  of  common  areas  and   structural   improvements.   These
improvements  were funded from operating cash flow.  The  Partnership  regularly
evaluates the capital  improvement needs of the property.  While the Partnership
has no material commitments for property improvements and replacements,  certain
routine  capital   expenditures  are  anticipated   during  2005.  Such  capital
expenditures  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 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  $4,982,000 has a maturity date of
September  15,  2007 at which  time a  balloon  payment  totaling  approximately
$4,688,000 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.


<PAGE>


There were no distributions to the partners during the six months ended June 30,
2005 and 2004. Future cash  distributions  will depend on the levels of net cash
generated from operations, the timing of debt maturities,  property sales and/or
refinancings. 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, 2005, there can be no assurance that the Partnership
will generate sufficient funds from operations,  after capital expenditures,  to
permit any distributions to its partners during 2005 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, 2005. 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

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.



<PAGE>


Revenue Recognition

The Partnership generally leases apartment units for twelve-month terms or less.
The Partnership will offer rental concessions during particularly slow months or
in response  to heavy  competition  from other  similar  complexes  in the area.
Rental income attributable to leases, net of any concessions, is recognized on a
straight-line  basis over the term of the lease.  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.

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 28, 2002, the trial court granted  defendants
motion to strike the complaint. Plaintiffs took an appeal from this order.

On January 8, 2003,  the parties filed a  Stipulation  of Settlement in proposed
settlement of the Nuanes  action and the Heller  action.  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 May 4, 2004, the Objector filed a
second appeal  challenging  the court's use of a referee and its order requiring
Objector to pay those fees.

On March 21, 2005, the Court of Appeals issued opinions in both pending appeals.
With regard to the settlement and judgment entered thereto, the Court of Appeals
vacated  the trial  court's  order and  remanded  to the trial court for further
findings  on the basis that the "state of the record is  insufficient  to permit
meaningful  appellate  review".  With regard to the second appeal,  the Court of
Appeals  reversed the order requiring the Objector to pay referee fees. On April
26, 2005,  the Court of Appeals  lifted the stay of a pending  appeal related to
the Heller action and the trial court's order striking the  complaint.  On April
28, 2005, the Objector  filed a Petition for Review with the California  Supreme
Court in connection with the opinion vacating the order approving settlement and
remanding for further findings.  On June 10, 2005, the California  Supreme Court
denied  Objector's  Petition for Review and the Court of Appeals sent the matter
back to the trial court on June 21,  2005.  The parties  intend to ask the trial
court to make further findings in connection with settlement consistent with the
Court of Appeal's  remand order.  With respect to the related Heller appeal,  on
July 28, 2005, the Court of Appeal reversed the trial court's order striking the
first amended complaint.

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.

As previously disclosed,  AIMCO Properties L.P. and NHP Management Company, both
affiliates of the Managing General Partner, are defendants in a lawsuit alleging
that they 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.  The  complaint  attempts to bring 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. and
NHP Management  Company failed to compensate  maintenance  workers for time that
they were required to be "on-call".  Additionally,  the complaint  alleges AIMCO
Properties  L.P. and NHP  Management  Company  failed to comply with the FLSA in
compensating maintenance workers for time that they worked in excess of 40 hours
in a week. On June 23, 2005 the Court  conditionally  certified  the  collective
action  on both the  on-call  and  overtime  issues.  The  Court  ruling  allows
plaintiffs  to  provide  notice  of the  collective  action  to  all  non-exempt
maintenance  workers from August 7, 2000 through the  present.  Those  employees
will have the  opportunity to opt-in to the collective  action.  Defendants have
asked the Court to  reconsider  its  ruling or in the  alternative  certify  the
ruling for appeal on that issue. After the notice goes out, defendants will have
the  opportunity to move to decertify the collective  action.  The Court further
denied plaintiffs' Motion for Certification of the state subclass.  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
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.

ITEM 5.     OTHER INFORMATION

            None.

ITEM 6      EXHIBITS

            See Exhibit Index.



<PAGE>


                                   SIGNATURES



In accordance  with the  requirements  of the Exchange  Act, the small  business
issuer  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 12, 2005



<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.



<PAGE>


                    DAVIDSON DIVERSIFIED REAL ESTATE III, LP
                            EXHIBIT INDEX (continued)

      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 and filed on
                  November 12, 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
                  and filed on November 12, 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
                  and filed on November 12, 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 and filed on November 12, 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 and filed on November 12, 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
                  and filed on November 12, 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 of the equivalent of the Chief Executive Officer
                  and Chief  Financial  Officer  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 12, 2005

                                /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 12, 2005

                                    /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, 2005 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 12, 2005


                                           /s/Stephen B. Waters
                                    Name:  Stephen B. Waters
                                    Date:  August 12, 2005


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.