0

                                  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 March 31, 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 ___


                         PART I - FINANCIAL INFORMATION


ITEM 1.     FINANCIAL STATEMENTS


                  DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

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


                                 March 31, 2005

<TABLE>
<CAPTION>


Assets
<S>                                                                          <C>
   Cash and cash equivalents                                                 $ 202
   Receivables and deposits                                                      650
   Other assets                                                                  374
   Investment properties:
      Land                                                    $ 2,821
      Buildings and related personal property                   41,331
                                                                44,152
      Less accumulated depreciation                            (26,548)       17,604
                                                                            $ 18,830

Liabilities and Partners' Deficit
Liabilities
   Accounts payable                                                          $ 180
   Tenant security deposit liabilities                                           123
   Accrued property taxes                                                        321
   Other liabilities                                                             221
   Due to affiliates (Note B)                                                 11,542
   Mortgage notes payable                                                     20,351

Partners' Deficit
   General partners                                            $ (278)
   Limited partners (1,011.5 units issued and
      outstanding)                                             (13,630)      (13,908)
                                                                            $ 18,830

         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
                                                                    March 31,
                                                               2005          2004
Revenues:
<S>                                                          <C>            <C>
   Rental income                                             $ 1,340        $ 1,166
   Other income                                                   183           173
      Total revenues                                            1,523         1,339

Expenses:
   Operating                                                      771           661
   General and administrative                                      45            42
   Depreciation                                                   485           488
   Interest                                                       592           510
   Property taxes                                                  94           102
      Total expenses                                            1,987         1,803

Net loss                                                      $ (464)       $ (464)

Net loss allocated to general partners (2%)                    $ (9)         $ (9)
Net loss allocated to limited partners (98%)                     (455)         (455)

                                                              $ (464)       $ (464)

Net loss per limited partnership unit                        $(449.83)     $(449.83)

         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 three months
   ended March 31, 2005                     --            (9)        (455)        (464)

Partners' deficit at
   March 31, 2005                      1,011.5        $ (278)    $(13,630)    $(13,908)

         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>

                                                                    Three Months Ended
                                                                         March 31,
                                                                     2005         2004

Cash flows from operating activities:
<S>                                                                 <C>          <C>
  Net loss                                                          $ (464)      $ (464)
  Adjustments to reconcile net loss to net cash provided by
   operating activities:
     Depreciation                                                       485          488
     Amortization of mortgage discounts and loan costs                    8            8
     Change in accounts:
      Receivables and deposits                                          (94)        (244)
      Other assets                                                     (109)        (141)
      Accounts payable                                                   58           82
      Tenant security deposit liabilities                                --            1
      Accrued property taxes                                             94          103
      Other liabilities                                                 (23)          33
      Due to affiliates                                                 215          143
         Net cash provided by operating activities                      170            9

Cash flows used in investing activities:
  Property improvements and replacements                               (161)        (298)

Cash flows from financing activities:
  Payments on mortgage notes payable                                    (33)         (32)
  Advances from affiliate                                                --          263
         Net cash (used in) provided by financing activities            (33)         231

Net decrease in cash and cash equivalents                               (24)         (58)
Cash and cash equivalents at beginning of period                        226          416

Cash and cash equivalents at end of period                           $ 202        $ 358

Supplemental disclosure of cash flow information:
  Cash paid for interest                                             $ 400        $ 382

Supplemental disclosure of non-cash information:
  Property improvements and replacements included in
   accounts payable                                                  $ 45         $ --

At December  31,  2003,  approximately  $235,000 of  property  improvements  and
replacements  were  included  in accounts  payable and are  included in property
improvements and replacements during the three months ended March 31, 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 month period ended March 31, 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 three months
ended March 31, 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
$74,000  and  $65,000  for the  three  months  ended  March  31,  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  $81,000 and
$50,000 for the three months ended March 31, 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
three  months  ended  March 31, 2005 and 2004 are fees  related to  construction
management  services provided by an affiliate of the Managing General Partner of
approximately $31,000 and $12,000. The construction management services fees are
calculated  based on a  percentage  of  current  year  additions  to  investment
properties.  At March 31, 2005,  approximately  $725,000 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 three  months  ended March 31,  2005,  no  advances  were made by the
Managing General Partner to the Partnership. During the three months ended March
31, 2004, the Managing  General Partner  advanced the Partnership  approximately
$263,000  for  redevelopment   costs  and  operational   expenses  at  Plainview
Apartments.

These  advances  were  made in  accordance  with the  terms  of the  Partnership
Agreement.  At March 31, 2005,  the balance of the advances,  including  accrued
interest, was approximately  $10,817,000 and is included in due to affiliates on
the accompanying  consolidated  balance sheet.  Interest is charged at the prime
rate plus 2%  (7.75% at March 31,  2005).  Interest  expense  was  approximately
$169,000  and  $121,000  for the three  months  ended  March 31,  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  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 three months ended March 31, 2005, the Partnership was charged
by AIMCO and its affiliates  approximately $49,000 for hazard insurance coverage
and fees associated with policy claims  administration.  Additional charges will
be incurred by the  Partnership  during 2005 as other  insurance  policies renew
later in the year.  The  Partnership  was  charged  by AIMCO and its  affiliates
approximately  $68,000 for insurance  coverage and fees  associated  with policy
claims administration during the year ended December 31, 2004.

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 is not able to estimate at this time what, if
any, current income tax or deferred income tax asset/(liability)  might exist at
March 31, 2005 or for the year ending December 31, 2005 as the state of Kentucky
has not yet issued  regulations  as to how the new tax is to be  calculated  and
implemented.

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.

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.  The Managing General Partner and its affiliates
are  currently  scheduled  to file an answer to  Objector's  petition on May 18,
2005.

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.

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  responding to a
call  while  "on-call."  The  defendants  have  filed an answer  to the  amended
complaint  denying the substantive  allegations.  Oral argument  relating to the
certification  of the  collective  action  took  place  on May 12,  2005 and the
parties await a ruling from the Court. Although the outcome of any litigation is
uncertain,  AIMCO  Properties,  L.P. does not believe that the ultimate  outcome
will have a material  adverse  effect on its  financial  condition or results of
operations.  Similarly,  the Managing  General Partner does not believe that the
ultimate  outcome  will have a  material  adverse  effect  on the  Partnership's
consolidated financial condition or results of operations.

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

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,  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  and  operation  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  eliminate,  or at least  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") is conducting a formal investigation  relating to certain
matters.  Although  the staff of the SEC is not limited in the areas that it may
investigate,   AIMCO  believes  the  areas  of  investigation   include  AIMCO's
miscalculated   monthly  net  rental  income  figures  in  third  quarter  2003,
forecasted  guidance,  accounts  payable,  rent  concessions,   vendor  rebates,
capitalization  of payroll and certain other costs and tax credit  transactions.
At the end of the first quarter of 2005, the SEC added certain tender offers for
limited partnership interests as an area of investigation.  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
three months ended March 31, 2005 and 2004:

                                                 Average Occupancy
                                                 2005        2004
         Salem Courthouse
            Indianapolis, Indiana                 85%         91%

         Plainview Apartments
            Louisville, Kentucky                  96%         81%

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

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.

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 $464,000 for each of the
three  months  ending  March 31, 2005 and March 31,  2004.  For the three months
ended March 31, 2005,  total revenues and total expenses  increased  compared to
the three  months  ended March 31,  2004.  Total  revenues  increased  due to an
increase in rental and other income.  Rental income increased due to an increase
in occupancy at Plainview Apartments,  an increase in the average rental rate at
both  properties  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
and  lease  cancellation  fees at  Plainview  Apartments  partially  offset by a
decrease  in  late  fees  and  lease   cancellation  fees  at  Salem  Courthouse
Apartments.

Total  expenses  increased  for the three  months ended March 31, 2005 due to an
increase in operating  and interest  expense  partially  offset by a decrease in
property tax  expense.  General and  administrative  and  depreciation  expenses
remained  relatively  constant for the  comparable  periods.  Operating  expense
increased due to an increase in property expense  partially offset by a decrease
in  maintenance  expense.  Property  expense  increased  due to an  increase  in
salaries and related expense at Plainview  Apartments and an increase in utility
expense at both of the Partnership's investment properties.  Maintenance expense
decreased  due to a decrease  in contract  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.

Included  in general  and  administrative  expenses  are  reimbursements  to the
Managing General Partner allowed under the Partnership Agreement associated with
the  management  of the  Partnership.  In addition,  costs  associated  with the
quarterly and annual  communications  with investors and regulatory agencies and
the annual audit required by the Partnership are also included.

Liquidity and Capital Resources

At  March  31,  2005,  the  Partnership   had  cash  and  cash   equivalents  of
approximately $202,000 compared to approximately $358,000 at March 31, 2004. The
decrease in cash an cash equivalents of approximately  $24,000 from December 31,
2004 is due to approximately  $161,000 and $33,000 of cash used in investing and
financing activities,  respectively,  partially offset by approximately $170,000
of cash  provided by operating  activities.  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  three  months  ended  March 31,  2005,  the
Partnership completed approximately $43,000 in capital expenditures at Plainview
Apartments  consisting  of floor  covering  replacements,  furniture and fixture
upgrades and water heaters.  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 three months ended March 31, 2005, the
Partnership  completed  approximately  $163,000 of capital improvements at Salem
Courthouse  Apartments,  consisting  primarily of floor  covering and  appliance
replacements,  exterior upgrades and plumbing fixtures.  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  $5,015,000 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.

There were no  distributions to the partners during the three months ended March
31, 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 March 31, 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 March 31,  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.

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.

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.  The Managing General Partner and its affiliates
are  currently  scheduled  to file an answer to  Objector's  petition on May 18,
2005.

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.

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  responding to a
call  while  "on-call."  The  defendants  have  filed an answer  to the  amended
complaint  denying the substantive  allegations.  Oral argument  relating to the
certification  of the  collective  action  took  place  on May 12,  2005 and the
parties await a ruling from the Court. Although the outcome of any litigation is
uncertain,  AIMCO  Properties,  L.P. does not believe that the ultimate  outcome
will have a material  adverse  effect on its  financial  condition or results of
operations.  Similarly,  the Managing  General Partner does not believe that the
ultimate  outcome  will have a  material  adverse  effect  on the  Partnership's
consolidated financial condition or results of operations.

ITEM 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: May 16, 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.

      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:  May 16, 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:  May 16, 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 March
31, 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:  May 16, 2005


                                           /s/Stephen B. Waters
                                    Name:  Stephen B. Waters
                                    Date:  May 16, 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.