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

                                  Form 10-QSB/A

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

                 For the quarterly period ended September 30, 2002


[ ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
   1934


                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)

<PAGE>

The issuer  recently  discovered  that it had  inadvertently  omitted  conformed
signatures on certain certifications included in its 10-QSB filing made November
14, 2002.  Original  signatures were complete and on file with the issuer at the
time the 10-QSB filing was made in November;  however,  due to a clerical error,
conformed  signatures were not included in the electronic filing. This amendment
is being filed solely to correct this inadvertent clerical error.

                         PART I - FINANCIAL INFORMATION


ITEM 1.     FINANCIAL STATEMENTS



                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

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


                               September 30, 2002
<TABLE>
<CAPTION>


Assets
<S>                                                                          <C>
   Cash and cash equivalents                                                 $   298
   Receivables and deposits                                                      241
   Restricted escrows                                                            205
   Other assets                                                                  246
   Investment properties:
      Land                                                    $ 2,821
      Buildings and related personal property                   35,162
                                                                37,983
      Less accumulated depreciation                            (22,542)       15,441
                                                                            $ 16,431

Liabilities and Partners' Deficit
Liabilities
   Accounts payable                                                          $ 315
   Tenant security deposit liabilities                                            74
   Accrued property taxes                                                        429
   Other liabilities                                                             295
   Due to affiliates                                                           1,726
   Mortgage notes payable                                                     23,278

Partners' Deficit
   General partners                                            $ (194)
   Limited partners (1,011.5 units issued and
      outstanding)                                              (9,492)       (9,686)
                                                                            $ 16,431

            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          Nine Months Ended
                                          September 30,               September 30,
                                        2002          2001         2002          2001

Revenues:
<S>                                    <C>          <C>           <C>           <C>
  Rental income                        $ 1,159      $ 1,221       $ 3,484       $ 3,903
  Other income                             129           134           415           483
  Casualty gain                            167            47           167            47
      Total revenues                     1,455         1,402         4,066         4,433

Expenses:
  Operating                                625           733         2,001         2,073
  General and administrative                59            63           175           188
  Depreciation                             439           429         1,329         1,293
  Interest                                 565           536         1,666         1,608
  Property taxes                           107            98           331           342
      Total expenses                     1,795         1,859         5,502         5,504

Net loss                               $ (340)       $ (457)     $ (1,436)     $ (1,071)

Net loss allocated to general
  partners (2%)                         $ (7)         $ (9)        $ (29)        $ (21)
Net loss allocated to limited
  partners (98%)                          (333)         (448)       (1,407)       (1,050)

                                       $ (340)       $ (457)     $ (1,436)     $ (1,071)

Net loss per limited partnership
  unit                                $(329.21)     $(442.90)   $(1,391.00)    $(1,038.06)

            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, 2001                   1,011.5        $ (165)     $(8,085)   $(8,250)

Net loss for the nine months
   ended September 30, 2002                 --           (29)      (1,407)    (1,436)

Partners' deficit at
   September 30, 2002                  1,011.5        $ (194)     $(9,492)   $(9,686)

            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>
                                                                    Nine Months Ended
                                                                      September 30,
                                                                    2002         2001
Cash flows from operating activities:
<S>                                                                <C>          <C>
  Net loss                                                         $(1,436)     $(1,071)
  Adjustments to reconcile net loss to net cash (used in)
   provided by operating activities:
     Depreciation                                                    1,329        1,293
     Amortization of mortgage discounts and loan costs                  52           50
     Casualty gain                                                    (167)         (47)
     Change in accounts:
      Receivables and deposits                                        (119)         (89)
      Other assets                                                     (45)         (36)
      Accounts payable                                                (134)         220
      Tenant security deposit liabilities                                2          (30)
      Accrued property taxes                                           203          188
      Other liabilities                                                 (3)          35
      Due to affiliate                                                 203           76
         Net cash (used in) provided by operating activities          (115)         589

Cash flows from investing activities:
  Insurance proceeds received                                          394           68
  Property improvements and replacements                              (963)        (890)
  Net deposits to restricted escrows                                   (50)          (8)
         Net cash used in investing activities                        (619)        (830)

Cash flows from financing activities:
  Payments on mortgage notes payable                                  (120)        (111)
  Advances from affiliates                                             905          156
  Payments on advances from affiliates                                  --          (68)
         Net cash provided by (used in) financing activities           785          (23)

Net increase (decrease) in cash and cash equivalents                    51         (264)
Cash and cash equivalents at beginning of period                       247          459

Cash and cash equivalents at end of period                          $ 298        $ 195

Supplemental disclosure of cash flow information:
  Cash paid for interest                                           $ 1,545      $ 1,557

Supplemental disclosure of non-cash information:
  Property improvements and replacements included in accounts
   payable                                                          $ 208        $ --

At December 31, 2001 and 2000, approximately $56,000 and $240,000, respectively,
of property  improvements  and  replacements  were included in accounts  payable
which are included in property  improvements  and  replacements  during the nine
months ended September 30, 2002 and 2001, respectively.

            See Accompanying Notes to Consolidated Financial Statements

</TABLE>

<PAGE>

                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Note A - Basis of Presentation

The  accompanying   unaudited  consolidated  financial  statements  of  Davidson
Diversified Real Estate III, L.P. (the  "Partnership" or "Registrant") have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-QSB and Item 310(b)
of Regulation S-B.  Accordingly,  they do not include all of the information and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements.  In the opinion of Davidson Diversified  Properties,  Inc.
(the  "Managing  General  Partner"),   all  adjustments  (consisting  of  normal
recurring  accruals)  considered  necessary  for a fair  presentation  have been
included. Operating results for the three and nine month periods ended September
30, 2002 are not necessarily  indicative of the results that may be expected for
the year  ending  December  31,  2002.  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, 2001.
The  Managing  General  Partner  is  a  wholly  owned  subsidiary  of  Apartment
Investment  and  Management  Company  ("AIMCO"),  a publicly  traded real estate
investment trust.

Note B - Transactions with Affiliated Parties

The  Partnership  has no employees  and is  dependent  on the  Managing  General
Partner  and  its  affiliates  for  the  management  and  administration  of all
Partnership  activities.  The  Partnership  Agreement  provides  for (i) certain
payments to affiliates for services and (ii)  reimbursement  of certain expenses
incurred by affiliates on behalf of the Partnership.

Affiliates of the Managing  General  Partner are entitled to receive 5% of gross
receipts  from both of the  Registrant's  investment  properties  for  providing
property   management   services.   The  Registrant   paid  to  such  affiliates
approximately $200,000 and $229,000 for the nine months ended September 30, 2002
and 2001, respectively, which is included in operating expenses.

An  affiliate  of  the  Managing  General  Partner  received   reimbursement  of
accountable  administrative  expenses  amounting to  approximately  $141,000 and
$285,000 for the nine months ended  September  30, 2002 and 2001,  respectively,
which  is  included  in  general  and  administrative  expenses  and  investment
properties.  At September 30, 2002, approximately $304,000 of reimbursements for
services was accrued by the  Partnership and is included in due to affiliates on
the accompanying consolidated balance sheet.

During the nine months ended  September 30, 2002, the Managing  General  Partner
advanced the Partnership approximately $905,000 to cover operational expenses at
Plainview Apartments and the Partnership. These advances were made in accordance
with the terms of the Partnership Agreement.  At September 30, 2002, the balance
of the advances,  including  accrued  interest,  was  approximately  $1,422,000.
Interest  is  charged  at  the  prime  rate  plus  1%.   Interest   expense  was
approximately  $53,000 and $4,000 for the nine months ended  September  30, 2002
and 2001, respectively.

Beginning in 2001, the  Partnership  began insuring its properties 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 its properties above the
AIMCO  limits  through  insurance  policies  obtained  by  AIMCO  from  insurers
unaffiliated  with the Managing  General  Partner.  During the nine months ended
September  30,  2002 and 2001,  the  Partnership  was  charged  by AIMCO and its
affiliates  approximately  $118,000 and  $71,000,  respectively,  for  insurance
coverage and fees associated with policy claims administration.

Note C - Casualty Events

During  the  nine  months  ended  September  30,  2002 a net  casualty  gain  of
approximately $167,000 was recorded at Plainview Apartments which was the result
of two separate  fires at the  property.  A December  2001 fire caused damage to
four units of the complex.  The gain associated with this fire was the result of
the  receipt  of  insurance   proceeds  of  approximately   $244,000  offset  by
approximately  $116,000 of undepreciated  property improvements and replacements
being written off.  Reconstruction has been completed with respect to the damage
caused by this fire.

A January 2002 fire caused  damage to an  additional  four units of the complex.
The gain  associated  with  this was the  result  of the  receipt  of  insurance
proceeds  of  approximately   $150,000  offset  by  approximately   $111,000  of
undepreciated  property  improvements  and  replacements  being written off. The
complete  reconstruction is expected to cost approximately $274,000 and is still
in process.  The Managing  General Partner is currently in discussions  with the
insurance  carrier  as to  additional  proceeds  to be  received  to  cover  the
remaining  cost  of  the  reconstruction.   The  Partnership   anticipates  that
additional insurance proceeds will be received related to this casualty and when
received will result in the recognition of an additional gain.

In August 2002,  another  fire  occurred at  Plainview  Apartments  which caused
damage  to an  additional  eight  units.  Demolition  of the  damaged  units  is
anticipated to begin in October 2002 with  reconstruction work commencing later.
At this time the estimated costs of the  reconstruction  are not known but it is
anticipated that insurance proceeds will cover such costs.

During  the  nine  months  ended  September  30,  2001 a net  casualty  gain  of
approximately $47,000 was recorded at Salem Courthouse Apartments.  The casualty
gain related to a fire in the maintenance  facility.  The gain was the result of
the  receipt  of  insurance   proceeds  of   approximately   $68,000  offset  by
approximately  $21,000 of undepreciated  property  improvements and replacements
being written off.

The  Partnership  has  discovered  roof  leaks  in two  buildings  at  Plainview
Apartments which has led to mold growth and has resulted in approximately 23% of
the  property's  total  available  units  being  currently  uninhabitable.   The
Partnership has engaged  architectural and environmental  engineering experts to
perform corrective action on the affected  buildings.  This project is currently
in the developmental stage and, accordingly, the Managing General Partner has no
estimate as to what the total cost of the  reconstruction  will be. In addition,
the Managing General Partner is in discussions with the insurance  carrier as to
the extent, if any, the reconstruction may be covered by insurance proceeds. The
renovations are anticipated to be completed during 2003.

Note D - 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
purports  to  assert  claims  on  behalf  of a class  of  limited  partners  and
derivatively  on behalf  of a number  of  limited  partnerships  (including  the
Partnership)  which 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 which 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  seek  monetary
damages and equitable relief, including judicial dissolution of the Partnership.
On June 25, 1998, the Managing General Partner filed a motion seeking  dismissal
of the action.  In lieu of responding  to the motion,  the  plaintiffs  filed an
amended  complaint.  The Managing General Partner filed demurrers to the amended
complaint which were heard February 1999.

Pending the ruling on such  demurrers,  settlement  negotiations  commenced.  On
November 2, 1999,  the parties  executed and filed a Stipulation  of Settlement,
settling claims, subject to court approval, on behalf of the Partnership and all
limited partners who owned units as of November 3, 1999. Preliminary approval of
the  settlement  was obtained on November 3, 1999 from the Court,  at which time
the Court set a final  approval  hearing for  December  10,  1999.  Prior to the
December  10,  1999  hearing,  the  Court  received  various  objections  to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement.  On
December 14, 1999, the Managing  General  Partner and its affiliates  terminated
the  proposed  settlement.  In  February  2000,  counsel  for some of the  named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated  the  settlement.  On June  27,  2000,  the  Court  entered  an order
disqualifying  them  from the case and an  appeal  was  taken  from the order on
October 5, 2000. On December 4, 2000, the Court  appointed the law firm of Lieff
Cabraser  Heimann & Bernstein  LLP as new lead  counsel for  plaintiffs  and the
putative class.  Plaintiffs filed a third amended complaint on January 19, 2001.
On March 2, 2001,  the  Managing  General  Partner  and its  affiliates  filed a
demurrer to the third amended  complaint.  On May 14, 2001,  the Court heard the
demurrer to the third amended  complaint.  On July 10, 2001, the Court issued an
order  sustaining  defendants'  demurrer on certain  grounds.  On July 20, 2001,
Plaintiffs filed a motion for reconsideration of the Court's July 10, 2001 order
granting in part and denying in part defendants' demurrer. On September 7, 2001,
Plaintiffs  filed a fourth amended class and  derivative  action  complaint.  On
September 12, 2001, the Court denied Plaintiffs' motion for reconsideration.  On
October 5, 2001, the Managing General Partner and affiliated  defendants filed a
demurrer to the fourth amended complaint,  which was heard on December 11, 2001.
On February 2, 2002,  the Court served its order  granting in part the demurrer.
The  Court has  dismissed  without  leave to amend  certain  of the  plaintiffs'
claims.  On February 11, 2002,  plaintiffs  filed a motion  seeking to certify a
putative  class  comprised of all  non-affiliated  persons who own or have owned
units  in  the  partnerships.   The  Managing  General  Partner  and  affiliated
defendants  oppose the motion.  On April 29,  2002,  the Court held a hearing on
plaintiffs' motion for class  certification and took the matter under submission
after further  briefing,  as ordered by the court, was submitted by the parties.
On July 10, 2002,  the Court entered an order vacating the current trial date of
January 13, 2003 (as well as the  pre-trial  and  discovery  cut-off  dates) and
stayed the case in its entirety through November 7, 2002 so that the parties can
have an  opportunity  to discuss  settlement.  On October  30,  2002,  the court
entered an order extending the stay in effect through January 10, 2003.

During the third  quarter of 2001, a complaint  (the "Heller  action") was filed
against  the same  defendants  that are named in the  Nuanes  action,  captioned
Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed
a first amended  complaint.  The first amended complaint in the Heller action is
brought as a purported  derivative  action,  and asserts  claims for among other
things  breach  of  fiduciary  duty;  unfair  competition;   conversion,  unjust
enrichment;  and judicial  dissolution.  Plaintiffs in the Nuanes action filed a
motion to  consolidate  the Heller action with the Nuanes action and stated that
the Heller action was filed in order to preserve the derivative claims that were
dismissed  without  leave to amend in the Nuanes action by the Court order dated
July 10, 2001. On October 5, 2001, the Managing  General  Partner and affiliated
defendants  moved to strike the first  amended  complaint  in its  entirety  for
violating  the Court's July 10, 2001 order  granting in part and denying in part
defendants'  demurrer in the Nuanes action, or alternatively,  to strike certain
portions of the complaint based on the statute of limitations.  Other defendants
in the action  demurred to the fourth  amended  complaint,  and,  alternatively,
moved to strike the complaint. On December 11, 2001, the court heard argument on
the motions  and took the matters  under  submission.  On February 4, 2002,  the
Court  served  notice of its order  granting  defendants'  motion to strike  the
Heller complaint as a violation of its July 10, 2001 order in the Nuanes action.
On March 27, 2002,  the plaintiffs  filed a notice  appealing the order striking
the complaint. The parties are currently in the midst of briefing that appeal.

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

The  Partnership is unaware of any other pending or outstanding  litigation that
is not of a routine nature arising in the ordinary course of business.

<PAGE>

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS

The Private  Securities  Litigation  Reform Act of 1995 provides a "safe harbor"
for forward-looking  statements in certain circumstances.  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. The discussions of the Registrant's business and results
of operations,  including forward-looking statements pertaining to such matters,
do not take into account the effects of any changes to the Registrant's business
and  results of  operations.  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; and possible environmental liabilities. Readers should carefully review
the Registrant's financial statements and the notes thereto, as well as the risk
factors  described in the documents the Registrant  files from time to time with
the Securities and Exchange Commission.

The Partnership's  investment properties consist of two apartment complexes. The
following  table sets forth the average  occupancy of these  properties  for the
nine months ended September 30, 2002 and 2001:

                                                 Average Occupancy
                                                 2002        2001
         Salem Courthouse
            Indianapolis, Indiana                 91%         93%

         Plainview Apartments
            Louisville, Kentucky                  69%         81%

Plainview  Apartments is located in a local market where the apartment  industry
has  been  soft  recently.  In  addition,  two of  the  buildings  at  Plainview
Apartments  have roof leaks  which has led to mold  growth and has  resulted  in
approximately 23% of the property's total available units being vacated in order
to expedite the  reconstruction.  The Partnership has engaged  architectural and
environmental  engineering  experts to perform corrective action on the affected
buildings.  The Managing  General  Partner  intends to restore  these units to a
leasable state at which time occupancy is expected to return to historic levels.
This project is  currently  in the  developmental  stage and,  accordingly,  the
Managing  General  Partner  has no  estimate  as to  what  the  total  costs  of
reconstruction  will be.  However,  the costs will be funded from any  available
cash flow from property  operations and additional  advances from  affiliates of
the Managing  General Partner.  In addition,  the Managing General Partner is in
discussions  with  the  insurance   carrier  as  to  the  extent,  if  any,  the
reconstruction  may be  covered  by  insurance  proceeds.  The  renovations  are
anticipated to be completed during 2003.

Results of Operations

The  Partnership's  net loss for the nine months  ended  September  30, 2002 was
approximately  $1,436,000 as compared to a net loss of approximately  $1,071,000
for the same period in 2001.  The  Partnership's  net loss for the three  months
ended September 30, 2002 was approximately $340,000 as compared to a net loss of
approximately $457,000 for the same period in 2001. The increase in net loss for
the nine months ended September 30, 2002 is primarily attributable to a decrease
in total revenues slightly offset by a decrease in total expenses.  The decrease
in net loss for the three months ended September 30, 2002 is primarily due to an
increase in total revenues and a decrease in total expenses.

The decrease in total  revenues for the nine months ended  September 30, 2002 is
due to a decrease  in both  rental  and other  income.  Rental and other  income
decreased  primarily  because of decreased  occupancy  at  Plainview  Apartments
caused by the fires as discussed  below and mold  problems as  discussed  above.
These  decreases  were  partially  offset  by the  casualty  gain  at  Plainview
Apartments as discussed below.

The increase in total revenues for the three months ended  September 30, 2002 is
due primarily to the casualty gain at Plainview  Apartments as discussed  below.
This gain was slightly offset by decreases in rental and other income due to the
decreased occupancy at Plainview Apartments.

The decrease in total  expenses for both the three and nine month  periods ended
September  30,  2002  was due  primarily  to  decreases  in  operating  expenses
partially  offset by  increases  in  interest  and  depreciation  expenses.  The
decrease in  operating  expenses is due to  decreases  in utility,  advertising,
property management,  and maintenance expenses.  The decrease in utility expense
is due to a decrease  in natural  gas costs at  Plainview  Apartments.  Property
management  fees  decreased  for both  periods  due to the  decrease  in  rental
revenues at the  Partnership's  investment  properties as discussed  above.  The
decrease  in  maintenance  expense  is due to a  decrease  in minor  repairs  at
Plainview  Apartments  partially  offset by an increase  in  interior  painting,
building  improvements,  and landscaping at Salem  Courthouse.  Interest expense
increased  for both periods due to an increase in the balances  owed on advances
from  the  Managing  General  Partner.  Depreciation  expense  increased  due to
property improvements put into service over the last twelve months which are now
being depreciated.

Included in general and  administrative  expenses at both September 30, 2002 and
2001 are  reimbursements  to the  Managing  General  Partner  allowed  under the
Partnership  Agreement.  In addition,  costs  associated  with the quarterly and
annual  communications  with  investors and  regulatory  agencies and the annual
audit required by the Partnership Agreement are also included.

During  the  nine  months  ended  September  30,  2002 a net  casualty  gain  of
approximately $167,000 was recorded at Plainview Apartments which was the result
of two separate  fires at the  property.  A December  2001 fire caused damage to
four units of the complex.  The gain associated with this fire was the result of
the  receipt  of  insurance   proceeds  of  approximately   $244,000  offset  by
approximately  $116,000 of undepreciated  property improvements and replacements
being written off.  Reconstruction has been completed with respect to the damage
caused by this fire.

A January 2002 fire caused  damage to an  additional  four units of the complex.
The gain  associated  with  this was the  result  of the  receipt  of  insurance
proceeds  of  approximately   $150,000  offset  by  approximately   $111,000  of
undepreciated  property  improvements  and  replacements  being written off. The
complete  reconstruction is expected to cost approximately $274,000 and is still
in process.  The Managing  General Partner is currently in discussions  with the
insurance  carrier  as to  additional  proceeds  to be  received  to  cover  the
remaining  cost  of  the  reconstruction.   The  Partnership   anticipates  that
additional insurance proceeds will be received related to this casualty and when
received will result in the recognition of an additional gain.

In August 2002,  another  fire  occurred at  Plainview  Apartments  which caused
damage  to an  additional  eight  units.  Demolition  of the  damaged  units  is
anticipated to begin in October 2002 with  reconstruciton work commencing later.
At this time the estimated costs of the  reconstruction  are not known but it is
anticipated that insurance proceeds will cover such costs.

During  the  nine  months  ended  September  30,  2001 a net  casualty  gain  of
approximately $47,000 was recorded at Salem Courthouse Apartments.  The casualty
gain related to a fire in the maintenance  facility.  The gain was the result of
the  receipt  of  insurance   proceeds  of   approximately   $68,000  offset  by
approximately  $21,000 of undepreciated  property  improvements and replacements
being written off.

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,  due to changing  market
conditions,  which  can  result  in the use of  rental  concessions  and  rental
reductions to offset softening market conditions, there is no guarantee that the
Managing General Partner will be able to sustain such a plan.

Liquidity and Capital Resources

At  September  30,  2002,  the  Registrant  had  cash and  cash  equivalents  of
approximately $298,000 compared to approximately $195,000 at September 30, 2001.
Cash and cash equivalents increased approximately $51,000 from December 31, 2001
due to approximately $785,000 of cash provided by financing activities partially
offset by  approximately  $619,000 and  $115,000 of cash used in  investing  and
operating  activities,  respectively.  Cash  provided  by  financing  activities
consisted  of  advances  to the  Partnership  by the  Managing  General  Partner
partially  offset  by  principal  payments  on  the  mortgages  encumbering  the
Partnership's properties.  Cash used in investing activities consisted primarily
of property  improvements  and  replacements  and net deposits to the restricted
escrow account maintained by the mortgage lender partially offset by the receipt
of insurance  proceeds.  The Registrant  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  and is
studying  new  federal  laws,  including  the  Sarbanes-Oxley  Act of 2002.  The
Sarbanes-Oxley Act of 2002 mandates or suggests  additional  compliance measures
with regard to governance,  disclosure, audit and other areas. In light of these
changes,  the Partnership  expects that it will incur higher expenses related to
compliance,  including  increased  legal and audit  fees.  Capital  improvements
planned for both of the Partnership's properties are detailed below.

Plainview Apartments:  The Partnership has budgeted  approximately  $161,000 for
capital  improvements  during 2002 at Plainview  Apartments  consisting of floor
covering and appliance replacements,  air conditioning upgrades, ground lighting
and fitness  equipment.  The  Partnership  completed  approximately  $976,000 in
budgeted and  unbudgeted  capital  expenditures  at Plainview  Apartments  as of
September 30, 2002,  consisting primarily of roof replacements,  water and sewer
upgrades,   water   heaters,   floor   covering   replacements   and  structural
improvements.  Most of these expenditures are attributable to the reconstruction
project and casualties  mentioned  above.  These  improvements  were funded from
operating cash flow,  insurance  proceeds and advances from the Managing General
Partner.  Additional  improvements  may be  considered  and will  depend  on the
physical  condition  of  the  property  as  well  as  replacement  reserves  and
anticipated cash flow generated by the property.

Salem Courthouse Apartments: The Partnership has budgeted approximately $178,000
for capital improvements during 2002 at Salem Courthouse  Apartments  consisting
of floor  covering and  appliance  replacements,  air  conditioning  and heating
upgrades and  interior  decorations.  The  Partnership  completed  approximately
$139,000 in capital expenditures at Salem Courthouse  Apartments as of September
30, 2002,  consisting  primarily  of floor  covering  replacements  and exterior
painting.   These   improvements  were  funded  from  operating  cash  flow  and
replacement reserves.  Additional improvements may be considered and will depend
on the physical  condition of the property as well as  replacement  reserves and
anticipated cash flow generated by the property.

The additional capital expenditures,  exclusive of expenditures  associated with
redeveloping the units at Plainview  Apartments affected by mold growth, will be
incurred only if cash is available from operations or from Partnership reserves.
To the  extent  that such  budgeted  capital  improvements  are  completed,  the
Registrant's distributable cash flow, if any, may be adversely affected at least
in the short term.

The  Registrant's  current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Registrant.  The first mortgage
encumbering  Salem  Courthouse  Apartments of approximately  $7,671,000,  net of
discount,  is amortized over 344 months with a balloon payment of  approximately
$7,513,000 due at its maturity of October 2003.  The first mortgage  encumbering
Plainview  Apartments  and the  second  mortgage  encumbering  Salem  Courthouse
Apartments of  approximately  $15,336,000  and $271,000,  respectively,  require
payments of interest  only until their  maturities  in November 2010 and October
2003,  respectively,  at which time the aforementioned balances are due in full.
The Managing General Partner will attempt to refinance such indebtedness  and/or
sell the properties  prior to such maturity dates.  If the properties  cannot be
refinanced or sold for a sufficient amount, the Registrant will risk losing such
properties through foreclosure.

The Partnership did not make any  distributions  to its partners during the nine
months ended September 30, 2002 and 2001. Future cash  distributions will depend
on the levels of net cash generated from  operations,  the  availability of cash
reserves,  and the timing of the debt maturities,  refinancings  and/or property
sales.  The  Partnership's  cash  available  for  distribution  is reviewed on a
monthly  basis.  In light of the mold clean up costs at Plainview and the amount
accrued and payable to the Managing General Partner at September 30, 2002, there
can be no assurance  that the  Registrant  will generate  sufficient  funds from
operations  after planned capital  expenditures to permit  distributions  to its
partners during the remainder of 2002 or subsequent  periods.  Distributions may
be restricted by the requirement to deposit net operating  income (as defined in
the mortgage note) into the reserve  account until the reserve account is funded
in an amount equal to a minimum of $200 and a maximum of $400 per apartment unit
for  Salem  Courthouse  Apartments  for a  total  of  approximately  $78,000  to
$155,000.  The reserve account  balance at September 30, 2002 was  approximately
$179,000.

Other

In addition to its indirect  ownership of the managing  general partner interest
in the Partnership,  AIMCO and its affiliates  owned 408.25 limited  partnership
units (the "Units") in the  Partnership  representing  40.36% of the outstanding
Units at September 30, 2002. 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 of limited partnership  interest in the
Partnership  in  exchange  for cash or a  combination  of cash and  units in the
operating  partnership  of AIMCO  either  through  private  purchases  or tender
offers. Under the Partnership  Agreement,  unitholders holding a majority of the
Units are  entitled to take action  with  respect to a variety of matters  which
would  include  voting on certain  amendments to the  Partnership  Agreement and
voting to remove the Managing General  Partner.  As a result of its ownership of
40.36% of the  outstanding  Units,  AIMCO is in a position to influence all such
voting  decisions with respect to the Registrant.  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 and Estimates

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  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 an impairment in the Partnership's assets.

Revenue Recognition

The Partnership generally leases apartment units for twelve-month terms or less.
Rental income  attributable to leases is recognized monthly as it is earned. The
Partnership will offer rental concessions during  particularly slow months or in
response  to  heavy  competition  from  other  similar  complexes  in the  area.
Concessions are charged to income as incurred.

ITEM 3.     CONTROLS AND PROCEDURES

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, within 90 days of
the filing date of this quarterly  report,  evaluated the  effectiveness  of the
Partnership's  disclosure  controls and  procedures  (as defined in Exchange Act
Rules  (13a-14(c)  and  (15d-14(c))  and have  determined  that such  disclosure
controls and procedures are adequate.  There have been no significant changes in
the Partnership's internal controls or in other factors that could significantly
affect the  Partnership's  internal  controls since the date of evaluation.  The
Partnership does not believe any significant deficiencies or material weaknesses
exist in the Partnership's internal controls. Accordingly, no corrective actions
have been taken.



<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
purports  to  assert  claims  on  behalf  of a class  of  limited  partners  and
derivatively  on behalf  of a number  of  limited  partnerships  (including  the
Partnership)  which 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 which 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  seek  monetary
damages and equitable relief, including judicial dissolution of the Partnership.
On June 25, 1998, the Managing General Partner filed a motion seeking  dismissal
of the action.  In lieu of responding  to the motion,  the  plaintiffs  filed an
amended  complaint.  The Managing General Partner filed demurrers to the amended
complaint which were heard February 1999.

Pending the ruling on such  demurrers,  settlement  negotiations  commenced.  On
November 2, 1999,  the parties  executed and filed a Stipulation  of Settlement,
settling claims, subject to court approval, on behalf of the Partnership and all
limited partners who owned units as of November 3, 1999. Preliminary approval of
the  settlement  was obtained on November 3, 1999 from the Court,  at which time
the Court set a final  approval  hearing for  December  10,  1999.  Prior to the
December  10,  1999  hearing,  the  Court  received  various  objections  to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement.  On
December 14, 1999, the Managing  General  Partner and its affiliates  terminated
the  proposed  settlement.  In  February  2000,  counsel  for some of the  named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated  the  settlement.  On June  27,  2000,  the  Court  entered  an order
disqualifying  them  from the case and an  appeal  was  taken  from the order on
October 5, 2000. On December 4, 2000, the Court  appointed the law firm of Lieff
Cabraser  Heimann & Bernstein  LLP as new lead  counsel for  plaintiffs  and the
putative class.  Plaintiffs filed a third amended complaint on January 19, 2001.
On March 2, 2001,  the  Managing  General  Partner  and its  affiliates  filed a
demurrer to the third amended  complaint.  On May 14, 2001,  the Court heard the
demurrer to the third amended  complaint.  On July 10, 2001, the Court issued an
order  sustaining  defendants'  demurrer on certain  grounds.  On July 20, 2001,
Plaintiffs filed a motion for reconsideration of the Court's July 10, 2001 order
granting in part and denying in part defendants' demurrer. On September 7, 2001,
Plaintiffs  filed a fourth amended class and  derivative  action  complaint.  On
September 12, 2001, the Court denied Plaintiffs' motion for reconsideration.  On
October 5, 2001, the Managing General Partner and affiliated  defendants filed a
demurrer to the fourth amended complaint,  which was heard on December 11, 2001.
On February 2, 2002,  the Court served its order  granting in part the demurrer.
The  Court has  dismissed  without  leave to amend  certain  of the  plaintiffs'
claims.  On February 11, 2002,  plaintiffs  filed a motion  seeking to certify a
putative  class  comprised of all  non-affiliated  persons who own or have owned
units  in  the  partnerships.   The  Managing  General  Partner  and  affiliated
defendants  oppose the motion.  On April 29,  2002,  the Court held a hearing on
plaintiffs' motion for class  certification and took the matter under submission
after further  briefing,  as ordered by the court, was submitted by the parties.
On July 10, 2002,  the Court entered an order vacating the current trial date of
January 13, 2003 (as well as the  pre-trial  and  discovery  cut-off  dates) and
stayed the case in its entirety through November 7, 2002 so that the parties can
have an  opportunity  to discuss  settlement.  On October  30,  2002,  the court
entered an order extending the stay in effect through January 10, 2003.

During the third  quarter of 2001, a complaint  (the "Heller  action") was filed
against  the same  defendants  that are named in the  Nuanes  action,  captioned
Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed
a first amended  complaint.  The first amended complaint in the Heller action is
brought as a purported  derivative  action,  and asserts  claims for among other
things  breach  of  fiduciary  duty;  unfair  competition;   conversion,  unjust
enrichment;  and judicial  dissolution.  Plaintiffs in the Nuanes action filed a
motion to  consolidate  the Heller action with the Nuanes action and stated that
the Heller action was filed in order to preserve the derivative claims that were
dismissed  without  leave to amend in the Nuanes action by the Court order dated
July 10, 2001. On October 5, 2001, the Managing  General  Partner and affiliated
defendants  moved to strike the first  amended  complaint  in its  entirety  for
violating  the Court's July 10, 2001 order  granting in part and denying in part
defendants'  demurrer in the Nuanes action, or alternatively,  to strike certain
portions of the complaint based on the statute of limitations.  Other defendants
in the action  demurred to the fourth  amended  complaint,  and,  alternatively,
moved to strike the complaint. On December 11, 2001, the court heard argument on
the motions  and took the matters  under  submission.  On February 4, 2002,  the
Court  served  notice of its order  granting  defendants'  motion to strike  the
Heller complaint as a violation of its July 10, 2001 order in the Nuanes action.
On March 27, 2002,  the plaintiffs  filed a notice  appealing the order striking
the complaint. The parties are currently in the midst of briefing that appeal.

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

ITEM 6      EXHIBITS AND REPORTS ON FORM 8-K

            a)    Exhibits

                  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.

                  Exhibit  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.

                  Exhibit 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).

                  Exhibit 99, Certification of Chief Executive Officer and Chief
                  Financial Officer.

            b)    Reports on Form 8-K:

                  None filed during the quarter ended September 30, 2002.


<PAGE>


                                   SIGNATURES



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



                                    DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.


                                    By:   Davidson Diversified Properties, Inc.
                                          Managing General Partner


                                    By:   /s/Patrick J. Foye
                                          Patrick J. Foye
                                          Executive Vice President


                                    By:   /s/Thomas C. Novosel
                                          Thomas C. Novosel
                                          Senior Vice President
                                          and Chief Accounting Officer


                                    Date: January 9, 2003



<PAGE>
                                  CERTIFICATION


I, Patrick J. Foye, 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  quarterly  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 quarterly
report;


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


4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


      a)  Designed  such  disclosure  controls  and  procedures  to ensure  that
      material   information   relating  to  the   registrant,   including   its
      consolidated  subsidiaries,  is made  known to us by others  within  those
      entities, particularly during the period in which this quarterly report is
      being prepared;


      b) Evaluated the effectiveness of the registrant's disclosure controls and
      procedures  as of a date  within 90 days prior to the filing  date of this
      quarterly report (the "Evaluation Date"); and


      c)  Presented  in  this  quarterly   report  our  conclusions   about  the
      effectiveness  of the  disclosure  controls  and  procedures  based on our
      evaluation as of the Evaluation Date;


5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's   board  of  directors  (or  persons   performing   the  equivalent
functions):


      a) All  significant  deficiencies  in the design or  operation of internal
      controls which could adversely affect the registrant's  ability to record,
      process,  summarize and report  financial data and have identified for the
      registrant's auditors any material weaknesses in internal controls; and


      b) Any fraud,  whether or not material,  that involves management or other
      employees  who  have  a  significant  role  in the  registrant's  internal
      controls; and


6. The  registrant's  other  certifying  officers  and I have  indicated in this
quarterly  report  whether or not there  were  significant  changes in  internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.


Date:  November 13, 2002

                                /s/Patrick J. Foye
                                Patrick J. Foye
                                Executive    Vice    President    of    Davidson
                                Diversified Properties,  Inc., equivalent of the
                                chief executive officer of the Partnership


<PAGE>



                                  CERTIFICATION


I, Paul J. McAuliffe, 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  quarterly  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 quarterly
report;


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


4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


      a)  Designed  such  disclosure  controls  and  procedures  to ensure  that
      material   information   relating  to  the   registrant,   including   its
      consolidated  subsidiaries,  is made  known to us by others  within  those
      entities, particularly during the period in which this quarterly report is
      being prepared;


      b) Evaluated the effectiveness of the registrant's disclosure controls and
      procedures  as of a date  within 90 days prior to the filing  date of this
      quarterly report (the "Evaluation Date"); and


      c)  Presented  in  this  quarterly   report  our  conclusions   about  the
      effectiveness  of the  disclosure  controls  and  procedures  based on our
      evaluation as of the Evaluation Date;


5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's   board  of  directors  (or  persons   performing   the  equivalent
functions):


      a) All  significant  deficiencies  in the design or  operation of internal
      controls which could adversely affect the registrant's  ability to record,
      process,  summarize and report  financial data and have identified for the
      registrant's auditors any material weaknesses in internal controls; and


      b) Any fraud,  whether or not material,  that involves management or other
      employees  who  have  a  significant  role  in the  registrant's  internal
      controls; and


6. The  registrant's  other  certifying  officers  and I have  indicated in this
quarterly  report  whether or not there  were  significant  changes in  internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.


Date:  November 13, 2002

                                /s/Paul J. McAuliffe
                                Paul J. McAuliffe
                                Executive  Vice  President  and Chief  Financial
                                Officer of Davidson Diversified Properties,
                                Inc.,  equivalent of the chief financial officer
                                of the Partnership


<PAGE>


Exhibit 99


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



In connection with the Quarterly  Report on Form 10-QSB of Davidson  Diversified
Real Estate III,  L.P.  (the  "Partnership"),  for the  quarterly  period  ended
September 30, 2002 as filed with the Securities  and Exchange  Commission on the
date hereof (the  "Report"),  Patrick J. Foye,  as the  equivalent  of the chief
executive officer of the Partnership,  and Paul J. McAuliffe,  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/  Patrick J. Foye
                                    Name:  Patrick J. Foye
                                    Date:  November 13, 2002


                                    /s/  Paul J. McAuliffe
                                    Name:  Paul J. McAuliffe
                                    Date:  November 13, 2002


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