FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF
                     THE SECURITIES EXCHANGE ACT OF 1934
                        Quarterly or Transitional Report


                   U.S. Securities And Exchange Commission
                             Washington, D.C. 20549

                                   Form 10-QSB

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

                For the quarterly period ended March 31, 2002


[ ]   TRANSITION REPORT PURSUANT TO 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)


Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days.
Yes X  No___

<PAGE>

                         PART I - FINANCIAL INFORMATION


ITEM 1.     FINANCIAL STATEMENTS

a)

                  DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

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


                                 March 31, 2002
<TABLE>
<CAPTION>


Assets
<S>                                                                          <C>
   Cash and cash equivalents                                                 $   399
   Receivables and deposits (net of uncollectible
     accounts of $31,000)                                                        191
   Restricted escrows                                                            109
   Other assets                                                                  348
   Investment properties:
      Land                                                    $ 2,821
      Buildings and related personal property                   34,627
                                                                37,448
      Less accumulated depreciation                            (21,807)       15,641
                                                                            $ 16,688

Liabilities and Partners' Deficit
Liabilities
   Accounts payable                                                          $   372
   Tenant security deposit liabilities                                            75
   Accrued property taxes                                                        340
   Due to affiliates                                                           1,005
   Other liabilities                                                             413
   Mortgage notes payable                                                     23,347

Partners' Deficit
   General partners                                            $ (177)
   Limited partners (1,011.5 units issued and
      outstanding)                                              (8,687)       (8,864)
                                                                            $ 16,688

         See Accompanying Notes to Consolidated Financial Statements

</TABLE>
<PAGE>
b)

                  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,
                                                               2002          2001
Revenues:
<S>                                                          <C>            <C>
   Rental income                                             $ 1,144        $ 1,359
   Other income                                                   145           168
      Total revenues                                            1,289         1,527

Expenses:
   Operating                                                      745           642
   General and administrative                                      61            60
   Depreciation                                                   441           431
   Interest                                                       542           537
   Property taxes                                                 114           105
      Total expenses                                            1,903         1,775

Net loss                                                      $ (614)       $ (248)

Net loss allocated to general partners (2%)                   $ (12)         $ (5)
Net loss allocated to limited partners (98%)                     (602)         (243)

                                                              $ (614)       $ (248)

Net loss per limited partnership unit                        $(595.16)     $(240.24)

         See Accompanying Notes to Consolidated Financial Statements

</TABLE>

<PAGE>
c)

                  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 three months
   ended March 31, 2002                    --            (12)        (602)      (614)

Partners' deficit at
   March 31, 2002                      1,011.5        $ (177)     $(8,687)   $(8,864)

         See Accompanying Notes to Consolidated Financial Statements

</TABLE>

<PAGE>
d)
                  DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                (in thousands)

<TABLE>
<CAPTION>
                                                                   Three Months Ended
                                                                       March 31,
                                                                    2002        2001
Cash flows from operating activities:
<S>                                                                <C>         <C>
  Net loss                                                         $ (614)     $ (248)
  Adjustments to reconcile net loss to net cash (used in)
   provided by operating activities:
     Depreciation                                                     441          431
     Amortization of mortgage discounts and loan costs                 15           17
     Change in accounts:
      Receivables and deposits                                        (69)         (22)
      Other assets                                                   (122)         (95)
      Accounts payable                                                 55          (59)
      Tenant security deposit liabilities                               3           (3)
      Accrued property taxes                                          114          105
      Other liabilities                                               115           11
      Due to affiliate                                                 55           --
         Net cash (used in) provided by operating activities           (7)         137

Cash flows from investing activities:
  Property improvements and replacements                             (180)        (361)
  Net withdrawals from (deposits to) restricted escrows                46           (1)
         Net cash used in investing activities                       (134)        (362)

Cash flows from financing activities:
  Payments on mortgage notes payable                                  (39)         (36)
  Payments on advances from affiliates                                 --          (13)
  Advances from affiliate                                             332           --
         Net cash provided by (used in) financing activities          293          (49)

Net increase (decrease) in cash and cash equivalents                  152         (274)
Cash and cash equivalents at beginning of period                      247          459

Cash and cash equivalents at end of period                         $ 399        $ 185

Supplemental disclosure of cash flow information:
  Cash paid for interest                                           $ 516        $ 519

Supplemental disclosure of non-cash information:
  Property improvements and replacements included in
   accounts payable                                                 $ 76        $ --

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 three
months ended March 31, 2002 and 2001, respectively.

         See Accompanying Notes to Consolidated Financial Statements

</TABLE>

<PAGE>
e)

                  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, 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  properties  for  providing  property
management  services.  The  Partnership  paid to such  affiliates  approximately
$66,000  and  $77,000  during the three  months  ended  March 31, 2002 and 2001,
respectively, which is included in operating expenses.

An  affiliate  of  the   Managing   General   Partner  is  entitled  to  receive
reimbursement of accountable  administrative expenses amounting to approximately
$46,000  and  $44,000  for the  three  months  ended  March  31,  2002 and 2001,
respectively, which is included in general and administrative expenses. At March
31, 2002,  approximately  $198,000 of reimbursement  for services was accrued by
the  Partnership  and  is  included  in due to  affiliates  on the  accompanying
consolidated balance sheet.

During the three  months  ended March 31, 2002,  the  Managing  General  Partner
advanced the Partnership approximately $332,000 to cover operational expenses at
Plainview Apartments and the Partnership. These advances were made in accordance
with the terms of the Partnership  Agreement.  At March 31, 2002, the balance of
advances  made by the  Managing  General  Partner  was  approximately  $807,000,
including  accrued  interest.  Interest  is  charged  at the prime rate plus 1%.
Interest expense was approximately $11,000 and $1,000 for the three months ended
March 31, 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 three months ended
March 31, 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 - 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 heard argument on the
motion and ordered  further  briefing  after which time the matter will be taken
under submission. The Court has set the matter for trial in January 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 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  matters  discussed  in this Form  10-QSB  contain  certain  forward-looking
statements  and  involve  risks and  uncertainties  (including  changing  market
conditions,   competitive  and  regulatory   matters,   etc.)  detailed  in  the
disclosures  contained  in this  Form  10-QSB  and the  other  filings  with the
Securities and Exchange Commission made by the Registrant from time to time. The
discussion of the  Registrant's  business and results of  operations,  including
forward-looking  statements  pertaining  to such  matters,  does not  take  into
account the effects of any changes to the  Registrant's  business and results of
operation.  Accordingly,  actual  results  could  differ  materially  from those
projected in the forward-looking  statements as a result of a number of factors,
including those identified herein.

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, 2002 and 2001:

                                                 Average Occupancy
                                                 2002        2001
         Salem Courthouse
            Indianapolis, Indiana                 89%         94%

         Plainview Apartments
            Louisville, Kentucky                  70%         86%

Plainview  Apartments is located in a local market where the apartment  industry
has been soft recently.  In addition,  the property  discovered roof leaks which
have  led  to  mold  growth  in  two  buildings.  The  Partnership  has  engaged
architectural and environmental engineering experts to perform corrective action
on the  affected  buildings.  The  affected  units have been vacated in order to
expedite the  restoration.  It is the intent of the Managing  General Partner to
restore these units to a leasable  state at which time  occupancy is expected to
return to historic  levels.  The Managing  General  Partner  estimates that this
restoration  will cost  approximately  $110,000  which  will be funded  from any
available cash flow from property operations and if needed,  additional advances
from affiliates of the Managing General Partner. The renovations are in progress
and are expected to be completed during the second quarter of 2002.

The  Managing  General  Partner  attributes  the  decrease in occupancy at Salem
Courthouse  Apartments  to many  first  time home  purchasers  during  the first
quarter due to lower interest rates and increased  competition in the property's
market area.

Results of Operations

The  Registrant's  net  loss for the  three  months  ended  March  31,  2002 was
approximately  $614,000 compared to a net loss of approximately $248,000 for the
corresponding period in 2001. The increase in net loss is primarily attributable
to a decrease in total  revenues and a slight  increase in total  expenses.  The
decrease  in total  revenues  is due to  decreases  in rental and other  income.
Rental  income  decreased  due to the  decrease  in  occupancy  at  both  of the
Registrant's  properties  especially  at  Plainview  Apartments  due to the mold
problems as previously  discussed.  Other income  decreased due to a decrease in
tenant reimbursements at Plainview Apartments. The increase in total expenses is
primarily  attributable to an increase in operating and  depreciation  expenses.
Operating  expenses increased due to the clean up costs of the mold at Plainview
Apartments.  The Managing  General Partner  estimates that the total cost of the
remediation  will be  $110,000.  Accordingly,  this amount was  expensed  and is
included in operating  expenses.  None of this amount had been paid at March 31,
2002, and it is included in accounts payable and other liabilities. Depreciation
expense increased due to additions to property  improvements and replacements of
the past twelve months which are now being depreciated.

Included in general and administrative  expenses at both March 31, 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.

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 March 31, 2002, the Registrant had cash and cash equivalents of approximately
$399,000  compared to  approximately  $185,000 at March 31, 2001.  Cash and cash
equivalents  increased  approximately  $152,000  from  December  31, 2001 due to
approximately $293,000 of cash provided by financing activities partially offset
by  approximately  $7,000 and $134,000 of cash used in operating  and  investing
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 partially offset by withdrawals from restricted escrow accounts
maintained by the mortgage lender. 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 Registrant and to comply with Federal,
state, and local legal and regulatory requirements. Capital improvements planned
for both of the Registrant's properties are detailed below.

Plainview Apartments:  The Partnership has budgeted  approximately  $166,000 for
capital  improvements  during 2002 at Plainview  Apartments  consisting of floor
covering  and  appliance   replacements  and  interior  and  exterior   building
improvements.  The  Partnership  completed  approximately  $163,000  in  capital
expenditures at Plainview Apartments as of March 31, 2002,  consisting primarily
of roof  replacements,  water/sewer  upgrades,  water  heaters,  floor  covering
replacements and structural  improvements.  These  improvements were funded from
operating cash flow 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 anticipated cash flow generated by the property.

Salem Courthouse Apartments: The Partnership has budgeted approximately $160,000
for capital  improvements  during 2002 at Salem  Courthouse  consisting of floor
covering replacements,  interior and exterior building improvements and interior
decorations.   The  Partnership  completed   approximately  $37,000  in  capital
expenditures  at Salem  Courthouse  Apartments as of March 31, 2002,  consisting
primarily of floor covering  replacements.  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 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  $7,740,000,  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,  requires
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 three
months ended March 31, 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 March 31, 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 requirements 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 March 31,  2002 was  approximately
$109,000.

In addition to its indirect  ownership of the managing  general partner interest
in the Partnership,  AIMCO and its affiliates  owned 395.50 limited  partnership
units (the "Units") in the  Partnership  representing  39.10% of the outstanding
Units at March 31,  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 make one or more additional offers to acquire additional limited
partnership  interests in the  Partnership  for cash or in exchange for units in
the operating partnership of AIMCO. 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  ownerships  of 39.10% of the  outstanding  Units,  AIMCO is in a
position to influence all such voting  decisions with respect to the Registrant.
When voting on matters, AIMCO would in all likelihood vote the Units it acquired
in a manner favorable to the interest of the Managing General Partner because of
its affiliation with the Managing General Partner.
<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 heard argument on the
motion and ordered  further  briefing  after which time the matter will be taken
under submission. The Court has set the matter for trial in January 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 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

                  None.

            b)    Reports on Form 8-K:

                  None filed during the quarter ended March 31, 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/Martha L. Long
                                          Martha L. Long
                                          Senior Vice President and
                                          Controller


                                    Date: