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

                                   Form 10-QSB

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

                 For the quarterly period ended June 30, 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>



                         PART I - FINANCIAL INFORMATION


ITEM 1.     FINANCIAL STATEMENTS



                  DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

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


                                  June 30, 2002
<TABLE>
<CAPTION>


Assets
<S>                                                                          <C>
   Cash and cash equivalents                                                 $ 391
   Receivables and deposits (net of uncollectible
      accounts of $49,000)                                                       222
   Restricted escrows                                                            125
   Other assets                                                                  295
   Investment properties:
      Land                                                    $ 2,821
      Buildings and related personal property                   34,867
                                                                37,688
      Less accumulated depreciation                            (22,256)       15,432
                                                                            $ 16,465

Liabilities and Partners' Deficit
Liabilities
   Accounts payable                                                          $ 183
   Tenant security deposit liabilities                                            79
   Accrued property taxes                                                        322
   Other liabilities                                                             266
   Due to affiliates                                                           1,654
   Mortgage notes payable                                                     23,307

Partners' Deficit
   General partners                                            $ (187)
   Limited partners (1,011.5 units issued and
      outstanding)                                              (9,159)       (9,346)
                                                                            $ 16,465

         See Accompanying Notes to Consolidated Financial Statements

</TABLE>

<PAGE>


                  DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

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

<TABLE>
<CAPTION>

                                        Three Months Ended          Six Months Ended
                                             June 30,                   June 30,
                                        2002          2001         2002          2001

Revenues:
<S>                                    <C>          <C>           <C>          <C>
  Rental income                        $ 1,181      $ 1,323       $ 2,325      $ 2,682
  Other income                             141           181           286          349
      Total revenues                     1,322         1,504         2,611        3,031

Expenses:
  Operating                                631           698         1,376        1,340
  General and administrative                55            65           116          125
  Depreciation                             449           433           890          864
  Interest                                 559           535         1,101        1,072
  Property taxes                           110           139           224          244
      Total expenses                     1,804         1,870         3,707        3,645

Net loss                               $ (482)       $ (366)     $ (1,096)      $ (614)

Net loss allocated to general
  partners (2%)                         $ (10)        $ (7)        $ (22)       $ (12)
Net loss allocated to limited
  partners (98%)                          (472)         (359)       (1,074)        (602)

                                       $ (482)       $ (366)     $ (1,096)      $ (614)

Net loss per limited partnership
  unit                                $(466.63)     $(354.92)   $(1,061.79)    $(595.16)

         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 six months
   ended June 30, 2002                      --           (22)      (1,074)    (1,096)

Partners' deficit at
   June 30, 2002                       1,011.5        $ (187)     $(9,159)   $(9,346)

         See Accompanying Notes to Consolidated Financial Statements

</TABLE>

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

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

                                                                    Six Months Ended
                                                                        June 30,
                                                                    2002         2001
Cash flows from operating activities:
<S>                                                                <C>          <C>
  Net loss                                                         $(1,096)     $ (614)
  Adjustments to reconcile net loss to net cash (used in)
   provided by operating activities:
     Depreciation                                                      890          864
     Amortization of mortgage discounts and loan costs                  28           33
     Bad debt expense                                                  128           --
     Change in accounts:
      Receivables and deposits                                        (228)         (31)
      Other assets                                                     (82)         (73)
      Accounts payable                                                (216)          (5)
      Tenant security deposit liabilities                                7          (19)
      Accrued property taxes                                            96           89
      Other liabilities                                                (32)         157
      Due to affiliate                                                 131           31
         Net cash (used in) provided by operating activities          (374)         432

Cash flows from investing activities:
  Insurance proceeds received                                          332           --
  Property improvements and replacements                              (338)        (576)
  Net deposits to restricted escrows                                  (302)         (57)
         Net cash used in investing activities                        (308)        (633)

Cash flows from financing activities:
  Payments on mortgage notes payable                                   (79)         (73)
  Advances from affiliates                                             905           72
  Payments on advances from affiliates                                  --          (38)
         Net cash provided by (used in) financing activities           826          (39)

Net increase (decrease) in cash and cash equivalents                   144         (240)
Cash and cash equivalents at beginning of period                       247          459

Cash and cash equivalents at end of period                          $ 391        $ 219

Supplemental disclosure of cash flow information:
  Cash paid for interest                                            $ 969       $ 1,038

Supplemental disclosure of non-cash information:
  Property improvements and replacements included in accounts
   payable                                                          $ 158        $ --

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 six
months ended June 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 six month periods ended June 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  $133,000  and $155,000 for the six months ended June 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  $90,000 and
$91,000 for the six months ended June 30, 2002 and 2001, respectively,  which is
included in general and administrative  expenses and investment  properties.  At
June 30, 2002, approximately $255,000 of reimbursements for services was accrued
by the  Partnership  and is included in due to  affiliates  on the  accompanying
consolidated balance sheet.

During the six months ended June 30, 2002, the Managing General Partner advanced
the Partnership approximately $905,000 to cover operational expenses required at
Plainview Apartments and the Partnership. These advances were made in accordance
with the terms of the  Partnership  Agreement.  At June 30, 2002, the balance of
the advances, including accrued interest, was approximately $1,399,000. Interest
is charged at the prime rate plus 1%. Interest expense was approximately $30,000
and $2,000 for the six months ended June 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 six months ended June
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

In December 2001, a fire occurred at Plainview Apartments which caused damage to
four units of the complex.  The  restoration  is expected to cost  approximately
$249,000.  Insurance proceeds of approximately $181,000 were received during the
six months ended June 30, 2002.  These  proceeds were  deposited into the escrow
account  maintained by the mortgage holder of the property.  The mortgage holder
will in turn pay contractors for reconstruction costs as they are completed. 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
restoration. The Managing General Partner does not anticipate that this casualty
will result in a loss to the Partnership.

In January 2002, a fire occurred at Plainview  Apartments which caused damage to
an additional  four units of the complex.  The  restoration  is expected to cost
approximately  $274,000.  Insurance  proceeds  of  approximately  $150,000  were
received  during  the six  months  ended  June 30,  2002.  These  proceeds  were
deposited  into the escrow  account  maintained  by the  mortgage  holder of the
property.  The mortgage holder will in turn pay  contractors for  reconstruction
costs as they are  completed.  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  restoration.  The Managing  General  Partner
does not anticipate that this casualty will result in a loss to the Partnership.

The Partnership has discovered roof leaks in two buildings which 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.  The
Managing General Partner is currently in the developmental stage of this project
and accordingly no estimate is currently  available as to what the total cost of
the restoration will be. The Managing General Partner is in discussions with the
insurance  carrier as to the extent,  if any, the  restoration may be covered by
insurance proceeds.

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.

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  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 six
months ended June 30, 2002 and 2001:

                                                 Average Occupancy
                                                 2002        2001
         Salem Courthouse
            Indianapolis, Indiana                 91%         94%

         Plainview Apartments
            Louisville, Kentucky                  71%         84%

The  Managing  General  Partner  attributes  the  decrease in occupancy at Salem
Courthouse  Apartments  to many  tenants  buying homes for the first time due to
lower interest rates and increased competition in the property's market area.

Plainview  Apartments is located in a local market where the apartment  industry
has been soft recently.  In addition,  the property discovered roof leaks in two
buildings  which has  resulted  in  approximately  23% of the  property's  total
available  units  being  vacated  in  order to  expedite  the  restoration.  The
Partnership has engaged  architectural and environmental  engineering experts to
perform  corrective  action on the affected  buildings.  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 is currently in the developmental  stage of this project and accordingly
no estimate is  currently  available  as to what the total costs of  restoration
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  restoration  may be
covered by insurance  proceeds.  The renovations are anticipated to be completed
during 2003.

Results of Operations

The  Registrant's  net  loss  for  the  six  months  ended  June  30,  2002  was
approximately $1,096,000 as compared to a net loss of approximately $614,000 for
the same period in 2001.  The  Registrant's  net loss for the three months ended
June  30,  2002  was  approximately  $482,000  as  compared  to a  net  loss  of
approximately $366,000 for the same period in 2001. The increase in net loss for
the six months  ended June 30, 2002 is primarily  attributable  to a decrease in
total revenues and an increase in total  expenses.  The increase in net loss for
the three  months  ended June 30, 2002 is  primarily  due to a decrease in total
revenues partially offset by a decrease in total expenses. The decrease in total
revenues for both periods is due to a decrease in both rental and other  income.
Rental and other income  decreased  due to decreases in occupancy at both of the
Registrant's  properties,  especially  at Plainview  Apartments  due to the mold
problems as previously discussed.

The increase in total expenses for the six months ended June 30, 2002 was due to
increases in operating, interest and depreciation expenses partially offset by a
decrease in property tax expense.  The increase in operating expense for the six
months  ended  June  30,  2002  is due to an  increase  in  maintenance  expense
partially offset by decreases in utility and property management expenses.

The decrease in total  expenses for the three months ended June 30, 2002 was due
to  decreases  in  operating  and  property  tax  expenses  partially  offset by
increases  in interest  and  depreciation  expense.  The  decrease in  operating
expenses for the three months ended June 30, 2002 is due to decreases in utility
and property  management expenses partially offset by an increase in maintenance
expense.  The decrease in utility  expense for both periods is due to a decrease
in natural gas costs at Plainview Apartments. Property management fees decreased
for both periods due to the decrease in revenues at the Partnership's investment
properties  as  discussed  above.  Maintenance  expense has  increased  for both
periods due to increases in landscaping at both properties and interior painting
at Salem  Courthouse,  in addition to incurring  costs  associated with the mold
clean-up at  Plainview  during the first  quarter of 2002.  Property tax expense
decreased  for both  periods  due to the  payment in 2001 of an  assessment  for
additional  taxes  owed  for  1999 at  Plainview  Apartments.  Interest  expense
increased  for both periods due to an increase in the balances  owed on advances
from the Managing  General  Partner.  Depreciation  expense  increased  for both
periods due to additions to property improvements and replacements over the past
year which are now being depreciated.

Included in general and  administrative  expenses at both June 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.

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 June 30, 2002, the Registrant had cash and cash  equivalents of approximately
$391,000  compared to  approximately  $219,000 at June 30,  2001.  Cash and cash
equivalents  increased  approximately  $144,000  from  December  31, 2001 due to
approximately $826,000 of cash provided by financing activities partially offset
by  approximately  $308,000 and $374,000 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,  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 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  $149,000 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  $356,000 in
budgeted and unbudgeted capital  expenditures at Plainview Apartments as of June
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 restoration  project mentioned above.
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 $151,000
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
$84,000 in capital  expenditures at Salem  Courthouse  Apartments as of June 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  $7,700,000,  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 six
months ended June 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 June 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 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 June 30,  2002  was  approximately
$125,000.

Other

In addition to its indirect  ownership of the managing  general partner interest
in the Partnership,  AIMCO and its affiliates  owned 406.75 limited  partnership
units (the "Units") in the  Partnership  representing  40.21% of the outstanding
Units at June 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
40.21% 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 Partnerships 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.


<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.

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 June 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: August 14, 2002


<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 June
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:  August 14, 2002


                                    /s/  Paul J. McAuliffe
                                    Name:  Paul J. McAuliffe
                                    Date:  August 14, 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.