United States
                       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 June 30, 2003


[ ] 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 registrant 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, 2003

<TABLE>
<CAPTION>

Assets
<S>                                                                          <C>
   Cash and cash equivalents                                                 $   550
   Receivables and deposits                                                      223
   Restricted escrows                                                            223
   Other assets                                                                  253
   Investment properties:
      Land                                                    $ 2,821
      Buildings and related personal property                   37,658
                                                                40,479
      Less accumulated depreciation                            (23,410)       17,069
                                                                            $ 18,318

Liabilities and Partners' Deficit
Liabilities
   Accounts payable                                                          $ 804
   Tenant security deposit liabilities                                           115
   Accrued property taxes                                                        536
   Other liabilities                                                             330
   Due to affiliates                                                           3,807
   Mortgage notes payable                                                     23,166

Partners' Deficit
   General partners                                            $ (209)
   Limited partners (1,011.5 units issued and
      outstanding)                                             (10,231)      (10,440)
                                                                            $ 18,318

            See Accompanying Notes to Consolidated Financial Statements

</TABLE>

<PAGE>

                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
                      (in thousands, except per unit data)
<TABLE>
<CAPTION>

                                        Three Months Ended            Six Months Ended
                                             June 30,                     June 30,
                                        2003          2002           2003          2002
                                                   (Restated)                   (Restated)
Revenues:
<S>                                     <C>          <C>           <C>            <C>
  Rental income                         $ 984        $ 1,181       $ 1,934        $ 2,325
  Other income                             154           141            288            286
  Casualty gain (Note D)                    --            --             62             --
      Total revenues                     1,138         1,322          2,284          2,611

Expenses:
  Operating                                596           603          1,167          1,327
  General and administrative                45            55            103            116
  Depreciation                             437           449            854            890
  Interest                                 525           517            964          1,035
  Property taxes                           116           101            233            211
      Total expenses                     1,719         1,725          3,321          3,579

Net loss                               $ (581)       $ (403)       $ (1,037)      $ (968)

Net loss allocated to general
  partners (2%)                         $ (12)        $ (8)         $ (21)         $ (19)
Net loss allocated to limited
  partners (98%)                          (569)         (395)        (1,016)          (949)

                                       $ (581)       $ (403)       $ (1,037)      $ (968)

Net loss per limited partnership
  unit                                $(562.53)     $(390.51)     $(1,004.45)    $ (938.21)

            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, 2002                   1,011.5        $ (188)    $ (9,215)    $ (9,403)

Net loss for the six months
   ended June 30, 2003                      --           (21)      (1,016)      (1,037)

Partners' deficit at
   June 30, 2003                       1,011.5        $ (209)    $(10,231)    $(10,440)

            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,
                                                                    2003         2002
Cash flows from operating activities:                                         (Restated)
<S>                                                                <C>          <C>
  Net loss                                                         $(1,037)     $ (968)
  Adjustments to reconcile net loss to net cash provided by
   (used in) operating activities:
     Depreciation                                                      854          890
     Amortization of mortgage discounts and loan costs                  34           28
     Bad debt expense                                                  125          128
     Casualty gain                                                     (62)          --
     Change in accounts:
      Receivables and deposits                                        (238)        (228)
      Other assets                                                     (83)         (82)
      Accounts payable                                                  51         (216)
      Tenant security deposit liabilities                               44            7
      Accrued property taxes                                           275           96
      Other liabilities                                                 75          (32)
      Due to affiliate                                                 167          131
         Net cash provided by (used in) operating activities           205         (246)

Cash flows from investing activities:
  Insurance proceeds received                                           62          332
  Property improvements and replacements                            (2,022)        (466)
  Net withdrawals from (deposits to) restricted escrows                570         (302)
         Net cash used in investing activities                      (1,390)        (436)

Cash flows from financing activities:
  Payments on mortgage notes payable                                   (86)         (79)
  Advances from affiliates                                           1,510          905
         Net cash provided by financing activities                   1,424          826

Net increase in cash and cash equivalents                              239          144
Cash and cash equivalents at beginning of period                       311          247

Cash and cash equivalents at end of period                          $ 550        $ 391

Supplemental disclosure of cash flow information:
  Cash paid for interest                                           $ 1,024       $ 969

Supplemental disclosure of non-cash information:
  Property improvements and replacements included in accounts
   payable                                                          $ 640        $ 158

At December 31, 2002 and 2001, approximately $12,000 and $56,000,  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, 2003 and 2002, 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,
2003 are not necessarily  indicative of the results that may be expected for the
year  ending  December  31,  2003.  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, 2002.
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  Partnership's  investment  properties  for providing
property   management   services.   The  Partnership  paid  to  such  affiliates
approximately  $109,000  and $133,000 for the six months ended June 30, 2003 and
2002, respectively, which is included in operating expenses.

An affiliate of the Managing  General  Partner is entitled to  reimbursement  of
accountable  administrative  expenses  amounting to  approximately  $169,000 and
$90,000 for the six months ended June 30, 2003 and 2002, respectively,  which is
included in general  and  administrative  expenses  and  investment  properties.
Included in the reimbursement of accountable administrative expenses for the six
months  ended  June  30,  2003  and 2002  are  construction  oversight  costs of
approximately  $95,000 and $2,000,  respectively.  The  construction  management
service  fees  are  based on a  percentage  of  current  year  additions  to the
investment   properties.   At  June  30,   2003,   approximately   $429,000   of
reimbursements  for  services  and related  accrued  interest 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, 2003 and 2002, the Managing General Partner
advanced the Partnership approximately $1,510,000 and $905,000, respectively, to
cover operational  expenses at Plainview  Apartments and the Partnership.  These
advances were made in accordance with the terms of the Partnership Agreement. At
June 30, 2003,  the balance of the advances,  including  accrued  interest,  was
approximately  $3,378,000.  Interest  is  charged  at the  prime  rate  plus 2%.
Interest expense was approximately  $64,000 and $30,000 for the six months ended
June 30, 2003 and 2002, respectively.  Subsequent to June 30, 2003, the Managing
General  Partner  has  approved  and funded  additional  advances  to  Plainview
Apartments of approximately $1,101,000.

During 2002 the Partnership  insured both of 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  2003  the  Partnership  is  insuring  Salem
Courthouse  under this method and the  Managing  General  Partner  has  obtained
insurance coverage for Plainview  Apartments from a third party.  During the six
months ended June 30, 2003 and 2002,  the  Partnership  was charged by AIMCO and
its affiliates approximately $36,000 and $111,000,  respectively,  for insurance
coverage and fees associated with policy claims administration.

Note C - Plainview Apartments Redevelopment

During 2002 the Managing General Partner began a major redevelopment  project at
Plainview  Apartments.  The property  discovered  mold growth  relating to water
leaks in two buildings in October 2001 and  experienced  fires in December 2001,
January 2002 and August 2002. The property also needed to be updated due to many
new  properties  being built which  significantly  increased the  competition in
Plainview's  market  area and the  older  property  has had  difficulty  staying
competitive.   Therefore,   in  an  effort  to  increase  occupancy  and  become
competitive  in the local market a  significant  redevelopment  project has been
undertaken at the property.  A significant  number of units have been unrentable
during the ongoing redevelopment project. As of June 30, 2003, a majority of the
units have been restored to a leasable  state with work on the  remaining  units
expected to be completed  during the third quarter of 2003. The Managing General
Partner expects occupancy at Plainview Apartments to return to historical levels
during the second half of 2003.

During the  construction  period  certain  expenses  are being  capitalized  and
depreciated over the estimated useful life of the property. During the three and
six month periods ended June 30, 2003 and 2002, the following  amounts have been
capitalized (in thousands):

2003
                              First                Second
                             Quarter               Quarter               Total
Interest                      $ 129                 $  79                $ 208
Operating expenses               65                    37                  102
Real estate taxes                21                    13                   34
                              $ 215                 $ 129                $ 344

2002
                              First                Second
                             Quarter               Quarter               Total
Interest                       $ 24                 $ 42                  $ 66
Operating expenses               21                   28                    49
Real estate taxes                 4                    9                    13
                               $ 49                 $ 79                 $ 128

Costs  capitalized  in the fourth  quarter of 2002 related to the  redevelopment
project were  retroactively  applied to the first,  second and third quarters of
2002.  Accordingly,  the accompanying  statement of operations for the three and
six months ended June 30, 2002 have been restated to reflect the  capitalization
of the costs noted above.

Note D - Casualty Gain

During the fourth quarter of 2002 a casualty gain of approximately  $211,000 was
recorded at Plainview  Apartments related to a fire that occurred in August 2002
which caused damage to ten units of the complex.  The gain was the result of the
receipt in 2002 of insurance  proceeds of  approximately  $316,000 offset by the
write off of approximately  $105,000 of undepreciated  property improvements and
replacements.  During the six months ended June 30, 2003,  additional  insurance
proceeds of  approximately  $62,000 were  received and  recognized as a casualty
gain.  As  of  June  30,  2003,  the  property's   mortgage  lender  is  holding
approximately   $103,000  of  the   insurance   proceeds  to  be   dispersed  as
reconstruction  is  completed.  The  Managing  General  Partner is  currently in
discussions with the insurance  carrier as to further proceeds to be received to
cover the remaining cost of the reconstruction. The Partnership anticipates that
further  insurance  proceeds will be received  related to this casualty and when
received  will result in the  recognition  of an  additional  gain,  however the
amount cannot be estimated at this time.

Note E - Legal Proceedings

In March 1998, several putative unit holders of limited partnership units of the
Partnership  commenced an action  entitled  Rosalie  Nuanes,  et al. v. Insignia
Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the
State of  California  for the  County  of San  Mateo.  The  plaintiffs  named as
defendants,  among others,  the  Partnership,  its Managing  General Partner and
several of their  affiliated  partnerships  and corporate  entities.  The action
purported  to  assert  claims  on  behalf  of a class of  limited  partners  and
derivatively  on behalf  of a number  of  limited  partnerships  (including  the
Partnership)  that are named as nominal  defendants,  challenging,  among  other
things,  the  acquisition  of  interests  in certain  Managing  General  Partner
entities by Insignia Financial Group, Inc.  ("Insignia") and entities that were,
at one  time,  affiliates  of  Insignia;  past  tender  offers  by the  Insignia
affiliates to acquire limited partnership units;  management of the partnerships
by the  Insignia  affiliates;  and the series of  transactions  which  closed on
October 1, 1998 and February 26, 1999 whereby  Insignia and Insignia  Properties
Trust,  respectively,  were merged into AIMCO.  The plaintiffs  sought  monetary
damages and equitable relief, including judicial dissolution of the Partnership.
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 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 opposed 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 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  could  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  Heller  action  was  brought  as a  purported
derivative  action,  and  asserted  claims for,  among other  things,  breach of
fiduciary duty, unfair competition,  conversion, unjust enrichment, and judicial
dissolution.  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.  Before  completing
briefing on the appeal, the parties stayed further  proceedings in the appeal in
light of a settlement.

On January 8, 2003,  the parties filed a  Stipulation  of Settlement in proposed
settlement of the Nuanes action and the Heller action described below.

In general  terms,  the  proposed  settlement  provides  for  certification  for
settlement  purposes of a settlement class consisting of all limited partners in
this  Partnership and others (the  "Partnerships")  as of December 20, 2002, the
dismissal  with  prejudice  and  release  of claims  in the  Nuanes  and  Heller
litigation,  payment by AIMCO of $9.9  million  (which shall be  distributed  to
settlement  class  members  after  deduction of attorney fees and costs of class
counsel and certain costs of settlement) and up to $1 million toward the cost of
independent  appraisals of the  Partnerships'  properties  by a Court  appointed
appraiser.  An affiliate of the Managing General Partner has also agreed to make
a tender offer to purchase all of the partnership  interests in the Partnerships
within one year of final  approval,  if it is granted,  and to provide  partners
with the  independent  appraisals  at the time of these  tenders.  The  proposed
settlement  also provided for the  limitation  of the allowable  costs which the
Managing  General  Partner or its  affiliates  will charge the  Partnerships  in
connection with this litigation and imposes limits on the class counsel fees and
costs in this litigation.  On April 11, 2003,  notice was distributed to limited
partners providing the details of the proposed settlement.

On June 13, 2003, the Court granted final approval of the settlement and entered
judgment in both the Nuanes and Heller actions.

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

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.

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

The matters discussed in this report contain certain forward-looking statements,
including, without limitation, statements regarding future financial performance
and the effect of government  regulations.  Actual results may differ materially
from those described in the forward-looking statements and will be affected by a
variety of risks and factors including,  without limitation:  national and local
economic  conditions;  the terms of  governmental  regulations  that  affect the
Registrant and interpretations of those regulations; the competitive environment
in which the Registrant operates;  financing risks, including the risk that cash
flows from operations may be insufficient to meet required payments of principal
and interest;  real estate risks, including variations of real estate values and
the general  economic  climate in local markets and  competition  for tenants in
such markets;  litigation,  including  costs  associated  with  prosecuting  and
defending  claims  and  any  adverse   outcomes,   and  possible   environmental
liabilities.   Readers  should  carefully  review  the  Registrant's   financial
statements and the notes thereto,  as well as the risk factors  described in the
documents  the  Registrant  files  from  time to time  with the  Securities  and
Exchange Commission.

The Partnership's  investment properties consist of two apartment complexes. The
following table sets forth the average occupancy of these properties for the six
months ended June 30, 2003 and 2002:

                                                 Average Occupancy
                                                  2003       2002
         Salem Courthouse
            Indianapolis, Indiana                 92%         91%

         Plainview Apartments
            Louisville, Kentucky                  56%         71%

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 had roof leaks which has led to some mold growth,  several  buildings
have had units down as a result of fires and the  property  needed to be updated
in order to become  competitive  in the local  market.  These  factors  have all
contributed to  approximately  32% of the property's total available units being
vacated  during  the six  months  ended  June  30,  2003 in  order  to  expedite
reconstruction.  The Partnership  has engaged  architectural  and  environmental
engineering experts to perform corrective action on the affected  buildings.  As
of June 30, 2003, a majority of the units have been restored to a leasable state
with work on the  remaining  units  expected  to be  completed  during the third
quarter of 2003. The Managing  General  Partner  expects  occupancy at Plainview
Apartments  to return to historical  levels during the second half of 2003.  The
Managing General Partner anticipates the total cost of the redevelopment project
to be  approximately  $4,200,000  of  which  approximately  $3,000,000  has been
expended as of June 30,  2003.  These costs will be funded from  available  cash
flow from  property  operations,  additional  advances  from  affiliates  of the
Managing General Partner and insurance proceeds.

Results of Operations

The Partnership  recognized a net loss for the six months ended June 30, 2003 of
approximately  $1,037,000  compared to a net loss of approximately  $968,000 for
the same period in 2002. The  Partnership's  net loss for the three month period
ended  June  30,  2003  was  approximately  $581,000  compared  with a  loss  of
approximately $403,000 for the three months ended June 30, 2002. The increase in
net loss for both  the  three  and six  month  periods  ended  June 30,  2003 is
attributable to a decrease in total revenues  partially  offset by a decrease in
total expenses.

The decrease in total  revenues for the three and six month  periods  ended June
30,  2003 is due to a decrease  in rental  income  caused  primarily  by the 15%
decrease in average  occupancy at Plainview  Apartments as discussed  above. For
the six months ended June 30, 2003, the decrease in total revenues was partially
offset by the recognition of a casualty gain during the first quarter of 2003.

During the fourth quarter of 2002 a casualty gain of approximately  $211,000 was
recorded at Plainview  Apartments related to a fire that occurred in August 2002
which caused damage to ten units of the complex.  The gain was the result of the
receipt in 2002 of insurance  proceeds of  approximately  $316,000 offset by the
write off of approximately  $105,000 of undepreciated  property improvements and
replacements.  During the six months ended June 30, 2003,  additional  insurance
proceeds of  approximately  $62,000 were  received and  recognized as a casualty
gain.  As  of  June  30,  2003,  the  property's   mortgage  lender  is  holding
approximately   $103,000  of  the   insurance   proceeds  to  be   dispersed  as
reconstruction  is  completed.  The  Managing  General  Partner is  currently in
discussions with the insurance  carrier as to further proceeds to be received to
cover the remaining cost of the reconstruction. The Partnership anticipates that
further  insurance  proceeds will be received  related to this casualty and when
received  will result in the  recognition  of an  additional  gain,  however the
amount cannot be estimated at this time.

The decrease in total  expenses for the six months ended June 30, 2003 is due to
decreases in operating,  general and  administrative,  depreciation and interest
expenses  partially  offset by an increase in property  tax  expense.  Operating
expense decreased due to decreases in property,  management fees and maintenance
expenses.  The  decrease  in property  expense is  primarily  attributable  to a
decrease  in water costs at  Plainview  Apartments  due to several  leaks in the
plumbing  system  contributing  to higher costs during the six months ended June
30,  2002.  Management  fees are  based on  rental  revenues  and  decreased  in
correlation  with the decrease in rental revenues  discussed above. The decrease
in  maintenance  and interest  expenses was  primarily due to an increase in the
capitalization  of certain  construction  period operating costs and interest in
connection with the rehabilitation  project at Plainview Apartments as discussed
below.  Depreciation  expense  decreased  as a result  of the  write-off  of the
damaged  units at  Plainview  Apartments  in 2002.  General  and  administrative
expense  decreased due to a decrease in  accountable  reimbursements  paid to an
affiliate  of the  Managing  General  Partner.  Property  tax expense  increased
slightly  as  the  reduction  in  expense  due to the  capitalization  of  costs
associated with Plainview  Apartments,  discussed below, was more than offset by
an increase in property tax expense for Salem  Courthouse  Apartments,  which is
located in Indiana.  During  2003,  Indiana has  adjusted  its  methodology  for
assessing taxable values and tax rates, which resulted in a significant increase
in property  tax  expense.  The  decrease in expenses for the three months ended
June 30, 2003 is due to decreases in operating,  general and  administrative and
depreciation expenses partially offset by an increase in property tax expense as
discussed above.

During 2002 the Managing General Partner began a major redevelopment  project at
Plainview  Apartments.  The property  discovered  mold growth  relating to water
leaks in two buildings in October 2001 and  experienced  fires in December 2001,
January 2002 and August 2002. The property also needed to be updated due to many
new  properties  being built which  significantly  increased the  competition in
Plainview's  market  area and the  older  property  has had  difficulty  staying
competitive.   Therefore,   in  an  effort  to  increase  occupancy  and  become
competitive  in the local market a  significant  redevelopment  project has been
undertaken at the property.  A significant  number of units have been unrentable
during the ongoing redevelopment project. As of June 30, 2003, a majority of the
units have been restored to a leasable  state with work on the  remaining  units
expected to be completed  during the third quarter of 2003. The Managing General
Partner expects occupancy at Plainview Apartments to return to historical levels
during the second half of 2003.

During the  construction  period  certain  expenses  are being  capitalized  and
depreciated  over the remaining  life of the property.  During the three and six
month  periods  ended June 30, 2003 and 2002,  the  following  amounts have been
capitalized (in thousands):

2003
                              First                Second
                             Quarter               Quarter               Total
Interest                      $ 129                 $  79                $ 208
Operating expenses               65                    37                  102
Real estate taxes                21                    13                   34
                              $ 215                 $ 129                $ 344

2002
                              First                Second
                             Quarter               Quarter               Total
Interest                       $ 24                 $  42                 $ 66
Operating expenses               21                    28                   49
Real estate taxes                 4                     9                   13
                               $ 49                 $  79                $ 128

Costs  capitalized  in the fourth  quarter of 2002 related to the  redevelopment
project were  retroactively  applied to the first,  second and third quarters of
2002.  Accordingly,  the accompanying  statement of operations for the three and
six months ended June 30, 2002 have been restated to reflect the  capitalization
of the costs noted above.

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, 2003, the Registrant had cash and cash  equivalents of approximately
$550,000  compared to  approximately  $391,000 at June 30,  2002.  Cash and cash
equivalents  increased  approximately  $239,000  from  December  31, 2002 due to
approximately  $1,424,000  and  $205,000  of  cash  provided  by  financing  and
operating activities, respectively, partially offset by approximately $1,390,000
of cash used in investing  activities.  Cash  provided by  financing  activities
consisted  of  advances  to the  Partnership  by the  Managing  General  Partner
partially offset by principal  payments on the first mortgage  encumbering Salem
Courthouse Apartments.  Cash used in investing activities consisted primarily of
property improvements and replacements  partially offset by net withdrawals from
the  restricted  escrow  account  maintained  by the mortgage  lender and by the
receipt of  additional  insurance  proceeds  related to the August  2002 fire at
Plainview  Apartments.  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: During the six months ended June 30, 2003, the Partnership
completed   approximately   $2,443,000  in  capital  expenditures  at  Plainview
Apartments  arising  from the  redevelopment  of the  property,  which  includes
capitalization of construction period interest of approximately  $208,000,  real
estate taxes of approximately  $34,000 and other construction period expenses of
approximately  $102,000.  The  Partnership  also  completed  additional  capital
expenditures  of  approximately  $108,000  consisting  of  floor  covering,  air
conditioning  unit,  water  heater  and  plumbing  fixture  replacements.  These
expenditures were funded primarily through loans from affiliates of the Managing
General Partner. The Partnership  evaluates the capital improvement needs of the
property  during  the year  and  currently  expects  to  complete  approximately
$1,200,000 for additional property  redevelopment as mentioned above,  exclusive
of capitalized  construction period costs, and expects to complete an additional
$55,000 in capital improvements not related to property redevelopment consisting
primarily of floor covering replacements, plumbing, appliances and HVAC work.

Salem  Courthouse  Apartments:  During the six months ended June 30,  2003,  the
Partnership  completed  approximately  $99,000 of capital  improvements at Salem
Courthouse  Apartments,  consisting  primarily of floor  covering and  appliance
replacements.  These  improvements  were  funded  from  operating  cash flow and
replacement reserves. The Partnership evaluates the capital improvement needs of
the property  during the year and  currently  expects to complete an  additional
$55,000 in capital  improvements  during the remainder of 2003.  The  additional
capital  improvements  will consist  primarily of floor  covering and  appliance
replacements,   parking  lot  upgrades  and  interior   building   improvements.
Additional  improvements  may be  considered  during 2003 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
the redevelopment project ongoing at Plainview Apartments, 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  Partnership's
distributable cash flow, if any, may be adversely affected at least in the short
term.

The  Partnership's  assets are thought to be sufficient for any near-term  needs
(exclusive  of  capital   improvements)   of  the   Partnership.   The  mortgage
indebtedness of  approximately  $23,166,000,  net of discount,  requires balloon
payments of  approximately  $7,784,000  due on October 15, 2003 related to Salem
Courthouse  and  approximately  $15,336,000  due on November 15, 2010 related to
Plainview  Apartments.  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
Partnership will risk losing such properties through  foreclosure.  The Managing
General  Partner   anticipates   refinancing  the  mortgage   encumbering  Salem
Courthouse prior to its maturity in October 2003.

There were no distributions to the partners during the six months ended June 30,
2003 and 2002. Future cash  distributions  will depend on the levels of net cash
generated from  operations,  the availability of cash reserves and the timing of
debt  maturities,  refinancings  and/or property sales. The  Partnership's  cash
available  for  distribution  is  reviewed on a monthly  basis.  In light of the
redevelopment costs anticipated for 2003 at Plainview Apartments and the amounts
accrued and payable to the Managing  General Partner at June 30, 2003, there can
be no  assurance  that the  Partnership  will  generate  sufficient  funds  from
operations, after required capital expenditures,  to permit any distributions to
its partners during the remainder of 2003 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  June  30,  2003  was
approximately $120,000.

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 June 30, 2003. A number of these Units were acquired pursuant to tender
offers  made by  AIMCO  or its  affiliates.  It is  possible  that  AIMCO or its
affiliates will acquire  additional  Units in exchange for cash or a combination
of cash and units in the operating  partnership of AIMCO either through  private
purchases or tender offers.  Pursuant to the Partnership Agreement,  unitholders
holding a majority of the Units are  entitled  to take action with  respect to a
variety of matters  that  include,  but are not  limited  to,  voting on certain
amendments  to the  Partnership  Agreement  and  voting to remove  the  Managing
General  Partner.  As a result of its  ownership  of  40.36% of the  outstanding
Units,  AIMCO and its  affiliates are in a position to influence all such voting
decisions with respect to the Partnership. Although the Managing General Partner
owes fiduciary duties to the limited  partners of the Partnership,  the Managing
General Partner also owes fiduciary duties to AIMCO as its sole stockholder.  As
a result,  the duties of the  Managing  General  Partner,  as  managing  general
partner, to the Partnership and its limited partners may come into conflict with
the duties of the Managing General Partner to AIMCO, as its sole stockholder.

Critical Accounting Policies 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 and
the Partnership  fully reserves all balances  outstanding  over thirty days. The
Partnership will offer rental concessions during  particularly slow months or in
response to heavy  competition  from other  similar  complexes in the area.  Any
concessions  given at the inception of the lease are amortized  over the life of
the lease.

ITEM 3.     CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures.  The Partnership's management,  with the
participation of the principal executive officer and principal financial officer
of the Managing  General  Partner,  who are the equivalent of the  Partnership's
principal executive officer and principal financial officer,  respectively,  has
evaluated  the  effectiveness  of  the  Partnership's  disclosure  controls  and
procedures (as such term is defined in Rules  13a-15(e) and 15d-15(e)  under the
Securities  Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this report.  Based on such  evaluation,  the principal
executive  officer  and  principal  financial  officer of the  Managing  General
Partner, who are the equivalent of the Partnership's principal executive officer
and principal  financial officer,  respectively,  have concluded that, as of the
end of such period,  the  Partnership's  disclosure  controls and procedures are
effective.

(b) Internal Control Over Financial  Reporting.  There have not been any changes
in the Partnership's  internal control over financial reporting (as such term is
defined in Rules  13a-15(f)  and  15d-15(f)  under the Exchange  Act) during the
fiscal quarter to which this report relates that have  materially  affected,  or
are reasonably likely to materially affect,  the Partnership's  internal control
over financial reporting.

                           PART II - OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

In March 1998, several putative unit holders of limited partnership units of the
Partnership  commenced an action  entitled  Rosalie  Nuanes,  et al. v. Insignia
Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the
State of  California  for the  County  of San  Mateo.  The  plaintiffs  named as
defendants,  among others,  the  Partnership,  its Managing  General Partner and
several of their  affiliated  partnerships  and corporate  entities.  The action
purported  to  assert  claims  on  behalf  of a class of  limited  partners  and
derivatively  on behalf  of a number  of  limited  partnerships  (including  the
Partnership)  that are named as nominal  defendants,  challenging,  among  other
things,  the  acquisition  of  interests  in certain  Managing  General  Partner
entities by Insignia Financial Group, Inc.  ("Insignia") and entities that were,
at one  time,  affiliates  of  Insignia;  past  tender  offers  by the  Insignia
affiliates to acquire limited partnership units;  management of the partnerships
by the  Insignia  affiliates;  and the series of  transactions  which  closed on
October 1, 1998 and February 26, 1999 whereby  Insignia and Insignia  Properties
Trust,  respectively,  were merged into AIMCO.  The plaintiffs  sought  monetary
damages and equitable relief, including judicial dissolution of the Partnership.
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 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 opposed 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 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  could  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  Heller  action  was  brought  as a  purported
derivative  action,  and  asserted  claims for,  among other  things,  breach of
fiduciary duty, unfair competition,  conversion, unjust enrichment, and judicial
dissolution.  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.  Before  completing
briefing on the appeal, the parties stayed further  proceedings in the appeal in
light of a settlement.

On January 8, 2003,  the parties filed a  Stipulation  of Settlement in proposed
settlement of the Nuanes action and the Heller action described below.

In general  terms,  the  proposed  settlement  provides  for  certification  for
settlement  purposes of a settlement class consisting of all limited partners in
this  Partnership and others (the  "Partnerships")  as of December 20, 2002, the
dismissal  with  prejudice  and  release  of claims  in the  Nuanes  and  Heller
litigation,  payment by AIMCO of $9.9  million  (which shall be  distributed  to
settlement  class  members  after  deduction of attorney fees and costs of class
counsel and certain costs of settlement) and up to $1 million toward the cost of
independent  appraisals of the  Partnerships'  properties  by a Court  appointed
appraiser.  An affiliate of the Managing General Partner has also agreed to make
a tender offer to purchase all of the partnership  interests in the Partnerships
within one year of final  approval,  if it is granted,  and to provide  partners
with the  independent  appraisals  at the time of these  tenders.  The  proposed
settlement  also provided for the  limitation  of the allowable  costs which the
Managing  General  Partner or its  affiliates  will charge the  Partnerships  in
connection with this litigation and imposes limits on the class counsel fees and
costs in this litigation.  On April 11, 2003,  notice was distributed to limited
partners providing the details of the proposed settlement.

On June 13, 2003, the Court granted final approval of the settlement and entered
judgment in both the Nuanes and Heller actions.

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


ITEM 6      EXHIBITS AND REPORTS ON FORM 8-K

            a) Exhibits:

                    3    Partnership Agreement dated July 8, 1985 and amended as
                         of  October 9, 1985 is  incorporated  by  reference  to
                         Exhibit A to the  Prospectus  of the  Registrant  dated
                         October 28, 1985 as filed with the Commission  pursuant
                         to Rule 424(b) under the Act.

                    3A   Second Amendment dated April 1, 1986 to the Partnership
                         Agreement dated July 8, 1985 as amended October 9, 1985
                         is  incorporated  by  reference  to  Exhibit  3A to the
                         Registrant's  Annual Report on Form 10-K for the fiscal
                         year ended December 31, 1986.

                    4    Certificate of Limited  Partnership dated June 28, 1985
                         is  incorporated  by  reference  to  Exhibit  4 to  the
                         Registrant's   Registration   Statement  on  Form  S-11
                         (Registration No. 2-99257).

                    31.1 Certification of equivalent of Chief Executive  Officer
                         pursuant    to    Securities    Exchange    Act   Rules
                         13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302
                         of the Sarbanes-Oxley Act of 2002.

                    31.2 Certification of equivalent of Chief Financial  Officer
                         pursuant    to    Securities    Exchange    Act   Rules
                         13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302
                         of the Sarbanes-Oxley Act of 2002.

                    32.1 Certification  Pursuant to 18 U.S.C.  Section  1350, as
                         Adopted  Pursuant to Section 906 of the  Sarbanes-Oxley
                         Act of 2002.

            b) Reports on Form 8-K:

                  None filed during the quarter ended June 30, 2003.


<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 13, 2003



<PAGE>

Exhibit 31.1


                                  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 report does not contain any untrue  statement
      of a material fact or omit to state a material fact  necessary to make the
      statements made, in light of the circumstances under which such statements
      were made,  not  misleading  with  respect  to the period  covered by this
      report;

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

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

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

      (b)   Evaluated the effectiveness of the registrant's  disclosure controls
            and  procedures and presented in this report our  conclusions  about
            the effectiveness of the disclosure  controls and procedures,  as of
            the  end  of the  period  covered  by  this  report  based  on  such
            evaluation; and

      (c)   Disclosed  in this  report any change in the  registrant's  internal
            control  over   financial   reporting   that  occurred   during  the
            registrant's  most recent fiscal  quarter (the  registrant's  fourth
            fiscal  quarter in the case of an annual report) that has materially
            affected,   or  is  reasonably  likely  to  materially  affect,  the
            registrant's internal control over financial reporting; and

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

      (a)   All significant  deficiencies and material  weaknesses in the design
            or operation of internal control over financial  reporting which are
            reasonably  likely to adversely affect the  registrant's  ability to
            record, process, summarize and report financial information; and

      (b)   Any fraud,  whether or not  material,  that  involves  management or
            other  employees  who have a  significant  role in the  registrant's
            internal control over financial reporting.

Date:  August 13, 2003

                                    /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>



Exhibit 31.2


                                  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 report does not contain any untrue  statement
      of a material fact or omit to state a material fact  necessary to make the
      statements made, in light of the circumstances under which such statements
      were made,  not  misleading  with  respect  to the period  covered by this
      report;

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

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

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

      (b)   Evaluated the effectiveness of the registrant's  disclosure controls
            and  procedures and presented in this report our  conclusions  about
            the effectiveness of the disclosure  controls and procedures,  as of
            the  end  of the  period  covered  by  this  report  based  on  such
            evaluation; and

      (c)   Disclosed  in this  report any change in the  registrant's  internal
            control  over   financial   reporting   that  occurred   during  the
            registrant's  most recent fiscal  quarter (the  registrant's  fourth
            fiscal  quarter in the case of an annual report) that has materially
            affected,   or  is  reasonably  likely  to  materially  affect,  the
            registrant's internal control over financial reporting; and

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

      (a)   All significant  deficiencies and material  weaknesses in the design
            or operation of internal control over financial  reporting which are
            reasonably  likely to adversely affect the  registrant's  ability to
            record, process, summarize and report financial information; and

      (b)   Any fraud,  whether or not  material,  that  involves  management or
            other  employees  who have a  significant  role in the  registrant's
            internal control over financial reporting.

Date:  August 13, 2003

                                    /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 32.1


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



In connection with the Quarterly  Report on Form 10-QSB of Davidson  Diversified
Real Estate III, L.P. (the  "Partnership"),  for the quarterly period ended June
30, 2003 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 13, 2003


                                           /s/Paul J. McAuliffe
                                    Name:  Paul J. McAuliffe
                                    Date:  August 13, 2003


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