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 March 31, 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)


                                 March 31, 2003
<TABLE>
<CAPTION>


Assets
<S>                                                                          <C>
   Cash and cash equivalents                                                 $  419
   Receivables and deposits                                                      146
   Restricted escrows                                                            871
   Other assets                                                                  162
   Investment properties:
      Land                                                    $ 2,821
      Buildings and related personal property                   35,601
                                                                          38,422
      Less accumulated depreciation                            (22,973)       15,449
                                                                            $ 17,047

Liabilities and Partners' Deficit
Liabilities
   Accounts payable                                                          $ 170
   Tenant security deposit liabilities                                            92
   Accrued property taxes                                                        398
   Other liabilities                                                             290
   Due to affiliates                                                           2,752
   Mortgage notes payable                                                     23,204

Partners' Deficit
   General partners                                            $ (197)
   Limited partners (1,011.5 units issued and
      outstanding)                                              (9,662)       (9,859)
                                                                            $ 17,047

            See Accompanying Notes to Consolidated Financial Statements

</TABLE>

<PAGE>

                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

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

<TABLE>
<CAPTION>

                                                               Three Months Ended
                                                                    March 31,
                                                               2003           2002
Revenues:                                                                 (Restated)
<S>                                                           <C>           <C>
   Rental income                                              $ 950         $ 1,144
   Other income                                                   134           145
   Casualty gain                                                   62            --
      Total revenues                                            1,146         1,289

Expenses:
   Operating                                                      571           724
   General and administrative                                      58            61
   Depreciation                                                   417           441
   Interest                                                       439           518
   Property taxes                                                 117           110
      Total expenses                                            1,602         1,854

Net loss                                                      $ (456)       $ (565)

Net loss allocated to general partners (2%)                    $ (9)         $ (11)
Net loss allocated to limited partners (98%)                     (447)         (554)

                                                              $ (456)       $ (565)

Net loss per limited partnership unit                        $(441.92)     $(547.70)

            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 three months
   ended March 31, 2003                     --            (9)        (447)      (456)

Partners' deficit at
   March 31, 2003                      1,011.5        $ (197)     $(9,662)   $(9,859)

            See Accompanying Notes to Consolidated Financial Statements

</TABLE>

<PAGE>

                     DAVIDSON DIVERSIFIED REAL ESTATE III, L.P.

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

                                                                   Three Months Ended
                                                                       March 31,
                                                                      2003      2002
                                                                             (Restated)
Cash flows from operating activities:
<S>                                                                <C>         <C>
  Net loss                                                         $ (456)     $ (565)
  Adjustments to reconcile net loss to net cash provided by
   operating activities:
     Depreciation                                                     417          441
     Amortization of mortgage discounts and loan costs                 17           15
     Casualty gain                                                    (62)          --
     Change in accounts:
      Receivables and deposits                                        (36)         (69)
      Other assets                                                     20         (122)
      Accounts payable                                                 --           55
      Tenant security deposit liabilities                              21            3
      Accrued property taxes                                          137          114
      Other liabilities                                                35          115
      Due to affiliates                                                77           55
         Net cash provided by operating activities                    170           42

Cash flows from investing activities:
  Property improvements and replacements                             (548)        (229)
  Net (deposits to) withdrawals from restricted escrows               (78)          46
  Insurance proceeds received                                          62           --
         Net cash used in investing activities                       (564)        (183)

Cash flows from financing activities:
  Payments on mortgage notes payable                                  (43)         (39)
  Advances from affiliate                                             545          332
         Net cash provided by financing activities                    502          293

Net increase in cash and cash equivalents                             108          152
Cash and cash equivalents at beginning of period                      311          247

Cash and cash equivalents at end of period                         $ 419        $ 399

Supplemental disclosure of cash flow information:
  Cash paid for interest                                           $ 513        $ 516

Supplemental disclosure of non-cash information:
  Property improvements and replacements included in
   accounts payable                                                 $ 57        $ 76

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 three
months ended March 31, 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 month period ended March 31, 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  $54,000 and $66,000 for the three months ended March 31, 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  $82,000 and
$46,000 for the three months ended March 31, 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
three months ended March 31, 2003 and 2002 are  construction  oversight costs of
approximately  $38,000 and $2,000,  respectively.  The  construction  management
service  fees  are  based on a  percentage  of  current  year  additions  to the
investment   properties.   At  March  31,   2003,   approximately   $377,000  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 three  months  ended March 31, 2003,  the  Managing  General  Partner
advanced the Partnership approximately $545,000 to cover operational expenses at
Plainview Apartments and the Partnership. These advances were made in accordance
with the terms of the Partnership  Agreement.  At March 31, 2003, the balance of
the advances, including accrued interest, was approximately $2,375,000. Interest
is charged at the prime rate plus 2%. Interest expense was approximately $27,000
and $11,000 for the three months ended March 31, 2003 and 2002, respectively.

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 2003 and
2002, the  Partnership's  cost for insurance  coverage and fees  associated with
policy claims administration provided by AIMCO will be approximately $36,000 and
$111,000, respectively.

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
started and is expected to be completed in July 2003.  A  significant  number of
units  have been  unrentable  during  the  ongoing  redevelopment  project.  The
Managing  General  Partner intends to restore these units to a leasable state at
which time occupancy is expected to return to historical levels.

During the  construction  period  certain  expenses  are being  capitalized  and
depreciated  over the remaining  life of the  property.  During the three months
ended March 31, 2003, approximately $129,000 of interest,  approximately $21,000
of  real  estate  taxes  and  approximately  $65,000  of  operating  costs  were
capitalized.  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   months   ended  March  31,  2002  has  been   restated  to  reflect  the
capitalization  of approximately  $24,000 of interest,  approximately  $4,000 of
real estate taxes and approximately $21,000 of operating costs.

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,  occurring 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
approximately  $105,000 of undepreciated  property improvements and replacements
being  written  off.  During  the first  quarter of 2003,  additional  insurance
proceeds of  approximately  $62,000 were  received and  recognized as a casualty
gain.  As  of  March  31,  2003,  the  property's  mortgage  lender  is  holding
approximately   $328,000  of  the   insurance   proceeds  to  be   dispersed  as
reconstruction  is  complete.  Additional  insurance  proceeds of  approximately
$58,000 were  received  subsequent  to March 31, 2003 and will be  recognized as
additional gain during the second quarter of 2003. 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.

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
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 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.

On January 8, 2003,  the parties filed a  Stipulation  of Settlement in proposed
settlement of the Nuanes action and the Heller action  described below. On April
4, 2003, the Court preliminarily approved the settlement and scheduled a hearing
on final approval for June 2, 2003.

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 provides 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.

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.  Before  completing  briefing on the appeal,  the parties stayed
further proceedings in the appeal pending the Court's review of the terms of the
proposed settlement described above.

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.



<PAGE>




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.  The discussions of the  Registrant's
business  and  results  of  operations,   including  forward-looking  statements
pertaining to such matters,  do not take into account the effects of any changes
to the  Registrant's  business  and results of  operations.  Actual  results may
differ  materially  from those described in the  forward-looking  statements and
will  be  affected  by  a  variety  of  risks  and  factors  including,  without
limitation:  national and local economic  conditions;  the terms of governmental
regulations that affect the Registrant and interpretations of those regulations;
the competitive  environment in which the Registrant operates;  financing risks,
including the risk that cash flows from  operations may be  insufficient to meet
required  payments of  principal  and  interest;  real estate  risks,  including
variations  of real  estate  values and the  general  economic  climate in local
markets and competition for tenants in such markets; and possible  environmental
liabilities.   Readers  should  carefully  review  the  Registrant's   financial
statements and the notes thereto,  as well as the risk factors  described in the
documents  the  Registrant  files  from  time to time  with the  Securities  and
Exchange Commission.

The Partnership's  investment properties consist of two apartment complexes. The
following  table sets forth the average  occupancy of these  properties  for the
three months ended March 31, 2003 and 2002:

                                                 Average Occupancy
                                                  2003       2002
         Salem Courthouse
            Indianapolis, Indiana                 92%         89%

         Plainview Apartments
            Louisville, Kentucky                  53%         70%

The occupancy at Salem Courthouse increased due to increased concessions offered
at the  property in an effort to boost  occupancy by the  property's  management
team.

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 at
March  31,  2003  being  vacated  in  order  to  expedite  reconstruction.   The
Partnership has engaged  architectural and environmental  engineering experts to
perform  corrective  action on the  affected  buildings.  The  Managing  General
Partner  intends  to  restore  these  units to a  leasable  state at which  time
occupancy  is  expected  to  return  to  historic   levels.   Based  on  current
redevelopment  plans the Managing General Partner  anticipates the redevelopment
to be complete in July 2003 at a cost of approximately  $4,200,000.  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's  net loss for the  three  months  ended  March  31,  2003 was
approximately  $456,000 as compared to a net loss of approximately  $565,000 for
the same period in 2002.  The  decrease in net loss for the three  months  ended
March  31,  2003 is  primarily  attributable  to a  decrease  in total  expenses
partially offset by a decrease in total revenues.

The decrease in total  revenues for the three months ended March 31, 2003 is due
to a decrease in rental income  caused  primarily by the 17% decrease in average
occupancy at Plainview  Apartments as discussed  above  partially  offset by the
recognition of a casualty gain during 2002.

During the fourth quarter of 2002 a casualty gain of approximately  $211,000 was
recorded at Plainview  Apartments  related to a fire,  occurring 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
approximately  $105,000 of undepreciated  property improvements and replacements
being  written  off.  During  the first  quarter of 2003,  additional  insurance
proceeds of  approximately  $62,000 were  received and  recognized as a casualty
gain.  As  of  March  31,  2003,  the  property's  mortgage  lender  is  holding
approximately   $328,000  of  the   insurance   proceeds  to  be   dispersed  as
reconstruction  is  complete.  Additional  insurance  proceeds of  approximately
$58,000 were  received  subsequent  to March 31, 2003 and will be  recognized as
additional gain during the second quarter of 2003. 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.

The decrease in total  expenses  was  primarily  due to decreases in  operating,
depreciation and interest  expenses  partially offset by an increase in property
tax  expense.   Operating  expense  decreased  due  to  decreases  in  property,
management  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
three months ended March 31, 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 in 2002. When the  redevelopment of such units is
completed they will then begin being depreciated. 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,  which is located in
Indiana.  During  2003,  Indiana is  adjusting  its  methodology  for  assessing
property  taxable  values  and tax  rates,  which is  expected  to  result  in a
significant increase in property tax expense.

General  and  administrative  expense  remained  relatively  constant  over  the
comparable  periods.  Included  in general and  administrative  expenses at both
March 31,  2003 and 2002 are  reimbursements  to the  Managing  General  Partner
allowed under the Partnership Agreement. In addition,  costs associated with the
quarterly and annual  communications  with investors and regulatory agencies and
the annual audit required by the Partnership Agreement are also included.

During 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
started and is expected to be completed in July 2003.  A  significant  number of
units  have been  unrentable  during  the  ongoing  redevelopment  project.  The
Managing  General  Partner intends to restore these units to a leasable state at
which time occupancy is expected to return to historical levels.

During the  construction  period  certain  expenses  are being  capitalized  and
depreciated  over the remaining  life of the  property.  During the three months
ended March 31, 2003, approximately $129,000 of interest,  approximately $21,000
of  real  estate  taxes  and  approximately  $65,000  of  operating  costs  were
capitalized.  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   months   ended  March  31,  2002  has  been   restated  to  reflect  the
capitalization  of approximately  $24,000 of interest,  approximately  $4,000 of
real estate taxes and approximately $21,000 of operating costs.

As part of the ongoing  business plan of the  Partnership,  the Managing General
Partner monitors the rental market  environment of its investment  properties to
assess the feasibility of increasing rents,  maintaining or increasing occupancy
levels and protecting  the  Partnership  from increases in expenses.  As part of
this plan, the Managing General Partner attempts to protect the Partnership from
the burden of  inflation-related  increases in expenses by increasing  rents and
maintaining a high overall  occupancy  level.  However,  due to changing  market
conditions,  which  can  result  in the use of  rental  concessions  and  rental
reductions to offset softening market conditions, there is no guarantee that the
Managing General Partner will be able to sustain such a plan.

Liquidity and Capital Resources

At March 31, 2003, the Registrant had cash and cash equivalents of approximately
$419,000  compared to  approximately  $399,000 at March 31, 2002.  Cash and cash
equivalents  increased  approximately  $108,000  from  December  31, 2002 due to
approximately  $170,000 and $502,000 of cash provided by operating and financing
activities,  respectively,  partially offset by  approximately  $564,000 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 and net deposits to the restricted  escrow account
maintained by the mortgage lender  partially offset 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  three  months  ended  March 31,  2003,  the
Partnership  completed   approximately   $506,000  in  capital  expenditures  at
Plainview  Apartments  arising from the  redevelopment  of the  property,  which
includes   capitalization  of  construction  period  interest  of  approximately
$129,000,  real estate  taxes of  approximately  $21,000 and other  construction
period  expenses  of  approximately  $65,000.  The  Partnership  also  completed
additional  capital  expenditures of approximately  $42,000  consisting of floor
covering replacements,  water heaters and plumbing fixtures.  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  $3,000,000 for
additional property  redevelopment as mentioned above,  exclusive of capitalized
construction  period costs,  and expects to complete an  additional  $121,000 in
capital improvements not related to property redevelopment  consisting primarily
of floor covering replacements, plumbing, appliances and HVAC work.

Salem Courthouse  Apartments:  During the three months ended March 31, 2003, the
Partnership  completed  approximately  $45,000 of capital  improvements at Salem
Courthouse  Apartments,  consisting  primarily of floor  covering and  appliance
replacements.  These  improvements  were funded from  operating  cash flow.  The
Partnership  evaluates the capital  improvement needs of the property during the
year and  currently  expects  to  complete  an  additional  $156,000  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  $23,204,000,  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 three months ended March
31, 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 March 31, 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  March  31,  2003 was
approximately $153,000.

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 March 31,  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 of limited partnership  interest in the
Partnership  in  exchange  for cash or a  combination  of cash and  units in the
operating  partnership  of AIMCO  either  through  private  purchases  or tender
offers. Under the Partnership  Agreement,  unitholders holding a majority of the
Units are  entitled to take action  with  respect to a variety of matters  which
would  include  voting on certain  amendments to the  Partnership  Agreement and
voting to remove the Managing General  Partner.  As a result of its ownership of
40.36% of the  outstanding  Units,  AIMCO is in a position to influence all such
voting  decisions with respect to the Registrant.  Although the Managing General
Partner owes fiduciary duties to the limited  partners of the  Partnership,  the
Managing  General  Partner  also  owes  fiduciary  duties  to  AIMCO as its sole
stockholder.  As a  result,  the  duties of the  Managing  General  Partner,  as
managing general  partner,  to the Partnership and its limited partners may come
into conflict with the duties of the Managing  General  Partner to AIMCO, as its
sole stockholder.

Critical Accounting Policies and Estimates

The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States which require the Partnership
to  make  estimates  and  assumptions.  The  Partnership  believes  that  of its
significant  accounting  policies,  the following may involve a higher degree of
judgment and complexity.

Impairment of Long-Lived Assets

Investment  properties  are  recorded at cost,  less  accumulated  depreciation,
unless  considered  impaired.  If  events  or  circumstances  indicate  that the
carrying  amount of a property may be  impaired,  the  Partnership  will make an
assessment of its  recoverability  by estimating  the  undiscounted  future cash
flows,  excluding  interest  charges,  of the property.  If the carrying  amount
exceeds the aggregate  future cash flows,  the  Partnership  would  recognize an
impairment  loss to the extent the carrying amount exceeds the fair value of the
property.

Real  property  investments  are  subject  to varying  degrees of risk.  Several
factors  may  adversely  affect  the  economic  performance  and  value  of  the
Partnership's  investment  properties.  These  factors  include  changes  in the
national,  regional and local economic  climate;  local  conditions,  such as an
oversupply  of  multifamily   properties;   competition   from  other  available
multifamily  property  owners and changes in market  rental  rates.  Any adverse
changes in these factors could cause an impairment in the Partnership's assets.

Revenue Recognition

The Partnership generally leases apartment units for twelve-month terms or less.
Rental income  attributable to leases is recognized  monthly as it is earned 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.
Concessions are charged to income as incurred.

ITEM 3.     CONTROLS AND PROCEDURES

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



<PAGE>


                           PART II - OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

In March 1998, several putative unit holders of limited partnership units of the
Partnership  commenced an action  entitled  Rosalie  Nuanes,  et al. v. Insignia
Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the
State of  California  for the  County  of San  Mateo.  The  plaintiffs  named as
defendants,  among others,  the  Partnership,  its Managing  General Partner and
several of their  affiliated  partnerships  and corporate  entities.  The action
purports  to  assert  claims  on  behalf  of a class  of  limited  partners  and
derivatively  on behalf  of a number  of  limited  partnerships  (including  the
Partnership)  which are named as nominal  defendants,  challenging,  among other
things,  the  acquisition  of  interests  in certain  Managing  General  Partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one  time,  affiliates  of  Insignia;  past  tender  offers  by the  Insignia
affiliates to acquire limited partnership units;  management of the partnerships
by the  Insignia  affiliates;  and the series of  transactions  which  closed on
October 1, 1998 and February 26, 1999 whereby  Insignia and Insignia  Properties
Trust,  respectively,  were merged  into AIMCO.  The  plaintiffs  seek  monetary
damages and equitable relief, including judicial dissolution of the Partnership.
On June 25, 1998, the Managing General Partner filed a motion seeking  dismissal
of the action.  In lieu of responding  to the motion,  the  plaintiffs  filed an
amended  complaint.  The Managing General Partner filed demurrers to the amended
complaint which were heard February 1999.

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

On January 8, 2003,  the parties filed a  Stipulation  of Settlement in proposed
settlement of the Nuanes action and the Heller action  described below. On April
4, 2003, the Court preliminarily approved the settlement and scheduled a hearing
on final approval for June 2, 2003.

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 provides 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.

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.  Before  completing  briefing on the appeal,  the parties stayed
further proceedings in the appeal pending the Court's review of the terms of the
proposed settlement described above.

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

                  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  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 March 31, 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: May 15, 2003



<PAGE>

                                  CERTIFICATION


I, Patrick J. Foye, certify that:


1. I have reviewed this quarterly report on Form 10-QSB of Davidson  Diversified
Real Estate III, L.P.;


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


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


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


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


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


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


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


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


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


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


Date:  May 15, 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>



                                  CERTIFICATION


I, Paul J. McAuliffe, certify that:


1. I have reviewed this quarterly report on Form 10-QSB of Davidson  Diversified
Real Estate III, L.P.;


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


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


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


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


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


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


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


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


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


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


Date:  May 15, 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 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 March
31, 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:  May 15, 2003


                                    /s/  Paul J. McAuliffe
                                    Name:  Paul J. McAuliffe
                                    Date:  May 15, 2003


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.