DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP, 10KSB, 1997-03-14

DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
10KSB, 1997-03-14
REAL ESTATE

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FORM 10-KSB--ANNUAL OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D)
(As last amended by 34-31905, eff. 4/26/93)

[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934 [No Fee Required]

For the fiscal year ended December 31, 1996
or
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 [No Fee Required]

For the transition period.........to.........

Commission file number 0-14483

DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
(Name of small business issuer in its charter)

Delaware 62-1207077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

One Insignia Financial Plaza, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices) (Zip Code)

Issuer's telephone number (864) 239-1000

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

Units of Limited Partnership Interest
(Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No .

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year. $9,526,000

State the aggregate market value of the voting partnership interests held by
non-affiliates computed by reference to the price at which the partnership
interests were sold, or the average bid and asked prices of such partnership
interests, as of December 31, 1996. Market value information for the
Registrant's partnership interests is not available. Should a trading market
develop for these interests, it is the Managing General Partner's belief that
such trading would not exceed $25,000,000.

DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Prospectus of Registrant dated October 16, 1984 (included in
Registration Statement, No. 2-92313, of Registrant) are incorporated by
reference into Parts I and III.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

Davidson Diversified Real Estate II, L.P. ("the Registrant" or "the
Partnership") is a Delaware limited partnership organized in June 1984. The
general partners of the Registrant are Davidson Diversified Properties, Inc., a
Tennessee corporation ("Managing General Partner"); Freeman Equities, Limited
("Associate General Partner"); and David W. Talley ("Individual General
Partner") (collectively, the "General Partners").

The offering of the Registrant's limited partnership units ("Units") commenced
on October 16, 1984, and terminated on October 15, 1985. The Registrant
received gross proceeds from the offering of $24,485,000 and net proceeds of
$21,760,500.

The Registrant's primary business is to own, operate and ultimately dispose of
existing income-producing residential and, to a lesser extent, existing and to-
be-built commercial real estate. Industry segment information is not relevant.
The Registrant does not engage in any foreign operations nor derive any income
from foreign sources.

All of the net proceeds of the offering were invested in the Registrant's eight
properties, of which one has been sold and two have been foreclosed. See "Item
2. Description of Properties", below for a description of the Registrant's five
remaining properties.

The Registrant receives income from its properties and is responsible for
operating expenses, capital improvements and debt service payments under
mortgage obligations secured by the properties. The Registrant financed its
properties primarily through non-recourse debt. Therefore, in the event of
default, the lender can generally only look to the subject property for recovery
of amounts due.

Both the income and expenses of operating the properties owned by the Registrant
are subject to factors outside of the Registrant's control, such as oversupply
of similar properties resulting from overbuilding, increases in unemployment or
population shifts, reduced availability of permanent mortgage funds, changes in
zoning laws, or changes in patterns or needs of users. In addition, there are
risks inherent in owning and operating residential properties because such
properties are susceptible to the impact of economic and other conditions
outside the control of the Registrant.

At this time, it appears that the Partnership's investment objective of capital
growth will not be attained. In addition, unless there is significant
improvement in the performance of the Registrant's properties and the markets in
which such properties are located, investors may not receive a return of a
portion or possibly any of their initial capital contributions.

For the year ended December 31, 1996, the Registrant's properties accounted for,
in the aggregate, over 99% of the Registrant's gross revenues. All eight
properties were acquired prior to December 31, 1985. Of the eight properties
originally acquired, only five remain.

The Registrant has no employees. Management and administrative services are
performed by Davidson Diversified Properties, Inc., the Managing General
Partner, and by Insignia Residential Group, L.P., an affiliate of Insignia
Financial Group, Inc. ("Insignia"). See "Item 12. Certain Relationships and
Related Transactions" for an enumeration of the affiliates and the compensation
and reimbursement received from the Registrant during 1996 and 1995.

The real estate business in which the Partnership is engaged is highly
competitive and the Partnership is not a significant factor in this industry.
The Registrant's real property investments are subject to competition from
similar types of properties in the vicinities in which they are located. In
addition, various limited partnerships have been formed by related parties to
engage in business which may be competitive with the Registrant.

ITEM 2. DESCRIPTION OF PROPERTIES:

The following table sets forth the Registrant's investments in properties as of
December 31, 1996:

<TABLE>
<CAPTION>
Date of Type of
Property Purchase Ownership Use
<S> <C> <C> <C>
Big Walnut Apartments 03/28/85 Fee ownership subject Apartment-
Columbus, Ohio to first and second 251 units
mortgages

LaFontenay Apartments 10/31/84 Fee ownership subject Apartment-
(Phase I and II) to first mortgage 260 units
Louisville, Kentucky

The Trails Apartments 08/30/85 Fee ownership subject Apartment-
Nashville, Tennessee to first mortgage 248 units

Greensprings Manor Apartments 09/30/85 Fee ownership subject Apartment-
Indianapolis, Indiana to first and second 582 units
mortgages

Outlet's Ltd. Mall 12/31/84 Fee ownership subject Commercial-
Murfreesboro, Tennessee to first mortgage 118,103 sq. ft.
</TABLE>

SCHEDULE OF PROPERTIES (IN THOUSANDS):

<TABLE>
<CAPTION>
Gross
Carrying Accumulated Federal
Property Value Depreciation Rate Methods Tax Basis
<S> <C> <C> <C> <C> <C>
Big Walnut Apartments $ 8,103 $ 3,722 5-25 yrs. S/L $ 2,721

LaFontaney I & II Apartments 8,753 4,022 5-25 yrs. S/L 3,168

The Trails Apartments 8,422 3,571 5-25 yrs. S/L 3,705

Greensprings Apartments 11,913 5,419 5-25 yrs. S/L 5,090

Outlet's Ltd. Mall 6,588 2,679 5-25 yrs. S/L 3,423

$43,779 $19,413 $18,107
</TABLE>

See "Note A" of the financial statements included in "Item 7" for a description
of the Partnership's depreciation policy.

SCHEDULE OF MORTGAGES (IN THOUSANDS):
Principal
Principal Stated Balance
Balance At Interest Period Maturity Due At
Property December 1996 Rate Amortized Date Maturity
<S> <C> <C> <C> <C> <C>
Big Walnut Apartments
1st mortgage $ 4,918 7.60% 257 months 11/15/02 $ 3,912
2nd mortgage 167 7.60% 257 months 11/15/02 167

LaFontenay I & II Apartments
1st mortgage 6,749 9.25% 360 months 06/01/97 6,728

The Trails Apartments
1st mortgage 6,000 (1) 140 months 12/01/09 6,000

Greensprings Apartments
1st mortgage 8,645 7.60% 257 months 11/15/02 6,875
2nd mortgage 294 7.60% 257 months 11/15/02 294

Outlet's Ltd. Mall
1st mortgage 1,710 10.125% 180 months 01/15/00 1,490
28,483 $25,466

Less unamortized discounts (1,854)
Total $ 26,629

</TABLE>

(1) Adjustable rate based on 75% of the interest rate on new-issue long-term A-
rate utility bonds as determined on the first day of each calendar quarter. The
rate at December 31, 1996 was 5.76%.

<TABLE>
<CAPTION>
Average Annual Average Annual
Rental Rates Occupancy
Property 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Big Walnut Apartments $6,076/unit $5,924/unit 96% 96%
LaFontenay I & II Apartments 6,825/unit 6,623/unit 94% 94%
The Trails Apartments 6,532/unit 6,251/unit 92% 97%
Greensprings Apartments 4,904/unit 4,729/unit 92% 92%
Outlet's Ltd. Mall 6.50/sq. ft. 7.56/sq. ft. 82% 90%
</TABLE>

Occupancy at The Trails Apartments decreased due primarily to move outs relating
to job transfers out of the Nashville area and as a result of tenants buying
homes due to attractive interest rates. Also contributing to the decrease in
occupancy at The Trails Apartments was the fire that destroyed four units. A
few tenants residing close to the destroyed units have moved out due to the
reconstruction. Outlet's Ltd. Mall also had a decrease in occupancy primarily
due to the move out of Leslie Fay, a tenant that occupied 6,250 square feet or
6% of the total space. In addition, Bass Shoe Outlet and Hush Puppies moved out
during 1996. These tenants had previously occupied 3,125 and 3,750 square feet,
respectively.

As noted under "Item 1. Description of Business", the real estate industry is
highly competitive. All of the properties of the Partnership are subject to
competition from other residential apartment complexes and commercial buildings
in the area. The Managing General Partner believes that all of the properties
are adequately insured. The multi-family residential properties' lease terms
are for one year or less. No residential tenant leases 10% or more of the
available space.

The following is a schedule of the lease expirations at Outlet's Limited Mall
for the years beginning 1997 through the maturities of current leases:

<TABLE>
<CAPTION>
Number of % of Gross
Expirations Square Feet Annual Rent Annual Rent
<S> <C> <C> <C> <C>
Outlet's Ltd. Mall

1997 9 19,815 182,000 19.38%
1998 3 13,797 118,000 12.53%
1999 6 20,816 181,000 19.32%
2000 6 17,030 162,000 17.22%
2001 5 16,461 138,000 14.67%
</TABLE>

1996 1996
Billing Rate

Big Walnut Apartments $ 122 5.87%
LaFontenay I & II Apartments 85 .94%
The Trails Apartments 92 3.50%
Greensprings Apartments 260 7.21%
Outlet's Ltd. Mall 155 5.56%

ITEM 3. LEGAL PROCEEDINGS

The Registrant is unaware of any pending or outstanding litigation that is not
of a routine nature. The Managing General Partner of the Registrant believes
that all such pending or outstanding litigation will be resolved without a
material adverse effect upon the business, financial condition, or operations of
the Partnership.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The unit holders of the Registrant did not vote on any matter during the fiscal
year covered by this report.

PART II

ITEM 5. MARKET FOR PARTNERSHIP EQUITY AND RELATED PARTNER MATTERS

There is no established market for the Units and it is not anticipated that any
will occur in the foreseeable future. As of December 31, 1996, there were 1,711
holders of record owning an aggregate of 1,224.25 Units.

During the year ended December 31, 1995, approximately $2,000 of distributions
were paid on behalf of the limited partners to the State of Indiana relating to
the operations of Greensprings Manor Apartments. In August 1996, the
Partnership distributed $100,000 to the partners. The limited partners received
$98,000 ($80.05 per limited partnership unit) and the general partners received
$2,000. In February 1997, the Partnership distributed $100,000 to the partners.
The limited partners received $98,000 ($80.05 per limited partnership unit) and
the general partners received $2,000.

Pursuant to the terms of the Partnership Agreement, there are restrictions on
the ability of the Limited Partners to transfer their Units. In all cases, the
General Partners must consent to any transfer.

The Revenue Act of 1987 contained provisions which have an adverse impact on
investors in "publicly traded partnerships." Accordingly, the General Partners
have established a policy of imposing limited restrictions on the
transferability of the Units in secondary market transactions. Implementation
of this policy should prevent a public trading market from developing and may
impact the ability of an investor to liquidate his investment quickly. It is
expected that such policy will remain in effect until such time, if ever, as
further clarification of the Revenue Act of 1987 may permit the Registrant to
lessen the scope of the restrictions.

There are no material restrictions upon the Registrant's present or future
ability to make distributions in accordance with the provisions of the
Registrant's Partnership Agreement.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

This item should be read in conjunction with the financial statements and other
items contained elsewhere in this report.

Results of Operations

The Partnership's net loss as reported in the financial statements for the year
ended December 31, 1996, was approximately $307,000 compared to a net loss of
approximately $212,000 for the corresponding period of 1995 (see "Note D" of the
financial statements for a reconciliation of these amounts to the Partnership's
federal taxable loss). The increase in the net loss from 1995 to 1996 is
primarily attributable to an increase in expenses.

Expenses increased due to increases in operating, depreciation, maintenance, and
general and administrative expenses but were partially offset by increases in
rental income, other income, and a casualty gain. Operating expense increased
primarily due to the hiring of maintenance employees on a full-time basis at
Greensprings Manor Apartments. Depreciation expense increased due to 1995 and
1996 purchases of depreciable fixed assets. Maintenance expense increased at
Big Walnut Apartments due to leaky pipes which resulted in extensive interior
improvements such as interior painting, dry wall repairs, and concrete work.
Also, contributing to the increase in maintenance expense at Big Walnut
Apartments was the damp spring weather which caused management to incur
excessive roof and balcony repairs to restore this property to an acceptable
condition. Included in maintenance expense is $220,000 of major repairs and
maintenance comprised of exterior building repairs, major landscaping, and
window coverings for the year ended December 31, 1996. General and
administrative expense increased due to increases in partnership administration
cost reimbursements, insurance and audit fees. Cost reimbursements increased
due to higher administrative expenses and reimbursements to affiliates of the
Managing General Partner for project management of various property repairs and
improvements. Rental income increased due to increases in average rental rates
at all of the Partnership's residential properties. Other income increased due
to an increase in lease cancellation fees and cleaning and damage fees at the
Trails and Greensprings Manor Apartments as a result of higher turnover rates
than in the past. (See Item 2. "Schedule of Rental Rates and Occupancy.")

The Partnership recorded a net casualty gain in 1996 resulting from two fires at
the Trails Apartments which destroyed four apartment units and caused minor
smoke damage in one unit. The damage resulted in a net gain of approximately
$227,000 arising from proceeds from the Partnership's insurance carrier of
approximately $319,000 which exceeded the basis of the property and expenses to
reconstruct the four destroyed apartment units and to repair the other unit
which incurred minor smoke damage.

The Partnership's properties experienced two casualties in 1995. Big Walnut
Apartments incurred storm damage which resulted in a casualty gain of $2,000,
net of insurance proceeds. The Trails Apartments experienced problems with the
pool due to freeze damage and recorded a casualty loss of $14,000, net of
insurance proceeds.

As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environment of each 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 December 31, 1996, the Partnership held unrestricted cash of approximately
$1,004,000 compared to approximately $714,000 at December 31, 1995. Net cash
provided by operating activities increased primarily due to the change in
accounts payable due to the timing of payments. Net cash used in investing
activities decreased due to a decrease in purchases of property improvements and
replacements , offset by an increase in insurance proceeds. In 1995, there were
substantial property improvements at Outlet's Ltd. Mall in an attempt to
modernize the mall. Net cash used in financing activities increased due to the
Partnership increasing the amount of distributions during 1996.

On January 19, 1995, the Partnership refinanced the mortgage encumbering
Outlet's Ltd. Mall. The total indebtedness refinanced was approximately
$1,765,000 of which approximately $337,000 related to the first mortgage and
approximately $1,428,000 related to the second mortgage. The refinancing
replaced the existing indebtedness which carried stated interest rates ranging
from 8.5% to 10.75% with maturity dates ranging from April 1995 to October 1995.
The new mortgage indebtedness of $1,820,000 carries a stated interest rate of
10.125% and is amortized over 180 months with a balloon payment due on January
15, 2000. As a result of the refinancing, the Partnership recognized an
extraordinary loss of approximately $32,000, as a result of the write-off of an
unamortized mortgage discount and unamortized loan costs.

The Partnership has no material capital programs scheduled to be performed in
1997, although certain routine capital expenditures and maintenance expenses
have been budgeted. These capital expenditures and maintenance expenses will be
incurred only if cash is available from operations or is received from the
capital reserve account.

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 various properties to adequately maintain the
physical assets and other operating needs of the Partnership. Such assets are
currently thought to be sufficient for any near-term needs of the Partnership.
The mortgage indebtedness of approximately $26,629,000, net of discount, with
stated interest rates of 7.6% to 10.125%, has maturity dates ranging from June
1997 to December 2009. Included in the outstanding indebtedness is a first
mortgage, secured by the LaFontenay Apartments, which matures June 1, 1997, with
a principal balance due at maturity of approximately $6,728,000. The Managing
General Partner intends to refinance this indebtedness and in the process obtain
a more favorable interest rate.

ITEM 7. FINANCIAL STATEMENTS

DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.

LIST OF FINANCIAL STATEMENTS

Independent Auditors' Report

Consolidated Balance Sheet - December 31, 1996

Consolidated Statements of Operations -Years ended December 31, 1996 and
1995

Consolidated Statements of Changes in Partners' Capital (Deficit) - Years
ended December 31, 1996 and 1995

Consolidated Statements of Cash Flows - Years ended December 31, 1996 and
1995

Notes to Consolidated Financial Statements

Report of Ernst & Young LLP, Independent Auditors

The Partners
Davidson Diversified Real Estate II, L.P.

We have audited the accompanying consolidated balance sheet of Davidson
Diversified Real Estate II, L.P. (A Limited Partnership) as of December 31,
1996, and the related consolidated statements of operations, changes in
partners' capital (deficit) and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Partnership's management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Davidson
Diversified Real Estate II, L.P. (A Limited Partnership) as of December 31, 1996
and the consolidated results of its operations and its cash flows for each of
the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.

/S/ ERNST & YOUNG LLP

Greenville, South Carolina
January 31, 1997

DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.

CONSOLIDATED BALANCE SHEET
(in thousands except unit data)

December 31, 1996

Assets
Cash and cash equivalents:
Unrestricted $ 1,004
Restricted--tenant security deposits 182
Accounts receivable 70
Escrows for taxes 377
Restricted escrows 726
Other assets 383
Investment properties (Notes B and F)
Land $ 2,878
Buildings and related personal property 40,901
43,779
Less accumulated depreciation (19,413) 24,366

$27,108
Liabilities and Partners' Deficit

Liabilities
Accounts payable $ 208
Tenant security deposits 183
Accrued taxes 585
Other liabilities 247
Mortgage notes payable (Note B) 26,629

Partners' Deficit
General partners $ (450)
Limited partners (1,224.25 units
issued and outstanding) (294) (744)

$27,108

See Accompanying Notes to Consolidated Financial Statements

DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
(in thousands except unit data)

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,
1996 1995
Revenues:
Rental income $ 8,587 $ 8,475
Other income 712 629
Casualty gain (Note G) 227 --
Total revenues 9,526 9,104
Expenses:
Operating 3,235 2,990
General and administrative 312 209
Maintenance 1,130 1,008
Depreciation 1,951 1,793
Interest 2,494 2,546
Property taxes 711 726
Casualty loss (Note G) -- 12
9,833 9,284

Loss before extraordinary item (307) (180)

Extraordinary item - loss on early
extinguishment of debt (Note B) -- (32)

Net loss (Note D) $ (307) $ (212)

Net loss allocated to general partners (2%) $ (6) $ (4)
Net loss allocated to limited partners (98%) (301) (208)

Net loss $ (307) $ (212)

Per limited partnership unit:
Loss before extraordinary item $(245.97) $(144.03)
Extraordinary loss -- (25.76)
Net loss $(245.97) $(169.79)

See Accompanying Notes to Consolidated Financial Statements

DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
(in thousands except unit data)

STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
Limited
Partnership General Limited
Units Partners Partners Total
<S> <C> <C> <C> <C>
Original capital contributions 1,224.25 $ 1 $24,485 $24,486

Partners' (deficit) capital at
December 31, 1994 1,224.25 (438) 315 (123)

Distributions -- (2) (2)

Net loss for the year ended
December 31, 1995 (4) (208) (212)

Partners' (deficit) capital at
December 31, 1995 1,224.25 (442) 105 (337)

Distributions (2) (98) (100)

Net loss for the year ended
December 31, 1996 (6) (301) (307)

Partners' deficit at
December 31, 1996 1,224.25 $ (450) $ (294) $ (744)

<FN>
See Accompanying Notes to Consolidated Financial Statements
</TABLE>

DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Years Ended December 31,
1996 1995
Cash flows from operating activities:
Net loss $ (307) $ (212)
Adjustments to reconcile net loss to net cash
provided by operating activities: 1,951 1,793
Depreciation
Amortization of discounts and loan costs 265 255
Casualty (gain) loss (227) 12
Extraordinary loss on retirement of debt -- 32
Change in accounts:
Restricted cash 2 15
Accounts receivable (22) 56
Escrows for taxes (31) (61)
Other assets (6) 15
Accounts payable 31 (257)
Tenant security deposit liabilities (2) (20)
Accrued taxes 76 16
Other liabilities (55) (29)

Net cash provided by
operating activities 1,675 1,615

Cash flows from investing activities:
Property improvements and replacements (1,046) (1,351)
Deposits to restricted escrows (141) (125)
Receipts from restricted escrows 58 79
Insurance proceeds 319 110

Net cash used in
investing activities (810) (1,287)

Cash flows from financing activities:
Payments on mortgage notes payable (471) (430)
Repayment of mortgage notes payable -- (1,765)
Proceeds from long-term borrowings -- 1,820
Loan costs (4) (31)
Distributions (100) (2)

Net cash used in
financing activities (575) (408)

Net increase (decrease) in cash 290 (80)

Cash as beginning of period 714 794

Cash at end of period $ 1,004 $ 714

Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,203 $ 2,283

[FN]
See Accompanying Notes to Consolidated Financial Statements
[/TABLE]

DAVIDSON DIVERSIFIED REAL ESTATE II, L.P

Notes to Consolidated Financial Statements

December 31, 1996

NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Davidson Diversified Real Estate II, L.P. (the "Partnership" or "Registrant") is
a Delaware limited partnership organized in June 1984 to acquire and operate
residential and commercial real estate properties. The Partnership's Managing
General Partner is Davidson Diversified Properties, Inc., an affiliate of
Insignia Financial Group, Inc. As of December 31, 1996, the Partnership operates
four residential and one commercial property located in or near major urban
areas in the United States.

PRINCIPLES OF CONSOLIDATION

The financial statements include all the accounts of the Partnership and three
99.9% owned partnerships. All significant interpartnership balances have been
eliminated.

ALLOCATIONS TO PARTNERS

Net income, other than that arising from the occurrence of a sale or
refinancing, and net loss shall be allocated 2% to the general partners and 98%
to the limited partners.

Cash from sales or refinancings shall be distributed in the following order of
priority:

First, to the limited partners, an amount which when added to all prior
distributions of cash from sales or refinancings shall equal their original
invested capital, plus an amount which, when added to all prior distributions to
the limited partners (excluding distributions which are deducted in the
calculation of adjusted invested capital), will equal 8% per annum cumulative
noncompounded on the adjusted invested capital, commencing the last day of the
calendar quarter in which each limited partner is admitted to the partnership
through the date of payment; and second, after payment to an affiliate of the
general partners of an amount equal to its subordinated real estate commissions,
85% of the remaining cash from sales or refinancings to the limited partners and
15% of the remaining cash from sales or refinancings to the general partners.

RESTRICTED ESCROWS

CAPITAL IMPROVEMENT RESERVES - At the time of the prior refinancing of Big
Walnut Apartments mortgage notes payable, proceeds were designated for a
"capital improvement escrow" for certain capital improvements. At December 31,
1995, Big Walnut Apartments had unexpended balances of $18,000. The remaining
balances were expended in 1996 for certain routine capital expenditures and
maintenance expenses.

RESERVE ACCOUNT - In addition to the Capital Improvement Reserve, a general
Reserve Account of $203,000 was established with the refinancing proceeds for
each refinanced property. These funds were established to cover necessary
repairs and replacements of existing improvements, debt service, out-of-pocket
expenses incurred for ordinary and necessary administrative tasks, and payment
of real property taxes and insurance premiums. The Partnership is required to
deposit net operating income (as defined in the mortgage note) from each
refinanced property to the respective reserve account until the reserve accounts
equal $1,000 per apartment unit or approximately $833,000 in total. At December
31, 1996, the account balances were approximately $256,000 for Big Walnut
Apartments and approximately $371,000 for Greensprings Manor Apartments.

REPLACEMENT RESERVE - LaFontenay Apartments has a replacement reserve as
required by its lender of approximately $99,000 at December 31, 1996, for
capital improvements.

ESCROWS FOR TAXES - These escrows are designated for the payment of real estate
taxes as designated. The Partnership and external escrow agents currently
maintain these accounts. The following properties escrows are maintained at an
external escrow agent and they are LaFontenay I & II Apartments and Outlets Ltd.
Mall. The remaining properties escrows are maintained at the Partnership.

INVESTMENT PROPERTIES

Prior to the fourth quarter of 1995, investment properties were carried at the
lower of cost or estimated fair value, which was determined using the net
operating income of the investment property capitalized at a rate deemed
reasonable for the type of property. During the fourth quarter of 1995 the
Partnership adopted "FASB Statement No. 121," "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount. The effect of adoption was not material.

DEPRECIATION

Depreciation is calculated using the straight-line method over the estimated
lives of the properties and related personal property. For Federal income tax
purposes, the accelerated cost recovery method is used (1) for real property
over 18 years for additions after March 15, 1984, and before May 9, 1985, and 19
years for additions after May 8, 1985, and before January 1, 1987, and (2) for
personal property over 5 years for additions prior to January 1, 1987. As a
result of the Tax Reform Act of 1986, for additions after December 31, 1986, the
modified accelerated cost recovery method is used for depreciation of (1) real
property additions over 27 1/2 years, and (2) personal property additions over 7
years. Effective generally for property placed in service on or after May 13,
1993, the Great Deficit Reduction Act of 1993 increases the depreciation period
from 31.5 to 39 years, although transition rules apply to property placed in
service before 1994.

PRESENT VALUE DISCOUNTS

Periodically, the Partnership incurs debt at below market rates. Present value
discounts are recorded on the basis of prevailing market rates and are amortized
using the interest method over the life of the related debt. The amortization
expense is included in interest expense.

LOAN COSTS

Loan costs are included in "Other assets" and are being amortized on a straight-
line basis over the life of the respective loans. The amortization expense is
included in interest expense.

CASH AND CASH EQUIVALENTS

The Partnership considers all highly liquid investments with a maturity when
purchased of three months or less to be cash equivalents. At certain times, the
amount of cash deposited at a bank may exceed the limit on insured deposits.

RESTRICTED CASH - TENANT SECURITY DEPOSITS

The Partnership requires security deposits from all apartment lessees for the
duration of the lease and are considered restricted cash. Deposits are refunded
when the tenant vacates the apartment if there has been no damage to the unit.

LEASES

The Partnership generally leases apartment units for twelve-month terms or less.
The Partnership leases certain commercial space to tenants under various lease
terms. The leases are accounted for as operating leases in accordance with
"Financial Accounting Standards Board Statement No. 13."

Some of the leases contain stated rental increases during their term. For
leases with fixed rental increases, rents are recognized on a straight-line
basis over the terms of the lease. This straight-line basis recognized
approximately $29,000 (1996) and approximately $33,000 (1995) more in rental
income than was collected. This amount will be collected in future years as
cash collections under the terms of the leases exceed the straight-line basis of
revenue recognition.

For all other leases, minimum rents are recognized over the terms of the leases.

The Managing General Partner finds it necessary to offer rental concessions
during particularly slow months or in response to heavy competition from other
similar complexes in the area. During 1996, the properties offered various
concessions including reduced rent for the first month, variable move-in
allowances, and reduced security deposits. Concessions are charged to expense
as incurred.

ADVERTISING COSTS

Advertising costs of approximately $313,000 and approximately $315,000 for the
years ended December 31, 1996, and December 31, 1995, respectively, are charged
to expense as they are incurred and are included in operating expenses.

FAIR VALUE

In 1995, the Partnership implemented Statement of "Financial Accounting
Standards No. 107, Disclosure about Fair Value of Financial Instruments," which
requires disclosure of fair value information about financial instruments for
which it is practicable to estimate that value. The carrying amount of the
Partnership's cash and cash equivalents approximates fair value due to short-
term maturities. The Partnership estimates the fair value of its fixed rate
mortgage by discounted cash flow analysis, based on estimated borrowing rates
currently available to the Partnership. The carrying amounts of variable-rate
mortgages approximate fair value due to frequent re-pricing.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the finical statements and accompanying notes.
Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain reclassifications have been made to the 1995 balances to conform to the
1996 presentation.

NOTE B - MORTGAGE NOTES PAYABLE

The principal terms of mortgage notes payable are as follows (dollar amounts in
thousands):

<TABLE>
<CAPTION>
Monthly Principal Principal
Payment Stated Balance Balance At
Including Interest Maturity Due At December 31,
Property Interest Rate Date Maturity 1996
<S> <C> <C> <C> <C> <C>
Big Walnut Apartments
1st mortgage $ 43 7.60% 11/15/02 $ 3,912 $ 4,918
2nd mortgage 1 7.60% 11/15/02 167 167

LaFontenay I & II Apartments
1st mortgage 56 9.25% 06/01/97 6,728 6,749

The Trails Apartments
1st mortgage 29 (1) 12/01/09 6,000 6,000

Greensprings Apartments
1st mortgage 75 7.60% 11/15/02 6,875 8,645
2nd mortgage 2 7.60% 11/15/02 294 294

Outlet's Ltd. Mall
1st mortgage 20 10.125% 01/15/00 1,490 1,710
$ 226 $25,466 28,483
Less unamortized discounts (1,854)
Total $26,629

<FN>
(1) Adjustable rate based on 75% of the interest rate on new-issue long-term A-
rated utility bonds as determined on the first day of each calendar quarter.
The rate at December 31, 1996 was 5.76%.
</TABLE>

The carrying value of the Partnership's aggregate debt approximates the
estimated fair value.

The discount is reflected as a reduction of the mortgage notes payable and
increases the effective rate of the debt to 8.76% for Big Walnut Apartments and
Greensprings Apartments and 7.96% for The Trails Apartments.

On January 19,1995, the Partnership refinanced the mortgage encumbering Outlet's
Ltd. Mall. The total indebtedness refinanced was approximately $1,765,000, of
which approximately $337,000 related to the first mortgage and approximately
$1,428,000 related to the second mortgage. The refinancing replaced the
existing indebtedness which carried stated interest rates from 8.5% to 10.75%
with maturity dates ranging from April 1995 to October 1995. The new mortgage
indebtedness of $1,820,000 carries a stated interest rate of 10.125% and is
amortized over 180 months with a balloon payment due on January 15, 2000. As a
result of the refinancing, the Partnership recognized an extraordinary loss of
approximately $32,000, as a result of the write-off of an unamortized mortgage
discount and unamortized loan costs.

Mortgages are nonrecourse and are collaterlized by the related property and
improvements and by pledge of revenues from the property and improvements of the
Partnership. Certain of the notes require prepayment penalties if repaid prior
to maturity and prohibit resale of the properties subject to existing
indebtedness.

Scheduled principal payments of mortgage notes payable, subsequent to December
31, 1996, are as follows (in thousands):

1997 $ 7,208
1998 497
1999 539
2000 1,983
2001 532
Thereafter 17,724

$ 28,483

NOTE C - LEASES

Property and improvements consist of apartments complexes and a shopping center
which are under operating leases. Lease terms are one year or less for
apartments and generally three to five years with renewal options for tenants of
the shopping center.

Tenants of Outlet's Mall reimburse the shopping center for common area expenses,
including taxes, utilities, and insurance.

Approximate minimum rentals for noncancelable operating leases with remaining
terms of more than one year are as follows (in thousands):

Year Amount

1997 $ 679
1998 515
1999 443
2000 206
2001 41

$1,884

These amounts do not include contingent rentals determined as a percentage of
tenant sales and reimbursement for real estate taxes and common area maintenance
costs.

NOTE D - INCOME TAXES

The Partnership has received a ruling from the Internal Revenue Service that it
will be classified as a partnership for Federal income tax purposes.
Accordingly, no provision for income taxes is made in the financial statements
of the Partnership. Taxable income or loss of the Partnership is reported in the
income tax returns of its partners.

The following is a reconciliation of reported net loss and Federal taxable loss
(in thousands except unit data):

1996 1995

Net loss as reported $ (307) $ (212)
Add (deduct):
Depreciation differences (84) (214)
Amortization of present
value discounts 30 51
Casualty gain (233) --
Unearned income (65) (17)
Miscellaneous (4) 2

Federal taxable loss $ (663) $ (390)

Federal taxable loss
per limited partnership unit $(530.74) $ (311.85)

The following is a reconciliation between the Partnership's reported amounts and
Federal tax basis of net assets and liabilities (in thousands):

Net deficit as reported $ (744)
Land and buildings 3,467
Accumulated depreciation (9,726)
Mortgage discount (1,230)
Other 148

Net deficit - Federal tax basis $(8,085)

NOTE E - TRANSACTIONS WITH AFFILIATED AND OTHER 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 payments to
affiliates for services and as reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership. The following (in thousands) were paid
to the Managing General Partner and affiliates in 1996 and in 1995:

Years Ended December 31,
1996 1995

Property management fees $381 $370
Reimbursement for services of affiliates 257 173

Property management fees are included in operating expenses. Reimbursement for
services of affiliates are included in general and administrative expenses.

The Partnership insures its properties under a master policy through an agency
and insurer unaffiliated with the Managing General Partner. An affiliate of the
Managing General Partner acquired, in the acquisition of a business, certain
financial obligations from an insurance agency which was later acquired by the
agent who placed the current year's master policy. The current agent assumed
the financial obligations to the affiliate of the Managing General Partner who
receives payments on these obligations from the agent. The amount of the
partnership's insurance premiums accruing to the benefit of the affiliate of the
Managing General Partner by virtue of the agent's obligations is not
significant.

NOTE F - INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION (IN THOUSANDS)

Initial Cost
To Partnership
Cost
Buildings Capitalized
and Related (Removed)
Personal Subsequent to
Encumbrances Land Property Acquisition

LaFontenay $ 6,749 $ 650 $ 6,719 $ 1,384
Big Walnut 5,085 520 6,505 1,078
The Trails 6,000 586 7,054 782
Greensprings Manor 8,939 847 9,684 1,382

Shopping Center
Outlet's Ltd. Mall 1,710 275 4,519 1,794
28,483

Less unamortized
discounts (1,854)

Total $26,629 $2,878 $34,481 $ 6,420

<TABLE>
<CAPTION>
Gross Amount at Which Carried
At December 31, 1996
Buildings Accum- Date Depre-
and Related ulated of ciable
Personal Depre- Const- Date Life-
Description Land Property Total ciation ruction Acquired Years
<S> <C> <C> <C> <C> <C> <C> <C>
Apartment
LaFontenay $ 650 $ 8,103 $ 8,753 $ 4,022 1971-1973 10/31/84 5-25
Big Walnut 520 7,583 8,103 3,722 1971 03/28/85 5-25
The Trails 586 7,836 8,422 3,571 1984-1985 08/30/85 5-25
Greensprings Manor 847 11,066 11,913 5,419 1970-1975 09/30/85 5-25

Shopping Center
Outlet's Ltd. Mall 275 6,313 6,588 2,679 1980 12/31/84 5-25

Totals $2,878 $40,901 $43,779 $19,413
</TABLE>

Reconciliation of "Investment Properties and Accumulated Depreciation" (in
thousands):

Years Ended December 31,
1996 1995
Real Estate
Balance at beginning of year $42,854 $41,529
Property Improvements 1,046 1,351
Disposals of property (121) (26)

Balance at end of year $43,779 $42,854

Accumulated Depreciation

Balance at beginning of year $17,512 $15,738
Additions charged to expense 1,951 1,793
Disposals of property (50) (19)

Balance at end of year $19,413 $17,512

The aggregate cost of the investment properties for Federal income tax purposes
at December 31, 1996 and 1995 is approximately $47,246,000 and approximately
$46,497,000, respectively. The accumulated depreciation taken for Federal
income tax purposes at December 31, 1996 and 1995 is approximately $29,139,000
and approximately $27,104,000, respectively.

NOTE G - CASUALTY GAIN (LOSS)

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The Registrant does not have any directors or officers. The Managing General
Partner, Davidson Diversified Properties, Inc., is responsible for the
management and control of substantially all of the Registrant's operations and
has general responsibility and ultimate authority in all matters affecting the
Registrant's business. The Individual General Partner, in his capacity as such,
did not devote any material amount of business time or attention to the
Registrant's affairs.

The present officers of the Managing General Partner are listed below:

Name Age Position

Carroll D. Vinson 56 President

Robert D. Long, Jr. 29 Controller and
Principal Accounting
Officer

William H. Jarrard, Jr. 50 Vice President

John K. Lines 37 Vice President and
Secretary

Kelley M. Buechler 39 Assistant Secretary

Carroll D. Vinson has been President of Davidson Diversified Properties, Inc.
since August of 1994. Prior to that, from April 1993 to August 1994, Mr. Vinson
was affiliated with Crisp, Hughes & Co. (regional CPA firm) and engaged in
various other investment and consulting activities. Briefly, in early 1993, Mr.
Vinson served as President and Chief Executive Officer of Angeles Corporation, a
real estate investment firm. From 1991 to 1993, Mr. Vinson was employed by
Insignia in various capacities including Managing Director-President during
1991. From 1986 to 1990, Mr. Vinson was President and a Director of U.S.
Shelter Corporation, a real estate services company, which sold substantially
all of its assets to Insignia in December 1990.

Robert D. Long, Jr. is Controller and Principal Accounting Officer of Davidson
Diversified Properties, Inc. Prior to joining Metropolitan Asset Enhancement,
L.P., and subsidiaries, he was an auditor for the State of Tennessee and was
associated with the accounting firm of Harshman Lewis and Associates.

William H. Jarrard, Jr. has been Managing Director - Partnership Administration
of Insignia since January 1991. Mr. Jarrard served as Managing Director -
Partnership Administration & Asset Management from July 1994 until January 1996.

John K. Lines has been General Counsel and Secretary of Insignia since June
1994. From May 1993 until June 1994, Mr. Lines was the Assistant General Counsel
and Vice President of Ocwen Financial Corporation in West Palm Beach, Florida.
From October 1991 until April 1993, Mr. Lines was a Senior Attorney with Banc
One Corporation in Columbus, Ohio. From May 1984 until October 1991, Mr. Lines
was employed as an Associate Attorney with Squire Sanders & Dempsey in Columbus,
Ohio.

Kelley M. Buechler has been Assistant Secretary of the Managing General Partner
and Assistant Secretary of Insignia since 1991. During the five years prior to
joining Insignia in 1991, she served in similar capacities with U. S Shelter.

ITEM 10. EXECUTIVE COMPENSATION

The Registrant was not required to and did not pay remuneration to
officers and/or directors of the Managing General Partner during 1996 or 1995.
See "Item 12" below and "Note E" of the Notes to the Financial Statements for a
discussion of compensation and reimbursements paid to the General Partners and
certain affiliates.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As of December 31, 1996, no security holder was known by the Registrant to be
the beneficial owner of more than 5% of the Units of the Registrant.

As of December 31, 1996, no director or officer of the Managing General Partner
owns, nor do the directors or officers as a whole own more than 1% of the
Registrant's Units. No such director or officer had any right to acquire
beneficial ownership of additional Units of the Registrant.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

No transactions have occurred between the Partnership and any officer or
director of Davidson Diversified Properties, Inc.

During the years ended December 31, 1996, and December 31, 1995, the
transactions that occurred between the Partnership and Davidson Diversified
Properties, Inc. and affiliates of Davidson Diversified Properties, Inc.
pursuant to the terms of the Agreement are disclosed under "Note E" of the
Partnership's Financial Statements included under "Item 7", which is hereby
incorporated by reference.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits: See Exhibit 27, Financial Data Schedule, is filed as an
exhibit to this report.

(b) No Reports on Form 8-K were filed during the fourth quarter of
1996.

SIGNATURES

In accordance with Section 13 or 15(d) 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 II, L.P.

By: Davidson Diversified Properties, Inc.,
as Managing General Partner

By: /s/Carroll D. Vinson
President

By: /s/Robert D. Long, Jr.
Controller
(Principal Accounting Officer)

Date: March 14, 1997

EXHIBIT INDEX

Exhibit

3 Partnership Agreement dated June 11, 1984, as amended is incorporated by
reference to Exhibit A to the Prospectus of the Registrant dated October
16, 1984 as filed with the Commission pursuant to Rule 424(b) under the
Act.

3B Amendment No. 1 to the Partnership Agreement dated August 1, 1985 is
incorporated by reference to Exhibit 3B to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1985.

4 Certificate of Limited Partnership dated June 11, 1984 is incorporated
by reference to Exhibit 4 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1987.

4A Certificate of Amendment to Limited Partnership dated July 17, 1984 is
incorporated by reference to Exhibit 4A to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987.

4B Restated Certificate of Limited Partnership dated October 5, 1984 is
incorporated by reference to Exhibit 4B to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987.

10A Agent's Agreement dated October 16, 1984 by and among the Registrant and
Harvey Freeman & Sons, Inc. is incorporated by reference to Exhibit 10B
to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1984.

10B Agreement Among Agents dated October 16, 1984 by and among Harvey
Freeman & Sons, Inc., Harvey Freeman & Sons, Inc. of Arkansas, Harvey
Freeman & Sons, Inc. of Florida, Harvey Freeman & Sons, Inc. of Georgia,
Harvey Freeman & Sons, Inc. of Indiana, Harvey Freeman & Sons, Inc. of
Kentucky, Harvey Freeman & Sons, Inc. of Mississippi, Harvey Freeman &
Sons, Inc. of North Carolina, Harvey Freeman & Sons, Inc. of Ohio and
Harvey Freeman & Sons, Inc. of South Carolina is incorporated by
reference to Exhibit 10C to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1984.

10C Acquisition and Disposition Services Agreement dated October 16, 1984
between the Registrant and Criswell Freeman Company is incorporated by
reference to Exhibit 10D to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1984.

10D Purchase Agreement Phases I and II dated October 3, 1984 between NTS-
LaFontenay Partners and Tennessee Trust Company, Trustee, is
incorporated by reference to Exhibit 10E to Amendment No. 1 to the
Registrant's Registration Statement on Form S-11 (Registration No. 2-
92313) as filed on October 15, 1984.

10E Modification of Purchase Agreements dated October 31, 1984 by and amount
NTS-LaFontenay Partners, the Registrant and LaFontenay Associates is
incorporated by reference to Exhibit 10F to Post-Effective Amendment No.
1 to the Registrant's Registration Statement on Form S-11 (Registration
No. 2-92313) as filed on January 15, 1985.

10F Contract for Sale of Real Estate for Outlets Ltd. Mall dated November
15, 1984 between Company Stores Development Corp. and Tennessee Trust
Company, as Trustee, is incorporated by reference to Exhibit 10G to
Post-Effective Amendment No. 1 to the Registrant's Registration
Statement on Form S-11 (Registration No. 2-92313) as filed on January
15, 1985.

10G Submanagement Agreement dated December 31, 1984 between Harvey Freeman &
Sons, Inc., Company Stores Management Corp. and the Registrant is
incorporated by reference to Exhibit 10H to Post-Effective Amendment No.
1 to the Registrant's Registration Statement on Form S-11 (Registration
No. 2-92313) as filed on January 15, 1985.

10H Assignment of Purchase Agreement dated October 25, 1984 between
Tennessee Trust Company, Trustee, and the Registrant relating to
assignment of Purchase Agreement for LaFontenay Apartments is
incorporated by reference to Exhibit 10I to Post-Effective Amendment No.
1 to the Registrant's Registration Statement on Form S-11 (Registration
No. 2-92313) as filed on January 15, 1985.

10I Contract for Sale of Real Estate for Big Walnut Apartments dated
December 6, 1984 between Community Development Company, an Ohio limited
partnership and Tennessee Trust Company, as Trustee, is incorporated by
reference to Exhibit 10(b) to the Registrant's Current Report on Form 8-
K dated March 28, 1985.

10J Assignment of Contract for Sale of Real Estate dated March 22, 1985
between Tennessee Trust Company, Trustee, and the Registrant, relating
to assignment of Purchase Agreement for Big Walnut Apartments is
incorporated by reference to Exhibit 10(a) to the Registrant's Current
Report on Form 8-K dated march 28, 1985.

10K Contract for Sale of Real Estate for the Trails Apartments dated July
31, 1985 between Trails of Nashville Associates, Ltd., a Tennessee
limited partnership by reference to Exhibit 10(b) to the Registrant's
Current Report on Form 8-K dated August 30, 1985.

10L Assignment of Contract for Sale of Real Estate dated August 28, 1985
between Tennessee Trust Company, as Trustee and the Registrant, relating
to assignment of Contract for Sale of Real Estate for The Trails
Apartments is incorporated by reference to Exhibit 10(a) to the
Registrant's Current Report on Form 8-K dated August 30, 1985.

10M Contract for Sale of Real Estate for Greenspring Manor Apartments dated
July 15, 1985 between Greenspring Apartments Associates, an Indiana
limited partnership and Tennessee Trust Company, as Trustee, is
incorporated by reference to Exhibit 20(d) to the Registrant's current
Report on Form 8-K dated August 30, 1985.

10N Assignment of Contract for Sale of Real Estate dated August 28, 1985
between Tennessee Trust Company, as Trustee and the Registrant, relating
to assignment of Contract for Sale of Real Estate for Greenspring Manor
apartments is incorporated by reference to Exhibit 10(c) to the
Registrant's Current Report on Form 8-K dated August 30, 1985.

10O Tennessee Note dated September 25, 1980 executed by Company Stores
Development Corp. payable to TVB Mortgage Corporation relating to
Outlets, Ltd. Mall is incorporated by reference to Exhibit 10GG to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1985.

10P Deed of Trust and Security Agreement dated September 25, 1980 between
Company Stores Development Corp. and TVB Mortgage Corporation relating
to Outlets, Ltd. Mall is incorporated by reference to Exhibit 10HH to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1985.

10Q Note secured by Real Estate dated October 21, 1985 payable to First
American National Bank of Nashville executed by the Registrant relating
to Outlet's, Ltd. Mall is incorporated by reference to Exhibit 10II to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1985.

10R Deed of Trust and Security Agreement dated October 21, 1985 executed by
the Registrant in favor of First American National Bank of Nashville
relating to Outlet's Ltd. Mall is incorporated by reference to Exhibit
10EE to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1986.

10S Mortgage Note dated March 27, 1985 executed by the Registrant payable to
The Great-West Life Assurance Company relating to Big Walnut Apartments
is incorporated by reference to Exhibit 10KK to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1985.

10T Mortgage and Security Agreement dated March 27, 1985 between the
Registrant and The Great-West Life Assurance company relating to Big
Walnut Apartments is incorporated by reference to Exhibit 10Ll to the
Registrant's annual Report on Form 10-K for the fiscal year ended
December 31, 1985.

10U Mortgage Note dated March 27, 1985, executed by the Registrant payable
to BANCOhio National Bank relating to Big Walnut Apartments is
incorporated by reference to Exhibit 10MM to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1985.

10V Open-End Mortgage and Security Agreement dated March 27, 1985 between
the Registrant and BANCOhio National Bank relating to Big Walnut
Apartments is incorporated by reference to Exhibit 10NN to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1985.

10W Deed of Trust and Security Agreement dated December 1, 1984 between
Trails of Nashville Associates, Ltd., and Capital Holding Corporation
relating to The Trails Apartments is incorporated by reference to
Exhibit 10QQ to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1985.

10X Note dated December 28, 1984 executed by Trails of Nashville Associates,
Ltd., payable to The Industrial Development Board of the Metropolitan
Government of Nashville and Davidson County relating to The Trails
Apartments is incorporated by reference to Exhibit 10RR to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1985.

10Y Wraparound Mortgage Note dated September 30, 1985 payable to Greenspring
Apartments Associates executed by the Registrant relating to Greenspring
Manor Apartments is incorporated by reference to Exhibit 10SS to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1985.

10Z Wraparound Mortgage Note dated September 30, 1985 between Green Spring
Apartments Associates and the Registrant relating to Green Spring Manor
apartments is incorporated by reference to Exhibit 10TT to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1985.

10AA Memorandum of Understanding among SEC Realty Corp., Tennessee
Properties, L.P., Freeman Mortgage Corporation, J. Richard Freeman, W.
Criswell Freeman and Jacques-Miller Properties, Inc. is incorporated by
reference to Exhibit 10DDD to the Registrant's Annual Report on Form 10-
K for the fiscal year ended December 31, 1988.

10BB Partnership Administration and Consultation Agreement among Freeman
Properties, Inc., Freeman Diversified Properties, Inc., Residual
Equities Limited and Jacques-Miller Properties, Inc. is incorporated by
reference to Exhibit 10EEE to the Registrant's Annual Report on Form 10-
K for the fiscal year ended December 31, 1988.

10CC Partnership Agreement of La Fontenay, L.P. dated May 15, 1990 owned
99.9% by the Registrant relating to refinancing of La Fontenay
Apartments is incorporated by reference to Exhibit 10FFF to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990.

10DD Multifamily Note with Addendum dated May 24, 1990 executed by La
Fontenay, L.P. payable to the Patrician Mortgage Company relating to La
Fontenay Apartments is incorporated by reference to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990.

10EE Multifamily Mortgage with Rider dated May 24, 1990 executed by La
Fontenay, L.P. in favor of the Patrician Mortgage Company relating to La
Fontenay Apartments is incorporated by reference to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990.

10FF Termination Agreement, dated December 31, 1991 among Jacques-Miller,
Inc., Jacques-Miller Property Management, Davidson Diversified
Properties, Inc., and Supar, Inc. is incorporated by reference to
Exhibit 10JJJ to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.

10GG Assignment of Limited Partnership Interest of Freeman Equities, Limited,
dated December 31, 1991 between Davidson Diversified properties, Inc.
and Insignia Jacques-Miller, L.P. is incorporated by reference to
Exhibit 10KKK to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.

10HH Assignment of General Partner Interests of Freeman Equities, Limited,
dated December 31, 1991 between Davidson Diversified Properties, Inc.
and MAE GP Corporation is incorporated by reference to Exhibit 10LLL to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.

10II Stock certificate, dated December 31, 1991 showing ownership of 1,000
shares of Davidson Diversified Properties, Inc. by MAE GP Corporation is
incorporated by reference to Exhibit 10MMM to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1991.

10JJ (a) First Deeds of Trust and Security Agreements dated October 28,
1992 between Big Walnut, L.P. and First Commonwealth Realty Credit
Corporation, a Virginia Corporation, securing Greensprings Manor
is incorporated by reference to Exhibit 10JJ (a) to the
Registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1992.

(b) Second Deeds of Trust and Security Agreements dated October 28,
1992 between Big Walnut, L.P. and First Commonwealth Realty Credit
Corporation, a Virginia Corporation, securing Greensprings Manor
is incorporated by reference to Exhibit 10JJ (b) to the
Registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1992.

(c) First Assignments of Leases and Rents dated October 28, 1992
between Big Walnut, L.P. and First Commonwealth Realty Credit
Corporation, a Virginia Corporation, securing Greensprings Manor
is incorporated by reference to Exhibit 10JJ (c) to the
Registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1992.

(d) Second Assignments of Leases and Rents dated October 28, 1992
between Big Walnut, L.P. and First Commonwealth Realty Credit
Corporation, a Virginia Corporation, securing Greensprings Manor
is incorporated by reference to Exhibit 10JJ (d) to the
Registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1992.

(e) First Deeds of Trust Notes dated October 28, 1992 between Big
Walnut, L.P. and First Commonwealth Realty Credit Corporation,
relating to Greensprings Manor is incorporated by reference to
Exhibit 10JJ (e) to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1992.

(f) Second Deeds of Trust Notes dated October 28, 1992 between Big
Walnut, L.P. and First Commonwealth Realty Credit Corporation,
relating to Greensprings Manor is incorporated by reference to
Exhibit 10JJ (f) to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1992.

10KK (a) First Deeds of Trust and Security Agreements dated October 28,
1992 between Big Walnut, L.P. and First Commonwealth Realty Credit
Corporation, a Virginia Corporation, securing Big Walnut is
incorporated by reference to Exhibit 10KK (a) to the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1992.

(b) Second Deeds of Trust and Security Agreements dated October 28,
1992 between Big Walnut, L.P. and First Commonwealth Realty Credit
Corporation, a Virginia Corporation, securing Big Walnut is
incorporated by reference to Exhibit 10KK (b) to the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1992.

(c) First Assignments of Leases and Rents dated October 28, 1992
between Big Walnut, L.P. and First Commonwealth Realty Credit
Corporation, a Virginia Corporation, securing Big Walnut is
incorporated by reference to Exhibit 10KK (c) to the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1992.

(d) Second Assignments of Leases and Rents dated October 28, 1992
between Big Walnut, L.P. and First Commonwealth Realty Credit
Corporation, a Virginia Corporation, securing Big Walnut is
incorporated by reference to Exhibit 10KK (d) to the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1992.

(e) First Deeds of Trust Notes dated October 28, 1992 between Big
Walnut, L.P. and First Commonwealth Realty Credit Corporation,
relating to Big Walnut is incorporated by reference to Exhibit
10KK (e) to the Registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1992.

(f) Second Deeds of Trust Notes dated October 28, 1992 between Big
Walnut, L.P. and First Commonwealth Realty Credit Corporation,
relating to Big Walnut is incorporated by reference to Exhibit
10KK (f) to the Registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1992.

10LL (a) Loan Agreement dated June 30, 1993 between Outlet's Mall, L.P. and
First American National Bank setting forth the terms and
conditions of the loan, as a condition of extending the maturity
date.

(b) Renewal Note Secured by Real Estate dated June 30, 1993 between
Outlet's Mall, L.P. and First American National Bank to extend the
maturity date of the loan until April 1, 1995.

(c) Loan modification and agreement dated January 18, 1995, between
Outlet's Mall, L.P. and First American National Bank setting
forth the new terms and conditions of the loan.

16 Letter from the Registrant's former independent accountant regarding its
concurrence with the statements made by the Registrant is incorporated
by reference to the exhibit filed with Form 8-K dated September 30,
1992.

27 Financial Data Schedule

99A Agreement of Limited Partnership for Big Walnut, L.P. between Davidson
Diversified Properties, Inc. and Davidson Diversified Real Estate II,
L.P. entered into on August 23, 1991 is incorporated by reference to
Exhibit 99A to the Registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1992.

99B Agreement of Limited Partnership for Outlet's Mall, L.P. between
Outlet's Mall GP Limited Partnership and Davidson Diversified Real
Estate II, L.P. is incorporated by reference to Exhibit 99B to the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1992.

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Davidson
Diversified Real Estate II, L.P. 1996 Year-End 10-KSB and is qualified in its
entirey by reference to such 10-KSB filing.
</LEGEND>
<CIK> 0000750258
<NAME> DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,004
<SECURITIES> 0
<RECEIVABLES> 70
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 43,779
<DEPRECIATION> (19,413)
<TOTAL-ASSETS> 27,108
<CURRENT-LIABILITIES> 0
<BONDS> 26,629
0
0
<COMMON> 0
<OTHER-SE> (744)
<TOTAL-LIABILITY-AND-EQUITY> 27,108
<SALES> 0
<TOTAL-REVENUES> 9,526
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,833
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,494
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (307)
<EPS-PRIMARY> (245.97)<F1>
<EPS-DILUTED> 0
<FN>
<F1>Multiplier is 1.
</FN>

</TABLE>