DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP, 10KSB, 1999-03-29

DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
10KSB, 1999-03-29
REAL ESTATE

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FORM 10-KSB--ANNUAL OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D)

(Mark One)
[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, 1998
or
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 [No Fee Required]

For the transition period from.........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.)

55 Beattie Place, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)

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. $9,143,000

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, 1998. No market exists for the limited partnership
interests of the Registrant, and, therefore, no aggregate market value can be
determined.

DOCUMENTS INCORPORATED BY REFERENCE
None

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"); Davidson Equities, Limited ("Associate
General Partner"); and David W. Talley ("Individual General Partner")
(collectively, the "General Partners"). Prior to February 25, 1998, the Managing
General Partner was a wholly-owned subsidiary of MAE GP Corporation ("MAE GP").
Effective February 25, 1998, MAE GP merged into Insignia Properties Trust
("IPT"), which was merged into Apartment Investment and Management Company
("AIMCO") effective February 26, 1999. Thus the Managing General Partner is now
a wholly-owned subsidiary of AIMCO. The Partnership Agreement provides that the
Partnership is to terminate on December 31, 2008 unless terminated prior to such
date.

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. Upon termination of the offering, the Registrant had accepted
subscriptions for 1,224.25 Units. All of the net proceeds of the offering were
invested in the Registrant's original eight properties, of which one has been
sold and two have been foreclosed. Since its initial offering, the Registrant
has not received, nor are limited partners required to make, additional capital
contributions.

The Registrant is engaged in the business of operating and holding real
properties for investment. In 1984 and 1985, during its acquisition phase, the
Registrant acquired eight existing apartment and commercial properties. The
Registrant continues to own and operate five of these properties. See "Item 2,
Description of Properties."

The Registrant has no employees. Management and administrative services are
provided by the Managing General Partner and by agents retained by the Managing
General Partner. These services were provided by an affiliate of the Managing
General Partner for the years ended December 31, 1998 and 1997. However, as of
October 1, 1998 management services for the Partnership's sole commercial
property, Shoppes at River Rock, were provided by an unrelated party. (See
"Transfer of Control" below.)

The real estate business in which the Partnership is engaged is highly
competitive. There are other residential and commercial properties within the
market area of the Registrant's properties. The number and quality of
competitive properties, including those which may be managed by an affiliate of
the Managing General Partner, in such market area could have a material effect
on the rental market for the apartments and commercial space at the Registrant's
properties and the rents that may be charged for such apartments and commercial
space. While the Managing General Partner and its affiliates are a significant
factor in the United States in the apartment industry, competition for the
apartments is local. In addition, various limited partnerships have been formed
by the Managing General Partner and/or affiliates to engage in business which
may be competitive with the Registrant.

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

There have been, and it is possible there may be other, Federal, state and local
legislation and regulations enacted relating to the protection of the
environment. The Partnership is unable to predict the extent, if any, to which
such new legislation or regulations might occur and the degree to which such
existing or new legislation or regulations might adversely affect the properties
owned by the Partnership.

The Partnership monitors its properties for evidence of pollutants, toxins and
other dangerous substances, including the presence of asbestos. In certain
cases environmental testing has been performed, which resulted in no material
adverse conditions or liabilities. In no case has the Partnership received
notice that it is a potentially responsible party with respect to an
environmental clean up site.

Transfer of Control

Pursuant to a series of transactions which closed on October 1, 1998 and
February 26, 1999, Insignia Financial Group, Inc. and Insignia Properties Trust
merged into Apartment Investment and Management Company, a publicly traded real
estate investment trust, with AIMCO being the surviving corporation (the
"Insignia Merger"). As a result, AIMCO ultimately acquired a 100% ownership
interest in Insignia Properties Trust ("IPT"), the entity which controls the
Managing General Partner. The Managing General Partner does not believe that
this transaction will have a material effect on the affairs and operations of
the Partnership.

ITEM 2. DESCRIPTION OF PROPERTIES:

The following table sets forth the Registrant's investments in properties as of
December 31, 1998:

Date of Type of
Property Purchase Ownership Use

Big Walnut Apartments 03/28/85 Fee ownership subject Apartment-
Columbus, Ohio to first and second 251 units
mortgages (2)

LaFontenay Apartments 10/31/84 Fee ownership subject Apartment-
(Phase I and II) to first mortgage (2) 260 units
Louisville, Kentucky

The Trails Apartments 08/30/85 Fee ownership subject Apartment-
Nashville, Tennessee to first mortgage (2) 248 units

Greensprings Manor Apartments 09/30/85 Fee ownership subject Apartment-
Indianapolis, Indiana to first and second 582 units
mortgages (2)

Shoppes At River Rock 12/31/84 Fee ownership subject Commercial-
(Formerly Outlet's Ltd. Mall) to first mortgage (1) approximately
Murfreesboro, Tennessee 120,000 sq. ft.

(1) The property is held by a Limited Liability Company of which the Registrant
is the sole member.

(2) The property is held by a Limited Partnership of which the Registrant owns
a 99.90% interest.

SCHEDULE OF PROPERTIES:

Set forth below for each of the Registrant's properties is the gross carrying
value, accumulated depreciation, depreciable life, method of depreciation and
federal tax basis.

Gross

Carrying Accumulated Federal

Property Value Depreciation Rate Method Tax Basis

(in thousands) (in thousands)

Big Walnut Apartments $ 8,540 $ 4,485 5-25 yrs. S/L $ 2,470

LaFontaney I & II

Apartments 9,252 4,624 5-25 yrs. S/L 3,198

The Trails Apartments 8,943 4,090 5-25 yrs. S/L 3,270

Greensprings Manor

Apartments 12,192 6,443 5-25 yrs. S/L 4,265

Shoppes At River Rock 6,678 3,448 5-25 yrs. S/L 2,961

$45,605 $23,090 $16,164

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

SCHEDULE OF PROPERTY INDEBTEDNESS:

The following table sets forth certain information relating to the loans
encumbering the Registrant's properties.

Principal

Principal Stated Balance

Balance At Interest Period Maturity Due At

Property December 1998 Rate Amortized Date Maturity (2)

(in thousands) (in thousands)

Big Walnut Apartments

1st mortgage $ 4,622 7.60% 257 months 11/15/02 $ 3,912

2nd mortgage 167 7.60% none 11/15/02 167

LaFontenay I & II

Apartments

1st mortgage 7,240 7.50% 360 months 09/01/07 6,369

The Trails Apartments

1st mortgage 5,751 (1) 240 months 12/01/09 3,015

Greensprings Manor

Apartments

1st mortgage 8,124 7.60% 257 months 11/15/02 6,875

2nd mortgage 294 7.60% none 11/15/02 294

Shoppes At River Rock

1st mortgage 1,571 10.125% 180 months 01/15/00 1,490

27,769 $22,122

Less unamortized

discounts (1,554)

Total $ 26,215

(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, 1998 was 4.9875%.

(2)See Item 7, Financial Statements _ Note C for information with respect to
the Registrant's ability to prepay these loans and other specific details
about the loans.

RENTAL RATES AND OCCUPANCY:

Average annual rental rate and occupancy for 1998 and 1997 for each property:

Average Annual Average Annual

Rental Rates Occupancy

Property 1998 1997 1998 1997

Big Walnut Apartments $6,577/unit $6,339/unit 94% 94%

LaFontenay I & II Apartments 7,347/unit 7,106/unit 92% 94%

The Trails Apartments 7,044/unit 6,798/unit 92% 92%

Greensprings Manor Apartments 4,934/unit 4,987/unit 88% 86%

Shoppes At River Rock 6.70/sq. ft. 8.93/sq. ft. 71% 71%

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 properties
in the area. The Managing General Partner believes that all of the properties
are adequately insured. Each residential property is an apartment complex which
leases units for lease terms of one year or less. No residential tenant leases
10% or more of the available space. Shoppes at River Rock is a retail shopping
center which leases available rental space from nine months to four years. No
tenant leases 10% or more of the available rental space at Shoppes at River
Rock. See "Notes A and D" to the Consolidated Financial Statements for
information as to the principle terms of the leases at Shoppes at River Rock.
All of the properties are in good physical condition subject to normal
depreciation and deterioration as is typical for assets of this type and age.

The following is a schedule of the lease expirations at Shoppes At River Rock
for the years beginning 1999 through the maturities of current leases:

Number of % of Gross
Expirations Square Feet Annual Rent Annual Rent
(in thousands)
Shoppes At River Rock

1999 5 24,665 $201 35.19%
2000 6 20,505 200 36.82%
2001 4 12,986 91 15.99%
2002 1 4,084 40 7.45%

SCHEDULE OF REAL ESTATE TAXES AND RATES:

Real estate taxes and rates in 1998 for each property were:

1998 1998
Billing Rate
(in thousands)
Big Walnut Apartments $ 122 5.90%
LaFontenay I & II Apartments 72 .93%
The Trails Apartments 128 3.43%
Greensprings Manor Apartments 275 7.32%

Shoppes At River Rock 133 2.75%

CAPITAL EXPENDITURES:

Big Walnut Apartments. In 1998 the Partnership expended approximately $276,000
on capital improvements consisting primarily of balcony, appliance and floor
covering replacements. These improvements were funded primarily from cash flow.
Based on a report received from an independent third party consultant analyzing
necessary exterior improvements and estimates made by the Managing General
Partner on interior improvements, it is estimated that the property requires
approximately $634,000 of capital improvements over the near term. The property
has budgeted, but is not limited to, capital improvements of approximately
$633,000 for 1999, including HVAC, roofing, and electrical improvements.

LaFontenay I&II Apartments. In 1998 the Partnership expended approximately
$318,000 on capital improvements consisting primarily of roof replacements,
gutter repairs, appliances, and floor covering replacements. These improvements
were funded primarily from cash flow. Based on a report received from an
independent third party consultant analyzing necessary exterior improvements and
estimates made by the Managing General Partner on interior improvements, it is
estimated that the property requires approximately $295,000 of capital
improvements over the near term. The property has budgeted, but is not limited
to, capital improvements of approximately $400,000 for 1999, including parking
lot repair, roofing and floor covering replacements.

The Trails. In 1998 the Partnership expended approximately $709,000 on capital
improvements consisting primarily of building improvements and floor covering
replacements. These improvements were funded primarily from cash flow and
insurance proceeds. Based on a report received from an independent third party
consultant analyzing necessary exterior improvements and estimates made by the
Managing General Partner on interior improvements, it is estimated that the
property requires approximately $267,000 of capital improvements over the near
term. The property has budgeted, but is not limited to, capital improvements of
approximately $304,000 for 1999, including landscaping, electrical, and HVAC
improvements.

Greensprings Manor. In 1998 the Partnership expended approximately $139,000 on
capital improvements consisting primarily of various building equipment,
appliances, and floor covering replacements. These improvements were funded
primarily from cash flow. Based on a report received from an independent third
party consultant analyzing necessary exterior improvements and estimates made by
the Managing General Partner on interior improvements, it is estimated that the
property requires approximately $693,000 of capital improvements over the near
term. The property has budgeted, but is not limited to, capital improvements of
approximately $693,000 for 1999, including roofing repairs, gutters and down
spouts, and exterior painting.

Shoppes At River Rock. In 1998 the Partnership expended approximately $19,000
on capital improvements consisting primarily of HVAC condensing units. These
improvements were funded primarily from cash flow. Based on a report received
from an independent third party consultant analyzing necessary exterior
improvements and estimates made by the Managing General Partner on interior
improvements, it is estimated that the property requires approximately $977,000
of capital improvements over the near term. The property has budgeted, but is
not limited to, capital improvements of approximately $249,000 for 1999,
including roof replacements, curb and gutter repairs.

The capital improvements planned for 1999 at the Partnership's properties will
be made only to the extent of cash available from operations and Partnership
reserves.

ITEM 3. 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. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs named as defendants, among others,
the Partnership, the Managing General Partner and several of their affiliated
partnerships and corporate entities. The complaint 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 the acquisition by Insignia Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia Affiliates") of interests in certain general partner entities, past
tender offers by Insignia Affiliates to acquire limited partnership units, the
management of partnerships by Insignia Affiliates as well as a recently
announced agreement between Insignia and Apartment Investment and Management
Company ("AIMCO"). The complaint seeks 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 have filed an amended complaint. The
Managing General Partner has filed demurrers to the amended complaint which were
heard during February 1999. No ruling on such demurrers has been received. The
Managing General Partner does not anticipate that costs associated with this
case, if any, to be material to the Partnership's overall operations.

On July 30, 1998, certain entities claiming to own limited partnership interests
in certain limited partnerships whose general partners were, at the time,
affiliates of Insignia filed a complaint entitled Everest Properties, LLC, v.
Insignia Financial Group, Inc., et. al. in the Superior Court of the State of
California, County of Los Angeles. The action involves 44 real estate limited
partnerships (including the Partnership) in which the plaintiffs allegedly own
interests and which Insignia Affiliates allegedly manage or control (the
"Subject Partnerships"). This case was settled on March 3, 1999. The
Partnership is responsible for a portion of the settlement costs. The expense
will not have a material effect on the Partnership's net income.

The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.

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

During the quarter ended December 31, 1998, no matter was submitted to a vote of
unit holders through the solicitation of proxies or otherwise.

PART II

ITEM 5. MARKET FOR PARTNERSHIP EQUITY AND RELATED PARTNER MATTERS

The Partnership, a publicly held limited partnership, offered and sold 1,224.25
limited partnership units aggregating $24,485,000. As of December 31, 1998
there were 1,622 holders of record owning an aggregate of 1,224.25 Units.
Affiliates of the Managing General Partner owned 170.0 units or 13.886% at
December 31, 1998. There is no established market for the Units and it is not
anticipated that any will develop in the future.

No distributions were made to the partners during 1998. 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. Future cash distributions will depend on the levels of net cash
generated from operations, refinancing, property sales and the availability of
cash reserves. The Partnership's distribution policy is reviewed on a quarterly
basis. There can be no assurance, however, that the Partnership will generate
sufficient funds from operations after required capital expenditures to permit
further distributions to its partners in 1999 or subsequent periods.

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

The matters discussed in this Form 10-KSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the disclosure
contained in this Form 10-KSB and the other filings with the Securities and
Exchange Commission made by the Registrant from time to time. The discussion of
the Registrant's business and results of operations, including forward-looking
statements pertaining to such matters, does not take into account the effects of
any changes to the Registrant's business and results of operation. Accordingly,
actual results could differ materially from those projected in the forward-
looking statements as a result of a number of factors, including those
identified herein.

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, 1998, was approximately $783,000 compared to a net loss of
approximately $819,000 for the year ending December 31, 1997 (see "Note E" of
the financial statements for a reconciliation of these amounts to the
Partnership's federal taxable loss). The decrease in net loss is attributable to
an increase in total revenues, which was offset by an increase in total
expenses. The increase in revenues is primarily attributable to the gain
recognized on casualty event which was offset by decreases in rental income and
other income. Rental income decreased due to a small decrease in occupancy at
LaFontenay I and II Apartments and a decrease in average annual rental rates at
Shoppes at River Rock. The Partnership recorded a casualty gain in 1998 as a
result of a fire at The Trails Apartments during 1997. The gain of
approximately $328,000 was recorded as a result of insurance proceeds received
which exceeded the basis of the damaged property.

Expenses increased primarily due to increases in operating expense and the
recognition in 1998 of a loss on disposal of a property and to a lesser extent
an increase in general and administrative expense. All other expenses remained
relatively constant except interest expense which decreased. The loss on
disposal of property was due to the write-off of the undepreciated value of
roofs that were replaced at LaFontenay and Big Walnut during 1998. The increase
in operating expenses was primarily related to the increase in maintenance
expense incurred at all of the properties except LaFontenay I & II. Maintenance
expense consisted of increases in cleaning costs, ground clean up, painting and
various repairs as a result of weather related damages incurred at the
properties during 1997 and 1998. Included in general and administrative expense
at both December 31, 1998 and 1997 are management 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. The decrease in interest expense is the result of the
refinancing of LaFontenay Apartments in August 1997 with a lower interest rate
mortgage.

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
expense. 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, 1998 the Partnership had cash and cash equivalents of
approximately $971,000 compared to approximately $885,000 at December 31, 1997.
The increase in cash and cash equivalents is due to $1,694,000 of cash provided
by operating activities which was partially offset by $862,000 of cash used in
investing activities and $746,000 of cash used in financing activities. Cash
used in investing activities consisted primarily of property improvements and
replacements, and to a lesser extent lease commission charges which were
partially offset by insurance proceeds from casualty event, and withdrawals from
restricted escrow accounts maintained by the mortgage lender. Cash used in
financing activities consisted of principal payments on the mortgages
encumbering the Registrant's properties. The Registrant invests its working
capital reserves in a money market account.

On August 6, 1997, the Partnership refinanced the mortgage encumbering
LaFontenay Apartments. The total indebtedness refinanced was approximately
$6,720,000. The refinancing replaced the existing indebtedness which carried
stated interest rates of 9.25% with maturity dates of August 1, 1997. The new
mortgage indebtedness of $7,325,000 carries a stated interest rate of 7.5% and
is amortized over 360 months with a balloon payment due on September 1, 2007.

The MultiFamily Housing Revenue Bonds and Note Agreement collateralized by The
Trails Apartments was called and, therefore, payable in full on February 1, 1997
in accordance with the terms of the agreements. On June 30, 1997 the
Partnership entered into a Modification of Bond Documents with the issuer.
Pursuant to the modification, the call notice was rescinded. The modification
converted the monthly payments from interest only to principal and interest
payments with an amortization period of twenty years. The note and bond mature
on December 1, 2009 with a balloon payment. Pursuant to the modified terms, the
Bondholder shall not exercise the call right on the Bond on a date prior to the
fifth anniversary of the modification.

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 and to comply with
Federal, state, and local legal and regulatory requirements. The Registrant has
budgeted approximately $2,279,000 in capital improvements for all of the
Registrant's properties in 1999. Budgeted capital improvements at Big Walnut
Apartments include HVAC, roofing repairs, and electrical repairs. Budgeted
capital improvements at LaFontenay I and II include parking lot repairs,
roofing, and floor covering repairs. Budgeted improvements at The Trails
include landscaping, electrical, and HVAC repairs. Budgeted capital
improvements at Greensprings Manor include roofing repairs, gutters and down
spout replacements, and exterior painting. Budgeted capital improvements at
Shoppes at River Rock include roof replacements, and curb and gutter repairs.
The capital improvements will be incurred only if cash is available from
operations or from partnership reserves. To the extent that such budgeted
capital improvements are completed, the Registrant's distributable cash flow, if
any, may be adversely affected at least in the short term.

The Registrant's current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Registrant. The mortgage
indebtedness of approximately $26,215,000, net of discount, is amortized over
varying periods with required balloon payments ranging from January 15, 2000 to
December 1, 2009. The Managing General Partner will attempt to refinance such
indebtedness and/or sell the properties prior to such maturity date. If the
properties cannot be refinanced or sold for a sufficient amount, the Registrant
will risk losing such properties through foreclosure.

No cash distributions were made during 1998. 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.
Future cash distributions will depend on the levels of net cash generated from
operations, refinancing, property sales and the availability of the cash
reserves. The Registrant's distribution policy is reviewed on a quarterly basis.
There can be no assurance, however, that the Registrant will generate sufficient
funds from operations after required capital expenditures to permit further
distributions to its partners in 1999 or subsequent periods.

Year 2000 Compliance

General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems

The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. The Partnership
is dependent upon the Managing General Partner and its affiliates for management
and administrative services ("Managing Agent"). Any of the computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.

Over the past two years, the Managing Agent has determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Managing Agent presently believes that with modifications or
replacements of existing software and certain hardware, the Year 2000 issue can
be mitigated. However, if such modifications and replacements are not made or
not completed in time, the Year 2000 issue could have a material impact on the
operations of the Partnership.

The Managing Agent's plan to resolve Year 2000 issues involves four Phases:
assessment, remediation, testing, and implementation. To date, the Managing
Agent has fully completed its assessment of all the information systems that
could be significantly affected by the Year 2000, and has begun the remediation,
testing and implementation phases on both hardware and software systems.
Assessments are continuing in regards to embedded systems. The status of each
is detailed below.

Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase

Computer Hardware:

During 1997 and 1998, the Managing Agent identified all of the computer systems
at risk and formulated a plan to repair or replace each of the affected systems.
In August 1998, the mainframe system used by the Managing Agent became fully
functional. In addition to the mainframe, PC-based network servers and routers
and desktop PCs were analyzed for compliance. The Managing Agent has begun to
replace each of the non-compliant network connections and desktop PCs and, as of
December 31, 1998, had completed approximately 75% of this effort.

The total cost to the Managing Agent to replace the PC-based network servers,
routers and desktop PCs is expected to be approximately $1.5 million of which
$1.3 million has been incurred to date. The remaining network connections and
desktop PCs are expected to be upgraded to Year 2000 compliant systems by March
31, 1999.

Computer software:

The Managing Agent utilizes a combination of off-the-shelf, commercially
available software programs as well as custom-written programs that are designed
to fit specific needs. Both of these types of programs were studied, and
implementation plans written and executed with the intent of repairing or
replacing any non-compliant software programs.

During 1998, the Managing Agent began converting the existing property
management and rent collection systems to its management properties Year 2000
compliant systems. The estimated additional costs to convert such systems at
all properties, is $200,000, and the implementation and the testing process is
expected to be completed by March 31, 1999.

The final software area is the office software and server operating systems.
The Managing Agent has upgraded all non-compliant office software systems on
each PC and has upgraded 80% of the server operating systems. The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
March 31, 1999.

Operating Equipment:

The Managing Agent has operating equipment, primarily at the property sites,
which needed to be evaluated for Year 2000 compliance. In September 1997, the
Managing Agent began taking a census and inventory of embedded systems
(including those devices that use time to control systems and machines at
specific properties, for example elevators, heating, ventilating, and air
conditioning systems, security and alarm systems, etc.).

The Managing Agent has chosen to focus its attention mainly upon security
systems, elevators, heating, ventilating and air conditioning systems, telephone
systems and switches, and sprinkler systems. While this area is the most
difficult to fully research adequately, management has not yet found any major
non-compliance issues that put the Managing Agent at risk financially or
operationally. The Managing Agent intends to have a third-party conduct an
audit of these systems and report their findings by March 31, 1999.

Any of the above operating equipment that has been found to be non-compliant to
date has been replaced or repaired. To date, these have consisted only of
security systems and phone systems. As of December 31, 1998 the Managing Agent
has evaluated approximately 86% of the operating equipment for the Year 2000
compliance.

The total cost incurred for all properties managed by the Managing Agent as of
December 31, 1998 to replace or repair the operating equipment was approximately
$400,000. The Managing Agent estimates the cost to replace or repair any
remaining operating equipment is approximately $325,000, which is expected to be
completed by April 30, 1999.

The Managing Agent continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within our enterprise.

Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000

The Managing Agent continues to conduct surveys of its banking and other vendor
relationships to assess risks regarding their Year 2000 readiness. The Managing
Agent has banking relationships with three major financial institutions, all of
which have indicated their compliance efforts will be complete before May 1999.
The Managing Agent has updated data transmission standards with two of the three
financial institutions. The Managing Agent's contingency plan in this regard is
to move accounts from any institution that cannot be certified Year 2000
compliant by June 1, 1999.

The Partnership does not rely heavily on any single vendor for goods and
services, and does not have significant suppliers and subcontractors who share
information systems (external agent). To date the Partnership is not aware of
any external agent with a Year 2000 compliance issue that would materially
impact the Partnership's results of operations, liquidity, or capital resources.
However, the Partnership has no means of ensuring that external agents will be
Year 2000 compliant.

The Managing Agent does not believe that the inability of external agents to
complete their Year 2000 remediation process in a timely manner will have a
material impact on the financial position or results of operations of the
Partnership. However, the effect of non-compliance by external agents is not
readily determinable.

Costs to Address Year 2000

The total cost of the Year 2000 project to the Managing Agent is estimated at
$3.5 million and is being funded from operating cash flows. To date, the
Managing Agent has incurred approximately $2.8 million ($0.6 million expensed
and $2.2 million capitalized for new systems and equipment) related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $0.5 million is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $0.2 million
relates to repair of hardware and software and will be expensed as incurred.
The Partnership's portion of these costs are not material.

Risks Associated with the Year 2000

The Managing Agent believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Managing Agent has not
yet completed all necessary phases of the Year 2000 program. In the event that
the Managing Agent does not complete any additional phases, certain worst case
scenarios could occur. The worst case scenarios could include elevators,
security and heating, ventilating and air conditioning systems that read
incorrect dates and operate with incorrect schedules (e.g., elevators will
operate on Monday as if it were Sunday). Although such a change would be
annoying to residents, it is not business critical.

In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Partnership. The Partnership could be
subject to litigation for, among other things, computer system failures,
equipment shutdowns or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.

Contingency Plans Associated with the Year 2000

The Managing Agent has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds and selecting new relationships for such
activities as banking relationships and elevator operating systems.

ITEM 7. FINANCIAL STATEMENTS

DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.

LIST OF FINANCIAL STATEMENTS

Report of Ernst & Young LLP, Independent Auditors

Consolidated Balance Sheet - December 31, 1998

Consolidated Statements of Operations - Years ended December 31, 1998 and 1997

Consolidated Statements of Changes in Partners' Deficit - Years ended
December 31, 1998 and 1997

Consolidated Statements of Cash Flows - Years ended December 31, 1998 and 1997

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. as of December 31, 1998, and the related
consolidated statements of operations, changes in partners' deficit and cash
flows for each of the two years in the period ended December 31, 1998. 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. at December 31, 1998 and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.

/S/ ERNST & YOUNG LLP

Greenville, South Carolina
March 3, 1999

DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.

CONSOLIDATED BALANCE SHEET
(in thousands except unit data)

December 31, 1998

Assets
Cash and cash equivalents $ 971
Receivables and deposits, net of $61,000 for
doubtful accounts 814
Restricted escrows 612
Other assets 474
Investment properties (Notes C and G)
Land $ 2,878
Buildings and related personal property 42,727
45,605
Less accumulated depreciation (23,090) 22,515

$25,386
Liabilities and Partners' Deficit

Liabilities
Accounts payable $ 234
Tenant security deposit liabilities 188
Accrued property taxes 697
Other liabilities 498
Mortgage notes payable (Note C) 26,215

Partners' Deficit
General partners $ (484)
Limited partners (1,224.25 units
issued and outstanding) (1,962) (2,446)

$25,386

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,

1998 1997

Revenues:

Rental income $ 8,100 $ 8,163

Other income 715 722

Casualty gain (Note H) 328 --

Total revenues 9,143 8,885

Expenses:

Operating 4,403 4,238

General and administrative 339 277

Depreciation 2,038 2,033

Interest 2,244 2,417

Property taxes 743 739

Loss on disposal of property 159 --

9,926 9,704

Net loss $ (783) $ (819)

Net loss allocated to general partners (2%) $ (16) $ (16)

Net loss allocated to limited partners (98%) (767) (803)

Net loss $ (783) $ (819)

Net loss per limited partnership unit $(626.51) $(655.91)

Distributions per limited partnership unit $ -- $ 80.05

See Accompanying Notes to Consolidated Financial Statements

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

STATEMENT OF CHANGES IN PARTNERS' DEFICIT

Limited

Partnership General Limited

Units Partners Partners Total

Original capital contributions 1,224.25 $ 1 $24,485 $24,486

Partners' deficit at

December 31, 1996 1,224.25 (450) (294) (744)

Distributions to partners -- (2) (98) (100)

Net loss for the year ended

December 31, 1997 -- (16) (803) (819)

Partners' deficit at

December 31, 1997 1,224.25 (468) (1,195) (1,663)

Net loss for the year ended

December 31, 1998 -- (16) (767) (783)

Partners' Deficit at

December 31, 1998 1,224.25 $ (484) $ (1,962) $(2,446)

See Accompanying Notes to Consolidated Financial Statements

DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Years Ended December 31,

1998 1997

Cash flows from operating activities:

Net loss $ (783) $ (819)

Adjustments to reconcile net loss to net cash

provided by operating activities:

Depreciation 2,038 2,033

Amortization of discounts, loan costs and lease
commissions 228 237

Casualty gain (328) --

Loss on disposal of property 159 23

Change in accounts:

Accounts receivable and deposits 124 (309)

Other assets 16 (27)

Accounts payable 8 18

Tenant security deposit liabilities (1) 6

Accrued property taxes 6 106

Other liabilities 227 24

Net cash provided by operating activities 1,694 1,292

Cash flows from investing activities:

Property improvements and replacements (1,461) (1,130)

Withdrawals from (deposits to) restricted escrows 285 (171)

Insurance proceeds from casualty event 358 159

Lease commissions (44) (2)

Net cash used in investing activities (862) (1,144)

Cash flows from financing activities:

Principal payments on mortgage notes payable (746) (573)

Repayment of mortgage notes payable -- (6,720)

Proceeds from long-term borrowings -- 7,325

Loan costs paid -- (199)

Distributions to partners -- (100)

Net cash used in financing activities (746) (267)

Net increase (decrease) in cash and cash equivalents 86 (119)

Cash and cash equivalents at beginning of period 885 1,004

Cash and cash equivalents at end of period $ 971 $ 885

Supplemental disclosure of cash flow information:

Cash paid for interest $ 2,029 $ 2,172

See Accompanying Notes to Consolidated Financial Statements

DAVIDSON DIVERSIFIED REAL ESTATE II, L.P

Notes to Consolidated Financial Statements

December 31, 1998

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. Prior to February 25,
1998, the Managing General Partner was a wholly-owned subsidiary of MAE GP
Corporation ("MAE GP"). Effective February 25, 1998, MAE GP merged into
Insignia Properties Trust ("IPT"), which was merged into Apartment Investment
and Management Company ("AIMCO") effective February 26, 1999. Thus the Managing
General Partner is now a wholly-owned subsidiary of AIMCO. See "Note B -
Transfer of Control." The directors and officers of the Managing General
Partner also serve as executive officers of AIMCO. The Partnership commenced
operations on October 16, 1984, and completed its acquisition of investment
properties prior to December 31, 1985. The Partnership Agreement provides that
the Partnership is to terminate on December 31, 2008 unless terminated prior to
such date. As of December 31, 1998, the Partnership operates four apartment
properties 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 its
three 99.9% owned partnerships. The Managing General Partner of the
consolidated partnerships is Davidson Diversified Properties, Inc. Davidson
Diversified Properties, Inc. may be removed by the Registrant; therefore, the
consolidated partnerships are controlled and consolidated by the Registrant.
All significant interpartnership balances have been eliminated.

ALLOCATIONS OF PROFITS, GAINS & LOSSES:

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.

ALLOCATION OF CASH DISTRIBUTIONS

Cash distributions by the partnership are allocated between general and limited
partners in accordance with the Partnership Agreement. The Partnership Agreement
provides that 98% of distributions of adjusted cash from operations are
allocated to the limited partners and 2% to the general partners. Cash from
operations is defined as the excess of cash received from operations less
operating expenses paid, adjusted for certain specified items which primarily
include mortgage payments on debt, property improvements and replacements not
previously reserved, and the effects of other adjustments to reserves including
reserve amounts deemed necessary by the Managing General Partner.

Distributions made from reserves no longer considered necessary by the general
partners are considered to be additional adjusted cash from operations for
allocation purposes. No cash distributions to the partners were made during the
year ended December 31, 1998. 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.

Cash from sales or refinancings (as defined in the Partnership Agreement) shall
be distributed to the limited partners until each limited partner has received
an amount equal to a cumulative 8% per annum of the average of the limited
partners'adjusted invested capital, less any prior distributions. The general
partners are then entitled to receive 3% of the selling price of properties
sold where they acted as a broker. The limited partners will then be allocated
85% of any remaining distributions and the general partners will receive 15%.

Distributions may be restricted by the requirement to deposit net operating
income (as defined in the mortgage note) from Greensprings Manor Apartments and
Big Walnut Apartments into the Reserve Account until the Reserve Account is
funded in an amount equal to $1,000 per apartment for a total of $833,000. As
of December 31, 1998, the Partnership has deposits of approximately $519,000 in
its Reserve Account.

RESTRICTED ESCROWS

RESERVE ACCOUNT - A general Reserve Account of $203,000 was established with
the refinancing proceeds for Big Walnut Apartments and Greensprings Manor
Apartments. 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,
1998, the account balances were approximately $280,000 for Big Walnut
Apartments and approximately $239,000 for Greensprings Manor Apartments.

REPLACEMENT RESERVE - LaFontenay Apartments has a replacement reserve as
required by its lender of approximately $88,000 at December 31, 1998, for
capital improvements.

ESCROWS FOR TAXES - These escrows are designated for the payment of real estate
taxes and are included in receivables and deposits. The Partnership and external
escrow agents currently maintain these accounts. The escrows for LaFontenay I &
II Apartments are maintained at an external escrow. The remaining properties'
escrows are maintained at the Partnership.

INVESTMENT PROPERTIES

Investment properties consist of four apartment complexes and a commercial
property and are stated at cost. Acquisition fees are capitalized as a cost of
real estate. In accordance with Financial Accounting Standards Board Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Partnership records impairment losses on long-
lived assets used in operations when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
Costs of investment properties that have been permanently impaired have been
written down to appraised value. No adjustments for impairment of value were
recorded in the years ended December 31, 1998 and 1997.

DEPRECIATION

Depreciation is provided by the straight-line method over the estimated lives of
the apartment properties, commercial property and related personal property.
For Federal income tax purposes, the accelerated cost recovery method is used
(1) for real property over 15 years for additions prior to March 16, 1984, 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 over 27 1/2 years and (2) personal property additions over 7 years.

LOAN COSTS

Loan costs of approximately $644,000 less accumulated amortization of
approximately $305,000 are included in other assets and are being amortized on a
straight-line basis over the life of the respective loans.

CASH AND CASH EQUIVALENTS

Includes cash on hand and in banks, money market funds and certificates of
deposit with original maturities less than 90 days. At certain times, the
amount of cash deposited at a bank may exceed the limit on insured deposits.

TENANT SECURITY DEPOSITS

The Partnership requires security deposits from all apartment lessees for the
duration of the lease and such deposits are included in receivables and
deposits. Deposits are refunded when the tenant vacates, provided the tenant
has not damaged its space and is current on its rental payments.

LEASES

The Partnership generally leases apartment units for twelve months or less. 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. Concessions are charged to income as incurred.

The Partnership leases certain commercial space to tenants under various lease
terms. Some of the leases contain stated rental increases during their lease
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 $31,000 during 1998 and approximately $4,000 during
1997 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.

Several tenants have percentage rent clauses which provide for additional rent
upon the tenant achieving certain rental objectives. Percentage rent totaled
$97,000 in 1998 and $50,000 in 1997.

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

ADVERTISING COSTS

Advertising costs of approximately $206,000 and approximately $252,000 for the
years ended December 31, 1998, and December 31, 1997, respectively, are charged
to operating expense as incurred.

FAIR VALUE OF FINANCIAL STATEMENTS:

Statement of Financial Accounting Standards ("SFAS") No. 107, Disclosures about
Fair Value of Financial Instruments", as amended by Statement of Financial
Accounting Standards ("SFAS") No. 119, Disclosures about Derivative Financial
Instruments and Fair Value of Financial Instruments", requires disclosure of
fair value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate fair value. Fair
value is defined in the SFAS as the amount at which the instruments could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. The Partnership believes that the carrying amount
of its financial instruments (except for long term debt) approximates their fair
value due to the short term maturity of these instruments. The fair value of
the Partnership's long term debt, after discounting the scheduled loan payments
to maturity, approximates its carrying balance.

SEGMENT REPORTING

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 131, Disclosure about Segments of an Enterprise and
Related Information ("Statement 131"), which is effective for years beginning
after December 15, 1997. Statement 131 established standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
established standards for related disclosures about products and services,
geographic areas, and major customers. See "Note I" for disclosure.

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 financial statements and accompanying notes.
Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain reclassifications have been made to the 1997 balances to conform to the
1998 presentation.

NOTE B - TRANSFER OF CONTROL

NOTE C - MORTGAGE NOTES PAYABLE

The principle terms of mortgage notes payable are as follows:

Principal Monthly Principal

Balance At Payment Stated Balance

December 31, Including Interest Maturity Due At

Property 1998 Interest Rate Date Maturity

Big Walnut Apartments

1st mortgage $ 4,622 $ 43 7.60% 11/15/02 $ 3,912

2nd mortgage 167 1 7.60% 11/15/02 167

LaFontenay I & II Apartments

1st mortgage 7,240 51 7.50% 09/01/07 6,369

The Trails Apartments

1st mortgage 5,751 41 (1) 12/01/09 3,015

Greensprings Manor Apartments

1st mortgage 8,124 75 7.60% 11/15/02 6,875

2nd mortgage 294 2 7.60% 11/15/02 294

Shoppes At River Rock

1st mortgage 1,571 20 10.125% 01/15/00 1,490

27,769 $ 233 $22,122

Less unamortized discounts (1,554)
discounts

Total $26,215

(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, 1998 was 4.9875%.

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 Manor Apartments and 8.00% for The Trails Apartments.

On August 6, 1997, the Partnership refinanced the mortgage encumbering
LaFontenay Apartments. The total indebtedness refinanced was approximately
$6,720,000. The refinancing replaced the existing indebtedness which carried
stated interest rates of 9.25% with a maturity date of August 1, 1997. The new
mortgage indebtedness of $7,325,000 carries a stated interest rate of 7.5% and
is amortized over 360 months with a balloon payment due on September 1, 2007.

The MultiFamily Housing Revenue Bonds and Note Agreement collateralized by The
Trails Apartments were called and, therefore, payable in full on February 1,
1997 in accordance with the terms of the agreements. On June 30, 1997 the
Partnership entered into a Modification of Bond Documents with the issuer.
Pursuant to the modification, the call notice was rescinded. The modification
converted the monthly payments from interest only to principal and interest
payments with an amortization period of twenty years. The note and bond mature
on December 1, 2009 with a balloon payment. Pursuant to the modified terms, the
Bondholder shall not exercise the call right on the Bond on a date prior to the
fifth anniversary of the modification.

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, 1998, are as follows (in thousands):

1999 $ 804

2000 2,265

2001 830

2002 12,039

2003 334

Thereafter 11,497

$ 27,769

NOTE D - OPERATING LEASES

Tenants of Shoppes at River Rock are responsible for their own utilities and
maintenance of their space and payment of their proportionate share of common
area maintenance, utilities, insurance, and real estate taxes. A portion of the
real estate taxes, insurance, and common area maintenance expenses are paid
directly by the Partnership. The Partnership is then reimbursed by tenants for
their proportionate share.

The future minimum rental payments to be received under operating leases that
have initial or remaining noncancellable lease terms in excess of one year as of
December 31, 1998, are as follows (in thousands):

Year Amount

1999 $ 482

2000 221

2001 75

2002 34

$ 812

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 E - 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):

1998 1997

Net loss as reported $ (783) $ (819)

Add (deduct):

Depreciation differences (2) 60

Asset Removals 159 --

Amortization of discounts 47 39

Casualty gain (519) 159

Unearned income 8 46

Miscellaneous 61 (24)

Federal taxable loss $ (1,029) $ (539)

Federal taxable loss

per limited partnership unit $(823.83) $(431.46)

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 $(2,446)

Land and buildings 3,709

Accumulated depreciation (10,060)

Other (1,038)

Net deficit - Federal tax basis (9,835)

NOTE F - 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 certain payments
to affiliates for services and as reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership. The following transactions with the
Managing General Partner and affiliates were incurred during 1998 and 1997 as
follows:

Years Ended December 31,
1998 1997
(in thousands)

Property management fees (included in operating expenses) $421 $436
Reimbursement for services of affiliates, including
approximately $111,000 of construction oversight
reimbursements in 1998 and $31,000 in 1997 (included in
general and administrative, operating expense and
investment properties). 390 252
Due to affiliate 142 --

During the years ended December 31, 1998 and 1997, affiliates of the Managing
General Partner were entitled to receive 5% of gross receipts from all of the
Registrant's residential properties for providing property management services.
The Registrant paid to such affiliates $390,000 and $382,000 for the years ended
December 31, 1998 and 1997 respectively. For the nine months ended September
30, 1998 and the year ended December 31, 1997, affiliates of the Managing
General Partner were entitled to varying percentages of gross receipts from the
Registrant's commercial property for providing property management services.
The Registrant paid to such affiliates $31,000 and $54,000 for the nine months
ended September 30, 1998 and the year ended December 31, 1997 respectively.
Effective October 1, 1998 (the effective date of the Insignia Merger) these
services for the commercial property were provided by an unrelated party.

An affiliate of the Managing General Partner was entitled to receive
reimbursement of accountable administrative expenses amounting to approximately
$390,000 and $252,000 for the years ended December 31, 1998 and 1997,
respectively. As of December 31, 1998, $142,000 of this balance has not been
paid and is reflected in other liabilities.

During September, 1998, an affiliate of the Managing General Partner (the
"Purchaser") commenced a tender offer for limited partnership interests in the
Partnership. The Purchaser offered to purchase up to 400 of the outstanding
units of limited partnership interest in the Partnership at $6,000 per Unit, net
to the seller in cash. The Purchaser acquired 135.5 units pursuant to this
tender offer. As a result of this purchase, AIMCO currently owns, through its
affiliates, a total of 170.0 limited partnership units or 13.886%.
Consequently, AIMCO could be in a position to significantly influence all voting
decisions with respect to the Registrant. Under the Partnership Agreement,
unitholders holding a majority of the Units are entitled to take action with
respect to a variety of matters. When voting on matters, AIMCO would in all
likelihood vote the Units it acquired in a manner favorable to the interest of
the Managing General Partner because of their affiliation with the Managing
General Partner.

For the period January 1, 1997 to August 31, 1997, the Partnership insured its
properties under a master policy through an agency affiliated with the Managing
General Partner with an 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 master policy. The agent assumed the
financial obligations to the affiliate of the Managing General Partner which
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.

On September 26, 1997, an affiliate of the Managing General Partner purchased
Lehman Brothers' class "D" subordinated bonds of SASCO, 1992-M1. These bonds
are secured by 55 multi-family apartment mortgage loan pairs held in Trust,
including Big Walnut Apartments and Greensprings Manor Apartments owned by the
Partnership.

NOTE G - INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION

Initial Cost

To Partnership

(in thousands)

Cost

Buildings Capitalized

and Related (Removed)

Personal Subsequent to

Encumbrances Land Property Acquisition
(in thoudands) (in thousands)

Apartment Properties

Big Walnut Apartments $ 4,789 $ 520 $ 6,505 $ 1,515

LaFontenay Apartments 7,240 650 6,719 1,883

The Trails Apartments 5,751 586 7,054 1,303

Greensprings Manor

Apartments 8,418 847 9,684 1,661

Shoppes At River Rock 1,571 275 4,519 1,884

27,769

Less unamortized

discounts (1,554)

Total $26,215 $2,878 $34,481 $ 8,246

Gross Amount at Which Carried

At December 31, 1998

(in thousands)

Buildings

and

Personal Accumulated Date of Date Depreciable

Description Land Property Total Depreciation Construction Acquired Life-Years

Apartment Properties

Big Walnut $ 520 $ 8,020 $ 8,540 $ 4,485 1971 03/28/85 5-25

LaFontenay 650 8,602 9,252 4,624 1971-1973 10/31/84 5-25

The Trails 586 8,357 8,943 4,090 1984-1985 08/30/85 5-25

Greensprings Manor 847 11,345 12,192 6,443 1970-1975 09/30/85 5-25

Shopping Center

Shoppes At River Rock 275 6,403 6,678 3,448 1980 12/31/84 5-25

Totals $2,878 $42,727 $45,605 $23,090

</TABLE>

Reconciliation of "Investment Properties and Accumulated Depreciation"

Years Ended December 31,

1998 1997
(in thousands)

Real Estate

Balance at beginning of year $44,544 $43,779

Property Improvements 1,461 1,130

Disposals of property (400) (365)

Balance at end of year $45,605 $44,544

Accumulated Depreciation

Balance at beginning of year $21,263 $19,413

Additions charged to expense 2,038 2,033

Disposals of property (211) (183)

Balance at end of year $23,090 $21,263

The aggregate cost of the investment properties for Federal income tax purposes
at December 31, 1998 and 1997 is approximately $49,314,000 and approximately
$48,372,000, respectively. The accumulated depreciation taken for Federal
income tax purposes at December 31, 1998 and 1997 is approximately $33,150,000
and approximately $31,112,000, respectively.

NOTE H - CASUALTY EVENT

In December 1997, a fire destroyed one building at The Trails Apartments. As a
result, the asset and related accumulated depreciation were written off in 1997.
At December 31, 1997, the proceeds received on the casualty approximated the
loss on write-off of the fire-damaged asset, with the difference of
approximately $9,000 being recorded as an insurance receivable. Therefore, no
gain or loss relating to this fire was recognized in 1997. The reconstruction
of the destroyed building was completed in 1998 with the costs reflected in
investment properties. The Partnership recognized a casualty gain of
approximately $328,000 in 1998, with insurance proceeds received totaling
$358,000.

NOTE I - SEGMENT REPORTING

As Defined by SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, the Partnership has two reportable segments: residential
properties and commercial properties. The Partnership's residential property
segment consists of four apartment complexes located in Ohio, Kentucky,
Tennessee, and Indiana. The Partnership rents apartment units to people for
terms that are typically twelve months or less. The commercial property segment
consists of a retail shopping center located in Murfreesboro, Tennessee. This
property leases space mainly to name brand outlet clothing stores at terms
ranging from nine months to four years.

The Partnership evaluates performance based on net income. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies.

The Partnership's two reportable segments are investment properties that offer
different products and services. The reportable segments are each managed
separately because they provide distinct services with different types of
products and customers.

Segment information for the years 1998 and 1997 is shown in the tables below.
The "Other" column includes partnership administration related items and income
and expense not allocated to reportable segments.

1998 RESIDENTIAL COMMERCIAL OTHER TOTAL

Rental income $7,161 $ 939 $ -- $ 8,100
Other income 525 171 19 715
Interest expense 2,075 169 -- 2,244
Depreciation 1,664 374 -- 2,038
General and administrative
expense -- -- 339 339
Loss on disposal of assets 159 -- -- 159
Casualty gain loss 328 -- -- 328
Segment loss (334) (129) (320) (783)
Total assets 21,364 3,662 360 25,386
Capital expenditures for
investment properties 1,442 19 -- 1,461

1997 RESIDENTIAL COMMERCIAL OTHER TOTAL

Rental income $ 7,064 $ 1,099 $ -- $ 8,163
Other income 474 226 22 722
Interest expense 2,234 183 -- 2,417
Depreciation 1,638 395 -- 2,033
General and administrative
expense -- -- 277 277
Segment loss (532) (32) (255) (819)
Total assets 22,262 3,831 428 26,521
Capital expenditures for
investment properties 1,058 72 -- 1,130

NOTE J - LEGAL PROCEEDINGS

The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.

ITEM 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 names and ages of, as well as the positions and offices held by, the present
executive officers and directors of Davidson Diversified Properties, Inc. are
set below. There are no family relationships between or among any officers or
directors.

The Registrant does not have any directors or officers. The officer and
directors of the Managing General Partner are as follows:

Name Age Position

Patrick J. Foye 41 Executive Vice President and Director

Timothy R. Garrick 42 Vice President - Accounting and Director

Patrick J. Foye has been Executive Vice President and Director of the Managing
General Partner since October 1, 1998. Mr. Foye has served as Executive Vice
President of AIMCO since May 1998. Prior to joining AIMCO, Mr. Foye was a
partner in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP from 1989 to
1998 and was Managing Partner of the firm's Brussels, Budapest and Moscow
offices from 1992 through 1994. Mr. Foye is also Deputy Chairman of the Long
Island Power Authority and serves as a member of the New York State
Privatization Council. He received a B.A. from Fordham College and a J.D. from
Fordham University Law School.

Timothy R. Garrick has served as Vice President-Accounting of AIMCO
and Vice President-Accounting and Director of the Managing General Partner since
October 1, 1998. Prior to that date, Mr. Garrick served as Vice President-
Accounting Services of Insignia Financial Group since June of 1997. From 1992
until June of 1997, Mr. Garrick served as Vice President of Partnership
Accounting and from 1990 to 1992 as an Asset Manager for Insignia Financial
Group. From 1984 to 1990, Mr. Garrick served in various capacities with U.S.
Shelter Corporation. From 1979 to 1984, Mr. Garrick worked on the audit staff
of Ernst & Whinney. Mr. Garrick received his B.S. Degree from the University
of South Carolina and is a Certified Public Accountant.

ITEM 10. EXECUTIVE COMPENSATION

The Registrant did not pay any remuneration to officers and/or directors of the
Managing General Partner during 1998 or 1997. See "Item 12" below 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

Except as noted below, as of December 31, 1998, no person or entity was known by
the Registrant to be the beneficial owner of more than 5% of the Limited
Partnership Units of the Registrant as of December 31, 1998.

Number

Entity of Units Percentage

Cooper River Properties, LLC

(an affiliate of AIMCO) 135.5 11.068%

Insignia Properties LP (an affiliate

of AIMCO) 34.25 2.798%

Davidson Diversified Properties, Inc.

(an affiliate of AIMCO) .250 .020%

Equity Resources XVII 61.000 4.983%

Cooper River Properties LLC, Insignia Properties LP and Davidson Diversified
Properties, Inc., are indirectly ultimately owned by AIMCO. Their business
address is 55 Beattie Place, Greenville, SC 29602. The business address for
Equity Resources XVII is 14 Story Street, Cambridge, MA 02138.

No director or officer of the Managing General Partner owns any Units.

On October 1, 1998, Insignia Financial Group, Inc. merged into AIMCO, a real
estate investment trust, whose Class A Common Shares are listed on the New York
Stock Exchange. As a result of such merger, AIMCO and AIMCO Properties, L.P., a
Delaware limited partnership and the operating partnership of AIMCO ("AIMCO OP")
acquired indirect control of the Managing General Partner. AIMCO and its
affiliates currently own 13.886% of the limited partnership interests in the
Partnership. AIMCO is presently considering whether it will engage in an
exchange offer for additional limited partnership interests in the Partnership.
There is a substantial likelihood that, within a short period of time, AIMCO OP
will offer to acquire limited partnership interests in the Partnership for cash
or preferred units or common units of limited partnerships interests in AIMCO
OP. While such an exchange offer is possible, no definite plans exist as to when
or whether to commence such an exchange offer, or as to the terms of any such
exchange offer, and it is possible that none will occur.

A registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This Form 10-KSB shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to the registration or
qualification under the securities laws of any such state.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Years Ended December 31,
1998 1997
(in thousands)

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

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

(b) Reports on Form 8-K were filed during the fourth quarter of 1998.

Current Report on Form 8-K dated October 1, 1998 and filed on
October 16, 1998 disclosing change in control of Registrant from
Insignia Financial Group, Inc. to AIMCO.

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.,
Managing General Partner

By: /s/Patrick J. Foye
Patrick J. Foye
Executive Vice President

By: /s/Timothy R. Garrick
Timothy R. Garrick
Vice President _ Accounting

Date: March 29, 1999

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
date indicated.

Signature/Name

By:/s/Patrick J. Foye Date: March 29, 1999
Patrick J. Foye
Executive Vice President and Director

By:/s/Timothy R. Garrick Date: March 29, 1999
Timothy R. Garrick
Vice President - Accounting
and Director

EXHIBIT INDEX

Exhibit

2.1 Agreement and Plan of Merger, dated as of October 1, 1998, by and
between AIMCO and IPT (incorporated by reference to Exhibit 2.1 of IPT's
Current Report on Form 8-K, File No. 1-14179, dated October 1, 1998).

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.

10MM Multifamily Note secured by a Mortgage or Deed of Trust dated
August 6, 1997, between La Fontenay, L.L.C. and Patrician
Financial Company Limited Partnership related to Lafontenay
Apartments, is filed as an exhibit to this report.

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 Limited Partnership 1998 Year-End 10-KSB and is
qualified in its entirety by reference to such 10-KSB filing.
</LEGEND>
<CIK> 0000750258
<NAME> DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 971
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 45,605
<DEPRECIATION> (23,090)
<TOTAL-ASSETS> 25,386
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 26,215
0
0
<COMMON> 0
<OTHER-SE> (2,446)
<TOTAL-LIABILITY-AND-EQUITY> 25,386
<SALES> 0
<TOTAL-REVENUES> 9,143
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,926
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,244
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (783)
<EPS-PRIMARY> (626.51)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>

</TABLE>