UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-KSB
(Mark One)
[X]   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934

                 For the fiscal year ended December 31, 2004

[ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

             For the transition period from _________to _________

                         Commission file number 0-14530

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

         Delaware                                           62-1242144
(State or other jurisdiction of                           (I.R.S. Employer
 incorporation or organization)                          Identification No.)

                          55 Beattie Place, PO 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
                                (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 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 the Partnership'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.  $3,629,000

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, 2004. 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

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

                                     PART I

Item 1.     Description of Business

Davidson  Income Real Estate,  L.P. (the  "Partnership"  or  "Registrant")  is a
Delaware  limited  partnership  organized in April 1985. The general partners of
the  Partnership  are  Davidson  Diversified   Properties,   Inc.,  a  Tennessee
corporation  ("Managing  General  Partner"),  David W.  Talley and James T. Gunn
(collectively,   "Individual  General  Partners")  (collectively,  the  "General
Partners").  The Partnership is engaged in the business of operating and holding
real  estate  properties  for  investment.  The  Managing  General  Partner is a
subsidiary of Apartment Investment and Management Company ("AIMCO"),  a publicly
traded real estate investment trust. The Partnership Agreement provides that the
Partnership  is to terminate on December 31, 2010,  unless  terminated  prior to
such date.

The offering of the Partnership's  limited partnership units ("Units") commenced
on July 26, 1985, and terminated on May 30, 1986. The Partnership received gross
proceeds from the offering of $26,776,000 and net proceeds of  $25,700,160.  All
of the net proceeds of the offering were invested in four residential properties
and in a 17.5%  joint  venture  interest  which owns one  residential  property.
During  2003  the  Partnership  sold  North  Springs  Apartments.  See  "Item 2.
Description of Properties" for a description of the Partnership's properties.

The Partnership  has no employees.  Management and  administrative  services are
provided by the Managing  General Partner and by agents retained by the Managing
General  Partner.  An affiliate of the Managing  General  Partner  provides such
property management services.

Risk Factors

The  real  estate  business  in which  the  Partnership  is  engaged  is  highly
competitive.  There are other  residential  properties within the market area of
the Partnership'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 at the  Partnership's  properties  and the rents that may be
charged  for  such  apartments.  While  the  Managing  General  Partner  and its
affiliates  own and/or  control a significant  number of apartment  units in the
United  States,  such  units  represent  an  insignificant  percentage  of total
apartment  units in the United  States and  competition  for the  apartments  is
local.

Laws benefiting  disabled persons may result in the Partnership's  incurrence of
unanticipated  expenses.  Under the Americans with  Disabilities Act of 1990, or
ADA,  all places  intended to be used by the public are required to meet certain
Federal  requirements  related to access and use by disabled persons.  Likewise,
the Fair Housing Amendments Act of 1988, or FHAA, requires apartment  properties
first occupied after March 13, 1990 to be accessible to the  handicapped.  These
and other  Federal,  state  and  local  laws may  require  modifications  to the
Partnership's   properties,   or  restrict   renovations   of  the   properties.
Noncompliance  with  these laws could  result in the  imposition  of fines or an
award of  damages  to private  litigants  and also  could  result in an order to
correct any  non-complying  feature,  which could result in substantial  capital
expenditures.   Although  the  Managing   General  Partner   believes  that  the
Partnership's  properties  are  substantially  in  compliance  with the  present
requirements,  the Partnership may incur  unanticipated  expenses to comply with
the ADA and the FHAA.

Both the income and expenses of operating the investment properties owned by the
Partnership are subject to factors outside of the Partnership's control, such as
changes in the supply and demand for similar  properties  resulting from various
market  conditions,  increases/decreases  in unemployment or population  shifts,
changes in the 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  properties because such properties
are  susceptible to the impact of economic and other  conditions  outside of the
control of the Partnership.

From time to time, the Federal Bureau of  Investigation,  or FBI, and the United
States  Department  of  Homeland  Security  issue  alerts  regarding   potential
terrorist threats  involving  apartment  buildings.  Threats of future terrorist
attacks,  such as those  announced  by the FBI and the  Department  of  Homeland
Security,  could  have a  negative  effect on rent and  occupancy  levels at the
Partnership's properties. The effect that future terrorist activities or threats
of such activities could have on the  Partnership's  operations is uncertain and
unpredictable. If the Partnership were to incur a loss at a property as a result
of an act of  terrorism,  the  Partnership  could  lose all or a portion  of the
capital  invested  in the  property,  as well as the  future  revenue  from  the
property.  In this regard, the Partnership has purchased insurance to cover acts
of terrorism.  The Managing General Partner does not anticipate that these costs
will  have  a  negative  effect  on  the  Partnership's  consolidated  financial
condition or results of operations.

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.

A further  description  of the  Partnership's  business is included in " Item 6.
Management's Discussion and Analysis or Plan of Operation" included in this Form
10-KSB.

Item 2.     Description of Properties

The following table sets forth the Partnership's investments in properties:
<TABLE>
<CAPTION>

                                  Date of
Property                          Purchase       Type of Ownership           Use

<S>                               <C>   <C>
Lakeside Apartments               05/20/86   Fee ownership subject to   Apartment
  Charlotte, North Carolina                  first mortgage             216 units

Bexley House Apartments           09/30/86   Fee ownership subject to   Apartment
  Columbus, Ohio                             first mortgage (1)         64 units

Covington Pointe Apartments       03/10/87   Fee ownership subject to   Apartment
  Dallas, Texas                              first mortgage (1)         180 units

Brighton Crest Apartments         Phase I    Partnership has a 17.5%    Apartment
  Marietta, Georgia               06/30/87   interest in the joint      320 units
                                             venture which has fee
                                  Phase II   ownership subject to
                                  12/15/87   first mortgage
</TABLE>

(1)   Property is held by a limited  partnership in which the Partnership owns a
      100% interest.

On April 15, 2003,  the  Partnership  sold North  Springs  Apartments to a third
party for a gross  sales price of  approximately  $6,100,000.  The net  proceeds
received by the  Partnership  were  approximately  $5,735,000  after  payment of
closing costs,  including a commission  paid to the Managing  General Partner as
permitted under the terms of the  Partnership  Agreement.  The Partnership  used
approximately  $1,779,000 of the net proceeds to repay the mortgages encumbering
the  property.  As a result  of the sale,  the  Partnership  realized  a gain of
approximately $3,524,000 during the year ended December 31, 2003.

Schedule of Properties

Set forth below for each of the  Partnership's  properties is the gross carrying
value, accumulated depreciation,  depreciable life, method of depreciation,  and
Federal tax basis.
<TABLE>
<CAPTION>

                             Gross
                           Carrying   Accumulated   Depreciable    Method of      Federal
Property                     Value    Depreciation      Life     Depreciation    Tax Basis
                                (in thousands)                                 (in thousands)

<S>                         <C>         <C>           <C>                         <C>
Lakeside Apartments         $ 7,596     $ 4,826       5-30 yrs        S/L         $ 3,702
Bexley House Apartments       5,161       2,388       5-30 yrs        S/L           2,363
Covington Pointe
 Apartments                  10,897       6,184       5-30 yrs        S/L           5,841
                            $23,654     $13,398                                   $11,906
</TABLE>

See  "Note A" to the  consolidated  financial  statements  included  in "Item 7.
Financial Statements" for a description of the Partnership's  capitalization and
depreciation policies.

Schedule of Property Indebtedness

The  following  table  sets  forth  certain  information  relating  to the loans
encumbering the Partnership's properties.
<TABLE>
<CAPTION>

                         Principal                                        Principal
                        Balance At     Stated                              Balance
                       December 31,   Interest     Period    Maturity      Due At
       Property            2004         Rate      Amortized    Date     Maturity (3)
                      (inthousands)                                   (in thousands)


Lakeside
<S>                       <C>            <C>      <C>        <C>   <C>     <C>
  1st mortgage            $ 2,797        (2)      30 years   09/15/07      $ 2,599
Bexley House
  1st mortgage              2,182     7.32% (1)   20 years   01/01/21           --
Covington Pointe
  1st mortgage              5,709     3.81% (1)   20 years   07/01/10        4,416

Total                     $10,688                                          $ 7,015
</TABLE>

(1)   Fixed rate mortgage.

(2)   Adjustable  rate  based  on  the  Fannie  Mae  discounted  mortgage-backed
      security  index plus 85 basis  points.  The rate at December  31, 2004 was
      3.07%.

(3)   See  "Note  C" of  the  consolidated  financial  statements  in  "Item  7.
      Financial  Statements" for information  with respect to the  Partnership's
      ability to prepay these loans and other specific details about the loans.

In June 2003, the  Partnership  refinanced the mortgages  encumbering  Covington
Pointe   Apartments.   The  refinancing   replaced   mortgage   indebtedness  of
approximately  $4,343,000  with a new mortgage of  $6,000,000.  The new mortgage
carries a stated  interest rate of 3.81%  compared to the 7.83% interest rate on
the old mortgages.  Payments of principal and interest of approximately  $36,000
are due on the first day of each month commencing in August 2003 until July 2010
at which time a balloon  payment in the amount of  approximately  $4,416,000  is
due.  Capitalized loan costs, which are included in other assets,  incurred with
the refinancing  were  approximately  $95,000,  and are being amortized over the
life of the mortgage note payable.  The Partnership  wrote off unamortized  loan
costs of approximately  $51,000 and mortgage  discounts of approximately  $6,000
resulting in a loss on early extinguishment of debt of approximately $57,000.

On  November  3, 2003,  the  Partnership  refinanced  the  mortgage  encumbering
Lakeside  Apartments.   The  refinancing   replaced  mortgage   indebtedness  of
approximately $4,100,000 with a new mortgage in the amount of $2,875,000.  Total
capitalized loan costs were approximately  $64,000. Due to the shortfall between
the new mortgage  loan and the amount  needed to pay off the existing  mortgage,
the Managing General Partner advanced the Partnership  approximately  $1,350,000
to cover the shortfall and other closing costs.

Initially the November 3, 2003,  refinancing of Lakeside Apartments was under an
interim credit facility  ("Interim Credit Facility") which also provided for the
refinancing of several other  properties.  The Interim Credit  Facility  created
separate  loans for each property  refinanced  thereunder,  which loans were not
cross-collateralized  or cross-defaulted with each other. During the term of the
Interim Credit Facility,  Lakeside Apartments was required to make interest only
payments. The first month's interest rate for Lakeside Apartments was 1.9%.

As of December 1, 2003,  the loan on Lakeside  Apartments  was  transferred to a
different lender. The credit facility ("Permanent Credit Facility") with the new
lender matures in September 2007 and has an option for the  Partnership to elect
one five-year  extension.  This Permanent  Credit Facility also created separate
loans  for  each   property   refinanced   thereunder,   which   loans  are  not
cross-collateralized  or  cross-defaulted  with each other. Each note under this
Permanent  Credit  Facility is initially a variable  rate loan,  and after three
years,  the  Partnership  has the option of converting to a fixed rate loan. The
interest  rate on the variable rate loans is 85 basis points over the Fannie Mae
discounted  mortgage-backed  security  index  (3.07% per annum at  December  31,
2004), and the rate resets monthly. Each loan automatically renews at the end of
each month.  In addition,  monthly  principal  payments are required  based on a
30-year  amortization  schedule,  using the interest  rate in effect  during the
first month that the property is financed on the Permanent Credit Facility.  The
loans may be prepaid without penalty.

Schedule of Rental Rates and Occupancy

Average  annual  rental rates and  occupancy for 2004 and 2003 for each property
were:

                                        Average Annual               Average
                                         Rental Rates               Occupancy
                                          (per Unit)
 Property                              2004         2003        2004        2003
 Lakeside Apartments (1)             $ 5,633      $ 5,813        95%         90%
 Bexley House Apartments (2)          12,682       13,280        71%         50%
 Covington Pointe Apartments (3)       8,455        8,609        86%         90%

(1)   The  Managing  General  Partner  attributes  the  increase in occupancy at
      Lakeside  Apartments  to an  increase in  promotions  and  concessions  to
      attract and maintain tenants.
(2)   The  Managing  General  Partner  attributes  the  increase in occupancy at
      Bexley House  Apartments  to the complete  reconstruction  of the 32 units
      that were destroyed by a fire in December 2002.
(3)   The  Managing  General  Partner  attributes  the  decrease in occupancy of
      Covington  Pointe  Apartments  to the decline in market  conditions in the
      Dallas  area,  and an increased  effort to attract a more stable  customer
      base.

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 in the area. The Managing
General Partner believes that all of the properties are adequately insured. Each
property is an  apartment  complex  which  leases units for terms of one year or
less.  No tenant leases 10% or more of the  available  rental space.  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.

Schedule of Real Estate Taxes and Rates

Real estate taxes and rates in 2004 for each property were:

                                            2004               2004
                                          Billings             Rates
                                       (in thousands)
       Lakeside Apartments                  $ 90               1.30%
       Bexley House Apartments                 96              8.91%
       Covington Pointe Apartments            193              2.88%

Capital Improvements

Lakeside Apartments

During the year ended December 31, 2004, the Partnership completed approximately
$93,000 of capital improvements at Lakeside Apartments,  consisting primarily of
floor  covering and  appliance  replacements,  fire safety  upgrades,  and major
landscaping.  These  improvements  were funded  from  replacement  reserves  and
operating cash flow. The Partnership regularly evaluates the capital improvement
needs of the property.  While the  Partnership  has no material  commitments for
property improvements and replacements, certain routine capital expenditures are
anticipated  during 2005. Such capital  expenditures will depend on the physical
condition  of the  property as well as  anticipated  cash flow  generated by the
property.

Bexley House Apartments

During the year ended December 31, 2004, the Partnership completed approximately
$147,000  of  capital  improvements  at  Bexley  House  Apartments,   consisting
primarily of floor covering and appliance  replacements,  electrical and heating
system upgrades and reconstruction of the fire damaged units. These improvements
were funded from operating cash flow and insurance proceeds. The Partnership has
completed  reconstruction  of this property as a result of the fire discussed in
"Note  D -  Casualty  Event"  to  the  consolidated  financial  statements.  The
Partnership  regularly  evaluates the capital improvement needs of the property.
While the Partnership has no material commitments for property  improvements and
replacements,  certain routine capital expenditures are anticipated during 2005.
Such capital  expenditures will depend on the physical condition of the property
as well as anticipated cash flow generated by the property.

Covington Pointe Apartments

During the year ended December 31, 2004, the Partnership completed approximately
$338,000 of capital  improvements  at Covington  Pointe  Apartments,  consisting
primarily of parking lot resurfacing, appliance and floor covering replacements,
air conditioning  upgrades and pool decking  upgrades.  These  improvements were
funded from  replacement  reserves  and  operating  cash flow.  The  Partnership
regularly  evaluates the capital  improvement  needs of the property.  While the
Partnership  has  no  material   commitments  for  property   improvements   and
replacements,  certain routine capital expenditures are anticipated during 2005.
Such capital  expenditures will depend on the physical condition of the property
as well as anticipated cash flow generated by the property.

Capital  expenditures will be incurred only if cash is available from operations
or from  Partnership  reserves.  To the extent  that  capital  improvements  are
completed,  the Partnership's  distributable cash flow, if any, may be adversely
affected at least in the short term.

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. (the "Nuanes action") in the Superior Court of the
State of  California  for the  County  of San  Mateo.  The  plaintiffs  named as
defendants,  among others,  the  Partnership,  its Managing  General Partner and
several of their  affiliated  partnerships  and corporate  entities.  The action
purported  to  assert  claims  on  behalf  of a class of  limited  partners  and
derivatively  on behalf  of a number  of  limited  partnerships  (including  the
Partnership)  that are named as nominal  defendants,  challenging,  among  other
things,  the  acquisition  of  interests  in certain  Managing  General  Partner
entities by Insignia Financial Group, Inc.  ("Insignia") and entities that were,
at one  time,  affiliates  of  Insignia;  past  tender  offers  by the  Insignia
affiliates to acquire limited partnership units;  management of the partnerships
by the  Insignia  affiliates;  and the series of  transactions  which  closed on
October 1, 1998 and February 26, 1999 whereby  Insignia and Insignia  Properties
Trust,  respectively,  were merged into AIMCO.  The plaintiffs  sought  monetary
damages and equitable relief, including judicial dissolution of the Partnership.
In addition,  during the third quarter of 2001, a complaint  captioned Heller v.
Insignia  Financial  Group (the  "Heller  action")  was filed  against  the same
defendants  that are named in the  Nuanes  action.  On or about  August 6, 2001,
plaintiffs filed a first amended  complaint.  The Heller action was brought as a
purported derivative action, and asserted claims for, among other things, breach
of fiduciary  duty,  unfair  competition,  conversion,  unjust  enrichment,  and
judicial dissolution.

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

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

On June 13, 2003, the court granted final approval of the settlement and entered
judgment in both the Nuanes and Heller actions.  On August 12, 2003, an objector
("Objector") filed an appeal (the "Appeal") seeking to vacate and/or reverse the
order approving the settlement and entering  judgment  thereto.  On November 24,
2003,  the Objector  filed an  application  requesting  the court order AIMCO to
withdraw settlement tender offers it had commenced,  refrain from making further
offers  pending  the appeal and auction  any units  tendered  to third  parties,
contending  that the offers did not  conform  with the terms of the  settlement.
Counsel  for the  Objector  (on behalf of another  investor)  had  alternatively
requested the court take certain action  purportedly to enforce the terms of the
settlement agreement. On December 18, 2003, the court heard oral argument on the
motions  and denied them both in their  entirety.  The  Objector  filed a second
appeal challenging the court's use of a referee and its order requiring Objector
to pay those fees.

On January 28, 2004,  the  Objector  filed his opening  brief in the Appeal.  On
April 23, 2004, the Managing General Partner and its affiliates filed a response
brief in support of the settlement and the judgment thereto. The plaintiffs have
also filed a brief in support of the settlement. On June 4, 2004, Objector filed
a reply to the briefs  submitted by the Managing General Partner and Plaintiffs.
In addition both the Objector and plaintiffs filed briefs in connection with the
second appeal.  On March 21, 2005, the Court of Appeals issued  opinions in both
pending appeals. With regard to the settlement and judgment entered thereto, the
Court of Appeals vacated the trial court's order and remanded to the trial court
for further  findings on the basis that the "state of the record is insufficient
to permit meaningful  appellate  review".  With regard to the second appeal, the
Court of Appeals reversed the order requiring the Objector to pay referee fees.

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

As previously disclosed,  AIMCO Properties L.P. and NHP Management Company, both
affiliates of the Managing General  Partner,  are defendants in an action in the
United States District Court,  District of Columbia.  The plaintiffs have styled
their  complaint  as a  collective  action  under the Fair Labor  Standards  Act
("FLSA") and seek to certify state subclasses in California,  Maryland,  and the
District of Columbia. Specifically, the plaintiffs contend that AIMCO Properties
L.P. failed to compensate  maintenance  workers for time that they were required
to be "on-call". Additionally, plaintiffs allege AIMCO Properties L.P. failed to
comply  with the FLSA in  compensating  maintenance  workers  for time that they
worked in responding to a call while  "on-call".  The  defendants  have filed an
answer to the amended complaint denying the substantive  allegations.  Discovery
relating  to the  certification  of the  collective  action  has  concluded  and
briefing on the matter is underway.  Although the outcome of any  litigation  is
uncertain,  AIMCO  Properties,  L.P. does not believe that the ultimate  outcome
will have a material  adverse  effect on its  financial  condition or results of
operations.  Similarly,  the Managing  General Partner does not believe that the
ultimate  outcome  will have a  material  adverse  effect  on the  Partnership's
consolidated financial condition or results of operations.

Item 4.     Submission of Matters to a Vote of Security Holders

During the quarter ended  December 31, 2004, no matters were submitted to a vote
of unit holders through the solicitation of proxies or otherwise.

                                     PART II

Item 5.     Market for the Partnership Equity and Related Partner Matters

The  Partnership,  a publicly  held  limited  partnership,  sold 26,776  limited
partnership  units (the  "Units")  aggregating  $26,776,000  during its offering
period.  As of December 31, 2004,  there are 1,521  holders of record  owning an
aggregate of 26,776  units.  Affiliates  of the Managing  General  Partner owned
12,340.50 Units or 46.09% of the  outstanding  Units as of December 31, 2004. No
public  trading  market has developed for the Units,  and it is not  anticipated
that such a market will develop in the future.

The  Partnership  distributed  the  following  amounts  during  the years  ended
December 31, 2004 and 2003 (in thousands, except per unit data):
<TABLE>
<CAPTION>

                                          Per                               Per
                      Year Ended        Limited         Year Ended        Limited
                     December 31,     Partnership      December 31,     Partnership
                         2004             Unit             2003             Unit

<S>   <C>              <C>              <C>              <C>               <C>
Sales (1)              $   --           $   --           $3,724            $134.90
Refinancing (2)            --               --            1,515              54.90
                       $   --           $   --           $5,239            $189.80
</TABLE>

(1) Proceeds from the sale of North Springs Apartments in April 2003.

(2) Proceeds from the refinance of Covington Pointe Apartments in June 2003.

Future  cash  distributions  will  depend on the levels of cash  generated  from
operations   and  the  timing  of  debt   maturities,   property   sales  and/or
refinancings. The Partnership's cash available for distribution is reviewed on a
monthly basis.  There can be no assurance,  however,  that the Partnership  will
generate sufficient funds from operations after required capital expenditures to
permit any  distributions  to its partners in 2005 or  subsequent  periods.  See
"Item 2.  Description  of  Properties - Capital  Improvements"  for  information
relating to anticipated capital expenditures at the properties.

In addition to its indirect  ownership of the general  partner  interests in the
Partnership,  AIMCO and its affiliates  owned 12,340.50 Units in the Partnership
representing  46.09% of the outstanding  Units at December 31, 2004. A number of
these  Units  were  acquired  pursuant  to  tender  offers  made by AIMCO or its
affiliates.  It is possible that AIMCO or its affiliates will acquire additional
Units  in  exchange  for  cash or a  combination  of cash  and  units  in  AIMCO
Properties,  L.P., the operating  partnership of AIMCO,  either through  private
purchases  or tender  offers.  In this  regard,  on  February  16,  2005,  AIMCO
Properties,  L.P., commenced a tender offer to acquire up to 14,435.50 Units for
a purchase price of $60.26 per Unit. This offer expires March 28, 2005. Pursuant
to the Partnership  Agreement,  unitholders  holding a majority of the Units are
entitled to take action with respect to a variety of matters that  include,  but
are not limited to, voting on certain  amendments to the  Partnership  Agreement
and voting to remove the Managing General Partner.  As a result of its ownership
of 46.09% of the outstanding  Units,  AIMCO and its affiliates are in a position
to influence all voting decisions with respect to the Partnership.  Although the
Managing  General Partner owes fiduciary  duties to the limited  partners of the
Partnership, the Managing General Partner also owes fiduciary duties to AIMCO as
its sole stockholder.  As a result,  the duties of the Managing General Partner,
as managing  general  partner,  to the Partnership and its limited  partners may
come into conflict with the duties of the Managing  General  Partner to AIMCO as
its sole stockholder.

Item 6.     Management's Discussion and Analysis or Plan of Operation

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

The  Partnership's  financial  results depend upon a number of factors including
the  ability to attract  and  maintain  tenants  at the  investment  properties,
interest  rates on mortgage  loans,  costs  incurred  to operate the  investment
properties,  general  economic  conditions  and weather.  As part of the ongoing
business plan of the  Partnership,  the Managing  General  Partner  monitors the
rental market  environment  of each of its  investment  properties to assess the
feasibility of increasing rents,  maintaining or increasing occupancy levels and
protecting the Partnership from increases in expenses. As part of this plan, the
Managing  General Partner attempts to protect the Partnership from the burden of
inflation-related  increases in expenses by increasing  rents and  maintaining a
high overall  occupancy  level.  However,  the Managing  General Partner may use
rental  concessions  and  rental  rate  reductions  to offset  softening  market
conditions, accordingly, there is no guarantee that the Managing General Partner
will be able to  sustain  such a plan.  Further,  a number of  factors  that are
outside the control of the  Partnership  such as the local economic  climate and
weather can adversely or positively affect the Partnership's financial results.

Results of Operations

For the  year  ended  December  31,  2004,  the  Partnership  had a net  loss of
approximately  $220,000  compared to net income of approximately  $3,707,000 for
the year ended  December 31, 2003. The decrease in net income for the year ended
December 31, 2004 is due to a decrease in total  revenues,  an increase in total
expenses and a decrease in gain on sale of discontinued operations.

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
the  accompanying  consolidated  statement  of  operations  for the  year  ended
December 31, 2003 reflects the  operations  of North Springs  Apartments as loss
from discontinued operations due to its sale in April 2003.

On April 15, 2003,  the  Partnership  sold North  Springs  Apartments to a third
party for a gross  sales price of  approximately  $6,100,000.  The net  proceeds
received by the  Partnership  were  approximately  $5,735,000  after  payment of
closing costs,  including a commission  paid to the Managing  General Partner as
permitted under the terms of the  Partnership  Agreement.  The Partnership  used
approximately  $1,779,000 of the net proceeds to repay the mortgages encumbering
the  property.  As a result  of the sale,  the  Partnership  realized  a gain of
approximately $3,524,000 during the year ended December 31, 2003. The property's
operations, loss of approximately $210,000 for the year ended December 31, 2003,
are shown as loss from discontinued operations on the accompanying  consolidated
statement of  operations  and include  revenues of  approximately  $229,000.  In
addition,  the Partnership  recorded a loss on early  extinguishment  of debt of
approximately  $16,000 for the year ended December 31, 2003 due to the write off
of unamortized loan costs and mortgage discounts, which is also included in loss
from discontinued operations.

The Partnership had a loss from continuing operations of approximately  $220,000
for the year  ended  December  31,  2004,  compared  to income  from  continuing
operations of  approximately  $393,000 for the year ended December 31, 2003. The
decrease  in income  from  continuing  operations  is due to a decrease in total
revenues, an increase in total expenses and an increase in equity in loss of the
joint venture.

The decrease in total revenues is due to decreases in rental income and casualty
gain.  Rental income decreased due to decreases in occupancy at Covington Pointe
Apartments,  average rental rates at all of the  investment  properties and lost
rents at Bexley House Apartments partially offset by an increase in occupancy at
Bexley  House  Apartments  and  Lakeside  Apartments  and a decrease in bad debt
expense at Bexley House and Lakeside Apartments.

In December 2002, Bexley House Apartments  experienced a fire, causing damage to
32 units. Property damages totaled  approximately  $1,452,000 and reconstruction
of the units was completed during 2003. During the year ended December 31, 2003,
a  casualty  gain  of  approximately  $651,000  was  recorded  at  Bexley  House
Apartments.  The gain was the result of the  receipt of  insurance  proceeds  of
approximately  $1,051,000  partially  offset by the  write off of  approximately
$400,000 of undepreciated fixed assets. During the year ended December 31, 2004,
the Partnership  recorded a casualty gain of  approximately  $390,000 due to the
receipt of final insurance proceeds of approximately  $393,000 and the write-off
of approximately $3,000 of remaining undepreciated fixed assets.

Total  expenses for the year ended  December 31, 2004 increased due to increases
in operating and depreciation  expenses partially offset by decreases in general
and  administrative  and  interest  expenses  and a  decrease  in loss on  early
extinguishment  of debt,  as  discussed  in  Liquidity  and  Capital  Resources.
Operating  expenses  increased  due  to  increases  in  advertising,   property,
maintenance and administrative expenses. Advertising expense increased due to an
increase in internet  advertising  at all of the  investment  properties  and in
leasing   promotions  and  referral  fees  at  Covington   Pointe  and  Lakeside
Apartments.  Property  expense  increased due to increases in salary and related
benefits at all of the investment properties.  Maintenance expense increased due
to increases in contract labor and  maintenance  parts and supplies at Covington
Pointe and Bexley House Apartments.  Administrative  expense increased due to an
increase  in  ad-valorem  tax service at  Covington  Point  Apartments,  and the
write-off  of  offering  costs  at  Lakeside  Apartments.  Depreciation  expense
increased due to property  improvements placed into service over the past twelve
months, primarily at Bexley House Apartments.  Interest expense decreased due to
a decrease in the interest rates on the mortgages  encumbering  Covington Pointe
and Lakeside  Apartments as a result of the refinancing of the mortgages in June
and November 2003, respectively.

The decrease in general and  administrative  expense for the year ended December
31, 2004 is due to decreases in the costs of services included in the management
reimbursements  to the Managing General Partner as allowed under the Partnership
agreement  and audit  fees.  Costs  associated  with the  quarterly  and  annual
communications  with  investors  and  regulatory  agencies are also  included in
general and  administrative  expenses for the years ended  December 31, 2004 and
2003.

The  Partnership  owns a 17.5%  interest in Sterling  Crest Joint  Venture  (the
"Joint Venture"). The Partnership recognized equity in loss of the joint venture
of  approximately  $28,000  for the year ended  December  31,  2004  compared to
approximately $6,000 for the year ended December 31, 2003.

Liquidity and Capital Resources

At  December  31,  2004,  the  Partnership  had  cash and  cash  equivalents  of
approximately  $322,000 compared to approximately $585,000 at December 31, 2003.
Cash and cash equivalents  decreased  approximately  $263,000 since December 31,
2003 due to  approximately  $665,000 of cash used in  investing  activities  and
approximately  $370,000 of cash used in financing activities partially offset by
approximately  $772,000 of cash provided by operating  activities.  Cash used in
investing activities consisted of property improvements and replacements and net
deposits to  restricted  escrows  maintained by the mortgage  lenders  partially
offset  by  insurance  proceeds  received  from the  casualty  at  Bexley  House
Apartments. Cash used in financing activities consisted of payments of principal
made on the mortgages  encumbering the Partnership's  investment  properties and
payment on advances from an affiliate of the Managing General Partner  partially
offset by advances  received from an affiliate of the Managing  General Partner.
The  Partnership  invests its  working  capital  reserves  in  interest  bearing
accounts.

The  Partnership  received  distributions  of  approximately  $33,000  from  the
operations of the joint venture during the year ended December 31, 2003.

In June 2003, the  Partnership  refinanced the mortgages  encumbering  Covington
Pointe   Apartments.   The  refinancing   replaced   mortgage   indebtedness  of
approximately  $4,343,000  with a new mortgage of  $6,000,000.  The new mortgage
carries a stated  interest rate of 3.81%  compared to the 7.83% interest rate on
the old mortgages.  Payments of principal and interest of approximately  $36,000
are due on the first day of each month commencing in August 2003 until July 2010
at which time a balloon  payment in the amount of  approximately  $4,416,000  is
due.  Capitalized loan costs, which are included in other assets,  incurred with
the refinancing  were  approximately  $95,000,  and are being amortized over the
life of the mortgage note payable.  The Partnership  wrote off unamortized  loan
costs of approximately  $51,000 and mortgage  discounts of approximately  $6,000
resulting in a loss on early extinguishment of debt of approximately $57,000.

On  November  3, 2003,  the  Partnership  refinanced  the  mortgage  encumbering
Lakeside  Apartments.   The  refinancing   replaced  mortgage   indebtedness  of
approximately $4,100,000 with a new mortgage in the amount of $2,875,000.  Total
capitalized loan costs were approximately  $64,000. Due to the shortfall between
the new mortgage  loan and the amount  needed to pay off the existing  mortgage,
the Managing General Partner advanced the Partnership  approximately  $1,350,000
to cover the shortfall and other closing costs.

Initially the November 3, 2003,  refinancing of Lakeside Apartments was under an
interim credit facility  ("Interim Credit Facility") which also provided for the
refinancing of several other  properties.  The Interim Credit  Facility  created
separate  loans for each property  refinanced  thereunder,  which loans were not
cross-collateralized  or cross-defaulted with each other. During the term of the
Interim Credit Facility,  Lakeside Apartments was required to make interest only
payments. The first month's interest rate for Lakeside Apartments was 1.9%.

As of December 1, 2003,  the loan on Lakeside  Apartments  was  transferred to a
different lender. The credit facility ("Permanent Credit Facility") with the new
lender matures in September 2007 and has an option for the  Partnership to elect
one five-year  extension.  This Permanent  Credit Facility also created separate
loans  for  each   property   refinanced   thereunder,   which   loans  are  not
cross-collateralized  or  cross-defaulted  with each other. Each note under this
Permanent  Credit  Facility is initially a variable  rate loan,  and after three
years,  the  Partnership  has the option of converting to a fixed rate loan. The
interest  rate on the variable rate loans is 85 basis points over the Fannie Mae
discounted mortgage-backed security index (3.07% per anum at December 31, 2004),
and the rate resets monthly.  Each loan automatically  renews at the end of each
month. In addition,  monthly principal  payments are required based on a 30-year
amortization schedule,  using the interest rate in effect during the first month
that the property is financed on the Permanent Credit Facility. The loans may be
prepaid without penalty.

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 investment  properties to adequately  maintain the
physical  assets and other operating needs of the Partnership and to comply with
Federal,  state,  and local  legal and  regulatory  requirements.  The  Managing
General  Partner  monitors  developments  in the  area of legal  and  regulatory
compliance.  For example,  the  Sarbanes-Oxley  Act of 2002 mandates or suggests
additional compliance measures with regard to governance,  disclosure, audit and
other areas.  In light of these changes,  the  Partnership  expects that it will
incur higher expenses related to compliance. The Partnership regularly evaluates
the capital  improvement  needs of the properties.  While the Partnership has no
material commitments for property improvements and replacements, certain routine
capital expenditures are anticipated during 2005. Such capital expenditures will
depend on the physical  condition of the properties as well as anticipated  cash
flow generated by the properties.  Capital expenditures will be incurred only if
cash is available from operations or from  Partnership  reserves.  To the extent
that capital  improvements are completed,  the Partnership's  distributable cash
flow, if any, may be adversely affected at least in the short term.

The  Partnership's  assets are thought to be sufficient for any near-term  needs
(exclusive  of  capital   improvements)   of  the   Partnership.   The  mortgage
indebtedness    encumbering   the   Partnership's   investment   properties   of
approximately  $10,688,000  is  amortized  over  varying  periods,  with balloon
payments  of  approximately  $4,416,000  due in July 2010 for  Covington  Pointe
Apartments  and  approximately  $2,599,000  due in  September  2007 for Lakeside
Apartments.  The Managing  General Partner  refinanced the mortgage  encumbering
Lakeside  Apartments in November  2003.  The new mortgage was not  sufficient to
repay the existing  debt and  accordingly  an affiliate of the Managing  General
Partner advanced approximately  $1,350,000 to cover the shortfall.  The Managing
General  Partner will attempt to refinance  and/or sell the properties  prior to
such  maturity  dates.  If the  properties  cannot be  refinanced  or sold for a
sufficient  amount,  the  Partnership  may risk losing such  properties  through
foreclosure.

The  Partnership  distributed  the  following  amounts  during  the years  ended
December 31, 2004 and 2003 (in thousands, except per unit data):
<TABLE>
<CAPTION>

                                          Per                               Per
                      Year Ended        Limited         Year Ended        Limited
                     December 31,     Partnership      December 31,     Partnership
                         2004             Unit             2003             Unit

<S>   <C>              <C>              <C>              <C>               <C>
Sales (1)              $   --           $   --           $3,724            $134.90
Refinancing (2)            --               --            1,515              54.90
                       $   --           $   --           $5,239            $189.80
</TABLE>

(1) Proceeds from the sale of North Springs Apartments in April 2003.

(2) Proceeds from the refinance of Covington Pointe Apartments in June 2003.

Future  cash  distributions  will  depend on the levels of cash  generated  from
operations   and  the  timing  of  debt   maturities,   property   sales  and/or
refinancings. The Partnership's cash available for distribution is reviewed on a
monthly basis.  There can be no assurance,  however,  that the Partnership  will
generate sufficient funds from operations after required capital improvements to
permit any distributions to its partners during 2005 or subsequent periods.

In addition to its indirect  ownership of the general  partner  interests in the
Partnership,  AIMCO and its affiliates owned 12,340.50 limited partnership units
(the "Units") in the Partnership representing 46.09% of the outstanding Units at
December  31,  2004.  A number of these Units were  acquired  pursuant to tender
offers  made by  AIMCO  or its  affiliates.  It is  possible  that  AIMCO or its
affiliates will acquire  additional  Units in exchange for cash or a combination
of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO,
either through private  purchases or tender offers.  In this regard, on February
16,  2005,  AIMCO  Properties,  L.P.,  commenced a tender offer to acquire up to
14,435.50  Units for a  purchase  price of $60.26 per Unit.  This offer  expires
March 28, 2005.  Pursuant to the Partnership  Agreement,  unitholders  holding a
majority of the Units are  entitled to take action with  respect to a variety of
matters that include,  but are not limited to,  voting on certain  amendments to
the Partnership  Agreement and voting to remove the Managing General Partner. As
a result of its  ownership  of 46.09% of the  outstanding  Units,  AIMCO and its
affiliates  are in a position to influence all voting  decisions with respect to
the Partnership.  Although the Managing General Partner owes fiduciary duties to
the limited partners of the Partnership,  the Managing General Partner also owes
fiduciary duties to AIMCO as its sole  stockholder.  As a result,  the duties of
the Managing  General Partner,  as managing general partner,  to the Partnership
and its limited  partners may come into conflict with the duties of the Managing
General Partner to AIMCO as its sole stockholder.

Critical Accounting Policies and Estimates

A summary of the Partnership's  significant  accounting  policies is included in
"Note A - Organization and Summary of Significant  Accounting Policies" which is
included  in  the  consolidated  financial  statements  in  "Item  7.  Financial
Statements".   The  Managing   General  Partner  believes  that  the  consistent
application of these policies  enables the Partnership to provide readers of the
financial   statements   with  useful  and   reliable   information   about  the
Partnership's  operating  results and financial  condition.  The  preparation of
consolidated  financial  statements in  conformity  with  accounting  principles
generally  accepted  in the  United  States  requires  the  Partnership  to make
estimates and assumptions.  These estimates and assumptions  affect the reported
amounts of assets and  liabilities  at the date of the  financial  statements as
well as reported  amounts of revenues and expenses during the reporting  period.
Actual results could differ from these  estimates.  Judgments and assessments of
uncertainties are required in applying the Partnership's  accounting policies in
many  areas.  The  following  may  involve  a  higher  degree  of  judgment  and
complexity.

Impairment of Long-Lived Assets

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

Real  property  investments  are  subject  to varying  degrees of risk.  Several
factors  may  adversely  affect  the  economic  performance  and  value  of  the
Partnership's investment properties.  These factors include, but are not limited
to,  changes  in the  national,  regional  and  local  economic  climate;  local
conditions,  such as an oversupply of multifamily  properties;  competition from
other available  multifamily property owners and changes in market rental rates.
Any adverse changes in these factors could cause impairment of the Partnership's
assets.

Revenue Recognition

The Partnership generally leases apartment units for twelve-month terms or less.
The Partnership will offer rental concessions during particularly slow months or
in response  to heavy  competition  from other  similar  complexes  in the area.
Rental income attributable to leases, net of any concessions, is recognized on a
straight-line  basis over the term of the lease.  The Partnership  evaluates all
accounts  receivable  from  residents and  establishes  an allowance,  after the
application of security deposits,  for accounts greater than 30 days past due on
current tenants and all receivables due from former tenants.

Item 7.     Financial Statements

DAVIDSON INCOME REAL ESTATE, L.P.

LIST OF CONSOLIDATED FINANCIAL STATEMENTS

      Report of Independent Registered Public Accounting Firm

      Consolidated Balance Sheet - December 31, 2004

      Consolidated  Statements of  Operations - Years ended  December 31, 2004
      and 2003

      Consolidated  Statements  of Changes in Partners'  Deficit - Years ended
      December 31, 2004 and 2003

      Consolidated Statements of Cash Flows - Years ended December 31, 2004
      and 2003

      Notes to Consolidated Financial Statements

           Report of Independent Registered Public Accounting Firm



The Partners
Davidson Income Real Estate, L.P.


We have audited the accompanying  consolidated  balance sheet of Davidson Income
Real  Estate,  L.P.  as of  December  31,  2004,  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,  2004.  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 the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  We were not engaged to perform an
audit of the Partnership's internal control over financial reporting.  Our audit
included  consideration of internal control over financial  reporting as a basis
for designing audit  procedures that are appropriate in the  circumstances,  but
not for the  purpose  of  expressing  an  opinion  on the  effectiveness  of the
Partnership's internal control over financial reporting. Accordingly, we express
no such opinion.  An audit also includes  examining,  on a test basis,  evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
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 Income
Real  Estate,  L.P. at December 31, 2004,  and the  consolidated  results of its
operations  and its cash  flows  for each of the two years in the  period  ended
December 31, 2004, in conformity with accounting  principles  generally accepted
in the United States.


                                                          /s/ERNST & YOUNG LLP



Greenville, South Carolina
March 21, 2005

                        DAVIDSON INCOME REAL ESTATE, L.P.

                           CONSOLIDATED BALANCE SHEET
                        (in thousands, except unit data)

                                December 31, 2004
<TABLE>
<CAPTION>


Assets
<S>                                                                          <C>
   Cash and cash equivalents                                                 $ 322
   Receivables and deposits                                                      100
   Restricted escrows                                                             90
   Other assets                                                                  294
   Investment properties (Notes C and H):
      Land                                                    $ 3,523
      Buildings and related personal property                   20,131
                                                               23,654
      Less accumulated depreciation                            (13,398)       10,256
                                                                            $ 11,062
Liabilities and Partners' Deficit
Liabilities
      Accounts payable                                                       $ 138
      Tenant security deposit liabilities                                         74
      Accrued property taxes                                                     367
      Other liabilities                                                          103
      Due to affiliates (Note G)                                               1,416
      Mortgage notes payable (Note C)                                         10,688
      Deficit in joint venture (Note B)                                          866

Partners' Deficit
   General partners                                            $ (850)
   Limited partners (26,776 units issued and
      outstanding)                                              (1,740)       (2,590)
                                                                            $ 11,062

        See Accompanying Notes to Consolidated Financial Statements
</TABLE>

<PAGE>


                        DAVIDSON INCOME REAL ESTATE, L.P.

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

                                                                Years Ended
                                                               December 31,
                                                          2004              2003
Revenues:
<S>                                                     <C>                <C>
  Rental income                                         $ 2,979            $ 3,224
  Other income                                              260                246
  Casualty gain (Note D)                                    390                651
     Total revenues                                       3,629              4,121

Expenses:
  Operating                                               1,722              1,428
  General and administrative                                177                223
  Depreciation                                              995                870
  Interest                                                  566                765
  Property taxes                                            361                379
  Loss on early extinguishment
    of debt                                                  --                 57
     Total expenses                                       3,821              3,722

(Loss) income before equity in loss of joint
  venture                                                  (192)               399
Equity in loss of joint venture                             (28)                (6)

(Loss) income from continuing operations                   (220)               393
Loss from discontinued operations                            --               (210)
Gain on sale of discontinued operations (Note E)             --              3,524

Net (loss) income  (Note F)                             $   (220)          $ 3,707

Net (loss) income allocated to
  general partners (3%)                                 $     (7)           $ 111
Net (loss) income allocated to
  limited partners (97%)                                    (213)            3,596

                                                        $   (220)          $ 3,707
Net (loss) income per limited partnership unit:
  (Loss) income from continuing operations              $  (7.95)          $ 14.24
  Loss from discontinued operations                           --             (7.60)
  Gain on sale of discontinued operations                     --            127.66

                                                        $  (7.95)          $134.30

Distributions per limited partnership unit              $     --           $189.80

        See Accompanying Notes to Consolidated Financial Statements
</TABLE>

                        DAVIDSON INCOME REAL ESTATE, L.P.

           CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
                        (in thousands, except unit data)

<TABLE>
<CAPTION>
                                         Limited
                                       Partnership    General     Limited
                                          Units       Partners   Partners     Total

<S>                                       <C>           <C>       <C>        <C>
Original capital contributions            26,776        $ 1       $26,776    $26,777

Partners' deficit at
  December 31, 2002                       26,776       $ (797)    $   (41)   $ (838)

Distributions to partners                     --         (157)     (5,082)    (5,239)

Net income for the year ended
  December 31, 2003                           --          111       3,596      3,707

Partners' deficit
  at December 31, 2003                    26,776         (843)     (1,527)    (2,370)

Net loss for the year ended
  December 31, 2004                           --          (7)        (213)      (220)

Partners' deficit at
  December 31, 2004                       26,776       $ (850)    $(1,740)   $(2,590)

        See Accompanying Notes to Consolidated Financial Statements
</TABLE>

                        DAVIDSON INCOME REAL ESTATE, L.P.

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

                                                                     Years Ended
                                                                    December 31,
                                                                      2004    2003
Cash flows from operating activities:
<S>                                                              <C>         <C>
  Net (loss) income                                              $  (220)    $ 3,707
  Adjustments to reconcile net (loss) income to net cash
   provided by operating activities:
     Gain on sale of discontinued operations                         --       (3,524)
     Casualty gain                                                 (390)        (651)
     Loss on early extinguishment of debt                            --           73
     Depreciation                                                   995          949
     Amortization of loan costs and discounts                        36           49
     Equity in loss of joint venture                                 28            6
     Change in accounts:
      Receivables and deposits                                       287        (204)
      Other assets                                                  (67)         (29)
      Accounts payable                                              (25)           8
      Tenant security deposit liabilities                             3          (18)
      Accrued property taxes                                         64            1
      Other liabilities                                              (3)         (12)
      Due to affiliates                                              64           26
      Net cash provided by operating activities                     772          381

Cash flows from investing activities:
  Net proceeds from sale of discontinued operations                  --        5,735
  Property improvements and replacements                           (934)      (1,662)
  Net (deposits) withdrawals from restricted escrows                (60)         153
  Insurance proceeds from casualty                                  329        1,051
  Distributions from joint venture                                   --           33
       Net cash (used in) provided by investing activities         (665)       5,310

Cash flows from financing activities:
  Payments on mortgage notes payable                               (346)        (216)
  Loan costs paid                                                    --         (159)
  Advances from affiliates                                           59        1,350
  Payment on advances from affiliate                                (83)         (71)
  Repayments of mortgage notes payable                               --      (10,222)
  Proceeds from mortgage notes payable                               --        8,875
  Distributions to partners                                          --       (5,239)
       Net cash used in financing activities                       (370)      (5,682)

Net (decrease) increase in cash and cash equivalents               (263)           9
Cash and cash equivalents at beginning of year                      585          576

Cash and cash equivalents at end of year                         $ 322        $ 585

Supplemental disclosure of cash flow information:
  Cash paid for interest                                         $ 478        $ 791
Supplemental disclosures of non-cash flow information:
  Property improvements and replacements in accounts
   payable                                                        $ 49        $ 405

        See Accompanying Notes to Consolidated Financial Statements
</TABLE>



<PAGE>




                        DAVIDSON INCOME REAL ESTATE, L.P.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 2004


Note A - Organization and Summary of Significant Accounting Policies

Organization

Davidson  Income Real Estate,  L.P. (the  "Partnership"  or  "Registrant")  is a
Delaware  limited  partnership  organized  in April 1985 to acquire  and operate
residential real estate properties.  The general partners of the Partnership are
Davidson  Diversified  Properties,  Inc.,  a  Tennessee  corporation  ("Managing
General Partner"), David W. Talley and James T. Gunn (collectively,  "Individual
General Partners") (collectively,  the "General Partners"). The Partnership owns
and  operates  three  apartment  properties  located in the  Midwest,  South and
Southeast  and  owns a joint  venture  interest  in an  entity  which  owns  one
residential property.  The Managing General Partner is a subsidiary of Apartment
Investment  and  Management  Company  ("AIMCO"),  a publicly  traded real estate
investment trust. The Partnership  Agreement provides that the Partnership is to
terminate on December 31, 2010, unless terminated prior to such date.

Basis of Presentation

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting  for  the  Impairment  or  Disposal  of  Long-Lived   Assets",   the
accompanying  consolidated  statement of operations  reflects the  operations of
North  Springs  Apartments  for the year ended  December  31,  2003 as loss from
discontinued operations due to its sale in April 2003.

Principles of Consolidation

The  consolidated  financial  statements of the  Partnership  include its 100%
ownership  interests in the following  partnerships:  Bexley  House,  L.P. and
Davidson IRE Associates,  L.P. All significant  interpartnership balances have
been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States  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.

Allocations to Partners

Net income (loss) of the Partnership and taxable income (loss) are allocated 97%
to the limited partners and 3% to the General Partners,  except for such amounts
which  are  allocated  prior  to  the  Partnership  meeting  the  minimum  close
requirements as defined in the Partnership Agreement. Distributions of available
cash from  operations  are allocated  97% to the limited  partners and 3% to the
General  Partners.  Cash from sales or refinancing  are allocated 97% to limited
partners and 3% to General  Partners until the limited partners have received an
amount of cumulative  distributions  from sales or refinancings that equal their
original  invested  capital  plus an  amount  which,  when  added  to the  prior
distributions  to  limited  partners,  will equal 12% per annum  cumulative  and
noncompounded  on  adjusted  invested  capital,  as defined  in the  Partnership
Agreement.  Thereafter,  upon payment to an  affiliate  of the General  Partners
certain  real  estate  commissions  and  incentive  fees  as  described  in  the
Partnership  Agreement,  remaining cash from sales or refinancings are allocated
97% to the limited partners and 3% to the General  Partners.  In connection with
the  liquidation of the  Partnership,  cash from sales or  refinancings  and any
remaining working capital reserves shall be allocated among, and distributed to,
the  partners in  proportion  to, and to the extent of, their  positive  capital
account balances.

Investment Properties

Investment  properties  consist of three  apartment  complexes and are stated at
cost. Acquisition fees are capitalized as a cost of real estate. The Partnership
capitalizes  all  expenditures  in  excess of $250  that  clearly  relate to the
acquisition and  installation of real and personal  property  components.  These
expenditures  include costs incurred to replace  existing  property  components,
costs  incurred  to add a material  new  feature to a  property,  and costs that
increase  the useful life or service  potential of a property  component.  These
capitalized   costs  are  depreciated   over  the  useful  life  of  the  asset.
Expenditures for ordinary repairs,  maintenance and apartment turnover costs are
expensed as incurred.

In accordance with SFAS No. 144, 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. No
adjustments  for  impairment of value were recorded in the years ended  December
31, 2004 and 2003.

Depreciation

Depreciation is provided by the straight-line method over the estimated lives of
the investment properties and related personal property.  For Federal income tax
purposes, the accelerated cost recovery method is used for real property over 19
years for additions  after May 8, 1985,  and before January 1, 1987. As a result
of the Tax Reform Act of 1986,  for  additions  after  December  31,  1986,  the
modified  accelerated  cost recovery method is used for depreciation of (1) real
property additions over 27 1/2 years, and (2) personal property additions over 5
years.

Cash and Cash Equivalents

Cash and cash  equivalents  include cash on hand and in banks. At certain times,
the amount of cash deposited at a bank may exceed the limit on insured deposits.
Cash  balances  include  approximately  $215,000 at  December  31, 2004 that are
maintained by an affiliated  management company on behalf of affiliated entities
in cash concentration accounts.

Tenant Security Deposits

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

Deferred Costs

Loan  costs  of  approximately  $236,000,   less  accumulated   amortization  of
approximately  $54,000,  are included in other assets.  The loan costs are being
amortized over the terms of the related loan agreements. Amortization expense of
approximately $36,000 and $43,000 for the years ended December 31, 2004 and 2003
is  included  in  interest  expense  and  loss  from  discontinued   operations.
Amortization expense is expected to be approximately  $36,000 for the years 2005
and 2006,  approximately  $32,000 in 2007 and approximately  $20,000 in 2008 and
2009.

Leasing   commissions  and  other  direct  costs  incurred  in  connection  with
successful  leasing  efforts are  deferred and  amortized  over the terms of the
related leases. Amortization of these costs is included in operating expenses.

Leases

The Partnership generally leases apartment units for twelve-month terms or less.
The Partnership will offer rental concessions during particularly slow months or
in response  to heavy  competition  from other  similar  complexes  in the area.
Rental income attributable to leases, net of any concessions, is recognized on a
straight-line  basis over the term of the lease.  The Partnership  evaluates all
accounts  receivable  from  residents and  establishes  an allowance,  after the
application of security deposits,  for accounts greater than 30 days past due on
current tenants and all receivables due from former tenants.

Joint Venture

The Partnership  accounts for its investment in the Sterling Crest Joint Venture
using the equity method of accounting (see "Note B" for further discussion).

Segment Reporting

SFAS  No.  131,   "Disclosure  about  Segments  of  an  Enterprise  and  Related
Information"  established standards for the way that public business enterprises
report information about operating  segments in annual financial  statements and
required that those  enterprises  report  selected  information  about operating
segments in interim financial reports.  SFAS No. 131 also establishes  standards
for related disclosures about products and services, geographic areas, and major
customers.  As defined in SFAS No. 131, the  Partnership has only one reportable
segment.

Advertising

The  Partnership  expenses the costs of  advertising  as  incurred.  Advertising
expense,  included in operating expenses and loss from discontinued  operations,
was approximately  $85,000 and $62,000 for the years ended December 31, 2004 and
2003, respectively.

Fair Value of Financial Instruments

SFAS No. 107 "Disclosures about Fair Value of Financial Instruments", as amended
by 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 Partnership  estimates the fair value of its
long-term  debt  by  discounting   future  cash  flows  using  a  discount  rate
commensurate with that currently believed to be available to the Partnership for
similar  term,  fully   amortizing   long-term  debt.  The  fair  value  of  the
Partnership's long term debt at the Partnership's  incremental borrowing rate is
approximately $10,260,000.

Note B - Deficit in Joint Venture Investment

The Partnership owns a 17.5% general partnership  interest in the Sterling Crest
Joint Venture  ("Sterling  Crest") with Davidson Growth Plus, L.P., an affiliate
of the Managing  General  Partner,  which owns the remaining  82.5% of the joint
venture.  In connection with the joint venture's purchase of Phase I of Brighton
Crest  Apartments  on June 30,  1987,  the  Partnership  invested  approximately
$2,727,000  in the  joint  venture.  The  joint  venture  purchased  Phase II of
Brighton Crest Apartments on December 15, 1987.

The  Partnership  accounts  for its 17.5%  investment  in Sterling  Crest on the
equity  method.  In  accordance  with  the  equity  method  of  accounting,  the
Partnership's  original investment in Sterling Crest is increased by advances to
Sterling Crest and by the Partnership's share of the earnings of Sterling Crest.
The  investment is decreased by  distributions  from  Sterling  Crest and by the
Partnership's share of losses of Sterling Crest. The Partnership's equity in the
operations of Sterling  Crest  amounted to a loss of  approximately  $28,000 and
$6,000 for the years ended  December 31, 2004 and 2003,  respectively.  In 2003,
the Partnership received  distributions of approximately  $33,000 from the joint
venture.  At December 31, 2004, the  Partnership had received  distributions  in
excess of its general partnership investment and has an investment deficiency of
approximately $866,000.

The following table  represents  Sterling Crest's net liabilities as of December
31,  2004  and net loss  for the  years  ended  December  31,  2004 and 2003 (in
thousands):

                         December 31, 2004

Total assets                 $  6,126
Total liabilities             (11,075)

Net liabilities              $ (4,949)

                              Years Ended December 31,
                               2004              2003

Total revenues               $ 2,299            $ 2,361
Total expenses                (2,459)            (2,395)

Net loss                     $  (160)           $   (34)

Note C - Mortgage Notes Payable

The terms of mortgage notes payable are as follows:
<TABLE>
<CAPTION>

                      Principal      Monthly                             Principal
                     Balance At      Payment      Stated                  Balance
                    December 31,    Including    Interest   Maturity       Due At
     Property           2004         Interest      Rate       Date        Maturity
                          (in thousands)                               (in thousands)

<S>                    <C>             <C>          <C>     <C>   <C>     <C>
Lakeside               $ 2,797         $ 11         (2)     09/15/07      $ 2,599
Bexley House             2,182           19      7.32% (1)  01/01/21           --
Covington Pointe
  1st mortgage           5,709           36      3.81% (1)  07/01/10        4,416
                       $10,688         $ 66                               $ 7,015
</TABLE>

(1)   Fixed rate mortgage.

(2)   Adjustable  rate  based  on  the  Fannie  Mae  discounted  mortgage-backed
      security  index plus 85 basis  points.  The rate at December  31, 2004 was
      3.07%.

In June 2003, the  Partnership  refinanced the mortgages  encumbering  Covington
Pointe   Apartments.   The  refinancing   replaced   mortgage   indebtedness  of
approximately  $4,343,000  with a new mortgage of  $6,000,000.  The new mortgage
carries a stated  interest rate of 3.81%  compared to the 7.83% interest rate on
the old mortgages.  Payments of principal and interest of approximately  $36,000
are due on the first day of each month commencing in August 2003 until July 2010
at which time a balloon  payment in the amount of  approximately  $4,416,000  is
due.  Capitalized loan costs, which are included in other assets,  incurred with
the refinancing  were  approximately  $95,000,  and are being amortized over the
life of the mortgage note payable.  The Partnership  wrote off unamortized  loan
costs of approximately  $51,000 and mortgage  discounts of approximately  $6,000
resulting in a loss on early extinguishment of debt of approximately $57,000.

On  November  3, 2003,  the  Partnership  refinanced  the  mortgage  encumbering
Lakeside  Apartments.   The  refinancing   replaced  mortgage   indebtedness  of
approximately $4,100,000 with a new mortgage in the amount of $2,875,000.  Total
capitalized loan costs were approximately  $64,000. Due to the shortfall between
the new mortgage  loan and the amount  needed to pay off the existing  mortgage,
the Managing General Partner advanced the Partnership  approximately  $1,350,000
to cover the shortfall and other closing costs.

Initially the November 3, 2003,  refinancing of Lakeside Apartments was under an
interim credit facility  ("Interim Credit Facility") which also provided for the
refinancing of several other  properties.  The Interim Credit  Facility  created
separate  loans for each property  refinanced  thereunder,  which loans were not
cross-collateralized  or cross-defaulted with each other. During the term of the
Interim Credit Facility,  Lakeside Apartments was required to make interest only
payments. The first months interest rate for Lakeside Apartments was 1.9%.

As of December 1, 2003,  the loan on Lakeside  Apartments  was  transferred to a
different lender. The credit facility ("Permanent Credit Facility") with the new
lender matures in September 2007 and has an option for the  Partnership to elect
one five-year  extension.  This Permanent  Credit Facility also created separate
loans  for  each   property   refinanced   thereunder,   which   loans  are  not
cross-collateralized  or  cross-defaulted  with each other. Each note under this
Permanent  Credit  Facility is initially a variable  rate loan,  and after three
years,  the  Partnership  has the option of converting to a fixed rate loan. The
interest  rate on the variable rate loans is 85 basis points over the Fannie Mae
discounted  mortgage-backed  security  index  (3.07% per annum at  December  31,
2004), and the rate resets monthly. Each loan automatically renews at the end of
each month.  In addition,  monthly  principal  payments are required  based on a
30-year  amortization  schedule,  using the interest  rate in effect  during the
first month that the property is financed on the Permanent Credit Facility.  The
loans may be prepaid without penalty.

The mortgage notes payable are  non-recourse  and are secured by a pledge of the
Partnership's  rental  properties  and by pledge of revenues from the respective
investment  properties.  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 the  mortgage  notes  payable  subsequent  to
December 31, 2004 are as follows (in thousands):

                               2005              $ 356
                               2006                 377
                               2007               2,974
                               2008                 333
                               2009                 350
                            Thereafter            6,298

                                                $10,688

Note D - Casualty Event

On December 31, 2002, Bexley House Apartments experienced a fire, causing damage
to  32  units.   Property   damages   totaled   approximately   $1,452,000   and
reconstruction  of the units was  completed  during 2003.  During the year ended
December  31, 2003, a casualty  gain of  approximately  $651,000 was recorded at
Bexley  House  Apartments.  The gain was the result of the receipt of  insurance
proceeds  of  approximately  $1,051,000  partially  offset  by the  write off of
approximately  $400,000 of  undepreciated  fixed  assets.  During the year ended
December 31, 2004,  the  Partnership  recorded a casualty gain of  approximately
$390,000  due to the  receipt  of  final  insurance  proceeds  of  approximately
$393,000 and the write off of  approximately  $3,000 of remaining  undepreciated
fixed assets.

Note E - Sale of Investment Property

On April 15, 2003,  the  Partnership  sold North  Springs  Apartments to a third
party for a gross  sales price of  approximately  $6,100,000.  The net  proceeds
received by the  Partnership  were  approximately  $5,735,000  after  payment of
closing costs,  including a commission  paid to the Managing  General Partner as
permitted under the terms of the  Partnership  Agreement.  The Partnership  used
approximately  $1,779,000 of the net proceeds to repay the mortgages encumbering
the  property.  As a result  of the sale,  the  Partnership  realized  a gain of
approximately $3,524,000 during the year ended December 31, 2003. The property's
operations, loss of approximately $210,000 for the year ended December 31, 2003,
are shown as loss from discontinued operations on the accompanying  consolidated
statements of operations  and include  revenues of  approximately  $229,000.  In
addition,  the Partnership  recorded a loss on early  extinguishment  of debt of
approximately  $16,000 for the year ended December 31, 2003 due to the write off
of unamortized loan costs and mortgage discounts, which is also included in loss
from discontinued operations.

Note F - Income Taxes

The Partnership  received a ruling from the Internal  Revenue Service that it is
to be classified as a partnership for Federal income tax purposes.  Accordingly,
no provision for income taxes is made in the consolidated  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)  income and Federal
taxable (loss) income (in thousands, except per unit data):

                                         2004          2003

Net (loss) income as reported          $  (220)     $ 3,707
Add (deduct)
  Depreciation differences                 113            13
  Equity in joint venture                  (22)          (31)
  Prepaid rents                             --            17
   Gain on sale                             --          (971)
   Casualty                               (351)         (690)
  Other                                   (151)           95

Federal taxable (loss) income           $  (631)     $ 2,140

Federal taxable (loss) income
  per limited partnership unit         $(14.34)      $ 77.52

The following is a reconciliation between the Partnership's reported amounts and
Federal tax basis of net assets as of December 31, 2004 (in thousands):

Net liabilities as reported                  $ (2,590)
Land and buildings                              1,350
Accumulated depreciation                          300
Syndication                                     3,809
Other                                             718

Net assets - Federal tax basis               $  3,587

Note G - Transactions with Affiliated Parties

The Partnership has no employees and depends on the Managing General Partner and
its  affiliates  for  the  management  and  administration  of  all  Partnership
activities.  The Partnership  Agreement  provides for (i) payments to affiliates
for property  management services and (ii) for reimbursement of certain expenses
incurred by affiliates on behalf of the Partnership.

Affiliates of the Managing General Partner receive 5% of gross receipts from all
of  the  Partnership's   properties  as  compensation  for  providing   property
management  services.  The  Partnership  paid to such  affiliates  approximately
$158,000  and  $164,000  for  the  years  ended  December  31,  2004  and  2003,
respectively, which is included in operating expenses and loss from discontinued
operations.

An  affiliate  of  the  Managing   General   Partner   charged  the  Partnership
reimbursement of accountable  administrative expenses amounting to approximately
$196,000  and  $318,000  for  the  years  ended  December  31,  2004  and  2003,
respectively,  which is  included  in general and  administrative  expenses  and
investment  properties.   The  portion  of  these  reimbursements   included  in
investment  properties  for the years ended  December 31, 2004 and 2003 are fees
related to  construction  management  services  provided by an  affiliate of the
Managing  General Partner of approximately  $76,000 and $176,000,  respectively.
The construction management service fees are calculated based on a percentage of
current  year  additions to  investment  properties.  At December 31, 2004,  the
Partnership owed  approximately  $41,000 of accrued  accountable  administrative
expenses to an affiliate of the Managing  General Partner and is included in due
to affiliates on the accompanying consolidated balance sheet.

During the years ended  December 31, 2004 and 2003, an affiliate of the Managing
General Partner advanced the Partnership  approximately  $59,000 and $1,350,000,
respectively,  to  fund  property  accounts  payables  in 2004  and to fund  the
repayment of the mortgage at Lakeside Apartments in 2003. During the years ended
December 31, 2004 and 2003, the  Partnership  repaid  advances of  approximately
$83,000 and  $71,000,  respectively.  At December  31,  2004,  the amount of the
outstanding  loans and accrued  interest was  approximately  $1,375,000  and are
shown as due to  affiliates  on the  accompanying  consolidated  balance  sheet.
Interest  on the  advances  was  charged  at the prime rate plus 1%, or 6.25% at
December  31, 2004,  in  accordance  with the  Partnership  Agreement.  Interest
expense on advances  from  affiliates  of the Managing  General  Partner for the
years ended  December  31, 2004 and 2003 was  approximately  $70,000 and $2,000,
respectively.  Subsequent  to December 31,  2004,  the  Partnership  received an
advance  of  approximately  $176,000  to pay  real  estate  taxes  at one of the
investment properties.

For acting as real estate  broker in  connection  with the sale of North Springs
Apartments,  the Managing  General Partner was paid a real estate  commission of
approximately  $183,000  during  the year  ended  December  31,  2003.  When the
Partnership  terminates,  the Managing  General Partner will have to return this
commission  if the  limited  partners  do not receive  their  original  invested
capital plus a 12% per annum cumulative non-compounded return.

The  Partnership  insures its properties up to certain  limits through  coverage
provided by AIMCO which is  generally  self-insured  for a portion of losses and
liabilities  related to workers  compensation,  property  casualty  and  vehicle
liability. The Partnership insures its properties above the AIMCO limits through
insurance  policies  obtained  by  AIMCO  from  insurers  unaffiliated  with the
Managing General Partner. During the years ended December 31, 2004 and 2003, the
Partnership  was charged by AIMCO and its affiliates  approximately  $51,000 and
$66,000,  respectively,  for insurance  coverage and fees associated with policy
claims administration.

In addition to its indirect  ownership of the general  partner  interests in the
Partnership,  AIMCO and its affiliates owned 12,340.50 limited partnership units
(the "Units") in the Partnership representing 46.09% of the outstanding Units at
December  31,  2004.  A number of these Units were  acquired  pursuant to tender
offers  made by  AIMCO  or its  affiliates.  It is  possible  that  AIMCO or its
affiliates will acquire  additional  Units in exchange for cash or a combination
of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO,
either through private  purchases or tender offers.  In this regard, on February
16,  2005,  AIMCO  Properties,  L.P.,  commenced a tender offer to acquire up to
14,435.50  Units for a  purchase  price of $60.26 per Unit.  This offer  expires
March 28, 2005.  Pursuant to the Partnership  Agreement,  unitholders  holding a
majority of the Units are  entitled to take action with  respect to a variety of
matters that include,  but are not limited to,  voting on certain  amendments to
the Partnership  Agreement and voting to remove the Managing General Partner. As
a result of its  ownership  of 46.09% of the  outstanding  Units,  AIMCO and its
affiliates  are in a position to influence all voting  decisions with respect to
the Partnership.  Although the Managing General Partner owes fiduciary duties to
the limited partners of the Partnership,  the Managing General Partner also owes
fiduciary duties to AIMCO as its sole  stockholder.  As a result,  the duties of
the Managing  General Partner,  as managing general partner,  to the Partnership
and its limited  partners may come into conflict with the duties of the Managing
General Partner to AIMCO as its sole stockholder.

Note H - Investment Properties and Accumulated Depreciation

                                                   Initial Cost
                                                  To Partnership
                                                  (in thousands)

<TABLE>
<CAPTION>

                                                           Buildings      Net Cost
                                                          and Related    Capitalized
                                                           Personal     Subsequent to
Description                  Encumbrances       Land       Property      Acquisition
                            (in thousands)                             (in thousands)
<S>                             <C>           <C>           <C>          <C>
Lakeside Apartments             $ 2,797       $ 1,259       $ 5,791      $    546
Bexley House Apartments           2,182           647         3,067         1,447
Covington Pointe
 Apartments                       5,709         1,935         7,041         1,921

Totals                          $10,688       $ 3,841       $15,899      $  3,914
</TABLE>

<TABLE>
<CAPTION>

                     Gross Amount At Which
                            Carried
                       At December 31, 2004
                         (in thousands)
                           Buildings
                          And Related
                           Personal            Accumulated     Date of      Date    Depreciable
   Description     Land    Property    Total   Depreciation  Construction Acquired  Life-Years
                                              (in thousands)
<S>               <C>       <C>       <C>        <C>             <C>        <C>        <C>
Lakeside          $ 1,046   $ 6,550   $ 7,596    $ 4,826         1980       05/86      5-30
Bexley House          542     4,619     5,161      2,388         1972       09/86      5-30
Covington Pointe    1,935     8,962    10,897      6,184         1982       03/87      5-30

Totals            $ 3,523   $20,131   $23,654    $13,398
</TABLE>

Reconciliation of "investment properties and accumulated depreciation"

                                              Years Ended December 31,
                                                 2004          2003
                                                   (in thousands)
Investment Properties
Balance at beginning of year                    $23,083       $27,335
  Property improvements and replacements            578         2,067
  Disposals of property                              (7)         (878)
  Sale of property                                   --        (5,441)
Balance at end of year                          $23,654       $23,083

Accumulated Depreciation
Balance at beginning of year                    $12,407       $15,220
  Additions charged to expense                      995           949
  Disposals of property                              (4)         (478)
  Sale of property                                   --        (3,284)
Balance at end of year                          $13,398       $12,407

The  aggregate  cost of the real  estate  for  Federal  income tax  purposes  at
December  31,  2004 and 2003,  is  approximately  $25,004,000  and  $24,544,000,
respectively. The accumulated depreciation taken for Federal income tax purposes
at December 31, 2004 and 2003, is  approximately  $13,098,000  and  $12,216,000,
respectively.

Note I - Commitments and Contingencies

The Partnership  Agreement provides for payment of a fee to the Managing General
Partner for managing the affairs of the  Partnership.  The fee is 2% of adjusted
cash from  operations,  as  defined  in the  Partnership  Agreement.  The fee is
payable only after the Partnership  has  distributed,  to all limited  partners,
adjusted  cash  from  operations  in any year  equal  to 10% of  their  adjusted
invested capital as defined in the partnership  agreement.  No fees were payable
for the years ended December 31, 2004 and 2003.

Note J - Contingencies

In March 1998, several putative unit holders of limited partnership units of the
Partnership  commenced an action  entitled  Rosalie  Nuanes,  et al. v. Insignia
Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the
State of  California  for the  County  of San  Mateo.  The  plaintiffs  named as
defendants,  among others,  the  Partnership,  its Managing  General Partner and
several of their  affiliated  partnerships  and corporate  entities.  The action
purported  to  assert  claims  on  behalf  of a class of  limited  partners  and
derivatively  on behalf  of a number  of  limited  partnerships  (including  the
Partnership)  that are named as nominal  defendants,  challenging,  among  other
things,  the  acquisition  of  interests  in certain  Managing  General  Partner
entities by Insignia Financial Group, Inc.  ("Insignia") and entities that were,
at one  time,  affiliates  of  Insignia;  past  tender  offers  by the  Insignia
affiliates to acquire limited partnership units;  management of the partnerships
by the  Insignia  affiliates;  and the series of  transactions  which  closed on
October 1, 1998 and February 26, 1999 whereby  Insignia and Insignia  Properties
Trust,  respectively,  were merged into AIMCO.  The plaintiffs  sought  monetary
damages and equitable relief, including judicial dissolution of the Partnership.
In addition,  during the third quarter of 2001, a complaint  captioned Heller v.
Insignia  Financial  Group (the  "Heller  action")  was filed  against  the same
defendants  that are named in the  Nuanes  action.  On or about  August 6, 2001,
plaintiffs filed a first amended  complaint.  The Heller action was brought as a
purported derivative action, and asserted claims for, among other things, breach
of fiduciary  duty,  unfair  competition,  conversion,  unjust  enrichment,  and
judicial dissolution.

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

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

On June 13, 2003, the court granted final approval of the settlement and entered
judgment in both the Nuanes and Heller actions.  On August 12, 2003, an objector
("Objector") filed an appeal (the "Appeal") seeking to vacate and/or reverse the
order approving the settlement and entering  judgment  thereto.  On November 24,
2003,  the Objector  filed an  application  requesting  the court order AIMCO to
withdraw settlement tender offers it had commenced,  refrain from making further
offers  pending  the appeal and auction  any units  tendered  to third  parties,
contending  that the offers did not  conform  with the terms of the  settlement.
Counsel  for the  Objector  (on behalf of another  investor)  had  alternatively
requested the court take certain action  purportedly to enforce the terms of the
settlement agreement. On December 18, 2003, the court heard oral argument on the
motions  and denied them both in their  entirety.  The  Objector  filed a second
appeal challenging the court's use of a referee and its order requiring Objector
to pay those fees.

On January 28, 2004,  the  Objector  filed his opening  brief in the Appeal.  On
April 23, 2004, the Managing General Partner and its affiliates filed a response
brief in support of the settlement and the judgment thereto. The plaintiffs have
also filed a brief in support of the settlement. On June 4, 2004, Objector filed
a reply to the briefs  submitted by the Managing General Partner and Plaintiffs.
In addition both the Objector and plaintiffs filed briefs in connection with the
second appeal.  On March 21, 2005, the Court of Appeals issued  opinions in both
pending appeals. With regard to the settlement and judgment entered thereto, the
Court of Appeals vacated the trial court's order and remanded to the trial court
for further  findings on the basis that the "state of the record is insufficient
to permit meaningful  appellate  review".  With regard to the second appeal, the
Court of Appeals reversed the order requiring the Objector to pay referee fees.

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

As previously disclosed,  AIMCO Properties L.P. and NHP Management Company, both
affiliates of the Managing General  Partner,  are defendants in an action in the
United States District Court,  District of Columbia.  The plaintiffs have styled
their  complaint  as a  collective  action  under the Fair Labor  Standards  Act
("FLSA") and seek to certify state subclasses in California,  Maryland,  and the
District of Columbia. Specifically, the plaintiffs contend that AIMCO Properties
L.P. failed to compensate  maintenance  workers for time that they were required
to be "on-call". Additionally, plaintiffs allege AIMCO Properties L.P. failed to
comply  with the FLSA in  compensating  maintenance  workers  for time that they
worked in responding to a call while  "on-call".  The  defendants  have filed an
answer to the amended complaint denying the substantive  allegations.  Discovery
relating  to the  certification  of the  collective  action  has  concluded  and
briefing on the matter is underway.  Although the outcome of any  litigation  is
uncertain,  AIMCO  Properties,  L.P. does not believe that the ultimate  outcome
will have a material  adverse  effect on its  financial  condition or results of
operations.  Similarly,  the Managing  General Partner does not believe that the
ultimate  outcome  will have a  material  adverse  effect  on the  Partnership's
consolidated financial condition or results of operations.

The  Partnership  is unaware  of any other  pending  or  outstanding  litigation
matters  involving  it or its  investment  properties  that are not of a routine
nature arising in the ordinary course of business.

Environmental

Various  Federal,  state and local laws subject  property owners or operators to
liability for management,  and the costs of removal or  remediation,  of certain
hazardous  substances  present on a property.  Such laws often impose  liability
without regard to whether the owner or operator knew of, or was responsible for,
the release or presence of the  hazardous  substances.  The  presence of, or the
failure to manage or remedy properly,  hazardous substances may adversely affect
occupancy at affected  apartment  communities and the ability to sell or finance
affected properties.  In addition to the costs associated with investigation and
remediation  actions brought by government  agencies,  the presence of hazardous
substances  on a  property  could  result in claims by  private  plaintiffs  for
personal injury,  disease,  disability or other  infirmities.  Various laws also
impose  liability for the cost of removal,  remediation or disposal of hazardous
substances  through a  licensed  disposal  or  treatment  facility.  Anyone  who
arranges for the disposal or treatment of hazardous  substances  is  potentially
liable  under such laws.  These laws often impose  liability  whether or not the
person arranging for the disposal ever owned or operated the disposal  facility.
In  connection  with  the  ownership  and  operation  of  its  properties,   the
Partnership could  potentially be liable for environmental  liabilities or costs
associated with its properties.

Mold

The Partnership is aware of lawsuits  against owners and managers of multifamily
properties asserting claims of personal injury and property damage caused by the
presence of mold, some of which have resulted in substantial  monetary judgments
or settlements. The Partnership has only limited insurance coverage for property
damage loss claims  arising from the  presence of mold and for  personal  injury
claims related to mold exposure. Affiliates of the Managing General Partner have
implemented a national  policy and  procedures to prevent or eliminate mold from
its properties  and the Managing  General  Partner  believes that these measures
will  eliminate,  or at least  minimize,  the  effects  that mold  could have on
residents.  To date,  the  Partnership  has not incurred  any material  costs or
liabilities  relating to claims of mold  exposure  or to abate mold  conditions.
Because the law  regarding  mold is unsettled and subject to change the Managing
General  Partner  can make no  assurance  that  liabilities  resulting  from the
presence of or exposure to mold will not have a material  adverse  effect on the
Partnership's consolidated financial condition or results of operations.

SEC Investigation

As  previously  disclosed,  the  Central  Regional  Office of the United  States
Securities  and  Exchange   Commission   (the  "SEC")  is  conducting  a  formal
investigation relating to certain matters.  Although the staff of the SEC is not
limited  in the  areas  that it may  investigate,  AIMCO  believes  the areas of
investigation include AIMCO's miscalculated monthly net rental income figures in
third quarter 2003,  forecasted  guidance,  accounts payable,  rent concessions,
vendor  rebates,  capitalization  of payroll and certain  other  costs,  and tax
credit  transactions.  AIMCO is cooperating  fully. AIMCO is not able to predict
when the matter  will be  resolved.  AIMCO does not  believe  that the  ultimate
outcome  will  have a  material  adverse  effect on its  consolidated  financial
condition or results of operations. Similarly, the Managing General Partner does
not believe that the ultimate outcome will have a material adverse effect on the
Partnership's consolidated financial condition or results of operations.

Item 8.     Changes in and  Disagreements  with  Accountants on Accounting and
            Financial Disclosures

            None.

Item 8a.    Controls and Procedures

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

(b) Internal Control Over Financial  Reporting.  There have not been any changes
in the Partnership's  internal control over financial reporting (as such term is
defined in Rules  13a-15(f)  and  15d-15(f)  under the Exchange  Act) during the
fourth quarter of 2004 that have materially  affected,  or are reasonably likely
to  materially  affect,  the  Partnership's   internal  control  over  financial
reporting.

Item 8b.    Other Information

            None.
                                    PART III

Item 9.     Directors,  Executive  Officers,  Promoters  and Control  Persons;
            Compliance with Section 16(a) of the Exchange Act

The  Partnership  does not have any  directors  or  officers.  The  names of the
directors and officers of Davidson Diversified  Properties,  Inc. (the "Managing
General Partner"),  their ages and the nature of all positions presently held by
them are set forth below. There are no family relationships between or among any
directors and officers.

Martha L. Long                   45   Director and Senior Vice President
Harry G. Alcock                  42   Director and Executive Vice President
Miles Cortez                     61   Executive Vice President, General Counsel
                                      and Secretary
Patti K. Fielding                41   Executive Vice President
Paul J. McAuliffe                48   Executive Vice President and Chief
                                      Financial Officer
Thomas M. Herzog                 42   Senior Vice President and Chief Accounting
                                        Officer
Stephen B. Waters                43   Vice President

Martha L. Long has been a Director  and Senior Vice  President of the Managing
General  Partner  since  February  2004.  Ms.  Long has been with AIMCO  since
October  1998 and has served in  various  capacities.  From 1998 to 2001,  Ms.
Long served as Senior Vice  President and Controller of AIMCO and the Managing
General  Partner.  During  2002 and 2003,  Ms.  Long  served  as  Senior  Vice
President of Continuous Improvement for AIMCO.

Harry G. Alcock was appointed as a Director of the Managing  General  Partner in
October 2004 and was appointed  Executive Vice President of the Managing General
Partner  in  February  2004 and has been  Executive  Vice  President  and  Chief
Investment Officer of AIMCO since October 1999. Prior to October 1999 Mr. Alcock
served as a Vice President of AIMCO from July 1996 to October 1997,  when he was
promoted to Senior Vice  President  Acquisitions  where he served until  October
1999. Mr. Alcock has had responsibility for acquisition and financing activities
of AIMCO since July 1994.

Miles  Cortez was  appointed  Executive  Vice  President,  General  Counsel  and
Secretary  of the  Managing  General  Partner in  February  2004 and of AIMCO in
August 2001. Prior to joining AIMCO, Mr. Cortez was the senior partner of Cortez
Macaulay Bernhardt & Schuetze LLC, a Denver law firm, from December 1997 through
September 2001.

Patti K. Fielding was appointed  Executive  Vice President - Securities and Debt
of the Managing  General Partner in February 2004 and of AIMCO in February 2003.
Ms.  Fielding was appointed  Treasurer of AIMCO in January 2005. Ms. Fielding is
responsible  for  debt  financing  and the  treasury  department.  Ms.  Fielding
previously  served as Senior Vice  President - Securities and Debt of AIMCO from
January 2000 to February 2003. Ms.  Fielding  joined AIMCO in February 1997 as a
Vice President.

Paul J. McAuliffe has been Executive Vice President and Chief Financial  Officer
of the Managing  General  Partner since April 2002. Mr.  McAuliffe has served as
Executive Vice  President of AIMCO since  February 1999 and was appointed  Chief
Financial Officer of AIMCO in October 1999. From May 1996 until he joined AIMCO,
Mr. McAuliffe was Senior Managing Director of Secured Capital Corp.

Thomas M.  Herzog was  appointed  Senior  Vice  President  and Chief  Accounting
Officer of the Managing General Partner in February 2004 and of AIMCO in January
2004.  Prior to joining AIMCO in January 2004, Mr. Herzog was at GE Real Estate,
serving  as Chief  Accounting  Officer & Global  Controller  from  April 2002 to
January 2004 and as Chief Technical Advisor from March 2000 to April 2002. Prior
to joining GE Real  Estate,  Mr.  Herzog was at  Deloitte & Touche LLP from 1990
until 2000.

Stephen B. Waters was appointed Vice President of the Managing  General  Partner
in April  2004.  Mr.  Waters  previously  served as a  Director  of Real  Estate
Accounting   since   joining   AIMCO  in   September   1999.   Mr.   Waters  has
responsibilities for real estate and partnership accounting with AIMCO.

One or more of the above persons are also directors and/or officers of a general
partner (or general partner of a general partner) of limited  partnerships which
either have a class of  securities  registered  pursuant to Section 12(g) of the
Securities Exchange Act of 1934, or are subject to the reporting requirements of
Section  15(d) of such Act:  Further,  one or more of the above persons are also
directors and/or officers of Apartment Investment and Management Company and the
general  partner  of  AIMCO  Properties,  L.P.,  entities  that  have a class of
securities  registered  pursuant to Section 12(g) of the Securities Exchange Act
of 1934, or are subject to the reporting  requirements of Section 15 (d) of such
Act.

The board of directors of the Managing  General Partner does not have a separate
audit committee. As such, the board of directors of the Managing General Partner
fulfills  the  functions  of an audit  committee.  The  board of  directors  has
determined  that  Martha L. Long meets the  requirement  of an "audit  committee
financial expert".

The directors and officers of the Managing  General  Partner with authority over
the Partnership are all employees of subsidiaries of AIMCO.  AIMCO has adopted a
code of ethics that applies to such  directors  and  officers  that is posted on
AIMCO's  website  (www.AIMCO.com).   AIMCO's  website  is  not  incorporated  by
reference to this filing.

Item 10.    Executive Compensation

No  remuneration  was paid by the  Partnership to any officer or director of the
Managing General Partner during the year ended December 31, 2004.

Item 11.    Security Ownership of Certain Beneficial Owners and Management

Except as noted below,  no person or entity was known by the  Partnership  to be
the beneficial  owners of more than 5% of the Limited  Partnership  Units of the
Partnership as of December 31, 2004.

                                                             Percentage
                 Entity                   Number of Units     of Total

AIMCO IPLP, L.P. (1)                              570           2.13%
  (an affiliate of AIMCO)
AIMCO Properties, L.P. (2)                   7,940.50          29.66%
  (an affiliate of AIMCO)
Cooper River Properties (1)                     3,830          14.30%
  (an affiliate of AIMCO)

Hospital Corporation of America                 3,000          11.20%
201 West Main Street
Louisville, KY 40202

(1)   Entity is indirectly ultimately owned by AIMCO. Its business address is 55
      Beattie Place, Greenville, SC 29602.

(2)   Entity is indirectly  ultimately controlled by AIMCO. Its business address
      is 4582 S. Ulster St. Parkway, Suite 1100, Denver, Colorado 80237.

As of December 31, 2004, no director or officer of the Managing  General Partner
owns,  nor do the  directors  or  officers  as a whole,  own more than 1% of the
Partnership's  Units.  No such  director  or  officer  had any right to  acquire
beneficial ownership of additional Units of the Partnership.

Item 12.    Certain Relationships and Related Transactions

The Partnership has no employees and depends on the Managing General Partner and
its  affiliates  for  the  management  and  administration  of  all  Partnership
activities.  The Partnership  Agreement  provides for (i) payments to affiliates
for property  management services and (ii) for reimbursement of certain expenses
incurred by affiliates on behalf of the Partnership.

Affiliates of the Managing General Partner receive 5% of gross receipts from all
of  the  Partnership's   properties  as  compensation  for  providing   property
management  services.  The  Partnership  paid to such  affiliates  approximately
$158,000  and  $164,000  for  the  years  ended  December  31,  2004  and  2003,
respectively, which is included in operating expenses and loss from discontinued
operations.

An  affiliate  of  the  Managing   General   Partner   charged  the  Partnership
reimbursement of accountable  administrative expenses amounting to approximately
$196,000  and  $318,000  for  the  years  ended  December  31,  2004  and  2003,
respectively,  which is  included  in general and  administrative  expenses  and
investment  properties.   The  portion  of  these  reimbursements   included  in
investment  properties  for the years ended  December 31, 2004 and 2003 are fees
related to  construction  management  services  provided by an  affiliate of the
Managing  General Partner of approximately  $76,000 and $176,000,  respectively.
The construction management service fees are calculated based on a percentage of
current  year  additions to  investment  properties.  At December 31, 2004,  the
Partnership owed  approximately  $41,000 of accrued  accountable  administrative
expenses to an affiliate of the Managing  General Partner and is included in due
to affiliates on the accompanying consolidated balance sheet.

During the years ended  December 31, 2004 and 2003, an affiliate of the Managing
General Partner advanced the Partnership  approximately  $59,000 and $1,350,000,
respectively,  to  fund  property  accounts  payables  in 2004  and to fund  the
repayment of the mortgage at Lakeside Apartments in 2003. During the years ended
December 31, 2004 and 2003, the  Partnership  repaid  advances of  approximately
$83,000 and  $71,000,  respectively.  At December  31,  2004,  the amount of the
outstanding  loans and accrued  interest was  approximately  $1,375,000  and are
shown as due to  affiliates  on the  accompanying  consolidated  balance  sheet.
Interest  on the  advances  was  charged  at the prime rate plus 1%, or 6.25% at
December  31, 2004,  in  accordance  with the  Partnership  Agreement.  Interest
expense on advances  from  affiliates  of the Managing  General  Partner for the
years ended  December  31, 2004 and 2003 was  approximately  $70,000 and $2,000,
respectively.  Subsequent  to December 31,  2004,  the  Partnership  received an
advance  of  approximately  $176,000  to pay  real  estate  taxes  at one of the
investment properties.

For acting as real estate  broker in  connection  with the sale of North Springs
Apartments,  the Managing  General Partner was paid a real estate  commission of
approximately  $183,000  during  the year  ended  December  31,  2003.  When the
Partnership  terminates,  the Managing  General Partner will have to return this
commission  if the  limited  partners  do not receive  their  original  invested
capital plus a 12% per annum cumulative non-compounded return.

The  Partnership  insures its properties up to certain  limits through  coverage
provided by AIMCO which is  generally  self-insured  for a portion of losses and
liabilities  related to workers  compensation,  property  casualty  and  vehicle
liability. The Partnership insures its properties above the AIMCO limits through
insurance  policies  obtained  by  AIMCO  from  insurers  unaffiliated  with the
Managing General Partner. During the years ended December 31, 2004 and 2003, the
Partnership  was charged by AIMCO and its affiliates  approximately  $51,000 and
$66,000,  respectively,  for insurance  coverage and fees associated with policy
claims administration.

In addition to its indirect  ownership of the general  partner  interests in the
Partnership,  AIMCO and its affiliates owned 12,340.50 limited partnership units
(the "Units") in the Partnership representing 46.09% of the outstanding Units at
December  31,  2004.  A number of these Units were  acquired  pursuant to tender
offers  made by  AIMCO  or its  affiliates.  It is  possible  that  AIMCO or its
affiliates will acquire  additional  Units in exchange for cash or a combination
of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO,
either through private  purchases or tender offers.  In this regard, on February
16,  2005,  AIMCO  Properties,  L.P.,  commenced a tender offer to acquire up to
14,435.50  Units for a  purchase  price of $60.26 per Unit.  This offer  expires
March 28, 2005.  Pursuant to the Partnership  Agreement,  unitholders  holding a
majority of the Units are  entitled to take action with  respect to a variety of
matters that include,  but are not limited to,  voting on certain  amendments to
the Partnership  Agreement and voting to remove the Managing General Partner. As
a result of its  ownership  of 46.09% of the  outstanding  Units,  AIMCO and its
affiliates  are in a position to influence all voting  decisions with respect to
the Partnership.  Although the Managing General Partner owes fiduciary duties to
the limited partners of the Partnership,  the Managing General Partner also owes
fiduciary duties to AIMCO as its sole  stockholder.  As a result,  the duties of
the Managing  General Partner,  as managing general partner,  to the Partnership
and its limited  partners may come into conflict with the duties of the Managing
General Partner to AIMCO as its sole stockholder.

Item 13.    Exhibits

            See Exhibit Index.


Item 14.    Principal Accountant Fees and Services

The Managing  General Partner has  reappointed  Ernst & Young LLP as independent
auditors to audit the financial  statements  of the  Partnership  for 2005.  The
aggregate  fees billed for  services  rendered by Ernst & Young LLP for 2004 and
2003 are described below.

Audit Fees. Fees for audit services  totaled  approximately  $44,000 and $50,000
for 2004 and 2003,  respectively.  Fees for audit services also include fees for
the reviews of the Partnership's Quarterly Reports on Form 10-QSB.

Tax Fees. Fees for tax services  totaled  approximately  $13,000 and $19,000 for
2004 and 2003, respectively.

                                   SIGNATURES



In accordance with the  requirements of the Exchange Act, the Registrant  caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.


                                    DAVIDSON INCOME REAL ESTATE, L.P.


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


                                    By:   /s/Martha L. Long
                                          Martha L. Long
                                          Senior Vice President

                                          /s/Stephen B. Waters
                                    By:   Stephen B. Waters
                                          Vice President

                                    Date: March 25, 2005


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

/s/Harry G. Alcock            Director and Executive        Date: March 25, 2005
Harry G. Alcock               Vice President

/s/Martha L. Long             Director and                  Date: March 25, 2005
Martha L. Long                Senior Vice President

/s/Stephen B. Waters          Vice President                Date: March 25, 2005
Stephen B. Waters


<PAGE>


                         DAVIDSON INCOME REAL ESTATE, LP
                                  EXHIBIT INDEX


Exhibit

 3                Agreement of Limited  Partnership is incorporated by reference
                  to Exhibit A to the  Prospectus of the  Registrant  dated July
                  26, 1985 as filed with the Commission  pursuant to Rule 424(b)
                  under the Act.

 3A               Amendment to  Partnership  Agreement  dated October 1, 1985 is
                  incorporated  by reference  to Exhibit 3A to the  Registrant's
                  Annual Report on Form 10-K for the fiscal year ended  December
                  31, 1987.

 4                Certificate  of Limited  Partnership  dated  April 29, 1985 is
                  incorporated  by  reference  to Exhibit 4 to the  Registrant's
                  Registration Statement on Form S-11 dated May 7, 1985.

 4A               Certificate   of   Amendment  to   Certificate   of  Limited
                  Partnership   dated  July  16,  1985  is   incorporated   by
                  reference to Exhibit 4B in Amendment  No. 1 to  Registration
                  Statement No. 2-97539, dated July 24, 1985.

10C               Acquisition  and Disposition  Services  Agreement dated July
                  1, 1985 between the Registrant and Criswell  Freeman Company
                  is  incorporated  by  reference  to Exhibit 10D in Amendment
                  No. 1 to  Registration  Statement No. 2-97539 dated July 24,
                  1985.

10H               Purchase Agreement for Lakeside Apartments dated April 4, 1986
                  between Lakeside  Apartments Venture, a North Carolina general
                  partnership   and  Tennessee   Trust   Company,   a  Tennessee
                  corporation,  is incorporated by reference to Exhibit 10(a) to
                  the  Registrant's  Current  Report  on Form 8-K  dated May 20,
                  1986.

10L               Contract  for Sale of Real  Estate for The Bexley  House dated
                  July 16, 1986 between Bexley House,  Limited,  an Ohio limited
                  partnership  and Tennessee  Trust Company is  incorporated  by
                  reference to Exhibit 10(a) to the Registrant's  Current Report
                  on Form 8-K dated September 30, 1986.

10M               Reinstatement  and  Amendment  of Contract  for Sale of Real
                  Estate for The Bexley House dated  September 4, 1986 between
                  Bexley  House,  Limited,  an Ohio  limited  partnership  and
                  Tennessee  Trust  Company,  a  Tennessee   corporation,   is
                  incorporated   by   reference   to  Exhibit   10(b)  to  the
                  Registrant's  Current Report on Form 8-K dated September 30,
                  1986.

10N               Amendment to Reinstated  and Amended for Sale of Real Estate
                  for The  Bexley  House  dated  September  19,  1986  between
                  Bexley  House,  Limited,  an Ohio  limited  partnership  and
                  Tennessee  Trust  Company,  a  Tennessee   corporation,   is
                  incorporated   by   reference   to  Exhibit   10(c)  to  the
                  Registrant's  Current Report on Form 8-K dated September 30,
                  1986.

10O               Assignment  of Contract for Sale of Real Estate for The Bexley
                  House dated September 30, 1986 between Tennessee Trust Company
                  and the  Registrant  is  incorporated  by reference to Exhibit
                  10(d) to the  Registrant's  Current  Report  on Form 8-K dated
                  September 30, 1986.

10P               Limited  Warranty Deed dated September 28, 1986 between Bexley
                  House, Ltd., an Ohio limited partnership and the Registrant is
                  incorporated by reference to Exhibit 10(e) to the Registrant's
                  Current Report on Form 8-K dated September 30, 1986.

10Q               Contract  for  Sale  of  Real  Estate  for  Covington   Pointe
                  Apartments dated January 20, 1987 between F.G.M.C.  Investment
                  Corp.,  a  Texas  corporation   Tennessee  Trust  Company,   a
                  Tennessee corporation, is incorporated by reference to Exhibit
                  10(a) to the  Registrant's  Current  Report  on Form 8-K dated
                  March 10, 1987.

10R               Amendment   to  Contract  for  Purchase  of  Real  Estate  for
                  Covington  Pointe  Apartments  dated  January 23, 1987 between
                  F.G.M.C. Investment Corp., a Texas corporation Tennessee Trust
                  Company, a Tennessee corporation, is incorporated by reference
                  to Exhibit 10(b) to the  Registrant's  Current  Report on Form
                  8-K dated March 10, 1987.

10S               Assignment  of  Contract  for  Purchase  of  Real  Estate  for
                  Covington  Pointe  Apartments  dated  March  2,  1987  between
                  Tennessee  Trust Company and the Registrant is incorporated by
                  reference to Exhibit 10(c) to the Registrant's  Current Report
                  on Form 8-K dated March 10, 1987.

10T               Contract  for  Purchase  of  Real  Estate  for  Phase  I  of
                  Sterling  Crest  Apartments  dated  March 10,  1987  between
                  Sterling  Crest  Development   Partners,   Ltd.,  a  Georgia
                  limited   partnership,   and  Tennessee  Trust  Company,   a
                  Tennessee  corporation,  is  incorporated  by  reference  to
                  Exhibit  10(d) to the  Registrant's  Current  Report on Form
                  8-K dated March 10, 1987.

10Y               Sterling  Crest Joint  Venture  Agreement  dated June 29, 1987
                  between the Registrant and Freeman Georgia  Ventures,  Inc. is
                  incorporated by reference to Exhibit 10(b) to the Registrant's
                  Current Report on Form 8-K dated June 30, 1987.

10Z               Assignment of Contract for Purchase of Real Estate for Phase I
                  of  Sterling   Crest   Apartments   dated  June  29,  1987  is
                  incorporated by reference to Exhibit 10(c) to the Registrant's
                  Current Report on Form 8-K dated June 30, 1987.

10AA              Warranty  Deed  dated June 30,  1987  between  Sterling  Crest
                  Development  Partners,  Ltd. and Sterling Crest Joint Venture,
                  is   incorporated   by  reference  to  Exhibit  10(d)  to  the
                  Registrant's Current Report on Form 8-K dated June 30, 1987.


10DD              Contract  for Purchase of Real Estate for Phase II of Sterling
                  Crest  Apartments  dated March 10, 1987 between Sterling Crest
                  Development  Partners,  Ltd. and  Tennessee  Trust  Company is
                  incorporated by reference to Exhibit 10(a) to the Registrant's
                  Report on Form 8-K dated December 29, 1987.

10FF              Assignment  of  Contract  for  Purchase  of  Real  Estate  and
                  Tri-Party  Agreement dated November 4, 1987 between  Tennessee
                  Trust  Company and Sterling  Crest Joint  Venture  relating to
                  Sterling Crest  Apartments,  is  incorporated  by reference to
                  Exhibit  10(c) to the  Registrant's  Report  on Form 8-K dated
                  December 29, 1987.

10GG              Amended and  Restated  Sterling  Crest Joint  Venture  Joint
                  Venture  Agreement dated June 29, 1987 among the Registrant,
                  Freeman  Georgia  Ventures,  Inc.,  and Freeman Growth Plus,
                  L.P., is  incorporated  by reference to Exhibit 10(d) to the
                  Registrant's Report on Form 8-K dated December 29, 1987.


10RR              Multifamily  Note dated December 15, 2000,  between Davidson
                  Income Real  Estate,  L.P., a Delaware  limited  partnership
                  and Reilly  Mortgage  Group,  Inc.,  a District  of Columbia
                  corporation,    related   to   Bexley   House    Apartments,
                  incorporated  by  reference  to Form 10-KSB  dated March 30,
                  2001.

10SS Contracts related to the sale of North Springs Apartments:

                 (a)    Purchase  and  Sale   Contract   between   Davidson  IRE
                        Associates,  L.P., as Seller and Capital City  Holdings,
                        L.L.C.,  as  Purchaser,  effective  February  11,  2003,
                        incorporated  by  reference  to Form 8-K dated April 15,
                        2003.

                  (b)   First  Amendment of Purchase and Sale  Contract  between
                        Davidson  IRE  Associates,  L.P.,  as Seller and Capital
                        City Holdings, L.L.C., as Purchaser, effective March 13,
                        2003,  incorporated by reference to Form 8-K dated April
                        15, 2003.

(c)                     Reinstatement  and Second Amendment of Purchase and Sale
                        Contract  between  Davidson  IRE  Associates,  L.P.,  as
                        Seller and Capital City Holdings,  L.L.C., as Purchaser,
                        effective  March 26, 2003,  incorporated by reference to
                        Form 8-K dated April 15, 2003.

                  (d)   Assignment and  Assumption of Sales  Contract  effective
                        April 15, 2003 between Capital City Holdings, L.L.C., as
                        assignor and Wingservice Holdings,  L.L.C., as assignee,
                        incorporated  by  reference  to Form 8-K dated April 15,
                        2003.

10TT              Contracts  related to refinancing of debt of Covington  Pointe
                  Apartments:

                  (a)   Multifamily  Note  dated  June 26,  2003  between  AIMCO
                        Covington Pointe,  L.P., a Delaware limited partnership,
                        and Keycorp Real Estate Capital  Markets,  Inc., an Ohio
                        corporation, incorporated by reference to Form 8-K dated
                        June 26, 2003.

                  (b)   Multifamily Deed of Trust, Assignment of Rents, Security
                        Agreement and Fixture Filing dated June 26, 2003 between
                        AIMCO  Covington   Pointe,   L.P.,  a  Delaware  limited
                        partnership,  and Keycorp Real Estate  Capital  Markets,
                        Inc., an Ohio corporation,  incorporated by reference to
                        Form 8-K dated June 26, 2003.

                  (c)   Replacement  Reserve and Security  Agreement  dated June
                        26,  2003  between  AIMCO  Covington  Pointe,   L.P.,  a
                        Delaware  limited  partnership,  and Keycorp Real Estate
                        Capital Markets, Inc., an Ohio corporation, incorporated
                        by reference to Form 8-K dated June 26, 2003.

10UU              Contracts   related  to   refinancing   of  debt  of  Lakeside
                  Apartments:

                  (a)   Multifamily Note dated November 3, 2003 between Davidson
                        Income   Real   Estate,   L.P.,   a   Delaware   limited
                        partnership, and GMAC Commercial Mortgage Corporation, a
                        California  corporation,  incorporated  by  reference to
                        Form 10 QSB dated November 13, 2003.

                  b)    Guaranty  dated  November  3, 2003 by AIMCO  Properties,
                        L.P., a Delaware limited partnership, for the benefit of
                        GMAC  Commercial  Mortgage  Corporation,   a  California
                        corporation,  incorporated  by  reference to Form 10 QSB
                        dated November 13, 2003.

                  c)    Multifamily  Deed of  Trust,  Assignment  of  Rents  and
                        Security   Agreement  dated  November  3,  2003  between
                        Davidson Income Real Estates,  L.P., a Delaware  limited
                        partnership, and GMAC Commercial Mortgage Corporation, a
                        California  corporation,  incorporated  by  reference to
                        Form 10 QSB dated November 13, 2003.

                  d)    Replacement   Reserve  and  Security   Agreement   dated
                        November 3, 2003 between  Davidson  Income Real Estates,
                        L.P.,   a  Delaware   limited   partnership,   and  GMAC
                        Commercial    Mortgage    Corporation,    a   California
                        corporation,  incorporated  by  reference to Form 10-QSB
                        dated November 13, 2003.

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

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

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

99A               Agreement  of  Limited   Partnership  for  Davidson  IRE  GP
                  Limited    Partnership    between    Davidson    Diversified
                  Properties,  Inc.  and  Davidson  Income Real  Estate,  L.P.
                  entered  into  on  September  15,  1993 is  incorporated  by
                  reference  to  Exhibit  99A  to the  Registrant's  Quarterly
                  Report on Form 10-QSB for the quarter  ended  September  30,
                  1993.

99B               Agreement of Limited  Partnership for Davidson IRE Associates,
                  L.P. between Davidson IRE GP Limited  Partnership and Davidson
                  Income Real  Estate,  L.P. is  incorporated  by  reference  to
                  Exhibit  99B to the  Registrant's  Quarterly  Report  on  Form
                  10-QSB for the quarter ended September 30, 1993.

99C               Agreement  of  Limited  Partnership  for  Bexley  House L.P.
                  between Davidson Income GP Limited  Partnership and Davidson
                  Income Real  Estate,  L.P.  entered into on October 13, 1993
                  is   incorporated   by  reference  to  Exhibit  99C  to  the
                  Registrant's  Annual  Report on Form  10-KSB  for the fiscal
                  year ended December 31, 1992.

Exhibit 31.1
                                  CERTIFICATION

I, Martha L. Long, certify that:


1.    I have reviewed this annual report on Form 10-KSB of Davidson  Income Real
      Estate, L.P.;

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

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

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

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

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

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

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

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

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

Date: March 25, 2005
                                    /s/Martha L. Long
                                    Martha L. Long
                                    Senior Vice President of Davidson
                                    Diversified Properties, Inc., equivalent
                                    of the chief executive officer of the
                                   Partnership
Exhibit 31.2

                                  CERTIFICATION


I, Stephen B. Waters, certify that:


1.    I have reviewed this annual report on Form 10-KSB of Davidson  Income Real
      Estate, L.P.;

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

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

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

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

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

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

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

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

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

Date: March 25, 2005
                                    /s/Stephen B. Waters
                                    Stephen B. Waters
                                    Vice President of Davidson Diversified
                                    Properties, Inc., equivalent of the chief
                                    financial officer of the Partnership


<PAGE>


Exhibit 32.1


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



In  connection  with the Annual  Report on Form 10-KSB of  Davidson  Income Real
Estate, L.P. (the "Partnership"),  for the year ended December 31, 2004 as filed
with the Securities and Exchange  Commission on the date hereof (the  "Report"),
Martha  L.  Long,  as the  equivalent  of the  chief  executive  officer  of the
Partnership,  and Stephen B. Waters,  as the  equivalent of the chief  financial
officer of the Partnership, each hereby certifies, pursuant to 18 U.S.C. Section
1350,  as adopted  pursuant  to Section 906 of the  Sarbanes-Oxley  Act of 2002,
that, to the best of his knowledge:

      (1)   The Report fully complies with the  requirements of Section 13(a) or
            15(d) of the Securities Exchange Act of 1934; and

      (2)   The  information  contained in the Report  fairly  presents,  in all
            material respects, the financial condition and results of operations
            of the Partnership.

                                           /s/Martha L. Long
                                    Name:  Martha L. Long
                                    Date:  March 25, 2005


                                           /s/Stephen B. Waters
                                    Name:  Stephen B. Waters
                                    Date:  March 25, 2005

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